Bell potter summary 1H15

1H15 Result – Strong Cash Position underpins future growth
Overall update today signifies to us a steady progress across various pipeline programmes with growth underpinned by MSB’s strong cash position.
There were 3 key takeaways from the management call:
• The company believes its current cash position of $149.2m will be sufficient to fund its burn for the next 18 months i.e. through CY16. On average MSB has burned ~$8.1m/month over the last 12 months.
• MSB has explicitly stated its intention to pursue various strategic partnership options over the next 12 months which could lead to a substantial cash injection. Key candidates up for partnering include the Tier 1 chronic discogenic low back pain product currently in Phase III trial and also the Tier 2 IV franchise with Phase II results expected to be reported for the diabetic nephropathy (kidney disease) by end of
CY1Q15. The Phase II Rheumatoid arthritis trial is also progressing well, with the first dose cohort now fully recruited and results expected in CY2H15.
• Mesoblast has advanced in its development of a 3-D manufacturing process for its stem cells. Moving to 3D-bioreactors will allow MSB to scale up manufacturing to commercial scale for large indications such as Congestive Heart Failure, with the potential to improve margins. The company has also developed a serum free media which could yield improvements in the manufacturing process, reduce the supply and associated pricing risk for serums in future and eliminate the possibility of any reactions from the serum such as those sourced from animals e.g. bovine serum.
We understand MSB will be moving ahead with its earlier formulation i.e., with serum and manufactured in 2D reactors for commercial launches of GVHD product as well as initial launch of the discogenic low back pain product. However, we expect the commercial scale product manufactured in 3D reactors to be potentially ready for use prior to the launch of the congestive heart failure product.
Over the next twelve months, the key catalysts for MSB will be the results from Phase II trials for both diabetic kidney disease and rheumatoid arthritis. Depending on how strong the results are, MSB may explore early partnering opportunity for these.
Commentary on the call suggests to us that MSB has identified potential partners for its products specifically those for the discogenic low back pain product and also for its diabetic kidney disease asset. Partnering discussions, in parallel to trials, in all likelihood continue.
We also expect update from the Phase III Heart Failure Trial being conducted and funded by MSB’s partner Teva. Enrolment (for first interim analysis) is to complete in CY2Q15.
Approval and launch of the Acute GvHD product in Japan by MSB’s partner JCR Pharmaceuticals is expected in CY2H15, with first commercial royalty revenue stream starting for MSB. The launch of a first product commercially will also be an important de-risking event for MSB.
MSB’s strong cash position underpins its future growth and we expect to see considerable M&A interest building towards MSB’s un-partnered indications as they progress through clinical trials.
Increased cash burn forecasts, partially offset by higher revenue forecasts, revised currency estimates and rolling forward of our DCF model has resulted in a reduction in our valuation to A$9.30/sh (was A$9.42/sh). Our NPAT changed as follows -18% FY15 and -42% FY16. We continue to rate Mesoblast as a Buy. ............... Cheers Vin