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Outlook for MSB in CY16 is positive
Overall MSB’s update was positive. MSB will preferentially allocate resources to Tier 1 products which have the fastest path to market and mid-term revenue potential. Timelines for the Tier 1 programs were confirmed with recruitment in ongoing trials progressing well. We are reassured about Teva’s commitment to the CHF program. We conclude that the outlook for MSB for CY16 is positive with various milestones expected to be achieved across the 4 key programs and are optimistic for a positive conclusion to MSB’s ongoing partnering discussions.
Cash runway extended through cash management initiative
MSB’s focus on arresting costs and prioritising its resources is expected to yield ~20-25% reduction in its operating cash burn for the remainder of FY16 relative to an average quarterly cash burn of ~US$27.7m over last 6 months. This implies that MSB expects to burn ~US$21-US$22m/quarter for the remaining 3 quarters of FY16. MSB’s cash reserves after the NASDAQ listing of ~US$139.0m (based on 1QFY16 cash) provides them now with roughly 18 months cash runway (from Oct’15 to March’17).
GvHD product in Tier 1 will take centre stage in CY2016
In Japan, partner JCR will launch TEMCELL in Feb’16 and MSB expects first royalty revenues from it in 1QCY16. MSB’s key priority in CY16 is to complete its ongoing Phase III trial for MSC-100-IV in paediatric aGvHD and file for regulatory approval in the US by end of CY16. This should position the product for FDA approval in 3QCY17. Interim results from the trial are expected in 3QCY16. We expect MSB and the market will be closely watching the uptake of TEMCELL in Japan.
Maintain Buy and valuation of $4.50
MSB has started reporting in USD from 1Q16. We are not making any number changes now. We expect to provide an update once we convert our model from AUD to USD. We retain Buy and Valuation of $4.50/sh. Key catalysts: results from Phase II trial for RA, launch of TEMCELL in Japan and interim analysis from Phase III CHF trial in 1QCY16.....................
Positive strategic update, cash runway extended
Mesoblast (MSB) has provided its first strategic update as a NASDAQ listed company today.
Key takeaways from the management call
• Resources prioritized on Tier 1 product candidates: MSB will preferentially allocate resources to Tier 1 products i.e. to those products which have the fastest path to market and mid-term revenue potential. Tier 1 products include Phase III assets: MSC-100-IV/TEMCELL for Acute Graft versus Host Disease (GvHD), MPC-06-ID for
Chronic Discogenic Low Back Pain (CLBP) and MPC-150-IM for Congestive Heart
Failure (CHF). It also includes Phase II asset MPC-300-IV for biologic refractory Rheumatoid Arthritis (RA) and diabetic nephropathy.
• Cash position strengthened after recent NASDAQ listing: MSB reported cash of
US$77.7m for the quarter ended 30th September, 2015. With the proceeds from the IPO, MSB’s cash reserves have lifted to ~US$139.0m, based on the cash balance at the end of 1QFY16.
• Cash management program implemented to extend cash runway and achieve Tier 1 value inflexion points: MSB’s focus on arresting costs and prioritising its resources to Tier 1 products is expected to yield ~20-25% reduction in its operating cash burn for the remaining 3 quarters of FY16 relative to an average quarterly cash burn of ~US$27.7m over last 6 months. This implies that on average MSB expects to burn ~US$21-US$22m/quarter for the remaining 3 quarters of FY16. This is significantly below the US$28.1m net operating cash outflow for 1QFY16. Based on this guidance, we expect total operating cash burn for FY16 at ~US$92.6m.
Assuming a quarterly burn rate of ~US$21-US$22m/quarter, MSB’s cash reserves after the NASDAQ listing of ~US$139.0m (based on cash balance at the end of 1QFY16) provides them with roughly 18 months cash runway (from Oct’15 to March’17).
The Tier 1 products are funded through to their next value inflexion points i.e. Phase III program for GvHD to US approval, Phase III program for CHF (Teva funding this but MSB manufacturing product for trial), Phase III trial for Back Pain and Phase II trial for Rheumatoid Arthritis.
• Royalty revenue from TEMCELL acute GvHD product expected to start from
1QCY16: MSB’s partner JCR Pharmaceuticals expects to launch the aGvHD product TEMCELL in Japan in February 2016. This follows both approval and reimbursement pricing being fixed for TEMCELL in Japan.
TEMCELL is being targeted for use in both adult and paediatric GvHD patients in Japan. TEMCELL is the first allogeneic (off the shelf) regenerative medicine product to be approved in Japan. It is also MSB’s first commercial product.
MSB has received US$3.5m in pre-commercial milestones triggered by the approval of TEMCELL in 4QCY15. Under the deal sales milestones (BPe ~US$4m) as well as royalties in the mid 20% range are also payable by JCR.
MSB expects to receive the first royalties from TEMCELL in 1QCY16.
We assume that at peak penetration (peak sales of US$110m), MSB will receive ~US$28m in annual royalty revenues from TEMCELL in Japan.
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Mesoblast (MSB) 17 December 2015
• Key strategic focus over next 12 months is FDA filing for approval of MSC-100-IV product for paediatric GvHD for the US market: MSB’s key priority is to complete its ongoing Phase III program for MSC-100-IV in paediatric aGvHD and file for regulatory approval in the US by end of CY16.
MSB is currently running a 60 patient open label, Phase III trial in children with steroid refractory GvHD in the US. The trial is currently recruiting patients. Interim results from the trial are expected in 3QCY16. Enrolment is expected to be completed in 4QCY16. MSB expects to report Top-line results from the trial in 4QCY16. The company expects to file a Biologics License Application (BLA) for approval in the US by end of CY16 based on the interim results. This should position the product for FDA approval in 3QCY17. We estimate that the product could launch in the US by end of CY17.
• Reimbursement pricing for MSC-100-IV for aGvHD in the US expected to be around 40% higher than the Japanese reimbursement price fixed for TEMCELL: The pricing for a course of treatment of TEMCELL in Japan has been set at 868,680 yen (~US$7,124/bag of 72 million cells; 1yen = 0.0082USD). A course of treatment of TEMCELL is expected to cost ~13.9 million yen. This equates to ~US$114,000/patient (based on 16 bags per treatment – dosage twice weekly for 4 weeks). Patients who have persistent symptoms beyond 4 weeks, may be given additional 8 bags per treatment (weekly dose for 4 additional weeks). This would increase the reimbursement per patient to US$171,000/patient.
Management expects that the pricing of MSB’s GvHD product in the US will be around 40% over the Japan pricing. Hence a US pricing per patient of ~US$240,000, is not unreasonable pricing for an orphan drug indication.
• Partnering discussions in advance stages: Management confirmed they are in advanced partnering discussions on its discogenic low back pain product with a number of companies and with Celgene on GvHD and others and they intend to conclude additional and appropriate strategic partnerships. We continue to believe the prospects for a deal in the next 12 months are encouraging. A partnership could lead to substantial cash injection and extends MSB’s cash runway beyond 1QCY17.
• Recruitment in Phase III CHF and CLBP trials progressing well: We understand that both Phase III CHF trial and Phase III Back pain trial are recruiting well. Although management was unable to provide any specific details on enrolment numbers to date, we were assured that the enrolment is on track and both the trials are expected to complete and report on time as guided. Further there have been no cell related adverse events in the trials to date.
• Partner Teva’s commitment to CHF program reaffirmed: Commentary on the call reconfirmed for us that the first interim analysis of CHF Phase III trial in 1Q16 is not a futility analysis i.e. there is no go/no go decision involved at that stage. It’s the second interim analysis in 1Q17 which is the futility analysis point. We expect Teva will continue to fund and run the Phase III program at least till the second futility analysis point.
Separately, management stated that they are in active discussions with their partner Teva on accelerated pathway in Japan for their CHF product MPC-150-IM. The impetus for this was apparently provided recently by the conditional approval and reimbursement price being fixed at ~US$120,000 for an autologous cell-based heart failure therapy called HeartSheet. We note that Terumo’s HeartSheet was priced according to a medical device in Japan unlike MSB/JCR’s TEMCELL which was priced as a drug therapy. Discussions with Teva on the Japanese prospects for the CHF product also reassure us about Teva’s commitment to the CHF program.
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Mesoblast (MSB) 17 December 2015
Key update on Tier 1 programs
Commentary on the call suggests that all the Tier 1 programs are on track. The timelines were confirmed on the Tier 1 programs and management outlined the key milestones for each candidate expected over CY16-CY18 as shown in the figure below...
Key points are:
• CY16 is important for the company with some clinical results (interim or Top-line) expected from each of the 4 candidates.
• GvHD product will be MSB’s first commercial product not only in Japan but also in the US. US approval for the product expected in CY17. MSB on approval in US is likely to be eligible to receive FDA’s valuable Rare paediatric disease priority review voucher. This special voucher allows the owner to have any of its investigational drugs reviewed under the FDA’s priority review pathway i.e. FDA will be obligated to review the drug within 6 months instead of the standard 10 months. MSB can decide to either use this voucher to accelerate the path to market of any of its other pipeline drugs or sell it to another company for multi-million dollars. Three companies have sold their rare disease priority review vouchers for multimillion dollars ranging from US$67.5m to US$350m.
• Management confirmed that both the second confirmatory trials in the CHF program and the back pain program will be conducted in parallel with the ongoing trials. The timeline for completion of the program of each as stated in the above figure account for completion of the second trials as well.
• The above Tier 1 programs are funded to the next inflexion point namely: a) GvHD completion of ongoing Phase III paediatric trial in the US, readiness for commercial manufacturing for the GvHD product and BLA filing through to approval; b) manufacturing clinical trial product for Phase III CHF program for Teva; c) completion of
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Mesoblast (MSB) 17 December 2015
ongoing Phase III trial in back pain and d) completion of ongoing Phase II trial in Rheumatoid Arthritis.
• We expect that the second confirmatory trial in back pain will be funded by a partner. MSB does not expect this second trial in back pain to start till enrolment in the first trial is complete.
• We also expect that for the MPC-300-IV product, depending on the strength of the
Phase II results MSB will decide on course forward. Current cash budget guided to by MSB, does not include any further development of this program beyond the completion of the Phase II trial. Previously management has suggested they were in discussions to partner on this, so likely that MSB looks for a partner to progress further development of this asset. Positive results from the RA trial could create early licensing prospects. We also believe this asset could be of interest to Celgene, although it is not part of the first right of refusal agreement they have with MSB.
In summary, overall it was a positive update with cash management initiative now expected to extend MSB’s cash runway to end March 2017 in our view. Timelines for the Tier 1 programs were confirmed with some clinical results (interim or Top-line) from all the
4 Tier 1 programs expected in CY16. We are reassured about Teva’s commitment to the CHF program. Management’s priority over next 12 months is getting the paediatric GvHD product approved in the US. We believe the prospects for the back pain asset being partnered before the end of CY16 are encouraging. Although granularity on enrolment numbers in the back pain and CHF Phase III trials were not provided, management has assured us that the trials are progressing well and are expected to complete and report on time as guided. We conclude that the outlook for MSB for CY16 is positive with various valuable milestones expected to be achieved across the 4 key programs and we also remain optimistic of a positive conclusion to MSB’s ongoing partnering negotiations.
We note that, MSB has started reporting in USD from 1Q16. We are not making any number changes now. We expect to provide another update in the coming weeks once we convert our model from AUD to USD. We retain our Buy recommendation and Valuation of $4.50/sh at this stage...............
Key Near-term Catalysts
• Launch of TEMCELL in Japan in February 2016: JCR Pharmaceuticals expects to launch its acute GvHD product TEMCELL in February 2016. MSB has received in 4QCY15 US$3.5m in pre-commercial milestones triggered by the approval of TEMCELL. Under the deal sales milestones (BPe ~US$4m) as well as royalties in the mid 20% range are also payable by JCR. We assume that at peak penetration (peak sales of US$110m), MSB will receive ~US$28m in annual royalty revenues from TEMCELL.
• Results from ongoing Phase II Rheumatoid Arthritis Trial: MSB has completed enrolment of the first dose cohort of its Phase II rheumatoid arthritis trial. Enrolment of the second cohort is ongoing. 6 month Top-line results from cohort 1 are expected to be released in 1QCY16. Results from cohort 2 are expected in 2QCY16.
• Interim analysis from Phase III CHF Trial being conducted by Teva: The first interim analysis point for this trial is when 125 patients (BPe) have been enrolled into the trial. Enrolment for first interim analysis has been completed. Interim results are expected to be reported in 1QCY16. Second interim analysis for futility, resizing and possible overwhelming efficacy will occur in 1QCY17.
• Expiry of Celgene’s 6 month right of first refusal to license certain products: Celgene’s first right of refusal to license MSB products covering certain disease fields expires in April 2016. Should Celgene decide to license any of MSB’s pipeline candidates before the expiry, it will be a source of near term cash injection for MSB in the form of potential upfront payment.
• Submission to the FDA for approval of MSC-100-IV for paediatric GvHD in US by end of CY16. Following discussions with the FDA, MSB is running a 60 patient Phase III trial in paediatric GvHD patients. The trial is currently enrolling. Interim results from the trial are expected in 3QCY16, with Top-line results expected in 4QCY16. MSB expects to file for approval in the US by end of CY16, positioning it for FDA approval in 3QCY17. We estimate that the product could launch in the US by end of CY17.
• Interim results from ongoing Phase III MPC-06-ID trial in chronic discogenic lower back pain (CLBP): MSB expects to complete enrolment in the first Phase III trial for CLBP in 3QCY16. Interim results from this trial are expected in 4QCY16. The Phase III program is expected to complete in 1HCY18.
• Results from Phase IIb trial in end stage Heart Failure patients requiring LVAD with MPC-150-IM: The US National Institutes of Health (NIH) run and funded Phase IIb end stage HF trial is expected to yield results in 3QCY17.
• Potential partnering deal for MSB’s chronic discogenic lower back pain product: MSB continues to be is in advanced partnering discussions with major companies for its chronic discogenic lower back pain product. The potential partners include top medical device companies with existing presence in the orthopaedic market and pharma companies with a strong pain franchise. We remain optimistic of a deal materialising before the end of CY16.
• Potential partnering deal for any of MSB’s products for Japanese Market: We expect to see licensing interest building towards MSB’s products for the Japanese market. Our belief is based on the growing interest of pharma companies in Japan towards regenerative medicine, the pro-regulatory environment allowing an expedited path to commercialization and nearer term revenues, the size of the market and high demand for treatments for diseases applicable to an ageing population. MSB’s MPC-300-IV product targeting inflammatory indications is likely a lead candidate for partnering in Japan.
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Mesoblast (MSB) 17 December 2015
Mesoblast (ASX: MSB, NASDAQ:MESO)
COMPANY DESCRIPTION
The Melbourne-based Mesoblast (MSB) is a biotechnology company commercialising the therapeutic use of mesenchymal lineage cells (MPCs and MSCs) – a kind of adult stem cells. MSB’s MPC technology allows these cells to be extracted from the bone marrow of donors, grown into therapeutic quantities and administered ‘allogeneically’ – ie, to patients that are not related to the donor. It has one of the most diversified pipelines, with 5 products in late stage. The first commercial product from its pipeline for GvHD is slated to launch in 1QCY16. Substantial shareholders include Silviu Itescu, M&G, Thorney, Capital group and pharmaceutical company Teva.
INVESTMENT STRATEGY
MSB is the leading allogeneic stem cell player and in our view the best placed in the space to successfully commercialise its technology. MSB’s strong cash position and ability to attract industry stalwarts with extensive Big Pharma executive level experience to its team makes the story more credible. We expect progress of the Tier 1 lead products towards commercial launch to be the key value driver for MSB. First commercial royalty revenue from GvHD product is expected to start from 1QCY16 marking the transition of the company from a development stage company to a commercial organization. We expect to see considerable M&A interest building towards MSB’s currently un-partnered indications as they progress through clinical trials. In our view, a partnership deal over the next 6-12 months with Celgene for selected disease fields, or with any other company for MSB’s back pain product or its product targeting inflammatory indications or a deal in Japan for any of its pipeline products could result in substantial cash injection and trigger a re-rating.
KEY RISKS
We see the following key stock specific risks to our investment thesis on Mesoblast:
• Clinical risk: There is a risk that MSB’s clinical trials fail to reach their endpoints. Failure of a Phase III trial may significantly impact markets confidence on Mesoblast’s technology and in case of an un-partnered product will reduce its partnering prospects.
• Timing and clinical risk on products partnered to Teva: For its partnered products to Teva, MSB is reliant on that company for development timelines. The ability of MSB’s products to finally reach the market and translate into royalty revenue streams for the company depends on Teva. Delays in timelines as seen in the past will affect market sentiment. Also, if the products fail at any stage of clinical development or if Teva decides to discontinue the development of MSB’s products, MSB’s ability to generate revenue from those assets will diminish/or fail totally.
• Manufacturing risk: The key success of Mesoblast’s business model is dependent on its ability to manufacture its stem cells on commercial scale as well as at a cost-effective price. Mesoblast has partnered with Lonza to manufacture its stem cells. Our underlying assumption is that together the companies will be able to drive down the COGS by driving efficiencies in the manufacturing process. Failure to cost-effectively manufacture would impact our valuation.
• Regulatory risk: Successful commercialisation of MSB’s products is ultimately dependent on getting approval from the regulatory authorities to commercially launch the product. Failure to satisfy regulatory requirements could mean that the product will fail to reach the market.
• Funding risk: Although MSB has a high cash balance currently further bolstered by the US$58.8m net cash injection from the NASDAQ IPO, the company may need to raise additional capital if its burn rate increases significantly or there are delays in partnering its spinal or Inflammatory franchise or pipeline for Japan or if the Celgene deal does not materialise, before commercialization............. V
MSB Price at posting:
$1.76 Sentiment: Buy Disclosure: Held
(20min delay)