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By Michael Fitzhugh

Cephalon (NASDAQ:CEPH) is committing up to $1.7 billion in milestone payments and $130 million in immediate funding to Mesoblast, an Australian company developing stem cell therapies to battle dementia and heart disease.

Pennsylvania-based Cephalon, best known for producing the blockbuster wakefulness drug Provigil, will also take a 20 percent stake in Mesoblast, which is granting its new investor an exclusive global license to a pipeline of early-stage and mid-stage therapies.

For Mesoblast, the deal provides an equity investment that will inject about $220 million into the company, adding heft to what is among the largest biotechnology deals of 2010 and the largest regenerative medicine deal ever, according to Mesoblast. Mesoblast CEO Silviu Itescu says that Cephalon’s strength in late-stage product development and commercialization, and expertise in developing products for neurological diseases, makes it an ideal strategic partner.

For Cephalon, the deal broadens the company’s pipeline and positions it to become a major player in the emerging field of regenerative medicine. “We are excited to have the opportunity to develop potentially the world's first stem cell therapy for indications that could serve millions of patients globally,” says Kevin Buchi, COO of Cephalon.

Should Mesoblast advance its clinical trials beyond an agreed-upon midpoint, Cephalon will pick up the development and commercialization costs that follow, it says. However Mesoblast will retain all manufacturing rights and will share significantly in the net product sales.

Mesoblast gained approval in October to acquire the U.S. adult stem cell company Angioblast Systems, transforming itself from a biologics company focused on orthopedics into a regenerative medicine developer and Australia’s fourth largest biotechnology company.

The most advanced therapy covered by the agreement is Revascor, an off-the-shelf adult stem cell therapy being developed to treat congestive heart failure and heart attack patients. The company in November reported encouraging interim data from an on-going mid-stage trial.