FORTUNE -- When federal judge Royce C. Lamberth ruled government funding of embryonic stem cell research impermissable under current laws*, he effectively jammed up research projects started under President Barack Obama's executive order issued in 2009, which reversed President George W. Bush's 2001 ban on funding for embryonic stem cell research. But, the ruling also set California further apart as a mecca for scientists investigating stem cells, and as the first state to receive real financial benefits from the field.
Quick point of clarification: The Obama administration never legalized federal funding for obtaining fertilized embryos, only studying them. The embryos used for stem cell research were mostly discarded from fertility clinics, and used only with the permission of the donors.
Now, studies on these embryos are off limits again, because according to Lamberth, studying an embryo is synonymous with destroying it, which goes against the Dickey-Wicker amendment. The Dickey-Wicker amendment prohibits federal funding for research that destroys human embryos -- it passes through Congress every year as a rider to the Department of Health and Human Serices budget, ever since President Clinton first signed it in 1995. Obama sidestepped the amendment -- or so he thought -- by drawing a distinction between destroying embryos and researching embryos that had already been created.
Judge Lamberth's ruling legally invalidates that distinction, which is probably going to hit researchers at the National Institutes of Health the hardest. Obama's 2009 executive order highlighted the NIH as a major recipient of federal support pursuing new therapies based on embryonic stem cells. Now, the New York Times reports NIH scientists are scrambling to figure out how to proceed with embryonic stem cell research already in progress without illegally using federal money.
Institutions doing steam cell research across the country have been afected by the ban. But one state in the union shunned federal money for stem cell research from the get-go: California. If the federal ban holds, California could actually benefit by becoming the prime target for money aimed at stem cell research.
Not that stem cell researchers in California are pleased with the ruling. Yesterday, the California Institute for Regenerative Medicine, which handles funding for stem cell research in state, released a statement saying in part:
The leadership of CIRM, the state stem cell agency, deplores the decision of U.S. District Judge Royce Lamberth to freeze federal funding of all human embryonic stem cell (hESC) research. This decision will disrupt the advances that are happening across the country to bring hESC-based therapies to patients in need.
CIRM will continue providing a stable source of funding for those researchers who have committed their labs to pursuing new therapies based on work with human embryonic stem cells.
The institute, set up to bypass federal government mandates about stem cell research was created by voter approval of Proposition 71 in 2004. Proposition 71 was an amendment to the California Constitution that authorized spending an average of about $300 million per year over ten years in bonds to fund stem cell research. It established CIRN to handle the funding.
The proposition was supposed to boost the California economy "by funding scientific and medical research that will significantly reduce state health care costs in the future; and by providing an opportunity for the state to benefit from royalties, patents, and licensing fees that result from the research." With a major funding competitor -- the federal government -- sidelined at least for now, California firms and taxpayers stand to reap the potential rewards (or, to be sure, losses) of investing in stem cell research.
Venture capital signs on to California's audacious plan
It's difficult to measure the direct return on investment for California, according to 2007 commentary in Nature Biotechnology. The authors called Proposition 71 "an audacious, unprecedented effort by one state to transform an area of biomedical research, for the benefit of its citizens and humanity." It also means that California will eventually have to pay bond purchasers back using state money that could have been used for a less risky investment.
California isn't the only state to invest in stem cell research, but its progressive policy on embryonic stem cells (ESCs) has made it the leader. The two main biotech companies investigating ESC therapies are Geron (GERN) and Advanced Cell Technologies, both with main offices in California.
Recently, venture capitalists have backed California-based companies investigating other kinds of stem cell research. In June, BAY paired with OncoMed Pharmaceuticals, based in Redwood City, CA, which researches therapy that targets cancer stem cells. In July, Google Ventures contributed most of the $22 million raised in second-round financing by San Francisco company iPierian.
Truly disruptive ESC therapies like growing organs from scratch or curing Parkinson's disease are decades down the road, if they happen at all. But if California can continue the trend of funneling the majority of ESC money into projects inside the state, it may be able to reap the benefits from groundbreaking research in the long term, and in the short term, create much-needed jobs.