Mesoblast’s friends maintain the faith

After a rollercoaster two decades in business, Mesoblast is now at a critical inflection point.

Silviu Itescu is the CEO of stem cell group Mesoblast. Picture: Aaron Francis

Alex Waislitz and Silviu Itescu have been friends ever since their days at Melbourne’s Monash University, when the former was at law school and the latter studied medicine.

Itescu, the chief executive of controversial listed stem cell manufacturer Mesoblast — long one of the most shorted stocks on the ASX — was in Waislitz’s bridal party, at the birth of his son and consoled the billionaire after the death of his father in 2009.

So on the morning of August 14, 2020, no one was prouder than Waislitz when a 10-person drug advisory committee to the US healthcare regulator voted nine to one in favour of the FDA approving Mesoblast’s flagship drug, Remestemcel-L.

Also smiling that day was Waislitz’s brother-in-law, paper and packaging magnate Anthony Pratt. Mesoblast is the only listed company stock he owns, on the recommendation of Waislitz, whose Thorney Group owns 6 per cent of Mesoblast and has been a shareholder for two decades.

For Itescu, it was a moment of euphoria, seemingly the turning point in the at times tortured history of the biotech company he founded.

Thirty times out of 30 in the previous five years, the FDA had gone along with the recommendation of its committee. It would be the company’s first approval in the US.

Stem-cell research has long held great promise in medicine, with its proponents claiming it will lead to important therapies for tackling major degenerative diseases, such as Parkinson’s, Alzheimer’s, stroke, heart disease, diabetes, cancer and arthritis.

Marketed as Ryoncil, remestemcel-L treats a life-threatening inflammatory condition in children called acute-Graft Versus Host Disease (GvHD), where they experience rejection of bone marrow transplants. But FDA approval for this use would open the door for others.

By the end of September, ahead of the FDA’s September 30 deadline to respond to the committee, Mesoblast shares had hit a six-year high of $5.50.

Then, as has happened so often in the history of this company, disaster struck unexpectedly.

On October 2 Mesoblast revealed to the ASX that the FDA had declined to take the committee’s advice. It wanted more trials. The share price fell 44 per cent.

“I couldn’t believe it. I was shocked,” Itescu tells The Weekend Australian on the decision that rocked his world. “For a month we were sitting waiting. We just weren’t getting any information. We tried and were told to sit and wait. As the date got closer and closer we got more concerned.

“I have never had so many mixtures of emotions in such a short amount of time.”

Waislitz shared his good friend’s disappointment but immediately looked to the future.

“At the end of the day it is the interpretation of the data that we are focused on. You should not be investing in drug development if you can’t handle the setbacks,” Waislitz declares. “The data is still showing great efficacy and great results. The progress of the company is quite significant, material and impactful towards improving life expectancy.”

But the decision gave the many Mesoblast naysayers — it remains the 12th most shorted stock in the ASX 200 — more ammunition.

Their guns were at the ready again on December 18 when the stock fell another 45 per cent after Mesoblast revealed news that a COVID-19 trial using Remestemcel was not likely to meet its primary objectives and would be pulled.

Most seriously, the news seemingly put in jeopardy a landmark $US50m deal with Swiss pharmaceutical giant Novartis struck last November that remains subject to certain closing conditions, including time to analyse the results from the COVID-19 trial.

At a critical point

After a rollercoaster two decades in business, Mesoblast is now at a critical inflection point. Negotiations in the coming months with the FDA and Novartis will make or break the company, which is yet to produce a major commercial product in America despite raising over $1bn since listing in 2004.

The share price is now below the $2 mark, half the level it was a year ago.

Waislitz, whose Thorney Group continues to share an office floor with Mesoblast in Melbourne, says his advice to his friend has been to simply concentrate on the business.

“Don’t get caught up in the share price. Communicate as best you can within the framework that is allowed. Focus on the underlying operating work. Work hard on the important things — step by step progress through the approval processes and doing the trials you need to do,’’ he says.

“Unfortunately it is an industry where you have to spend a lot of money. But the good part is they haven’t given up their rights for all the applications. They own all their IP and their entitlements. Many other companies would have given that away to big pharma on their journey.”

Bell Potter healthcare analyst Tanushree Jain has previously warned that because a stem cell product like remestemcel-L has never secured US approval before, the FDA will be determined to leave no stone unturned despite the fact the product is approved and selling in Japan.

Now, six months on from the FDA ruling, Itescu is philosophical as he remains focused what he still believes is a $750m-$1bn revenue opportunity for Mesoblast in GvHD.

“The FDA has previously said they don’t want to have unregistered use of stem cells. They want to make sure that when they approve the first product, they are not opening a Pandora’s box,” Itescu says.

“I am not surprised there is a lot of conservatism inside the FDA. Those discussions are active and ongoing. Our role now is to give the FDA comfort that we are legitimate, we have high integrity, and that we will comply with everything they want us to comply with.

“We will do additional studies as needed and have the highest standards of manufacturing.”

In the wake of the FDA decision and the suspension of the COVID trial in December, in February Mesoblast’s auditor PwC said a private share placement and future partnership payments were key to the company continuing as a going concern.

Mesoblast burnt more than $100m in cash last year as it ramped up industrial-scale manufacturing of remestemcel-L and put a sales team in place in anticipation of FDA approval.

But Itescu bristles at assertions the company was on the brink of going broke. “I don’t know where the concept of going broke came from. It was never a concern,” he says. “The audit report simply said we don’t have 12 months of cash, so there was a going concern issue. But we have had a going concern issue in our financials every quarter for the past three years.

“As a biotech company you don’t generally want to have enough money that you have a pile of cash sitting around. You always work towards a 12-18 months window.

“We had been approached by strategic investors from offshore who had done a lot of due diligence. We always have strategic options, either from partners or investors. We never have a concern about running out of cash.”

SurgCenter Development, one of the largest private operators of ambulatory surgical centres in the US specialising in spine, orthopaedic and total joint procedures, injected $US110m into Mesoblast in March, taking its cash balance from $US77.5m to $US187.5m.

In theory it means Mesoblast will have no need to raise more money for up to 24 months.

Concerns ‘overblown’

Itescu denies there was any link between the raising and the auditor’s cash concerns.

“Our quarterly results go out, which are audited. And we run our financial strategies in parallel,” he says. “Investors do diligence. We weren’t running a strategy to bring in cash ahead of quarterly financials. We had six months of cash at least. They (SurgCenter) clearly thought it was a good entry price to have a good return.”

Waislitz also says the concerns about the cash of the company have been “well overblown and conflated for many years”, adding: “If this company was based out of the US with this potential and the results it had, the ability to raise capital would not be as problematic. It would not have got the attention of the short side promoters that it gets in Australia.”

Questions remain about Mesoblast’s obligations to its lenders, especially $US50m from Californian venture capital finance house Hercules Capital.

Analyst Hashan De Silva of CLSA, which has a sell on Mesoblast, has previously questioned how soon the loan needs to be repaid. Mesoblast also has a $US30m loan from US healthcare investor NovaQuest Capital Management.

“Discussions with Hercules have always been excellent and multiple times already repayment terms have been deferred and we are confident that will continue as we restructure our debt position,’’ Itescu says.

There are now multiple class actions afoot in the US against Mesoblast — which is also listed on the Nasdaq — after the share price slumps investors have experienced over the past 18 months.

Each relate to questions about Mesoblast’s failure to disclose ­materially adverse facts related to prior trials of remestemcel-L.

Itescu and Waislitz won’t comment on the specific allegations, but the former claims US companies “get routinely sued when there are share price movements that are abnormal”.

He says the lawsuits are “without basis. We have always had full disclosure, full transparency, we meet all of our obligations.”

Waislitz is not surprised by the litigation given the share price falls, and notes pointedly that he — as an investor — would prefer more disclosure by the company. But he understands the rules.

Itescu, whose 11 per cent Mesoblast shareholding is valued at just over $130m, now remains focused on progressing its three traditional stem-cell therapy product candidates — remestemcel-L for GvHD and rexlemestrocel-L for chronic heart failure and chronic low back pain. It hopes the latter will reduce opioid use in the US.

Covid results excite

But he is most excited about the COVID applications, despite the trial setback in December.

Mesoblast recently told investors the latest trial results showed COVID patients aged under 65 ­receiving remestemcel-L had reduced mortality for 60 days after taking the drug. Those using Mesoblast’s drug saw 46 per cent lower mortality through to day 50 of the treatment.

When used in combination with the standard COVID-treating steroid known as dexamethason, remestemcel-L lowered mortality by 75 per cent and increased days alive without mechanical ventilation in subjects aged under 65. No test data was released for patients aged over 65.

“The survival benefit we are now seeing is beyond my wildest dreams,” Itescu says.

“On that basis we are going to have a conversation with the FDA over the next couple of months to see if we have sufficient data points for an emergency use authorisation. Or whether they want another trial.”

So what will this mean for the Novartis deal?

“Novartis is quite aware of the data, they are analysing it themselves,” Itescu says. “In order to close the transaction they wanted to see what the data looked like. Clearly, the fact that we didn’t hit our primary end point they were aware of back in December. If that was the only thing they were interested in, they would have walked five months ago.”

Waislitz and Mesoblast’s rusted-on believers continue to hang onto the dream that the cash-burning biotech is on the cusp of a number of applications that are multi-billion-dollar markets.

“I understand the risk-reward side of this and the volatility of the journey. I am there for both the impact on human lives and the ­financial returns,” Waislitz says.

“I am there to make five, 10 or 20 times my money from here, even though I have banked good gains already.”

Itescu knows only FDA approval for any of Mesoblast’s stem cell treatments will finally get the company off a seemingly endless share price rollercoaster.

“I am patient, I am working harder than I ever worked,” he says.

“I might have been naive 10 years ago. But now I know exactly where we need to be to deliver returns to shareholders.”