IntroductionA lot has happened in the last 3 months (and...

Introduction

A lot has happened in the last 3 months (and particularly the last week) for MSB shareholders, and I have noticed some despairing posts. I will summarise below a synthesis of opinions and information over the last ~3 months (since CRL2) based on information provided by MSB (including formal and informal information provided at the AGM, which I attended) and some additional research.

My purpose is to encourage disappointed shareholders to take a broader view and see the optimistic side of their investment. The purpose is not to encourage buying nor to defend management nor to make any particular investment recommendation. I have no motive to do either of those latter things. Sorry it’s a bit long-winded.

Status and share price prior to CRL2

Just prior to CRL2, the share price was trading at about $1.20 (+/-20c) and there were ~814M shares on issue.At that time:
• There appeared to be a likelihood of FDA approval for Ryoncil for paediatric AGvHD as it appeared that potency assays had been addressed. Some remain concerned that a second trial (recommended in CRL1) had not been undertaken.
• There was a declared intention to also pursue adult AGvHD, although the trial protocols and approval pathway were not necessarily clear.
• To my knowledge, data on the trends in adult AGvHD EAP were not declared.

Several posters and brokers have proposed valuations of paediatric AGvHD (which I won’t go into here). The range seems to be in the value of $2-$3/share.One might surmise that the market was pricing in a 50% chance or less that the company would realise this value. (Noting of course, there are other potential indications).

New information since the CRL2

Feedback from FDA:
• CRL & Type A meeting minutes both indicate no issue with efficacy and trial would have been assessed as a potentially approvable adequate and well-controlled study but for an assay which was too variable.
• Support to proceed with a trial in adults or children, with open-mind for a single-arm trial.
• Support for an alternative assay (IL2R-alpha) which was more stable, but FDA were concerned that this assay was different to that used in the trial.

We’ve had subsequent explanations from MSB regarding the potency assay. As I understand it:
• It can be demonstrated that IL2R-alpha (supported by the FDA) measured the same thing as the original potency assay (in essence, IL reduction) and is not by its nature a different potency assay.
• It has been identified that the original assay itself was actually also stable (‘standardized to identify, strength, quality, purity and dosage), but there were issues with the reagents used that made it appear variable and
• further work (appears to be between now and January) will produce data to demonstrate the original assays standardization and relevance of the original assay is similar to that for IL2R-alpha, supported by the FDA and
• that there is correlation between original assays in AGvGH001 trial and inventory and
• that this should put a strong case for full approval (not accelerated approval) for paediatric AGvHD

We heard that the EAP program for Ryoncil with adults and adolescents was achieving survival rates of 63% vs a background rate of 20%. i.e. efficacy for adults appears to be just as good as children which in my opinion is very important information - convincing for the FDA and for the prospect of success in the adult trial.

Meanwhile, there are clear changes in the FDA scence for cellular and gene therapies:
• Apparent changing of posture in relation to seeking to support cellular and gene therapies.
https://www.biospace.com/article/fda-braces-for-looming-boom-in-cell-and-gene-therapy-submissions/

• Support from Peter Marks
https://www.medpagetoday.com/special-reports/exclusives/104594

• Appointment of Nicole Verdun as the permanent director of FDA’s Centre for Biologics Evaluation and Research (CBER) office, who incidentally I understand is a previous colleague of Phil Krause
https://www.aabb.org/news-resources/news/article/2023/07/31/nicole-verdun-named-permanent-director-of-cber-s-office-of-therapeutic-products https://endpts.com/platform-designations-fdas-new-cell-and-gene-therapy-super-office-director-sees-potential/ )

• FDA draft guidance to industry in Sept regarding marketing applications based on single arm trials may be approved where there is no other therapy (example AGvHG which has failed steroids & Rux). This guidance was issued shortly after the Type A meeting.

We’ve learned that there’s support from BMT CTN (NiH) to substantially fund / co-ordinate adult trial, which will probably greatly enhance speed of enrolment. It also adds a lot of confidence / credibility to the prospects of the trial succeeding.

AGM updates on timelines show this is being pursued with vigour.

In short, there are numerous internal and external pointers that have emerged in the last few months indicating FDA approval for paediatric approval is likely to be forthcoming in the first half of CY2024 and adult approval (market 5x larger in CY2024) is also farily likely. However, this assumes that MSB is a going concern.

An added bonus is that there is also an entirely new indication in congenital heart disease.

Prospects on Partnerships

I took notice of comments in the AGM about:
• strategic selection of indications with which to partner (i.e. big ones such as heart) and
• advanced partnership discussions might be potentially affected by interactions with FDA (one of which is expected to be approval pathways for CHF, and perhaps another being response to filing for congenital heart disease)

I’ve noted other posts / videos including comments from Dr. Perin in some industry forums on timing of the confirmatory trial for DREAM study, which suggest commencement is imminent.

The above all point to a negotiation in progress for a partnership in CHF or the heart more generally. MSB may be able to negotiate better terms with stronger financial backing.

With regard to Back Pain, I’m less sure that we’re going to see a partnership in terms of a royalty structure in the short-term / prior to the trial. However, whilst I have no particular data to support this, I suspect Gregory George / directors from SurgCentre have generally indicated support to participate in the capital raise. It would make sense for them to participate to keep their investment as a going concern (and going expeditiously). I take a view that a further buy-in by SurgCentre is as good as a partnership– just that the quid pro quo is based on equity rather than advance commitment via a contract to a royalty structure.

Comments on capital raise

If offer is fully subscribed, shares on issue will raise by ~40% to ~1,140M – a dilution for each shareholder of ~29%.

From comments at the AGM, I believe there is strong confidence from Mesoblast management, that this raise will be strongly supported by substantial shareholders and will be successful.Fortunately for retail investors, it is a raise that other existing shareholders can participate in, to an extent, on equal terms. I suspect some had anticipated that this raise would be structured in the form of a rights issue and this is why we saw the share price action on Thursday.

Here are some calculations relative to a hypothetical shareholder who saw value at $1.20 price-point (pre- CRL2) and made an investment, and who has the wherewithal to participate in the rights issue:

• A full subscription to the rights issue on a 4:1 basis @ 30c only requires an additional investment of ~6% of the original investment at $1.20 (i.e. 25% x (0.30/1.20). By increasing proportionate shareholding by 25%, the dilution per shareholding will be limited to 11%.

• For those who wish to increase proportionate holding by 40% to avoid dilution at all, an additional top up of 15% is required. If the rights issue has a secondary round or if the market still has shares available at ~30c, this would equate to a top up of 15% x 25% = 4% of the original investment at $1.20 level.
Under this scenario, an investor avoids dilution at all, by making an additional investment of 10% of the investment made at a $1.20 price-point (i.e. it is relatively cheap to avoid dilution).

Capital raise impact on share value – would the top up be worth it?

Obviously, the capital raise increases book value.More importantly, once funded and confidently seen as a going concern, there will be improved confidence of completing the trials and gaining approvals for particularly AGvHD, importantly including adult AGvHD.

Further to this, when confidently funded, MSB is in a much greater position from which to close negotiations for partnerships.

IMHO, an informed investor would assess the probabilities of success to be much higher than what they were in July because of what we know now compared to what we knew then. It is difficult to predict how the market will respond.

Comment on management professionalism

Some have expressed mistrust regarding SI or mesoblasts executive management team. I don’t believe the information was misleading. I also do not consider that the AGM was sequenced prior to the capital raise as a design to secure remuneration votes. Rather, I see that it makes sense for the AGM information to be provided so that investors can make informed decisions regarding participation in the capital raise.

Obviously, there are constraints regarding what can be said about partnerships until a deal is executed / outside of a non-disclosure agreement.
Obviously, there are constraints around announcing a capital raise until a trading halt is in place.

I asked my own informal questions of the CFO, CEO and Director Bell who were authentic and courteous. One of my questions was regarding the general risks of insolvency (answer was an emphatic no). Another question was whether retail investors may be able to participate in future capital raisings (answer was non-committal but that it is an option open to consideration and it has been observed as a trend in capital markets).

Conclusion

Prima facie, a capital raise may be concerning / ugly from a dilution perspective. However, given shareholders are able to participate in the rights issue, and in the context of several recent developments which will potentially enhance the value of shares, there are benefits and opportunities too.

Please do not rely on this and undertaken your own research in making an investment decision.