Not only is stem cell research the most politicised field in the history of science, it is also one of the most dauntingly complex. So while stem cells have the potential to provide therapies for a vast range of ills, it is proving hard to attract the investment needed to develop them.

Many venture capitalists make the comparison with monoclonal antibodies, which took more than 20 years to translate from basic research to marketed products. As Lutz Giebel, venture partner at SV Life Sciences in San Francisco, remarks: "The promise of monoclonal antibodies was obvious, but VCs [venture capitalists] that invested at an early stage pretty much lost their shirts".

Not that stem cell companies are entirely unattractive. In the first biotech initial public offering of 2005, ViaCell, Inc., a specialist in umbilical cord stem cells, raised $52.5m (£28.4m).

At the point that ViaCell went public, it had annual revenues of $36.8m from umbilical cord blood banking, combined with a cord stem cell product in the clinic, and the potential for forming corporate partnerships. But there are few similar opportunities where the risks inherent in the science are mi-tigated by a healthy revenue stream.

"ViaCell exemplifies how a lot of VCs feel about the risks of investing in stem cells", says Denise Pollard-Knight, head of Nomura Phase4 Ventures, the VC investment arm of the investment bank Nomura International plc, which was one of ViaCell's major venture-capital backers. "You just have to look at the numbers. VCs have invested $300m to date into stem cell companies as a whole, versus $20bn into other technology platforms".

In many respects this is due to the preliminary nature of the science. G. Steven Burrill, CEO of Burrill & Company in San Francisco, a life sciences merchant bank, says that a VC funding a stem cell company now would be paying for basic research that would ordinarily be carried out in academic laboratories. "We are beginning to see some business plans for stem cell companies, but we are still in the science end of it", he states.

This lack of basic research creates a major risk because it is not clear where the intellectual property might go, says Paul McCubbin, head of Ventures at BTG plc in London. "In the current model if you screen against a receptor and get a hit, you have novel IP; when you stimulate differentiation of stem cells, you have no idea whose IP you might cross", he explains.

Brian Kerr, director at Scottish Equity Partners (SEP) in Glasgow and sees almost every life sciences opportunity in Scotland, examines hundreds of business plans each year. Despite Scotland's scientific standing in the field, SEP has yet to fund a stem cell company. Kerr objects that not only is the science too preliminary, but the business plans per se are too risky.

"Businesses need to be more sophisticated about how they control risk", he says. Stem cells have not been developed as a platform, and too many companies are focusing on a single treatment for a specific disease. "You wouldn't back a conventional science company that had only one product", observes Kerr.

On top of this he believes a further obstacle has developed in Europe, where the funding engine has broken. After the genomics boom and bust, the public markets have continued to shun biotechs, forcing VCs to fund companies for longer. "It's almost impossible to make money in Europe with a first- round investment in any sort of biotech", states Kerr.

The situation in Europe contrasts with Australia where a number of stem cell companies have listed on the Australian Stock Exchange. But Alison Coutts, director of the investment bank eG Capital in Sydney, says these tend to be early stage: "I think Australia is unique in this respect. While there has been a lot of criticism of the Australian Stock Exchange that it lets companies list 'too early'---quite often when there have been no clinical trials on any product--it has been the primary mechanism for funding a lot of great science that we produce here, and it has even started to attract international companies".

Stem cell startups may also get a sympathetic hearing from Bio*One Capital, the investment arm of Singapore's Economic Development Board. "The potential of stem cell research is too enormous for us to ignore", says Swee Yeok Chu, CEO. "We recognised that we need to take a long-term approach in this field". Bio*One Capital mitigates risk by investing in companies at different stages of development, with different research projects and business models.

That public expectations of the ability of stem cells to provide cures for degenerative disease and severe trauma have gotten so far ahead of what the science can to deliver is largely because of the publicity given to small-scale trials with adult stem cells.

But while there is evidence of efficacy, adult stem cells are not attractive to VCs, says Giebel of SV Life Sciences: "Most people are talking about autologous transplants using cells harvested from patients. But from an investment point of view that's not scalable. It's also difficult for the FDA to get an arm around it. Every single time it is different cells".

While much legwork remains, embryonic stem cells conversely do have the potential to be produced to Good Manufacturing Practice standards.

One VC who has intimate experience of the difficulties of producing potentially commercial stem cell lines is Sir Christopher Evans, founder and chairman of Merlin Biosciences in London. Merlin put £250,000 ($460,000) seed capital into ReNeuron Ltd when it was formed in 1997, followed by £5m a year later. The company went public in November 2000, raising £19.5m and becoming the only quoted stem cell company in Europe.

But ReNeuron was beset by genetic instability problems in its foetal neural stem lines, and in 2003 the Merlin Consortium put fellow investors out of their misery, paying £3.6m to make ReNeuron private again.

"You just have to look at the numbers. VCs have invested $300m to date into stem cell companies as a whole, versus $20bn into other technology platforms". --Denise Pollard-Knight

The company has since overcome problems with the cell lines and is aiming to get regulatory approval before the end of 2005 (in either the US or the UK) to carry out a clinical trial.

"We have had to pay for work that would normally be done in an academic laboratory, but if ReNeuron came to us today we'd back it again. But as for backing any other stem cell companies--there aren't any", remarks Evans.

This prompted him to form the Stem Cell Foundation, a charity designed to plug the gap between academic research and mid-stage clinical trials. "In three years we should have 10 to 15 projects approaching or in the clinic. With the usual attrition rate this will translate into two or three successes, and we will then get [private investment] money flowing in", says Evans. "The foundation is the catalyst--we will create a phenomenon in stem cells".

Evans is keen to get the foundation up and running before the money starts flowing from California's Proposition 71 and other US state funding schemes for stem cells and thus prompts a brain drain of researchers from the UK to the US.

"We are beginning to see some business plans for stem cell companies, but we are still in the science end of it". --G. Steven Burrill

But the fact that California and other states are raising their own budgets for stem cell research highlights yet another hurdle in the way of its commercialisation. Uniquely, for a medical product, it is unclear whether it will be possible to get a single regulatory approval to sell a stem cell therapy across the US or whether the states with bans on embryonic stem cell research will ban products based on them also.

The situation is no better in Europe, where there is a patchwork of different regulation, most of it militating against embryonic stem cell research.

Cathy Prescott, science director at Avlar BioVentures in Cambridge, UK, says: "The major issue is on the regulatory side of things at the moment. National rules are applying in Europe, and in the US different states have taken a different stance, and therefore there is a fragmented marketplace".

Most biotechnology companies rely on doing deals with big pharmaceutical companies to get their products through the later stages of clinical trials and on to the market.

"The market fragmentation is making stem cells a very, very difficult business model for big pharma", says Prescott. "If biotechs haven't got partners, how can they take it forward"?

"Businesses need to be more sophisticated about how they control risk.You wouldn't back a conventional science company that had only one product". --Brian Kerr

No doubt VCs are daunted by the ethical and regulatory baggage surrounding stem cells. Several prominent firms in North America and Europe did not wish to be interviewed for this article. Others were prepared to discuss the scientific challenges but not the baggage.

Proposition 71 will change attitudes, believes Burrill of Burrill & Company: "At present, stem cell science is tainted. Proposition 71 will legitimise a lot of research in the US, which under federal guidelines is perceived to be not investible".