Mesoblast boss and major shareholder Silviu Itescu won’t be the only one breathing easier now that the ASX-listed biotech’s flagship treatment has managed to get the green light from the US regulator’s advisory committee.
It was a close run thing by all accounts and for Itescu and investors in Mesoblast a no vote would have seen a decade’s worth of work come to a standstill.
For his part, Itescu says he wasn’t quite as spooked as investors by signs the US Food and Drug Administration’s drug advisory council was going to put Mesoblast’s treatment under severe scrutiny.
“We have been very well prepared for this meeting, we have known what the issues are and we’ve known what the answers are,” he says.
Mesoblast’s stock, which plunged more than 30 per cent in a single session ahead of the USFDA meeting, roared back to life on Friday, up over 40 per cent.
The company had been talking up hopes that its flagship product, remestemcel-L, used to treat acute graft-versus-host disease in children, a severe immune response which can occur after a bone marrow transplant, could also be used for respiratory distress caused by COVID-19. The link with COVID-19 may have played a part in raising the stakes for investors prior to the US hearing.
The vote by the advisory council on Friday morning Australian time means experts believe remestemcel-L is effective for graft-versus-host disease. This paves the way for the FDA to approve the treatment for use in the US for this illness, which would be a regulatory first. The FDA will make a final decision by September 30.
The rollercoaster three days for Mesoblast is a salutary lesson in how quickly the ground can shift under the feet of biotech companies and their backers. Even before this week’s gyrations, Mesoblast’s share price has bounced around this year, from as low as $1.02 to as high as $4.87 over the last six months.
Itescu says he hasn’t been paying much attention to the share price. It’s not a bad idea, especially when it comes to the biotech sector, where high risk, high reward is par for the course and regulators can make or break a company.
“I mean, volatility is just other people’s perception of risk,” he says.
Long time Mesoblast backer and executive chairman of Thorney Investment Group Alex Waislitz says the opportunities offered by Mesoblast have never been in doubt but adds that putting money in biotechs isn’t for those looking for a sure bet.
“It leaves itself open for a lot of volatility. You need to have a long-term perspective on it — you need to have the capacity to deal with the long time between announcements and trials,” he says.
“It’s not for the faint-hearted.”
A COVID-19 launch pad
The coronavirus pandemic has fuelled extraordinary volatility in the markets but the fight against the virus has also thrust relatively obscure companies into the spotlight and turned some into multibillion-dollar businesses.
The biotech sector, which includes diagnostics, novel drug development and medical devices, is big business. The top 10 healthcare companies on the ASX are worth more than $200 billion alone.
‘If you can make substantial differences to patients and their outcomes, you have the ability to create a new industry.’
Silviu Itescu, Mesoblast chief executive
Australia is renowned for its cutting edge research, and its largest life sciences companies such as CSL and ResMed have grown into multibillion-dollar exports with sustained share price growth.
Beyond these household names, there are more than 80 listed smaller pharmaceutical and medical device companies working, often under the radar, to turn brand new therapies into reality.
And there are big rewards on offer for investors but as Itescu says, the sector also presents significant risks. “Investors should understand that biotech is a highly regulated field — it requires patience, diligence and ultimately you’re in the hands of regulators.
“Having said that, there’s got to be more of an understanding of the hurdles but also the rewards, if the tech works and it’s patented and has an exclusive area of focus, really if you can make substantial differences to patients and their outcomes, you have the ability to create a new industry,” Itescu says.
While the sector hasn’t traditionally been on the radar of many investors, experts say the pandemic has generated awareness of the role of drug and treatment supply chains, which has in turn led to money flowing into the sector.
Atomo Diagnostics’ experience since listing on the ASX in April illustrates the new-found enthusiasm of investors in punting on stocks involved in testing, treating and eradicating COVID-19.
The rapid diagnostic testing startup pitched itself to the market with a test for HIV but quickly shifted its focus to developing a COVID-19 test. Atomo’s rapid antibody test was approved by the Therapeutic Goods Administration last week, launching it into the Australian market. As the pandemic put biotech companies front and centre, its share price jumped. Sitting at 38¢ on Friday, the business is trading 90 per cent above its initial public offer price.
Managing director John Kelly says the swift pivot has served the company well and while investor interest in biotechs is welcome, it’s what happens once the virus is contained that will be crucial for the sector.
“I think for a company like Atomo it’s a bit of a double-edged sword, it’s increased interest in the sector, but at the same time there has been such a level of media saturation.
“We’d rather grow a steady share price over five years rather than spiking over one year.”
Atomo is not the only small biotech that has rocketed in recent months. Real-time lung function tracking company 4D Medical soared on its ASX debut in the second week of August, up 117 per cent on its 73¢ offer price to $1.59.
Meanwhile in the US, companies such as vaccine developer Moderna skyrocketed from $US19.23 in January to a high of $US94.84 in July, a 393 per cent increase.
‘Take the emotion out of it’
Even fund managers that have benefited from the growth of vaccine stocks in recent months urge caution about evaluating investment opportunities in the space.
Platinum Asset Management’s international healthcare fund portfolio manager Bianca Ogden has been watching companies like Moderna for years. Platinum has been invested in the US biotech since the company’s IPO in 2018, when it bought-in at $US23.
Ogden says there has been a lot of money flowing through US biotech stocks, but she is also watching closely for when the fuel of vaccine enthusiasm wears off.
“I wonder if the next data point is where they run out of puff.”
The global pandemic has given local investors a better insight into research processes and medical products, particularly around diagnostics and tests, she says. But cautions that despite there being strong companies both here and abroad, investors shouldn’t be jumping into stocks without considering their long-term risks and rewards.
“You have to take the emotion out and look at ‘what can this company realistically generate in sales?’,” she says.
Ogden says there are plenty of up and coming Australian-founded biotechs that will grow beyond the pandemic but the challenge will be competing with some of their cashed-up US peers.
“I think there are some good companies — one of the issues here is the funding environment, it’s sometimes a bit challenging. For larger trials, for example, you often need $20 million-$50 million.”
Her team is currently focused on finding investment opportunities with inventions that will be of use beyond the pandemic.
“We tend to gravitate to things that are less discovered, less in the headlines.”
Securing the research pipeline
However, investors believe Australia has the power to further capitalise on rising appetite for biotechs post-COVID, although there will be some hurdles.
Melbourne was ranked among the top 40 startup ecosystems in the world this year by global research firm Startup Genome. Its debut on the list was based largely on the strength of the city’s life sciences sector, which Startup Genome believes generates close to $17 billion in economic activity each year.
“There’s going to be great careers in being a research scientist, because more than any time perhaps in history, we will find funds being dedicated to this area,” Mr Waislitz says.
However, Paul Kelly, who oversees the $170 million healthcare fund at OneVentures, says the country will have to face up to local challenges. COVID-19 has hit Australian universities incredibly hard, having implications for research projects that might one day be spun out into successful companies.
“That significant impact runs the risk of really gutting research and development. There may be impacts we won’t see for the next five to 10 years.”
Atomo’s Kelly agrees that Australia’s challenge will be improving the commercialisation pipeline. “The research is brilliant, we could do better at turning that research into businesses that can grow globally,” he says.
Despite the commercialisation challenges, he’s hopeful the pandemic has reframed the sector. “It has been a bit unloved in Australia at times — the appetite is not always patient enough and sophisticated enough,” Kelly says.
“With the pandemic, one positive that might come out of it is these types of businesses are more investable.”
Emma is the small business reporter for The Age and Sydney Morning Herald based in Melbourne.