investment funds miss 1st. bounce

Biotech investors will likely put their portfolios under the microscope after stem cell researcher Mesoblast's unexpected $US1.7 billion licensing deal.
The Melbourne company, which specialises in bone diseases, recently attracted the bumper investment from US pharmaceutical giant Cephalon, even though it could be two years before it has approval to sell its therapies.

Sector watchers now privately admit they did not pay enough attention to the implications of the milestones Mesoblast achieved and are kicking themselves over the lost opportunity after the stock more than doubled in value.

The coup, masterminded by Mesoblast chief executive Silviu Itescu, will now force investors to determine if there are other sleepers in the biotechnology sector going unnoticed.

Dr Itescu, who established the $1.4 billion company and its US sister Angioblast, migrated from Romania as a child. He trained as a scientist and went on to become a professor of medicine at Melbourne University before attempting business.
After having wooed the US's Cephalon into the biggest-ever global stem cell deal in early December, he says he's "delighted".

The deal propelled Mesoblast into fourth spot in the biotech market cap league behind CSL, Cochlear and Resmed. It has given Mesoblast the confidence and cash to fast-track its pipeline of cures for degenerative diseases in the growing ageing population.

But there's a sad chapter in Mesoblast's story of success: a week after Cephalon signed on the dotted line, its founder, chairman and chief executive, Frank Baldino died from leukemia.

Dr Baldino's obituary urged mourners to contribute to the University of Pennsylvania's bone marrow transplant research.

Ironically, one of Mesoblast's lead programs involves bone marrow therapy for leukemia patients, but unfortunately, Dr Baldino was not surgically eligible to take part in clinical trials of the company he had just bought a stake in.

Mesoblast, which last year merged with Angioblast, has a suite of programs searching for cures to a variety of diseases, including of the bones, joints, cartilage and heart, as well as diabetes, rheumatoid arthritis, leukemia and cancers.

Its therapies rely on stem cells of the patients they treat, as well as adult donor stem cells, avoiding the controversy around embryonic stem cell research.

The sector reacted with jubilant surprise at the timing and largesse of the Cephalon deal.

But Dr Itescu admitted to BusinessDaily: "It's fair to say that it was obvious to me that if we merged with Angioblast, that Cephalon was more likely to take an equity stake."

The value of Dr Itescu's 25 per cent stake in Mesoblast more than doubled in the last six months of 2010 from $70 million to $153 million.

Biotech investors were also impressed at Dr Itescu voluntarily putting his stock in escrow, preventing him from selling it for a year.

Mesoblast shares were in the Top 10 ASX league of greatest gains last year, having gone from under $2 at the start of 2010 to more than $4.50.

The December deal is "terrific" for a number of reasons, Dr Itescu said.

The company has retained manufacturing rights and will be able to control and collect revenue from sales, rather than just royalties; it has been given an upfront $US130 million payment; it has not had to "sell the farm" as the deal covers only some of its promising therapies; and Cephalon has agreed to keep its stake under the 20 per cent takeover trigger.

"That's where the surprising factor came in, but in the US, large pharma often take risks on proven technology," he said.

"What the Australian market is not used to is early-stage research companies doing major transactions, like ours."

He said investors should open their minds to the increasing possibility that similar deals would be announced by the Australian biotech sector soon, as some drug developers get close to putting their therapies on the market in the next 12 months.

The first Mesoblast product likely to hit shelves would be a therapy to treat cardiac-neural disease.

"It is frozen in a vial and available to surgeons as an injectible," Dr Itescu said.

Stem cells from one donor can be used to regenerate tissue in 15,000 patients.

Dr Itescu estimates over time, Mesoblast is likely to have nine or more products on the market and each stands to reap turnover in excess of $1 billion a year.

Apart from Cephalon, other significant investors do not think this plug is too good to be true.

They include insurance group Aviva, the Telstra superannuation fund and Thorney Holdings, which is managed by the late Dick Pratt's son-in-law, Alex Waislitz, for the Pratt family.

Thorney's $81 million stake in Mesoblast is the second-largest investment behind engineering group Monadelphous in the Pratt portfolio.

"It's fair to say Alex was one of the early investors. He has always been a supporter of what I do," Dr Itescu said.


Cheers Vin