Silviu Itescu's Hard Cell

Silviu Itescu risked his last dollar on launching Mesoblast. Today, his $1.8 billion stem cell research company is a world leader in its field. By Tom Skotnicki

Australia's leading biotech entrepreneur, Silviu Itescu, says unless your strategic approach is right, it doesn't matter how good your technology proves.

Itescu heads up Mesoblast, which over the past few years has emerged as arguably the world's leading stem cell research company with a market capitalisation of about $1.8 billion.

Itescu launched the company on the Australian stock exchange in 2004. Before that he was based in New York heading up a research team at Columbia University Medical Centre and a company seeking to commercialise his research in collaboration with Columbia University.

Itescu, who now lives in Melbourne and did his original medical degree at Monash University, attributes the success of the company to a combination of solid science and a highly strategic approach to the biotech industry.

Mesoblast has several potential products at different stages in the process of obtaining international drug agencies' approval. The company is on the verge of starting several Phase 3 trials (the final phase before approval) into the use of stem cells in the treatment of conditions including rheumatoid arthritis, some forms of cancer, orthopedics and chronic heart conditions.

Itescu says when he started down the path of trying to commercialise stem cell treatments in 2001 he was largely met with indifference.

"There was funding and grants available for research but how do you develop clinical trials, large animal studies and manufacturing on $1 million spread over several years?"

He says venture capital in the US was devastated by the September 11 attacks and pharmaceutical companies considered stem cell therapies too theoretical. "They couldn't get their heads around it," he says.

Itescu says the company he ran at Columbia was designed to attract development capital using a licence to intellectual property he had developed along with his team. However, by 2002 it was not very much further advanced.

Itescu admits part of the problem was the approach at that time involved extracting stem cells from bone marrow and then injecting them back into the affected area. This type of personalised medicine made it difficult to scale up, which reduced its appeal to the pharmaceutical industry.

However, Itescu says as a result of the meetings and discussions he had with the pharmaceutical industry and venture capitalists he expanded his understanding of what was needed to succeed.

The stroke of luck came in 2002 when a portfolio of patents seeking licensing came across his desk from a South Australian research group, the Hanson Institute. Its approach was based on Mesenchymal Precursor Cells which Itescu recognised could be much more easily reproduced.

"It potentially provided an opportunity to develop a scalable, industrialised business model with an off-the-shelf stem cell type that I thought was much more likely to attract investment capital," he explains. "This is the point at which I took a big risk."

The researcher who at this stage was living in a one-bedroom rented apartment in New York decided to provide the funds necessary to license the new technology.

"I decided to spend my last dollar on licensing the technology into Angioblast (the US venture with Columbia University). I had never in my life taken a risk like this."

He risked several hundred thousand dollars to buy the licence and undertake the necessary concept research to interest investors.

Initially, the company was considering raising $20 million being sought in the US.

"My view was that the US market was not sufficiently recovered and the venture capital groups still had no appreciation of the value of stem cells whereas there was far more happening in the IPO (initial public offering) space in Australia."

Itescu also had some contacts with the investment arm of the Pratt Group, having acted as a scientific consultant on IPO proposals for its investment arm the Thorney Group.

"It became clear to me that the Australian public market was operating as an alternative to the US venture capital market for investment in early stage developments."

Mesoblast listed publicly in December 2004, raising $20 million.

That initial capital was used to kickstart manufacturing and establish the first human drug trials. Phase 1 drug trials only lead to treatments in about 5 per cent of cases so it was only when several of its products moved to Phase 2 trials (which have a 20 per cent success rate) two years later that Mesoblast was able to raise additional capital. Itescu said after a capital raising earlier this year the company has $330 million in cash which will be sufficient to fund a series of Phase 3 trials (mass randomised trials) which can cost up to $100 million. In the case of its cardio treatment drugs, Mesoblast has a development partner, Teva Pharmaceuticals (a leading generics manufacturer which also has a substantial shareholding in the company), which will absorb much of the cost however for several of its other final stage trials it has decided to go it alone because the pay-off if the drug is accepted can be far greater.

Itescu says there are four key determinates of success in biotech apart from the technology:

• Having multiple products under development so not all your eggs are in one basket;
• Patent life is finite so focus on simultaneously developing several products to maximise the value of patent protection;
• Make sure you have sufficient cash to fund trials and developments (with a single Phase 3 clinical trial costing up to $100 million);
• Seek out key strategic partners to help shoulder some of the risks involved in getting products to market.

Itescu says he is not sure which of his products will pass regulatory scrutiny but the likelihood of bringing a treatment to market after a Phase 3 trial is about 50 per cent. He says given the company is planning several of these trials over the next year, Mesoblast could be offering the world's first stem cell treatment within three years.

"If we have a first approval for an oncology product even if it is a narrow area which may be a market of $200 million the fact that we have approval for a therapy involving stem cells would change perceptions."

Itescu compares it to the development of monoclonal antibodies in the 1990s. Today, virtually all pharmaceutical companies offer monoclonal antibody-based drugs.

"A first FDA approval will totally change the paradigm and will establish stem cell therapy with the investment market as a genuine breakthrough approach."

Itescu says he is convinced biotech companies should be led by people with professional experience and qualification in science and medicine or biotech investment to deliver the necessary innovation, although he accepts that once Mesoblast moves beyond the research and development stage a different set of skills may be required.

He says despite the risks associated with biotech he has to be confident of his company's success.

"I have to be confident or I shouldn't be leading the company. Perhaps over the past eight years since we listed I may have on occasions been naively optimistic but unless you are optimistic you will never achieve."

Itescu says in his favour is the strength of the technology and the fact that it is targeting the "sweet spot of unmet medical needs with a platform technology".

He admits the risk to this point has been massive, but a large part of his role is successfully managing risk.