Mesoblast (MSB) Buy (Speculative), Valuation$3.75 – John Hester Announces further debt facility Mesoblast has announced a second non-dilutive round of funding via a $40m debt facility with NovaQuest Capital. This new 8 year facility is interest only for the first 4 years with interest accruing at 15% p.a. The NovaQuest loan is subordinate to the previously announced Hercules Capital facility. NovaQuest will also acquire US$10m of Mesoblast common shares (as traded on the ASX) at a 5% premium to the 10 day VWAP price at the time of execution of the agreement. Mesoblast will draw down US$30m upon execution of the agreement and further US$10m upon FDA marketing approval of Remestemcel-L (for the treatment of steroid refractory acute graft versus host disease – SR aGvHD). In our view FDA approval of Remestemcel not likely before 30 June 2019. Across both facilities (Hercules and NovaQuest) the company has total credit facilities of US$115m, of which it has drawn US$35m. Undrawn credit is US$80m (US$40m from Hercules and US$40m from NovaQuest) plus US$10m from the NovaQuest placement announced today – hence US$90m in total. The current cash burn is ~US$19m/qtr. In our view the NovaQuest investment represents further validation of the Mesoblast technology in the treatment of SR aGVHD. Both NovaQuest and Hercules have performed extensive due diligence on the company including the results from the GVHD trial and it is no co-incidence that this latest funding comes immediately following the announcement 10 days ago of the day 100 survival data. The data has clearly been pivotal in securing this debt facility. The data from the paediatric SR aGvHD trial showed an 87% survival rate for the day 28 responders and an overall survival rate of 75%. In addition, the safety profile of the drug is outstanding with Remestemcel-L being well tolerated. The trial is open label and non-randomised. Notwithstanding, in the absence of any other effective treatment we believe oncologists around the globe should adopt this technology. The drug has been approved in Japan where it is licenced to JCR Pharmaceuticals. Adoption rates in Japan continue to increase each quarter. Next step in the clinical trial is the announcement of day 180 survival data (expected in this current quarter) followed by a pre BLA (Biological License Application) submission meeting with the FDA. This is likely to be a precursor to the BLA perhaps later this calendar year. The funding announced today provides working capital until well into calendar year 2019. By that time the company will have announced the day 180 survival data in SR a GVHD in addition to results from concurrent trials in lower back pain and heart failure. Beyond the current cash runway as outlined here, the company has a number of options for further funding including the sale of commercial rights to certain assets, further debt or indeed further equity. Clearly the CEO and Board remain confident of success with the clinical trials. This confidence is now validated by the dollars of both Hercules and NovaQuest. In addition, the recent appointment of Joe Swedish to the Board is highly relevant. Mr Swedish has two decades of leadership experience in major US healthcare organisations including Anthem – one of the leading managed care providers in the US. Mr Swedish is expect to lead the company’s reimbursement negotiations with health insurers in the US over the next 12 months. The level of risk for equity investors in MSB is high and now accentuated due to these debt facilities. A delay in the company’s BLA for the treatment of aGVHD may (depending on the reasons given) result in adverse valuation impact. We expect the day 180 overall survival data in aGvHD will be supportive of a BLA later this year. We maintain our Buy (Speculative) rating and valuation of $3.75.
MSB Price at posting:
$1.55 Sentiment: Buy Disclosure: Held
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