US analysis confirms MSB pathway to success, page-2

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Mesoblast Limited

 

MESO: Price: $5.48; Market Cap (M): $519

Rating: Buy; Price Target: $17.00

 

Jason Kolbert

 

Phase 2b LVAD Results Offer Potential for RegulatoryApproval; Reiterate Buy

 

Click here for complete report and disclosures

 

Phase 2b LVAD data presented at AHA. At the American HeartAssociation meeting November 11, Mesoblast presented the trial data. The Phase2b, 159-patient trial was a randomized, placebo-controlled study evaluatingMesoblast's MPC-150-IM (allogeneic mesenchymal precursor cells—MPC) productcandidate in the treatment of end-stage heart failure patients implanted with aleft ventricular assist device (LVAD). While the trial did not meet the primaryendpoint of temporary weaning from full LVAD support (p=0.55 versus control),we note that a predetermined subgroup of ischemic heart failure patients (44%of the total trial population) did achieve the primary endpoint (p=0.02 versuscontrol). Why not? It may be that the total trial population may have beenskewed towards younger patients, a group that tends to have less ischemia andwould therefore theoretically not benefit as significantly from theanti-inflammatory effects of MPC-150-IM. In discussions with the FDA thissummer Mesoblast was notified that temporary weaning from full LVAD supportshould be considered a biomarker endpoint and therefore unlikely to lead toapproval. Regulators advised Mesoblast that gastrointestinal (GI) bleeds,measured as part of the Phase 2b study, would be considered more clinicallymeaningful.

 

The impact of GI bleeds. The trial succeeded in achievingstatistically and clinically meaningful results on secondary endpointsincluding GI bleeds: reduction in cumulative incidence of major GI bleedingevents (p=0.02 versus control); reduction in rate of major GI bleeding events(p<0.001 versus control); and reduction in rate of hospitalization for GIbleeding (p=0.03 versus control). It is worth noting that GI bleeds costhospitals approximately $46K per patient and are the number one non-surgicalcause of re-hospitalizations in the LVAD population. Improving technologyaround LVADs is leading to decreased mortality, which is leading to more focuson causes of morbidity in patients. We believe this shift in focus could leadto MPC-150-IM becoming part of the standard of care for prevention of GIbleeds, a major cause of LVAD morbidity.

 

Path to approval. As GI bleeding is now deemed to be aclinically meaningful endpoint by the FDA it could be the basis for a BLAfiling. Mesoblast is planning to meet with the FDA in 1H19 to discuss the nextsteps for MPC-150-IM in this indication. There are estimated to beapproximately 5K LVAD patients in the U.S. It is considered to be anultra-orphan, unmet medical need. This, coupled with the benefits of aRegenerative Medicine Advanced Therapy (RMAT) designation, could result in anexpedited pathway to approval, with a small Phase 3 trial designed around a GIbleeding endpoint.

 

Ongoing Phase 3 CHF trial. Patients in the ongoing ClassII/III congestive heart failure (CHF) Phase 3 trial are more likely to be anolder, ischemic population and therefore not eligible for transplant. We notethat this group of patients saw a significant benefit in the Phase 2b LVADtrial. The 600-patient Phase 3 trial is approximately 85% enrolled. While GIbleeds are not as large a morbidity issue in the non-LVAD HF population, we seethe anti-inflammatory effects observed with MPC-150-IM as providing rationalefor a positive outcome in reducing the ischemia-related major adverse cardiacevents in the Class II/III HF patients (the trial's primary endpoint).

 

Valuation. Our valuation is based on our therapeutic modelsand reflects our assumptions for the product launch dates, product attributes,and pricing, to determine the future revenue streams. We maintain our view thatMPC-150-IM is launched in 2024 for the Stage II/III CHF indication, andtherefore believe that the recent selloff after this trial announcement isoverdone. For Mesoblast we use our maximum discount rate of 30%, which is inaddition to our therapeutic probability of success rate. We select 30% as thecompany is not yet profitable and most of the products are still dependent onthe outcome of clinical trials. Our valuation conclusion is an equally weightedaverage of our FCFF, EPS, and sum-of-the-parts analysis. We use a fully dilutedend-year share count and assume multiple raises. The conclusion is a $17 pricetarget.

 

Risks to our thesis, include the following: (1) clinicalrisks; (2) regulatory risks; (3) finance risk; (4) intellectual property risk;(5) partnership risk; and (6) commercial risk.

 

Jason Kolbert

646-975-6965

[email protected]