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Mesoblast: a story of Australian innovation The case study examines the development of stem cell technology company Mesoblast. It is an innovation success story and it also shows how support from the Australian Government has contributed to the company’s success.

Mesoblast’s technology enables the identification, efficient extraction and scale-up of adult mesenchymal precursor (stem) cells from bone marrow. The technology has potentially wide application in regenerative medicine, with conditions being targeted including: cardiovascular disease; bone marrow transplant; degenerative disc disease; spinal fusion;

Mesoblast is an Australian biotechnology success story. In just six years it has taken groundbreaking Australian research into stem cells and developed it into a suite of products treating a broad range of health conditions, from regenerating degenerative spinal discs to regrowing blood vessels around the heart and treating diabetes.
The company entered into a strategic alliance in December 2010 with Cephalon, a United States biopharmaceutical company (now wholly owned by Teva Pharmaceutical Industries) in a deal worth more than US$2 billion, partly contingent upon achieving key regulatory milestones. This places Mesoblast not only amongst the top echelons of Australian healthcare companies, but makes it a clear world leader in the field of regenerative medicine.
While the profound regenerative potential of stem cells has long been acknowledged, most stem cells technologies have faced significant scientific or ethical challenges when it comes to turning them into commercial therapies. Mesoblast’s technology avoids these issues by using potent mesenchymal precursor cells to produce ‘off-the-shelf’ adult stem cells produced with Mesoblast’s patented manufacturing techniques. These stem cells can then be used at the time and place of need in a wide range of unrelated recipients, making them more like a traditional pharmaceutical product rather than a complex biological treatment.
Mesoblast’s technology has very broad applications, including in cardiovascular disease, neurological conditions, diabetes, eye diseases, cancers of the blood, bone fractures, cartilage degeneration, and musculoskeletal conditions among others. Each of these applications represents multi-billion dollar markets worldwide.
Over the last seven years, Mesoblast has partnered with international research institutions and public companies, has garnered substantial amounts of private and public investment, and has leveraged Australian Government grants to place itself at the forefront of regenerative medicine worldwide. Mesoblast is well funded to continue its remarkable pace of commercialisation.
History and company milestones
Romanian-born and Australian reared, Mesoblast Chief Executive Officer Professor Silviu Itescu is used to being at the frontline of medicine. After completing his undergraduate medical training at Melbourne’s Monash University he transferred his residency to New York’s Bellevue Hospital in 1984, where he found himself at the epicentre of the AIDS epidemic. It was through treating AIDS patients in New York that he developed a particular interest in diseases involving the immune system.
After making a name for himself as an expert clinical immunologist, he was recruited by the Cardiac Transplantation Center at Columbia University in New York, where he worked in the field of immunosuppression to prevent the rejection of transplanted organs, particularly the heart. It was here that Professor Itescu became aware that transplantation was far from the ideal solution for the large numbers of people worldwide living with the debilitating consequences of heart failure.
In 2001, Professor Itescu was the first to demonstrate that adult stem cells from bone marrow could be used to repair hearts damaged by heart attacks by creating new small capillary vascular networks. This work has since led to many clinical trials around the world using whole bone marrow in patients with ischemic heart disease.
Professor Itescu's group continued refining and optimising the approach of using adult stem cells for cardiac functional recovery. By working with more potent stem cell types from the bone marrow, which generate larger vascular channels, such as arterioles and arteries, Professor Itescu determined that greater heart function recovery and regeneration of heart muscle can be obtained than with capillary formation alone.
In 2001 Professor Itescu founded Angioblast Systems Inc., a United States-based company focusing on the development of therapeutic products for cardiovascular diseases. He then embarked on a worldwide search for the most powerful adult stem cell technology considered to have significant advantages over competing technologies and to have the greatest prospect for commercial development.
Professor Itescu identified adult stem cell technology developed over more than 10 years by three Australian scientists: Professor Paul Simmons; Professor Stan Gronthos, and Professor Andrew Zannettino, at the Hanson Institute in South Australia, as meeting his rigorous technical and commercial criteria. This technology enabled efficient extraction, isolation and scale-up of adult mesenchymal precursors cells (MPCs), which are the building blocks for cells and tissues that make up support structures and solid organs in the body, such as arteries, heart muscle, bone and cartilage.
MPCs have two significant technical advantages: the ability of the cells to be greatly expanded; and, their lack of immunogenicity when used from one donor to treat many unrelated recipients. The outcome is the ability to generate industrially scaled-up allogeneic, or ‘off-the-shelf,’ products for use in thousands to tens of thousands of patients from a small amount of starting material obtained from a single healthy adult donor.
Itescu also recognised that MPCs had applications beyond the heart, and in June 2004 he established Mesoblast in Melbourne, Australia with a vision to develop the MPCs for a wider range of orthopaedic applications, ranging from repairing poorly-healing long bone fractures to regenerating cartilage. At its founding, Mesoblast was granted a worldwide license to Angioblast’s technology for orthopaedic indications, from whence both companies would foster a close relationship and conduct and share further research.
In December 2004, six months after its establishment, Mesoblast listed on the Australian Securities Exchange, raising $20.7 million. Until that point the company was sustained by private funding, primarily from private investors in the biotechnology and academic communities, all of whom placed their faith in the remarkable medical potential of stem cell technology. Following listing, Mesoblast immediately acquired a 33.3 per cent interest in its associate company Angioblast.
In late 2005, Mesoblast received a $2.7 million grant through the Australian Government’s Commercial Ready scheme for the development of the MPC technology. This funding enabled the company to embark on the costly clinical testing required to demonstrate the safety and efficacy of the technology in order to secure interest and funding from investors. The grant helped fund the initial trials in arthritic indications such as osteoarthritis of the knee and cartilage tears, which began in 2006.
Mesoblast also undertook a number of major funding rounds, notably raising $17.2 million in a share purchase plan in 2006, a further $13.4 million in late
2007, and $10.8 million in 2009, then $37 million in 2010, which helped fund the full acquisition of the company’s US partner, Angioblast.
Immediately following the announcement of the full acquisition of Angioblast in 2010 was the establishment of a strategic alliance with United States biopharmaceutical company, Cephalon, which acquired a 19.99 per cent equity stake in Mesoblast at a 45 per cent premium along with a US$130 million ($129 million) upfront cash payment.
The alliance granted Cephalon exclusive worldwide rights to commercialise specific products using Mesoblast’s technology. In return, Cephalon took on responsibility for funding and conducting the expensive late-stage clinical trials and the commercialisation of the end products, while Mesoblast was responsible for certain other mid-stage trials. Further milestone payments to Mesoblast worth up to US$1.7billion were forthcoming contingent on reaching specific regulatory milestones. Mesoblast also retained all manufacturing rights and a share of net product sales. In October 2011, Cephalon was acquired by Teva Pharmaecutical Industries.
This deal worth more than US$2 billion was the biggest ever in the field of regenerative medicine and saw Mesoblast becoming one of the top healthcare companies in Australia overnight.
In July 2010, Mesoblast reached a significant milestone with it receiving regulatory approval from the Therapeutic Goods Administration (TGA) to manufacture its MPCs and supply them to doctors and hospitals around Australia. This license is specifically for deriving a patient’s own stem cells, culturing them and then returning them to their body to repair damage.
In September 2011, Mesoblast formed a strategic alliance with leading biologics manufacturer, Lonza, for clinical and long-term commercial production of Mesoblast’s allogeneic adult stem cell products. The alliance will provide Mesoblast with significant commercial advantages, including certainty of capacity to meet long-term global supply of its proprietary MPC products; a purpose-built manufacturing facility to be built by Lonza exclusively for Mesoblast and exclusive access to Lonza’s cell therapy facilities in Singapore. Other commercial benefits include reduced cost of goods (COGS), increased margins on sales price, and R&D support for enhanced second generation products.
Technology
Our bodies are vast cooperative conglomerates made up of hundreds of specialised cell types working in concert to sustain life. Yet these multitudes of cells, from bone cells to blood cells and many others, all spring from a single source - stem cells. These foundation blocks of our bodies, small in number, are able to replicate and transform into dozens of different cell types through a process called differentiation.
Embryonic stem cells are the most fundamental type of stem cell and are able to differentiate into any other cell type in the body. However, their source in embryos raises many ethical challenges and makes them extremely difficult to develop into a commercial product. Recently research has also been done on ‘induced pluripotent’ stem cells (iPCs), which effectively take a fully differentiated cell and ‘turn back the clock,’ reverting them to an earlier stem cell state. However the iPC technology is still in its infancy and there are many significant technical barriers to overcome before they can be employed therapeutically.
There are other types of natural stem cells, ones that differentiate into a smaller range of cell types than embryonic stem cells. The earliest and most powerful cell type is the mesenchymal precursor cell (MPC), which dwell within bone marrow
and differentiate into osteoblasts (bone cells), chondrocytes (cartilage cells) and adipocytes (fat cells).
Being adult stem cells, these can be extracted from adult bone marrow, purified and then cultured to grow into a large population of stem cells. These can then be re-injected into an individual and begin differentiating into the desired type of cells. As stem cells respond to the chemical signals of their surrounding cells, MPCs injected into a knee will automatically differentiate into cartilage, whereas the same cells injected near the heart will almost magically begin to differentiate into blood vessels.
There are many features of MPCs that make them highly attractive for therapeutic applications, such as their self-guiding nature. Another is that, unlike many other types of stem cells, they are ‘allogeneic’, meaning they do not risk the patient’s immune system rejecting them. This means that the MPCs derived from a small number of individuals can be cultured and grown into an ‘off-the-shelf’ product that can then be used as needed, more like a traditional pharmaceutical product rather than requiring donor and recipient to be individually matched.
Central to Mesoblast’s intellectual property is its patented technology for isolating the crucial MPCs from bone marrow. MPCs exist only in very small numbers (approximately 1:100,000), so they need to be separated out so they can be cultured and grown. Mesoblast’s technology enables highly efficient extraction and scale-up of MPCs.
This technology relies on the identification of unique markers that appear on the surface of the MPCs, but not other cells in bone marrow, enabling the identification and extraction of MPCs at levels up to 1000-fold purer than can be generated using existing and competing technologies. Once isolated, the cells can be cultured and turned into a large population that can then be formed into the final commercial product that can be delivered to patients at the time and place of need.
Therapeutic applications
One of the things that make Mesoblast’s platform adult stem cell technology so exciting is that it has a very broad range of applications. Here are some of the conditions, with major unmet clinical needs, that are being targeted by Mesoblast
Cardiovascular diseases
Mesoblast is developing a multi-pronged cardiovascular franchise for its lead biologic product, Revascor™. Its most advanced cardiovascular indication is congestive heart failure which affects more than six million people in the United States alone, with 670,000 new cases each year. Progressive loss of heart muscle function in these patients is the number one cause of recurrent hospitalisations in the Western world and a major cause of mortality. Current therapies for heart failure offer only modest symptomatic benefits, do not result in rebuilding of heart muscle and do not prevent progression of heart failure and long-term deterioration.
In contrast, Mesoblast’s cardiovascular product, Revascor™, has been shown to result in significant improvement of heart function and to prevent heart failure progression by helping heart and vascular tissue regenerate, effectively helping it heal itself.
Clinical trials of the technology have shown that patients who received a single injection of Revascor™ into damaged heart muscle had significantly improved cardiac function at both three and six months compared with other patients. At six months, a single dose of Revascor™ was accompanied by a 22 per cent
improvement of heart function on average, compared with an 18 per cent decrease in other patients.
The observed improvement between treated and controlled patients on top of medical standard of care was over two-fold higher than previously reported with existing device therapies. The trials also demonstrated that the technology was safe to use with no adverse effects observed.
Interim results disclosed that a subset of results from the Phase 2 heart failure trial demonstrated that Revascor™ increased blood supply to damaged heart muscle and that the improved perfusion led to long-term reduction of major adverse events. This was in stark contrast to the control patients who did not receive our off-the-shelf cardiovascular product and who showed no improvement in perfusion.
Based on these very positive results, Mesoblast is expanding the use of Revascor™ for the treatment of vascular conditions including chronic refractory angina and acute myocardial infarction (heart attacks). Individually these represent multi-billion dollar annual market opportunities, each with patient populations of more than one million people in the United States alone who are not benefitting from existing cardiovascular therapies.
Bone Marrow Transplantation
Over 60,000 patients annually receive a bone marrow transplant following high dose chemotherapy for blood cancers. Mesoblast’s technology has the potential to significantly improve transplant survival, expand the pool of donors and consequently increase the number of transplants currently being performed for patients with life-threatening conditions. The technology effectively boosts the number of haematopoietic stem cells – which differentiate into the various blood cells – derived from umbilical cord blood, which then go on to repair and regenerate the bone marrow in the cancer patients after high-dose chemotherapy. Clinical trials of the technology have seen a high level of success in extending survival compared to conventional treatments, and with minimal side effects.
Given the success of the technology in expanding this different type of stem cells, it opens up the possibility of Mesoblast expanding into new conditions that can be treated with cord blood, such as multiple myeloma, a cancer of the plasma cells in bone marrow.
Degenerative disc disease
Up to 15 per cent of people in industrialised countries have chronic back pain lasting more than six months. While short-term benefits may be obtained by bed rest, analgesics, physiotherapy and steroids, many patients progress to unremitting, severe and debilitating pain due to ongoing progression of disc degeneration. For these patients, the only current option is major back surgery involving artificial disc replacement or spinal fusion.
Mesoblast is developing a biologic disc repair therapeutic to reverse the degenerative process and regenerate the disc back to a healthy state. This is a non-invasive treatment approach for the number one cause of chronic low back pain.
Clinical trials are underway, aiming to build on preclinical results which showed that six months after a single low-dose injection of Mesoblast's allogeneic MPCs into severely damaged intervertebral discs there was dramatic reversal of the degenerative process, regrowth of disc cartilage, and sustained normalisation of disc pathology, anatomy and function.
Spinal fusion
Degenerative intervertebral disc disease affects up to 25 per cent of the population. Current treatments attempt to alleviate pain and inflammation in the early stages of disc disease but in the later stages the only treatment option is spinal fusion, where two or more vertebral segments are fused to prevent movement.
Over 500,000 spinal fusion treatments are currently performed annually in the United States alone. Current fusion therapies use bone harvested from a patient’s own hip (termed an ‘autograft’) that requires a second surgical procedure, which frequently results in long-term complications such as chronic pain and infection.
Mesoblast’s orthopedic product NeoFuse™ can be used to inject stem cells between the vertebrae causing them to fuse together organically, eliminating the need for an autograft.
In preclinical trials at Colorado State University, Mesoblast’s stem cells were highly successful in generating intervertebral spinal fusion in multiple, unrelated recipients. The fusion resulting from Mesoblast’s stem cells were equally or more robust, continuous and mechanically strong when compared with the current standard surgical treatment, indicating that Mesoblast’s therapy could eliminate the need for a second surgical procedure and its potential complications. Mesoblast is conducting trials for lumbar and spinal fusion in the United States and Australia and aims to have NeoFuse™ widely available by 2015.
Diabetes
Diabetes affects 230 million people in the developed world and its prevalence is increasing at an alarming rate. Complications from diabetes include heart disease, chronic kidney failure, blindness, nerve damage and lower extremity amputations. Mesoblast has developed a treatment for diabetes using the off-the-shelf stem cells and trialled them in mice.
This trial showed that a single dose of the human MPCs injected into mice with diabetes resulted in a significant increase in blood insulin levels and sustained reduction in blood glucose levels for the entire three week period of follow-up. This was due to restoration in the damaged pancreas of the balance between insulin-producing beta cells, which reduce blood glucose, and glucagon-producing alpha cells, which increase blood glucose.
Osteoarthritis
Knee osteoarthritis affects as many as 15 million people in the United States alone, and no approved therapies currently have any effect on joint cartilage repair or regeneration. Osteoarthritis results in loss of cartilage, which cannot repair itself after injury, and interferes with mobility and causes intense pain. Currently there is no effective therapy for progressive osteoarthritis, with current treatments simply attempting to alleviate pain, but they unable to restore the cartilage lining the joint.
Mesoblast is developing a cartilage repair product called RepliCart™ for the restoration of knee joint lining cartilage. This product has completed successful preclinical trials, and a clinical trial in Australia is currently ongoing for prevention of generalised cartilage loss after an acute knee injury.
Business model
Mesoblast pursues an innovative and flexible business model that seeks to commercialise technology with genuine therapeutic benefits. Where some biotechnology companies simply develop their technology to the point where it can be licensed to a pharmaceutical company, drawing revenue from royalties alone, Mesoblast has deliberately pursued a strategy where it has focused on developing a platform technology with multiple applications, allowing it to license or manufacture and market the end product, depending on which approach is optimal.
Mesoblast’s model is based on raising enough funds to pursue early- and mid-stage trials to demonstrate the efficacy of its platform technology in a variety of indications. For some of the larger indications, Mesoblast can then engage in strategic alliances, such as that with Cephalon. This alliance will see Cephalon help drive specific products in Mesoblast’s portfolio through the costly late-stage clinical trials and regulatory approval processes, as well as partnering to leverage Cephalon’s marketing and distribution strengths.
For other products, Mesoblast can use its own resources, including revenue from its partnerships with companies like Cephalon, to take other products all the way through to gaining regulatory approval, allowing the company to manufacture and market the product itself or through a partner.
This innovative business model is not limited to licensing deals or committed to driving a single product through to regulatory approval, but is adaptive to whichever approach is most advantageous depending on the product, the market and the partners on offer.
One of the primary points of difference that separates Mesoblast from other biotechnology companies pursuing regenerative medicine technology is its use of off-the-shelf stem cells, which can be derived from a single universal donor and applied to multiple recipients. This makes Mesoblast’s technology and business model more akin to a traditional pharmaceutical model, with corresponding high-margin pharmaceutical-based sales model, rather than a more complex and less profitable biological model.
In terms of the applications that have been focused on to date, most already receive reimbursement from health care systems either in Australia or overseas. This reduces the end cost of the product for the consumer, and also appeals to governments if the technology yields improved results for a lower overall cost for that disease or condition.
Mesoblast has enjoyed very stable management, with the founder, Professor Silviu Itescu, remaining active as Chief Executive from foundation to today.
Government support
The $2.7 million Commercial Ready grant issued by the Australian Government to Mesoblast in 2005 was pivotal in enabling the fledgling company to demonstrate the effectiveness of its technology, specifically in arthritic and other cartilage diseases. Securing private funding requires demonstrable results, so these solid trial results enabled Mesoblast to gain more funding and expand its commercial opportunities by engaging additional indications, facilitating a faster path to clinical and commercial development.
The injection of funds from the Commercial Ready grant also enabled Mesoblast to run more trials simultaneously, thus fast-tracking its development and data gathering at a crucial time in its history. According to Mesoblast’s management, the Commercial Ready grant was deemed invaluable to the early development of the company and to its tremendous success today.
Mesoblast also intends to take advantage of the R&D Incentive introduced by the Australian Government to help the company conduct early stage experimental research and trials to demonstrate the effectiveness of its platform technology in new and existing indications.
Government funding also came in the form of a National Health and Medical Research Council Program Grant of $1.5 million in 2005. This was instrumental in sponsoring a number of preclinical and clinical studies using Mesoblast’s stem cell technology at a decisive time for the company. The return for the Government is potentially a new technology that can dramatically reduce health care costs when it comes to treating a wide range of diseases and conditions once the technology has been fully commercialised.
Intellectual Property
The United States Patent and Trade Mark Office has granted key patents that deliver major commercial advantages and offer long term protection for Mesoblast’s platform technology including foundation patents for composition-of-matter, or ownership, over the MPCs derived from bone marrow, dental pulp and adipose tissue (fat); exclusive commercial protection for Mesoblast’s bone tissue generating products; and manufacturing patents covering methods of purifying, isolating and enriching the MPCs. Additional patents have been filed covering specific uses of the company’s biologic products that considerably extend the duration of patent protection.
The future
Mesoblast is currently actively pursuing the final pivotal stages of clinical trials for a number of indications with the expectation of seeing marketing approval here and in the United States and Europe within the next few years. The products entering the late-stages of the commercialisation process include treatments for congestive heart failure, spinal fusion, degenerative disc disease and for bone marrow transplantation.
Several products for diseases such as diabetes, eye diseases and central nervous system conditions such as Parkinson’s disease, multiple sclerosis and stroke, will also be progressing through mid-stage trials as a precursor to advancing to late-stage trials and application for regulatory approval. Other applications for the stem cell technology are also being evaluated internally, with Mesoblast planning to increase the number of programs being developed depending on unmet needs in the market where stem cell therapies might be applied.
Gaining approval by government regulatory authorities requires constant diligence and anticipation of the demands of the regulators. As such, execution is a high priority for Mesoblast, particularly as it nears the final stages before marketing approval.
Contact information
AUSTRALIA
Mesoblast Limited Level 39 55 Collins Street Melbourne 3000 T: +61 3 9639 6036
F: +61 3 9639 6030
UNITED STATES
Mesoblast Limited Level 4 275 Madison Avenue New York, NY 10016
T: +1 212 880 2060 F: +1 212 880 2061
www.mesoblast.com