bell potter update

Mesoblast (MSB)
Phase II success in heart failure
Recommendation
Spec Buy (Spec Buy)
Price
$8.20
Target (12 months)
$16.00 (unchanged)
Analyst
Stuart Roberts 612 8224 2871
Associate Analyst
Tanushree Jain 612 8224 2849
Authorisation
Steve Goldberg 612 8224 2809
Expected Return
Capital growth 95%
Dividend yield 0
Total expected return 95%
Company Data & Ratios
Enterprise value $2,044m
Market cap $2,300m
Issued capital 280.4m
Free float 100%
Avg. daily vol. (52wk) 0.73m
12 month price range $2.82-$10.04
GICS sector
Healthcare Equipment and Services
Disclosure: Bell Potter Securities acted as lead
manager in a capital raising in May 2010 and in a
selldown of stock in December 2010 and received
fees for that service.
Price Performance
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 7721
AFSL 243480
DISCLAIMER AND DISCLOSURES
THIS REPORT MUST BE READ WITH THE DISCLAIMER
AND DISCLOSURES ON PAGE 9 THAT FORM PART OF IT.
Page 1
(1m) (3m) (12m)
Price (A$) 9.48 7.94 2.80
Absolute (%) -20.89 -5.54 167.86
Rel market (%) -21.34 -8.35 177.93
MSB has stem cell technologies that work
MSB is commercialising Mesenchymal Precursor Cell (MPC) technology which allows
adult stem cells to be extracted from a donor?’s bone marrow, grown into therapeutic
quantities and administered to non-related patients. MSB initially focused on MPCs in
orthopaedic and cardiovascular applications but has since expanded into inflammatory
and immunological disorders, and diseases of the Central Nervous System. MSB has
multiple Phase II trials underway and is initiating a Phase III trial in Bone Marrow
Transplant, with a revenue opportunity matching that of Cochlear. With the FDA
requiring only one Phase II and a pivotal trial before approving a successful stem cell
therapy, the company has the potential to be yielding commercial revenues by
2014/15 under a partnering deal with Cephalon, now owned by Teva. That deal, which
was inked in December 2010, put >US$200m into the company and has left Teva with
a 19.99% stake.
Mesoblast has outstanding Phase II data in heart failure
Bell Potter Securities believes Mesoblast?’s share price undervalues the cardiovascular
applications alone. The company has now unveiled the results of its 60 patient Phase
II trial of MPCs in heart failure at a special session of the American Heart
Association?’s annual meeting on 14 November 2011. The data suggests a powerful
heart failure treatment, putting the company on track for a Phase III next year,
with a reduction in MACE (Material Adverse Coronary Events) by 78% for the treated
patients versus the controls (p=0.011), reduction in cardiac mortality by 89% (p=0.02),
and reduction in heart failure-related hospitalisation by 43%. Donor specific antibody
response occurred in 6 treated patients, or 13% of that group, without impacting on
the efficacy of the cells, meaning that immune response to MPCs was not a serious
issue. The favourable clinical outcomes were achieved without needing to move the
dial on Ejection Fraction because of favourable ?‘reverse remodeling?’ of heart muscle,
as indicated by a statistically significant improvement in left ventricular end-systolic
volume (LVESV) at the 150 million dose level.
The markets for MPCs in cardio therapies are huge
Applications in heart failure, in heart attacks and in chronic angina represent multibillion
dollar market opportunities. We see a US$6bn market in heart failure alone
based on the current take-up of ICD and CRT-D devices in Class III heart failure
patients. We think the heart failure trial results not only explain the keen corporate
interest which has seen Cephalon/Teva and now Lonza commit hundreds of millions
of dollars to Mesoblast programmes, but also show how far Mesoblast?’s science has
progressed since we initiated coverage on Mesoblast in January 2010.
Spec Buy recommendation and $16 target maintained
With Mesoblast?’s cardiovascular and Bone Marrow Transplant franchises and other
pipeline opportunities in eye diseases, diabetes & orthopaedics becoming more
substantial, we re-iterate our positive outlook on the stock. We value Mesoblast at
A$11.14 base case and A$21.59 optimistic case. Our target price of A$16.00 sits at
the mid-point of our DCF range.
Absolute Price
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Mesoblast (MSB) 15 November 2011
Mesoblast – Phase II success in heart
failure
Mesoblast has announced some very favourable Phase II data from its 60-patient
heart failure trial. Mesoblast?’s trial kicked off in October 20081 and measured three
progressively higher MPCs doses2 against standard of care where Ejection Fraction had
dropped below 40%3. In the trial, 45 patients randomised to the three MPCs doses and 15
to placebo. With each dose, patients received a single injection and were evaluated for
heart function at three, six and twelve months. The last patient joined the trial in June 2010
and Mesoblast has now reported 12-month data at this year?’s Scientific Sessions meeting
of the American Heart Association, 12 months being the follow-up time for the lastrecruited
patient. The mean follow-up period across the trial was 22 months.
?? One investigator described the result, in this morning?’s analyst briefing, as ?‘an
impressive result for 60 patients...as impressive as anything we have seen in the last
10 years?’. Later on an investigator suggested that ?‘even with less favourable data
MPCs would still be satisfactory enough for regulatory approval?’;
?? When asked about the next stage in development, Mesoblast CEO Dr Silviu Itescu
reiterated Teva comments that it was ready to take MPCs into a Phase III heart failure
trial, with the company intending to sit down with the FDA to discuss the endpoints for
next year's commencement.
We were impressed with six aspects of the trial result
1 In what is a statistically significant outcome, people are still alive thanks to
MPCs. In this trial, only one of the 45 treated patients died of cardiac causes over the
22 month follow-up period, as against three of the 15 control patients. This was a
reduction in cardiac mortality of 89%, for which the p value was 0.02, suggesting that
MPCs were a major factor in improving outcomes on mortality4.
2 MPCs kept people out of hospital, with statistical significance. Compared with
controls, MPC treatment reduced the overall risk of Material Adverse Coronary Events
(MACE) by 78% (p=0.011), which in today?’s analyst briefing principal investigator Dr
Emerson Perin characterised as the most surprising aspect of the trial given the small
patient numbers5. In this trial MACE was defined as either cardiac death,
revascularisation (ie procedure to reopen blocked arteries, such as stenting or heart
bypass, as a result of chest pain) or myocardial infarction (ie heart attack). Heart
failure-related hospitalisation came down by 43%. This was not statistically significant
due to small patient numbers, but the reduction is still very important in terms of the
future healthcare economics of MPCs in heart failure. Moreover Mesoblast reported this
morning that the 150 million dose ?‘completely prevented any episodes of heart failure
hospitalization over 18 months of follow-up?’. All this is further proof that a single
injection of stem cells is quite powerful. It?’s important to keep in mind that some
patients in this trial received their MPCs more than three years ago.
3 There were no immune system issues with MPCs. A donor specific antibody
response occurred in 6 treated patients, or 13% of that group. So there was an immune
response to the cells, as per the findings of recent science on mesenchymal stem cells
1 After the IND was cleared in June 2008 - see NCT00721045 at www.clinicaltrials.gov.
2 The animal work has suggested that the effects of MPC in heart failure are dose-related.
3 A normal heart has a 55-70% EF. Around 40% of heart failure patients have EFs below 40% - consider, for example, the Echocardiographic Heart of England Screening population study,
which found that 41% of definite heart failure patients had an EF under 40 (see Lancet. 2001 Aug 11;358(9280):439-44).
4 The cardiac mortality reduction was not quite statistically significant at the interim data point reported in January 2011.
5 We think small patient numbers accounts for an apparent lack of dose response across some measures (although the balance of probabilities lies with the 150 million cell dose given its
effect on LVESV and six-minute walk) and that larger patient numbers will show a clearer dose response.
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Mesoblast (MSB) 15 November 2011
and immunogenicity, but that response was weak and did not impact on the efficacy of
the cells. Moreover of those six patients, four lost their antibodies in less than one
month. There was no effect on therapeutic outcomes from the antibodies, and no
clinical-signs or symptoms related to such antibodies. At today?’s analyst briefing Silviu
Itescu also noted that in repeat dosing work in non-human primates there had been no
immune response issues observed in terms of its impact on therapeutic effectiveness.
We conclude from all this that immune response is not an issue with MPCs. At worse,
patients with an immune response could receive a differently typed MPC batch for any
repeat dosing should that be necessary.
4 The favourable clinical outcomes were achieved without needing to move the dial
on Ejection Fraction, probably thanks to ‘reverse remodeling’. In this trial Ejection
Fraction from baseline to 12 months did not change in MPC-treated patients (mean, 30
to 31%) nor in controls (mean, 32 to 31%). This suggests that the mechanism of action
lies elsewhere than in Ejection Fraction, such as reversal of fibrosis and collagen
deposition. In the study the treated patients experienced a lower increase in left
ventricular end-systolic volume (LVESV), a measure of the size of the failing heart. As
hearts fail, they get bigger due to the heart having to pump harder. The investigators
noted that at the 150 million cell dose there was a statistically significant reduction in
LVESV at six months (p=0.015) over the controls, suggesting that the stem cells were
engaging in ?‘reverse remodeling?’ of the heart, and that this was what led to the
favourable hard data on MACE and mortality without the need to change Ejection
Fraction6.
5 There was improved functional capacity in treated patients. The six minute walk
test, which measures how far along a flat 30m walkway a patient can walk in a six
minute period, is a measure of functional exercise capacity that correlates with survival
in moderate heart failure patients. This trial did not generate a statistical significant
change in six minute walk test outcomes across all doses, but the 150 million dose did
see a trend towards significance (p =0.062) compared to the controls7.
6 There was an improvement in NYHA Class. NYHA Class is often regarded as too
subjective a measure of heart failure8, and Mesoblast?’s investigators preferred the trend
on six minute walk test to the change in NYHA as a more objective measure of
functional improvement. That said, MPCs worked quite well on this score. At 12
months, 40% of MPC-treated patients reverted to NYHA class I status compared with
only 14% of controls9. This suggests that MPCs can meaningfully reverse the course of
heart failure in a cost- effective way for a large patient group (Class II, which is around
40% of all heart failure patients) and also suggests competitiveness in Class III
(another 30%) where treatment options are limited.
MPCs can now move to Phase III in heart failure. Mesoblast has indicated that it
expects its MPCs to move into a Phase III trial in the first half of 2012, with Teva indicating
that the Phase II results ‘reinforce Teva’s commitment to its strategic investment in
Mesoblast’s adult stem cell technology and to our continued support for the clinical
development of Revascor.?’ We think this indicates support from Teva to move MPCs into
Phase III. We expect that MSB and Teva will proceed to a ~1,000-patient pivotal, with a
500 patient interim analysis point allowing early completion in the event of statistical
significance on a composite endpoint of MACE, mortality and hospitalisation. We expect
completion of this trial around mid-2014 based on 12-month follow-up from a single
injection.
6 LVESV has been found to be a better predictor of survival after recovery from a heart attack than LVEF. See Circulation. 1987 Jul;76(1):44-51.
7 We understand that overall the controls actually had higher scores on the six minute walk test at baseline, which would negate any issues that may have arisen from a mismatch of NYHA
classes in the treatment and control groups. We deal with the mismatch issue in our 1 November 2011 note on Mesoblast, headlined ?‘We have seen the future, and it works?’.
8 See Heart. 2007 Apr;93(4):476-82. Epub 2006 Sep 27.
9 Silviu Itescu noted in today?’s analyst briefing that the changes are broadly the same if the NYHA mismatch between treatment and control groups are removed.
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Mesoblast (MSB) 15 November 2011
A strong market awaits a successful launch of Mesoblast’s
product
The growth of the market for ICDs and CRT-D points to a large commercial payoff for
MPCs. The last ten years has seen the emergence of implantable defibrillation devices as
an alternative for later-stage heart failure patients. ICDs, or Implantable Cardioverter
Defibrillators, which send electrical signals to the heart to correct irregular heartbeat, began
to be increasingly implanted in Class III patients from around 200510. That followed on from
the rise of CRT-D devices, which came on the market from 2001, designed to correct
conduction defects as well as defibrillate the failing heart11 and useful in around 20% of
heart-failure patients12. With both ICDs and CRT-Ds found to be cost effective for the extra
year or two of life gained13 the result has been the creation of a >US$6bn market globally
for the big American medical device companies Medtronic, St Jude Medical and Boston
Scientific. Between 2008 and 2010 that market grew another 5%, based on this evidence
of cost effectiveness and an increasing level of comfort on the part of cardiologists as to
safety and efficacy. We think MPCs can tap into this same market dynamic:
?? There’s a lot of heart failure out there. Heart failure may affect at least 5.7 million
adult Americans or 2.4% of the adult population14.
?? Class III heart failure is a sizeable market in its own right. We estimate Class III
heart failure (experiencing marked limitation of physical activity) constitute 30% of the
patient population while Class IV patients (virtually no physical activity without
discomfort) are only 4-5%. Without downplaying the opportunity in Class II patients
(~40% of the market), we expect that Class III patients and their treating physicians are
likely to be particularly attracted to MPCs, because these patients are becoming
refractory to conventional drug treatment, and as a consequence are the main drivers
for increased ICD and CRT-D implantations, but do not yet qualify for LVADs, which, for
cost reasons, are the preserve of Class IV patients. There are probably something like
1.6 million Class III patients in the US alone.
?? The survival data for MPCs has potential to be more favourable than for ICDs.
The Phase II data for MPC suggested the potential for a higher level of life-years
gained than for ICDs given that after an average 18 month follow-up period no treated
patients had died from cardiac causes.
?? Favourable economics are likely to drive usage in the medium term. We think
evidence of efficacy, as it gathers in the forthcoming pivotal trial and then in Phase IV
studies, will combine with favourable healthcare economics, as determined primarily by
data gathered post hoc on hospitalisation rates15, to drive demand both for MPCs as
well as the new generation (and yet to be widely used) J&J NOGA catheters that
deliver them.........Cheers Vin