ceo warns , shorters beware of turn

CEO of life sciences company Mesoblast warns short sellers of turnaround



SILVIU Itescu, the straight-talking chief executive of life sciences company Mesoblast, has a message for the short sellers that helped to wipe almost $1 billion from his group's market capitalisation late last year.

"If you're gambling on a stock, which is what people who go short do, you don't want to be caught out when a company continues to deliver," he said. "A good company with good fundamentals will always turn around those investors."

These are interesting times for followers of the Melbourne-based company, which is gaining global recognition for its work in the fast-evolving stem cell therapy sector.

Mesoblast is set to embark on a 1000-patient clinical trial of its cardiovascular treatment Revascor, after commercial partner Teva Pharmaceutical Industries confirmed its support for the product only recently inherited through its takeover of the company's original partner, Cephalon.

The confirmation earlier this month came with some hearty praise from Teva president Shlomo Yanai, who described Revascor as a "very, very large, very exciting opportunity" for the Israel-based pharmaceutical giant.

While supporters of Mesoblast, including members of the wealthy Pratt and Gandel families in Melbourne, as well as an increasing number of European funds, have been eagerly awaiting the news, it no doubt caught others by surprise.

Macquarie Securities, in particular, disagrees with most large broking houses that cover the company following its elevation to the S&P/ASX 200 Index.

Although Macquarie isn't the only broker with a negative rating (BBY also rates it as an "underperform"), its healthcare analyst, Craig Collie, has ruffled a few feathers with his coverage, including his stinging analysis of Mesoblast's clinical trial results.

Mr Collie has described the data from Mesoblast's recent phase-II study of Revascor for congestive heart failure as "disappointing". He argued it failed to meet all efficacy end points, except an improvement in major cardiac events. He also pointed to a lack of a relationship between dose and response, suggesting that the trial results may have been random. And he questioned whether Teva and the US Food & Drug Administration would provide clearance for a phase-III study. Since Macquarie's original research report, entitled Too hard, too fast, was published last October, Mesoblast shares have fallen from $9.40 to $6.09.

A stream of positive news has since helped the stock to rebound to $7.56 at last week's close, giving the company a market capitalisation of almost $2.2bn.

While shares rise and fall for a multitude of reasons, an increase in the short-selling activity in the stock has not gone unnoticed by the company.

Last week, about 6 per cent of the issued capital was held in short positions.

Speaking to The Australian before the release of Mesoblast's interim results this week, Professor Itescu said he welcomed the commentary from analysts that had come with the company's growing profile.

However, he cautioned that such comments should aim to provide clarity and context to investors.

Regarding the recent Revascor studies, Professor Itescu stressed that a reduction in mortality was the only end point that the FDA would accept when considering whether to approve treatments for heart failure.

"Consequently, the significant reduction in mortality in Mesoblast's phase-II trial of heart failure patients treated with . . . Revascor was a particularly important milestone, and should be so recognised," Professor Itescu said.

"When this is so straightforward a fact, one would expect a responsible analyst to inform his readership that a clinical trial has met this end point successfully and to educate investors on the importance of this outcome to ultimate product approval."

The Macquarie analyst, however, is standing by his coverage of the company, arguing that testing mortality with any degree of confidence would require trials involving hundreds, if not thousands, of cardiac patients.

"Stem-cell science is an exciting but inherently risky space, with many unanswered questions remaining," Mr Collie said.

"And I don't think the investment community is fully aware of those risks."

There's no question that Mesoblast has come a long way from the fledgling biotech that was listed on the Australian Securities Exchange in 2004.

After raising an initial $20 million, it has taken its off-the-shelf adult stem-cell treatments through six human trials and its potential markets span cardiovascular disease, diabetes, eye disease, oncology and orthopaedics. Following the 2010 partnering deal with Cephalon, and now Teva, the company has about $240m in the bank and the promise of up to $1.7bn in milestone payments if its therapies get to market.

Professor Itescu, who will update investors on the planning for the phase-III cardiovascular trial as well as an upcoming phase-II diabetes trial soon, said he could understand why some analysts or investors might have difficulty ascribing value to his company.

He compared Mesoblast with US-style biotechnology companies given it had a multitude of products, varied lucrative target markets and the resources required to move its clinical products through the development pipeline quickly.

"I don't think there's been a company in Australia that's had all these strategic risk factors locked away," he said.

He pointed to CSL's market capitalisation of $16.9bn. "I think that's easily achievable if just one of our products gets to market."

Type-II diabetes alone is a $US34bn a year market.

As Mesoblast's founder, Professor Itescu remains its largest investor, with a 24 per cent stake.

He is followed by Teva, with almost 20 per cent, and M&G Investment Management, which has 10 per cent holding. Thorney Holdings, run by the late Richard Pratt's son-in-law, Alex Waislitz, holds 6 per cent and has seen the value of its original investment rise more than 1400 per cent.

London's Tiburon Partners, which has been a shareholder for two years, believes that Mesoblast has distinguished itself from its peers by mitigating many of the typical biotechnology risks.

"Phase-II results for Revascor were well received by the independent clinicians responsible for the trials, and with revenue from the oncology product possible in 2014, it may not be long before conventional valuation techniques can be used for the stock," Tiburon principal Mark Fleming said.

"The risk is clinical failure, and while this remains in the lap of the gods, the potential upside is a quantum greater than the downside."

The company's house broker, Bell Potter, has a 12-month price target of $16 on the stock.

Meanwhile, Deutsche Bank's risk-adjusted valuation of $8.20 seems positively cheap compared with the $92 a share "potential value" it has flagged if all things were to go in Mesoblast's favour..........
Cheers Vin