Mesoblast re-enters ASX/200 after wild two decade ride
Carrie LaFrenz and Tom Richardson
Jun 20, 2020 – 12.00am
Entering the ASX/200 should be a moment of celebration for any biotech start-up.
For Silvio Itescu, the multimillionaire founder and chief executive of stem cell group Mesoblast, it should be an even-greater triumph after a fourfold surge in the stock price spurred by an announcement that the company was assessing one of its drug candidates as a treatment for COVID-19 patients.
On June 12, Mesoblast re-entered the ASX/200 as other healthcare companies Estia Health and Mayne Pharma dropped out.
On paper the success has made Itescu wealthy. His 11 per cent holding is now valued at $280 million.
But it's been a roller-coaster ride and Itescu is still fending off critics. They say he is yet to prove the company's worth at over $2.3 billion, and note the regenerative medicine group is yet to produce a major commercial product despite raising over $1 billion in fresh equity since listing on the ASX in 2004 at just 50¢ per share.
Thorney Investments chairman Alex Waislitz was a pre-IPO investor in Mesoblast.
Long-time backers like billionaire investor and Iescu buddy Alex Waislitz say Mesoblast is on the cusp of the next frontier medicine. Waislitz's Thorney Investment Group owns 6 per cent of the company.
But critics ask why - if its prospects really are so good - some voracious pharma giant hasn't bought Mesoblast out or partnered with it after the better part of two decades plying its trade?
'There are concerns'
OneVentures managing partner Paul Kelly says it would be great for the biotech sector if Mesoblast succeeds, but he says concerns exist about stem cell therapies. Big money is being sunk into companies yet to have US Food and Drug Administration (FDA) products approved. Such therapies may never reach the mainstream market.
"If you have a company that still does not have an FDA-approved product, after so much investment and time, and big pharma has walked away from it, there are concerns," Kelly tells the AFR Weekend.
"When you see immuno-oncology companies being acquired for hundreds of millions at the preclinical stage in the US, you have to ask what the issue might be (at Mesoblast)?"
Kelly, who leads the VC's healthcare/biotech practice, warned there are not enough investors asking hard questions about the science. Instead, investors have rushed into buying companies that have anything to do with COVID-19.
AFRWeekend interviewed a dozen sources in writing this feature on Mesoblast, which is an investment banker favourite after raising capital at least five times since 2007. In the past eight months alone, it has has raised over $200 million.
Waislitz was a pre-IPO investor in Mesoblast. The biotech also counts billionaire cardboard king, Anthony Pratt, as a supporter.
Waislitz says he has participated in every capital raising since Mesoblast listed. He also acknowledges he has "traded round the edges" in shares over time, but remains a "fundamentally long" supporter.
Mesoblast CEo and founder, Silviu Itescu, could have a big win the horizon with a key date in September with US FDA.
The investor says short sellers were smashed by the recent share price surge and are seeking to recover lost ground by questioning the company's position in its COVID-19 research, and elsewhere.
Waislitz conceded the absence of a big pharma partner in the US is a question mark, but the upside is Mesoblast that still owns 100 per cent of the opportunity.
"So when and if they do a deal I think they'll be able to extract very significant commercial terms, higher upfront payments, higher milestone payments, higher royalty rates," he says. "That's probably the next big commercial milestone they have to achieve along with the development work they're doing."
Itescu and Waislitz have been close friends over decades, sharing an apartment in New York in their university days. Today they share an office floor in Melbourne's Collins Street.
Itescu has the strengths and weaknesses of a founder: he takes criticisms of the company personally and leaves critics withered. Sources say he is a master of stakeholder relations, and not challenged easily.
One analyst insinuates that Itescu is opportunistic, saying he understands the financial markets "better than any other company I cover" and "is good at doing cap raises at the right price."
Itescu is unafazed by this. "The priority is revenues, we're in transition from an R&D company to a commercial organisation, that's what our entire focus is now. Our first priority [drug] is in front of the FDA as we speak," says Itescu.
"We expect to get approval in the third quarter. In anticipation of approval we've put in place a target sales force in the US, we've built out inventory to support the product launch. "
The CEO says the company is "very undervalued" by US biotech standards. "We have three products in phase III and one product about to get approval. So I'd say to potential investors this is the beginning of a real potential run up."
John Hempton, chief investment officer of Bronte Capital, is short about 70 biotech stocks around the world. Jeremy Piper
Many are betting against the market darling, which is a top 50 shorted stock on the ASX, according to shortman.com.
Bronte Capital cofounder John Hempton is a known short seller in biotech. He declines to talk about specific stocks, but says there are few investors (including himself) in Australia who can skilfully assess the science.
“This creates bad incentives," he says. "On one side you have people who are gambling, often with other people’s money, on the other side you can’t tell if companies are raising money because they really have good prospects for the drug, or whether they are raising money to keep afloat when hope has evaporated.”
Waislitz acknowledges the cynics, but with the company now re-entering the ASX/200, he says it's "a disappointment" that so few institutional holders back life science companies with potential.
"I think this will end up being a fabulous Australian success story," Waislitz says. "It will be an amazing opportunity to further Australia’s status as an innovative country, in the mould of CSL."
He wants the government and the Future Fund to support Mesoblast in building a manufacturing facility in Australia.
"If they don’t, it will go overseas and we would have missed an opportunity to really celebrate the success of Mesoblast in Australia," he adds.
Run higher
Mesoblast's market value peaked at $2.5 billion in late 2011 and then endured a near decade of decline. Since the market's nadir in March, the shares have leapt nearly fourfold to about $4, spurred by the announcement that it was evaluating one of its current product candidates - remestemcel-L - as a remedy for COVID-19 lung disease.
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Mesoblast surges as COVID-19 treatment shows promise
Remestemcel-L - used to treat acute graft versus host disease (GVHD) in children - showed early signs of helping seriously ill coronavirus patients. The product was acquired from US-based Osiris Therapeutics and has since provided almost all of Mesoblast's sales revenue.
Treatments addressing the bigger sale opportunities of heart failure and back pain remain in development at late-stage clinical trials.
History
Itescu styles himself as a stem cell pioneer, capturing investors' imagination and dollars along the way.
Every January at the JP Morgan Healthcare Conference in San Francisco, sources say Itescu had a table at the upmarket seafood restaurant, Farralon, where he would wine and dine portfolio managers, selling the the Mesoblast story. He convinced investors such as The Capital Group, which manages over $US2 trillion, to join the register.
I think Mesoblast started off in arthritis and now they’re looking at COVID-19. They must’ve have tried at least ten indications.
— Portfolio manager
Itescu was helped by others in London, including Philip "Scoop" Beard, a former journalist who moved into broking. In 2008, Beard opened the London office of Southern Cross Equities Australia, which was later acquired by Bell Potter.
During his 11 years running the broker, Beard got UK institutional investors like M&G Investment Group interested in Australian small caps. M&G declined to comment and is Mesoblast's biggest institutional shareholder.
Despite the big name support, the market is still split. Several analysts and fund managers say they lost interest after it failed to deliver on its "big promises" for many years.
"They have been just around the corner (from the next big breakthrough) for some time," says a portfolio manager.
"Investors in this space do need to be patient. But good drugs don't tend to jump from indication to indication. I think Mesoblast started off in arthritis and now they’re looking at COVID-19. They must’ve have tried at least ten indications."
Waislitz counters: "When you are tackling new areas, or uncharted waters, there will be sceptics along the way."
Partners
Over the years Mesoblast has secured a number of partnership deals. It's most important was with drug maker Cephelon, with whom it inked a $US2 billion deal in 2010.
Israel's Teva Pharmaceutical Industries, subsequently bought Cephelon. But in 2016, Mesoblast shares tanked 42 per cent in one day after Teva pulled out from work on a treatment for chronic heart failure, the company's then leading research program. Teva's decision followed the failure of US biotech major Celgene to exercise a six-month option to partner some of Mesoblast's research programs.
Itescu says Mesoblast had a "great" partnership with Cephelon and Teva exited because it was a generic drug focused company. He adds right now he is "engaged in a number of significant discussions with pharmaceutical companies and some of the assets we are building are very likely to be part of (those talks)."
Mesoblast also has a partnership with Swiss-based Lonza Group. It also reached a deal with China's Tasly Pharmaceutical Investments in 2018, which resulted in the group taking a 2.7 per cent stake for developing and marketing Mesoblast's drug candidates for heart failure in China. More recently Mesoblast reached a similar type deal with Germany's GrĂĽnenthal, for its chronic back pain candidate for Europe and Latin America.
In fiscal 2019, it received $US11 million milestone payments and $US5 million in commercialisation revenue. R&D spend was sitting at $US60 million. It's $US50 million cash position has jumped post-capital raise. The group has about $US100 million of venture debt with Hercules Capital and NovaQuest Capital Management.
But over the past five years, Mesoblast has spent over $US400 million on operating activities. While Istecu says he expects cash outflows to remain at current levels of about $US60 million.
Jefferies analysts Dr David Stanton and Vanessa Thomson in April initiated coverage of Mesoblast with a 'hold' call. The said the biotech has risks, but meaningful upside should products be approved.
"Obviously, Mesoblast's potential stumbling block is further negative late stage clinical trial results and lack of regulatory approval," they said. "That said, Mesoblast is arguably the most advanced listed stem cell company globally and if successful would likely gain large amount of market in this new field of medicine."
In 2016, Itescu told the Financial Review it is not unusual for drug development to take about 10 years to get from a lab bench to hospital ward.
Now, well beyond a decade, Mesoblast is facing a make or break date with the FDA in September for its GVHD treatment.
As for Itescu, he says the company is "built on multiple pillars" and he is sticking around.
“As a major shareholder, I'm always evaluating who is best to run the company. (But) I'm not going any where any time soon," he says. "This is an exciting time for Mesoblast."
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