Finally got a chance to sit down an soak in today's developments and listen to this webcast in full... and although there was some bad news today, all in all I feel the balance of news released is resoundingly net positive.
First the obvious disappointment was that the Type A meeting with the FDA on the 17th was very much a worst case scenario when it comes to the pediatric SR-aGVHD program... when the CRL was issued, I shared my thoughts on what the FDA's position was in regards to Ryoncil.. and unfortunately the FDA has clearly thrown the rule book at Mesoblast and will not accept anything less than a randomised controlled trial before they will issue any sort of approval for Ryoncil.
Whilst MSB are somewhat obligated to continue down the dispute path to try overturn the FDA decision, the chances of a favourable outcome are low and it is a lengthy process in normal times, and moreso in a pandemic ridden country. Personally I feel that the only chance of Ryoncil hitting the market for SR-aGVHD is if the COVID ARDS trial fails and remestemcel-l doesn't work for ARDS or any other indication... because if remestemcel-l does get a positive read-out for COVID or the phase 3 for all-cause ARDS... then SR-aGVHD is simply not financially feasible to pursue. The demand for remestemcel-l will outstrip supply for many years and there will be little bandwidth for SR-aGVHD.
From a biggest picture, SR-aGVHD's importance to MSB as a business was simply due to it's short term revenue stream potential... it would have been a small enough market for MSB to manage and organically grow without the need for a partner... and the revenue stream would have been sufficient for MSB to largely become cash flow neutral which would de-risk the company significantly.
In my mind, unfortunately from a business perspective.. SR-aGVHD is now a side-show. It is getting more air-time than it probably warrants... and I suspect MSB's focus on this indication will only decline from here on in... because the main-event is about to begin.
One of the biggest pieces of news today is that both the CHF and CLBP phase 3 trial read-outs are due out in the next couple of weeks. There has been plenty said in other threads over the past few months on the merits of both trials... and at the end of the day, any large scale phase 3 randomised controlled trial carries risk of failure. Whilst there hasn't been much focus by MSB this year... it is in my view totally understandable. Firstly, there isn't much to talk about before the trial read-outs... secondly, the airwaves were jammed with COVID ARDS and Ryoncil since March/April this year.. which by no accident are/were the two indications closest to commercialisation. Both the CLBP and CHF phase 3 trials will need (in the absence of accelerated approval) a confirmatory trial... so any revenues from these are likely a couple years away at least... however a positive read-out is likely going to mean US partners for CLBP and/or CHF... and their upfront payments will be substantially more than what we saw from Novartis for al cause ARDS.
Which is a nice segway to the headline piece of news today... Novartis' collaboration agreement. It's taken me a little while to appreciate the magnitude of this transaction... and it's a lot bigger than the dollar figures mentioned in the agreement. My initial reaction to the US$25 non-dilutive / US$25m equity (@ 15% premium to 30 day VWAP) was that it was on the light side... surely COVID-ARDS in itself is worth more than US$50m. But on reflection, this is totally in line with how the industry works. The magnitude of the upfront payments are typically aligned to the amount spent by the company to get a particular indication to where it is today, taking into account if the rights are regional or global (that is a regional partnership may only account for a fraction of the companies' development costs to date, whereas a global one is likely going to reimburse all/most development costs to date).
So as MSB have only really stumbled onto all-cause ARDS since the start of this year... then MSB really hasn't spent much money at all developing remestemcel-l for all-cause ARDS. All it's development has been for Ryoncil for SR-aGVHD.. which is probably why Novartis didn't buy rights to this, they probably had to stump up a lot more up-front cash.
In any case, the pre-commercial US$505m milestones are on much more commensurate to the potential of remestemcel-l against all-cause ARDS. That is, if the current phase 3 trial reads out positively and a EUA is grants (very likely in my view)... then we can expect at least US$100m of that US$505m to be due to MSB.. that could be in the next 3-6 months, then the commencement of the all-cause ARDS phase 3 trial is also likely to trigger some payments and the successful read-out of that some more... this is all before sales even begin, and that when the double digit royalties kick in and commercialisation milestones of up to US$750m may come MSB's way in coming years.
But what's more important from this Novatis' agreement, and others have touched on this also, is their calibre, reputation, size and their very very deep pockets. Mesoblast have in the past dealt with the smaller end of town when it comes to pharma partners. Novartis is #4 in annual revenues globally.. only behind J&J, Pfizer and Roche... and #5 in the world for market cap (US$195bn). In other words, approx 50% bigger than CSL and double the size of Astrazeneca. This is very important because MSB need a partner than can fund the footprint/capital investment required to scale up remestemcel-l in a way that can meet global needs in an accelerated go-to-market timeframe.
A second-tier pharma simply wouldn't cut it... for investors to take MSB seriously, a big player needed to step into this strategic partnership role for COVID-ARDS... and Silviu delivered with Novatis.. this is no small achievement to get a partnership negotiated and signed in around 6 months... it shows the urgency from both parties and the acknowledgement of the situation the world faces... this is not a time to fluff around... the world needs remestemcel-l.
What I really like about this collaboration is that Novartis have basically bankrolled the ARDS program for MSB as a starting point, with an option to run more respiratory disease related trials... as well as being the distributor for any ARDS product launches. Mesoblast simply need to focus on manufacturing / providing remestemcel-l and spend it's funds bringing forward the next-gen manufacturing of allogeneic cells. Novartis will provide up to US$50m if MSB are successful in bringing these technologies into production.
With over 60% of the patients recruited for the COVID ARDS phase 3 trial, the third and final interim read-out is due in no more than a month. More likely in a few weeks, but surprisingly Silviu has been very cryptic about the third interim read-out.. where previously the market was clearly notified of the timing of the first and second interim read-outs... they have changed tact on the third read-out. Were they simply fed up with people chasing/calling their offices asking about the interim read-outs? Maybe... but his behaviour on this has been strange if you ask me... why the need to be so cryptic this time around...
But I have to keep coming back to the point that having a top 5 pharma company partner with MSB for ARDS/COVID ARDS is not only a huge vote of confidence shown by such a large global player, but it now gives Mesoblast some real credibility in terms being able to deliver on the world stage if this phase 3 trial is successful. Mesoblast now have a partner that truly has the global footprint, man-power, bandwidth and financial means to execute... to think MSB's market cap was over 50% higher on 30 Sep 20 when the market thought we had a foot in the SR-aGVHD market's door... CLBP, CHF and COVID ARDS 60% interim read-out coming in the next few weeks.
Goodluck all
MSB Price at posting:
$3.64 Sentiment: Buy Disclosure: Held
(20min delay)