Mesoblast Is No Match For Pluristem's IP And Manufacturing
Jan. 16, 2014 6:52 AM ET | 1 comment | About: PSTI, MBLTY
Disclosure: I am long PSTI. (More...)
Last week, Pluristem Therapeutics Inc. (PSTI) won a methods of use patent in Australia for its PLX cells in ischemia, where obstruction of blood vessels to an organ causes tissue death. This important step in the company's cornering of the stem cell manufacturing market follows last September's announcement of a seminal US patent award for use of its technology to treat peripheral artery disease with placental-derived cells, a $200 billion industry. Together, these broad patents cover a wide range of therapeutic indications including critical limb ischemia, acute myocardial infarction, intermittent claudication, and orthopedic and central nervous system conditions.
Pluristem now holds a total of 27 exclusive patents, creating for itself a monopoly on the expansion of mesenchymal stem cells (MSC) in three dimensions, whether they come from the placenta, or fat, blood, and bone marrow.
Mesoblast Limited an Australian listed company (MSB) and US listed ADR's (OTCPK:MBLTY), a direct competitor to Pluristem, has patents for MSCs derived from bone marrow and while there is no distinct overlap, a huge difference exists in the acquisition of stem cells. Mesoblast must obtain the marrow from healthy donors that undergo an invasive and painful procedure; they are most likely not donated and there is no doubt in my mind that money changes hands in the land down under. By contrast, Pluristem gets its seed stem cells free of charge from Cesarean section birth mothers, considered a medical disposable and easy to acquire.
Another distinction between the two companies favors Pluristem. Because their MSCs are placenta-derived the cells are younger and more vigorous with a greater ability to differentiate into other cell types where repair is targeted. Almost half of fertilized embryos are spontaneously aborted during pregnancy, so the ones that survive undergo a natural screening method with cells that are genetically viable and more capable of performing therapeutic functions. Mesoblast's bone marrow stem cells of children and adults are older and may not show the same degree of efficacy, a consequence that could easily illustrate itself in clinical trials.
The biggest disparity between Pluristem and Mesoblast is in manufacturing. Successful commercial supply of stem cells will be dependent on the ability to consistently and reproducibly provide product that passes regulatory scrutiny. Pluristem has labored to build and equip a facility compliant with FDA standards, the first and only to exist. Mesoblast, on the other hand, has an alliance with Lonza, an international contract manufacturer of biologic products where eventual scale-up and supply would force Lonza to build a new bricks and mortar plant for Mesoblast's stem cell offerings. If this is done in a remote region like Singapore, FDA officials may take longer to grant Lonza the manufacturing practices approval necessary for production.
The economics of commercialization favors Pluristem, which uses proprietary three-dimensional, bioreactors to create a superior product. Lonza uses two-dimensional technology. In my analysis and based on management conversations, Mesoblast pays Lonza approximately $30 per one million cells for a single 300 million cell dose of therapeutic value (considered suitable in a range of conditions), incurring a cost of $9,000, not including the price of bone marrow extraction. Adding a profit margin of 30%, the medical and patient community pays upwards of $12,000.
Pluristem's 3-D bioreactors can grow PLX cells at a cost of $1 per one million cells. A single 300 million cell dose of PLX Cells costs them only $300, bringing down the charge to patients considerably and making Pluristem a clear economic winner. Further, the company's precision controlled and fully-automated 3-D bioreactors allow them to create different PLX product by tweaking the cell culture environment through changes in oxygen and acid/base levels. By contrast, Lonza's large-scale 2-D cell expansion does not allow the formation of some cells and does not ensure batch to batch consistency, a continual concern to regulatory authorities. Osiris Therapeutics (OSIR) ran into this problem with Prochymal, which may be why so small an amount of money was accepted at purchase despite a massive research and development spend of nearly $400 million. Ironically, the sale was to Mesoblast.
All told, Mesoblast incurs high production cost payments to Lonza where Pluristem can produce cells at a fraction of that amount, a point completely overlooked by investors who do not understand the concept of economies of scale, and a fact that could impact the financial bearing of the two companies in the future. Which begs the point - no company in the world can gain a cost advantage over Pluristem by growing mesenchymal stem cells in 3-D without first obtaining a licensing agreement. I find it hard to fathom why Lonza has not to date nailed down an arrangement with Pluristem, given their inferior technology. Unless it's because Pluristem recognizes that there is no money incentive large enough to entice them to relinquish the monopoly on their exclusive manufacturing process, that is fast becoming known as a clear competitive advantage in cell therapy.
Mesoblast has had a few hiccups in its pursuit of stem cell therapy. In 2010, the company struck an alliance with then publicly-traded Cephalon in one of the largest regenerative medicine licensing deals of the decade - potentially worth $2 billion - surpassing that of Genzyme and Osiris Therapeutics three years earlier. Less than six months later Teva Pharmaceutical Industries (TEVA) bid $6.2 billion for Cephalon, shutting out Valeant Pharmaceuticals (VRX) in hopes of capitalizing on an exciting area of medicine and shore up its pipeline as its lead drug Copaxone for multiple sclerosis approached the end of patent protection. Mesoblast's pipeline suggests that it continues with Cephalon's work in heart failure, where Phase II results were presented last November at the American Heart Association Scientific Sessions, but Cephalon's projects in Parkinson's disease and other neurological disorders have all but disappeared.
Like any biotechnology firm, Pluristem's risks for investors are tied primarily to clinical results - whether or not PLX cell therapy will be effective in patient populations larger than those conducted in early phase trials because good news in Phase II does not guarantee efficacy in Phase III. However, I believe Pluristem has enough scientific talent and advisory muscle to act as a kind of research and development checks and balances to mitigate risk. With cash on hand of almost $50 million, the company has roughly three years of runway to fund both studies and operations, given its low burn rate.
Pluristem's cells developed for therapeutic purpose against those of Mesoblast are easier to obtain and less expensive to manufacture. Their patents cover more indications. Mesoblast has had to relinquish more shares to finance itself, hence its bloated market capitalization. Pluristem's progress is rapid and its stock price should soon surpass this competitor.
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