Californians, who not long ago recalled a governor they did not like and replaced him with one they did, now appear set to give the same treatment to President George W. Bush’s controversial decision to restrict federal funding to embryonic stem cell research. Backers of the research believe these cells, which appear in an embryo five to seven days after conception, hold the promise of some day curing diseases from Alzheimer’s to Parkinson’s. Unlike adult stem cells, which generally replicate the tissue of their origin, embryonic stem cells have the potential to develop into other cell types, offering the tantalizing potential of regenerating a variety of diseased or damaged tissues.

A well-funded group of advocates has placed a proposal called Proposition 71 on California’s Nov. 2 ballot to create a $3 billion state fund to assist embryonic and other stem cell research. The supporters of Proposition 71 include the Juvenile Diabetes Research Foundation and a real estate developer whose young son has the disease and whose mother has Alzheimer’s. Also backing the initiative are the Christopher Reeve Paralysis Foundation – which may lend some emotional weight to the initiative because of the actor’s recent death – and the Michael J. Fox Foundation for Parkinson’s Research. Other well-known (and well-heeled) backers include Microsoft’s Bill Gates and John Doerr, the Silicon Valley-based venture capitalist.

Opponents, including some scientists as well as church groups, fear this research tinkers with the very stuff of life and poses ethical risks. They claim that it would be the first step on the slippery slope to human cloning. And if enough Californians are not persuaded by that argument, they ask how a state that is flirting with bankruptcy can afford to fund a new multi-billion-dollar bond issue. With interest and other expenses, the state would be taking on an obligation of around $6 billion. They describe the proposal as “a shameless attempt … by venture capitalists and big pharmaceutical company executives to have California taxpayers pay for their research and development costs.”

Still, opinion polls suggest that Proposition 71 should pass with ease. The money is intended to have California replace in some part the federal National Institutes of Health funds that the Bush administration has withheld.

Whether stem cell research ever leads to miracle cures, the California initiative is apt to shift the biotechnology research landscape in multiple and perhaps unpredictable ways, according to experts from Wharton and elsewhere. “In the medium run, it will benefit the California biotechnology industry, because companies tend to locate where the research is. This will cement California’s existing advantage,” notes Andrew Metrick, a professor of finance at Wharton.

It may also serve as an impetus for other states to follow suit. Forty-one states already are trying to create bioscience clusters, says Fritz Bittenbender, who heads the Pennsylvania Biotechnology Association, a trade group. “Each is putting together some state program to do that. It is important because you don’t want someone else to have a competitive advantage over you,” he adds. Among many incentives, Pennsylvania offers tax credits that small companies without profits can trade to profitable companies, he says. While Pennsylvania is unlikely to match California’s initiative, Bittenbender notes, the state is highlighting its strengths, including a lower cost of living and a plethora of healthcare expertise.

Still, money is an essential ingredient, says Michael J. Heller, chairman of the emerging business and venture capital practice at the Philadelphia law firm of Cozen O’Connor. “Any time you have additional sources of funds coming into a state to enhance research and development, you are promoting entrepreneurialism in that state,” Heller points out. “In Pennsylvania, for example, there is a huge brain drain. You have technology companies leaving the state and going to where they think opportunities are better. If you have something like Proposition 71 in the state, you wouldn’t lose them.”

Huge Impact

The impact of Proposition 71 funds on industry could be huge. Brian Dovey, general partner at the venture capital firm of Domain Associates, which operates a $1.4 billion portfolio of life-sciences companies from offices in Princeton, N.J., and  Laguna Niguel, Calif., says that stem-cell science is so young, it needs public funds to get off the ground and attract private capital. Domain’s fund was an initial investor in Geron, one of a handful of privately funded companies working on embryonic stem cells.

The scant public money for stem cell research has had one “perverse” effect. When companies like Geron fund scientists doing fundamental research, they end up getting patents and other intellectual-property rights to the research. “That is bad public policy,” notes Dovey, who sits on the board of healthcare research institutions such as the Burnham Institute and the Wistar Institute.

National Institutes of Health funds usually are the life blood of such early-stage research. Private investment in such research typically awaits some proof of viability. Not surprisingly, Proposition 71 has the vocal support of the venture capital industry. In a letter urging California Gov. Arnold Schwarzenegger to endorse the ballot initiative, the president of the National Venture Capital Association, Mark G. Heesen, wrote: “Proposition 71 is not only a huge help to ease the suffering of people, but it is also an economic engine, bringing jobs and new revenue to the Golden State. Researchers must have a stable regulatory framework in which to conduct their long-term research. California is on the verge of creating such a framework and becoming a world leader in stem cell research.” Schwarzenegger has since endorsed the proposition.

Spending on stem cell research could have unintended benefits, explains Nancy Saucier, who is the director of the medical industry group at the venture capital association. Researchers are apt to discover a bio marker or some other tool that may have nothing directly to do with stem cells, she says.

Just how crucial is a steady, unfettered, public source of money to research scientists? “It’s their lifeline,” notes Arthur L. Caplan, professor of bioethics at the University of Pennsylvania School of Medicine. “You can go private with a small company, but that means leaving the university, and most scientists don’t want to do that. They don’t have the infrastructure for that. Also, proprietary and trade secret issues begin to intervene and a lot of basic scientists with an academic bent are turned off by the trade secrecy required in private models of research,” Caplan says.

Caplan takes issue with the basis of Bush’s policy on stem cell research. In an awkward compromise in 2001, the president permitted work to continue on a handful of batches of stem cells already extracted from embryos. The number of batches that are viable has varied, from about 60 to about 20. Many of these embryos were created at in-vitro fertilization clinics and were either in indefinite frozen storage or destined to be discarded.

Actual People vs. Potential People

“We must attend to the needs of actual people as opposed to possible people,” Caplan says. He does not share opponents’ fear that embryonic stem cell research would open the door a crack to human cloning. One technique for such stem cell production involves duplicating embryos. He dismisses that worry as a red herring. The California initiative expressly bars efforts at reproductive human cloning.

But Caplan does express some concerns. “There are some issues around transgenics – mixing animal genes into human genes to study what would happen. I’m not sure that this isn’t too much on the fringe and alienates people to the point of thinking there is a risk of making monsters here,” he says. The early patenting of processes to make stem cells also bothers Caplan, but he adds that he is prepared to consider such concerns “case by case.”

Gerald A. McDermott, a professor of management at Wharton, is concerned that the very process of government sponsorship of scientific research is under siege. Citing colleagues, he alleges that political and ideological agendas of the Bush administration increasingly are dictating what research should be funded. Forcing controversial areas of research to rely on the marketplace is an unsatisfactory solution because “the market wants returns and will take only a measurable risk (of failure), and the risk of a lot of early research cannot be measured,” McDermott says.

Perhaps California will serve as a national laboratory for scientific experimentation on stem-cell research of the kind envisaged by former Supreme Court Justice Louis Brandeis, McDermott notes. “Brandeis said one of the strengths of federalist structures is that each state can be a lab for social and institutional experimentation.” But leaving it to one state, or even a handful of states, risks fragmentation of the effort and raises the question of whether there will be enough resources to fund it.

Proposition 71 limits bond sales to $350 million a year. It envisages that bond-related costs, such as the costs of administering the bond sales, would be deducted before grants and loans for research and construction of research facilities were given out. A new state institute, the California Institute for Regenerative Medicine, would be created to award the grants. The institute would be governed by an oversight committee made up of representatives of the University of California system, non-profit research organizations, health advocacy groups and companies involved in developing new therapies. Conducting stem-cell research would become a state constitutional right.

Metrick says the actual spending on research, expected to be less than $300 million a year, will be “significant – though in the normal course, the federal money would have been five times that amount.” (Under the Bush restrictions, a scant $25 million in federal money went toward embryonic stem cell research.) Despite the best hopes of the stem-cell proposal’s backers, California probably won’t recoup its investment, Metrick predicts.

Biotechnology companies tend to be relatively small operations, he says. “Even if you create 100 companies, which would be a lot, you are unlikely to create enough jobs to cover $3 billion,” he said. Metrick’s financial analysis is in line with that of Proposition 71’s opponents, who dismiss its backers’ financial projections of hundreds of millions of dollars in state royalty and tax revenues as being overblown.

But the calculations turn positive if the potential healthcare gains from finding new treatments for diseases even years down the road are factored in, Metrick notes. Then the rest of the country is likely to get a free ride on California, the way much of the world gets free rides on medical advances coming out of the U.S.

A University of California researcher made that argument vividly at a legislative hearing in San Diego recently, according to a report. He showed a video of a mouse whose rear legs were paralyzed, but the rodent regained their use after receiving embryonic stem cell therapy. “Maybe every 100 years there is one major milestone, like the invention of penicillin,” the researcher, Hans Keirstead, was quoted as saying. “This is such a thing.”