Stem cell pioneer lures big pharma
by Tony Boyd
Just when Australia’s beaten-down biotech sector was in need of a boost, Silviu Itescu at stem cell pioneer Mesoblast sends positive signals by selling $58.5 million in stock to US pharmaceutical giant, Celgene Corporation.
This is a hugely important transaction for Mesoblast and the Australian biotech sector. It shows big pharma is not content to sit back and rely on its in-house research to fill its pipeline of potential treatments.
It has made a down-payment to get its hands on the intellectual property of a leader in stem cell research.
The biotech game is extremely complex and risky but the rewards can be enormous. For example, a recent report on Celgene by analysts at Morningstar said its blockbuster drug Revlimid has formidable growth prospects as the market grows from $US8 billion to $US16 billion by 2019.
Investors in biotech stocks tend to get dazzled by the blue sky and assume the optimistic scenarios will prevail.
The flaw in that investment thinking was evident in Australia last month when one of the darlings of the biotech sector, Sirtex Medical, halved in price in one day.
More than $1 billion was wiped off the Sirtex market value after clinical trials of its radiation treatment did not show a meaningful improvement in patients with liver cancer.
Clinical trials are the costly front end of the life sciences, biotech and medical device industries. In Australia, these trials have been funded by regular capital raisings.
Itescu has been smarter than most of his compatriots by tapping into the huge cash flows and powerful balance sheets of US pharmaceutical companies.
However, his most successful deal with big pharma in 2010 did not deliver what was promised in terms of promised investment in clinical trials.
Global pharmaceutical group Cephalon bought a 20 per cent stake in Mesoblast and entered into a $1.7 billion strategic partnership with Mesoblast.
But when Cephalon was taken over by Israeli company Teva Pharmaceuticals the pace of promised investment in Mesoblast’s intellectual property slowed. Teva is a world leader in generic drugs and was widely seen as being less interested in the development of new disease treatments.
That did not stop Itescu raising $170 million in a private placement in the US in 2013. It was the largest equity financing by a global biotech in 2013.
It says a lot about how much the world has moved on since then that the share issue to Celgene on Monday was at $3.82 a share whereas in 2013 it was at $6.30.
That comparison simply shows the wisdom of the Itescu strategy and one that other chief executives in other industries have been slow to learn. The message is clear that when capital markets are open companies should take as much as they can get because the door may slam shut real fast.
The Itescu strategy has been carefully orchestrated so Mesoblast does not have all its eggs in one basket. It had options beyond the disappointing relationship with Teva.
The company expanded its portfolio with the purchase of the culture-expanded mesenchymal stem-cell assets owned by Osiris Therapeutics in October 2013.
Itescu has been negotiating separate deals for the more rapid development of its IP and it is distinctly possible that the Celgene deal could be the first in a series of transactions.
Mesoblast said Celgene has a six-month right of first refusal with respect to Mesoblast’s proprietary mesenchymal lineage adult stem cell product candidates for the prevention and treatment of acute graft versus host disease (GVHD), certain oncologic diseases, inflammatory bowel diseases and organ transplant rejection.
Itescu said the agreement provided an opportunity for Celgene to add Mesoblast’s IP to its leading cellular and regenerative medicine pipeline.
Chris Kallos, Morningstar healthcare analyst, says the overlapping interests of Mesoblast and Celgene are favourable for the development of a closer working relationship. He says the fact both companies are focused on immunological diseases is positive.
He says there are four aspects of the transaction that deserve attention including the extension of the Mesoblast runway for development thanks to the additional $58.5 million in cash, the endorsement of big pharma and the presence on the share register of a major and financially powerful company.
He says Celgene has cash in the bank of $US7 billion. Celgene has a market capitalisation of $US93 billion compared to Mesoblast’s market value of $1.2 billion.
In keeping with most healthcare analysts, Kallos at Morningstar examines biotech stocks from the perspective of the size of the “moat” that surrounds them.
He says Mesoblast does not have a moat because it has no approved products on the market in the US, based on its proprietary MPC technology, and only conditional approval of Prochymal (the most advanced product acquired in Osiris deal) for treatment of children with acute graft versus host disease, or GcHD.
The best way to look at the Celgene investment in Mesoblast is an option on the company’s IP. In effect, it has gained six months exclusive access to examine the work the company has done in a range of disease fields.
That raises the real prospect that Celgene will take the big leap and takeover Mesoblast. But even without a takeover offer, the placement of the shares has put a floor under the company’s stock price.
The deal between Celgene and Mesoblast prompted some positive commentary from analysts but it could not persuade the bear on Mesoblast, Craig Collie at Macquarie Securities.
He said in a note to clients that he had maintained his “underperform” rating on Mesoblast. “The share issue is positive for Mesoblast in that it gains another six months of funding, meaning at current burn rates, it now has enough cash to last for 17 months,” Collie said.
“For Celgene, the deal also appears beneficial in that, for a moderate sum (0.05 per cent of its market cap), it gains an option to examine MSB’s products in detail to compare and contrast to its own investigational products.
“However, with the transaction being of relatively modest value and containing no specific future commitments (ie milestones, royalties, etc.) we would urge caution in over-interpreting the read-through for the prospects of Mesoblast.”
Ryan Stokes steps up
When Chanticleer asked Ryan Stokes and outgoing chief executive of Seven Group Holdings Don Voelte if Kerry Stokes would step back from his role as executive chairman, both laughed out loud.
Both men know the founder and driving force behind Seven Group has never been more actively or energetically involved in the day-to-day running of the company.
Stokes snr, however, has shown his faith and confidence in his son’s ability by several years ago handing him responsibilities equivalent to a chief executive officer.
Ryan Stokes has been handling analyst presentations for quite a while but admits that more needs to be done to build relationships with institutional investors.
Seven Group is modelled on Wesfarmers. It is a conglomerate that allows its managers to get on with the job of managing once the strategy is set. The major difference is in relation to its $793million investment portfolio. That investment in strategic companies or sectors that are ripe for upheaval or consolidation has been a feature of Kerry Stokes’ business model for four decades.
Ryan Stokes says the buyback of 17.7million shares currently under way will not be used by the Stokes family interests to increase their holding in the company. He says the interests of the company and the Stokes family, which owns 67 per cent of the company, are both in alignment.
Voelte leaves a legacy of strong management talent in the various Seven Group businesses.
TONY BOYD
Twitter: @TonyBoydAFR
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