Obama Can't Save Stem Cell Companies

In 2001, President George Bush hampered stem cell research by restricting government funding on embryonic stem cell research to the then-available embryonic stem cell lines. Today, there's a big buzz in the scientific community because President-elect Barack Obama plans to issue an executive order allowing federal funding for new embryonic stem cell research.

Unfortunately, that's not going to help existing stem cell companies and their investors all that much. Let me explain.

Public funds
First off, these public funds are likely to go to research institutes and universities. That could result in collaborations with current companies, but those are too difficult to predict to be used as the basis of an investment thesis. That funding could also eventually result in startups that are spun out of universities, but that, too, is difficult to predict. Finally, the money will likely lead to advances in knowledge and techniques, but that is more of a long term result and, again, should not be the basis of an investment thesis.

In other words, Obama changing the rules is not going to help current investors a whole heck of a lot. At least not immediately.

That said, an increase in funding could benefit Life Technologies (NASDAQ:LIFE) -- formerly Invitrogen -- a supplier of laboratory reagents that help scientists grow stem cells.

Some stem-cell companies are using stem cells from sources other than embryos. For instance, Cytori Therapeutics is developing therapies using stem cells derived from fat tissue. While government-sponsored research on embryonic stem cells might eventually help scientists better understand all stem cells, it's not likely to help the companies right now.

And they could use the help:

Source: Capital IQ, a division of Standard & Poor's. *Includes a $30 million secondary offering.

With products still a ways off, these companies are going to need a shot of capital in the arm fairly soon. Unfortunately, with their stock prices deflated over the past year, secondary offerings aren't a very good option at the moment.

Private-private partnerships
If public-private partnerships aren't going to stimulate the growth of the stem cell industry, then is the industrial potential of stem cells dead in the water? Not even close. What's going to drive this industry is funding from large pharmaceutical companies.

Pfizer (NYSE:PFE) recently set up a unit to focus on stem cells. I think it's likely that we'll see Pfizer spending some of its cash to partner up with these experienced stem-cell companies rather than recreating all the hard work that its little brothers have done. And of course Pfizer will likely need access to the patents held by these companies to develop therapies anyway.

The other way that stem-cell companies can generate cash while they wait for the technology to advance is by using stem cells to create systems to test drug toxicology. Geron is designing a system based on liver cells because the liver is one of the most common places that drugs cause the side effects that derail their clinical development. AstraZeneca (NYSE:AZN), GlaxoSmithKline (NYSE:GSK), and Roche have teamed up with the U.K. government to start a similar venture. However, I'm sure the companies would be just as happy to buy a system from Geron if it could save them time and money by identifying drugs that were likely to fail in the clinic.

Long road
Patient investors willing to wait a while for these small-cap stocks to develop could certainly see some serious gains from here. They're still fairly risky and will likely need help from big pharma to bring their treatments to market, but that was true of Amgen (NASDAQ:AMGN) in the mid 1980s, which needed a hand-up from Johnson & Johnson (NYSE:JNJ), and look where the company is now.

It's risky to invest in new technologies, but if you've got the guts to buy, the payoff could be huge. Just be smart, Fools, and keep it a reasonably small percentage of your portfolio.