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By Elliot Turner

Shares of research stage embryonic stem cell companies Geron (NASDAQ: GERN) and StemCells, Inc. (NASDAQ: STEM) were trading lower Tuesday after a federal judge issued a preliminary injunction against all government funding of embryonic stem cell research (ESC). Shares of Osiris Therapeutics (NASDAQ:OSIR), on the other hand, were trading higher, as the company’s research is exclusively dealing with adult stem cells (ASC), which is acceptable under this ruling.

In the case of Dr. James Sherley v. Kathleen Sebelius, Royce Lambert, Chief Judge of the DC District Court, ruled that “ESC research is clearly research in which an embryo is destroyed” and is therefore in violation of the Dickey-Wicker Amendment which “prohibits the use of federal funds for ‘(1) the creation of a human embryo or embryos for research purposes; or (2) research in which a human embryo or embryos are destroyed, discarded, or knowingly subjected to risk of injury or death greater than that allowed for research on fetuses in utero.”

This is a crippling blow for President Obama, who early on in his administration issued an executive order expanding the parameters at the National Institutes of Health (NIH) for which ESC researchers could receive funding. The Dicker-Wickey Amendment originally passed as an addition to the 1996 Balanced Budget Downpayment Act and has been included in each subsequent federal budget. However, prior to President Obama’s expansion of ESC funding, the federal government did in fact provide funds for ESC research on lines of ESCs that were in existence prior to the passage of Dicker-Wickey. Those lines were exempted from the prohibition on ESC funding because they did not at that time lead to, or result from, the destruction of any embryos.

Research funds from the NIH are particularly important for any institution engaging in early stage biomedical research. As of 2003, the NIH accounted for 28% of all such research in the US annually, and if anything, that amount has only gone up as investors are in risk-averse mode following the financial crisis. The fact that this opinion was particularly broad, and encompassed ESCs that were already receiving federal funding prior to President Obama’s 2009 executive order, increases the amount of political uncertainty facing this young and promising line of biomedical research. That accounts for why we are seeing such a strong reaction in stem cell stocks in trading.

That being said, this is not the end of the legal line of this story. There remain avenues for appeal, and elements of this particular ruling are rather vague and overbroad. It is a difficult game for investors to anticipate legal rulings. Additionally, while this case may shut down public lines of funding for ESCs for the time being, there remain several other adequate and viable lines of private funding for these companies.

Disclosure: None.

Source: Court Decision Puts Pressure on Embryonic Stem Cell Stocks