Captian Cook Bridge, Brisbane 2008, courtesy of Nam Nguyen, licensed under creative commons
How do you value biotech startups? It’s not easy.
Conventional methods for normal companies rely on discounted cash flows - a fancy term for guessing how much future profit a business will make in today’s dollars.
But valuing biotech startups is much harder. They have no real products for sale, just the promise of something to sell in the future. Stock analysts have much less information to guess future profits. To make matters worse, biotechs require huge upfront investments, and navigate enormous risks in getting products through clinical trials and onto the market.
For Melbourne company Mesoblast, whose stem cell therapies are several years away from the marketplace, much of its $2 billion market value is underpinned by patents. Yes, there are other influencing factors like its product pipeline, the size of potential markets, and the quality of its management. But patents build a bridge from the science laboratory to the pharmacy. Patents bridge the gap between risk and reward.
On one side of the patent bridge there's nothing but risky investment in research and clinical trials. On the other side are predicable cash flows, where doctors write new prescriptions for breakthrough medicines.
Company spokesperson, Julie Meldrum, says Mesoblast is committed to the ongoing expansion, broadening, and development of its intellectual property portfolio.
'The granting of patents in various jurisdictions protects Mesoblast's commercial rights and helps to ensure that it has freedom to operate commercially,' says Ms Meldrum.
But that freedom also includes the freedom to fail. There are two time bombs ticking away in the background for any biotech. One explodes when a start-up runs out of cash. The other time bomb goes off when patents expire after twenty years. After that, it's open season and competitors can manufacture and sell the drug.
One of Mesoblast's most promising products is Revascor, a therapy for congestive heart failure, which has just passed through phase II clinical trials. This is a crucial step in gaining approval from the US Food and Drug Adiministration (FDA) - a mandatory hurdle for access to the lucrative US market.
Revascor works on adult-derived Mesenchymal Precursor Cells (MPCs). MPCs are like 'blank canvass" cells that can mature into muscle, nerve, bone and blood cells, They easily expand in large numbers and, importantly, don't appear to induce any clinically significant immune responses.
The recent phase II clinical trials indicate that Revascor can actually reduce the risk of heart failure by rebuilding tissue lost from previous heart attacks.
The United States Patent and Trade Mark Office has granted Mesoblast patents that deliver major commercial advantages and offer long term protection for the company's platform technology.
They include a foundation patent around MPCs, exclusive commercial protection for Mesoblast's bone tissue generating products and manufacturing patents covering methods of purifying, isolating and enriching MPCs.
Mesoblasts plans to crack the US market rely not only on FDA approvals, but also a robust patent portfolio. Without that bridge, it would have no promising new therapies to save, extend and improve our lives.