BP update - R.A.

Mesoblast (MSB)
Top-line results from Phase II Rheumatoid Arthritis Trial impress and improve partnering prospects

Event: Mesoblast’s Top-line results from its ongoing Proof of concept Phase II trial with MPC-300-IV in 48 patients with biologic refractory rheumatoid arthritis (RA), announced today, is highly encouraging. Key highlight was that in patients who had previously received 1-2 biologics, a single infusion of 2m MPC/kg resulted in 55% and 36% ACR50 and ACR70 responses, respectively, compared with 11% and 0% of placebo treated patients and in 91% of patients achieving the minimum clinically important improvement in physical function (defined as a reduction of at least -0.22 in the HAQ-DI), compared with 33% of placebo treated patients.

Our comments

• • Results build on the positive interim results from low dose MPC group reported earlier in 2016. As we expected the benefits seen in the high dose group reported today are even better. We are encouraged to see dose response clearly with higher dose showing improved outcomes.
  • No serious adverse events at either the low dose or the high dose at 12 weeks. Treatment related adverse events were similar between the drug treated groups and the placebo (control) group.

• Importantly consistent benefit with high dose MPC treatment and separation from placebo was seen across multiple efficacy endpoints namely FDA acceptable ACR20/50/70 response criteria, physical function (measured by health assessment questionnaire-disability index –HAQ-DI) and disease activity (DAS28 measurement).

• • Data is strong and achieved statistical significance (despite the small patient numbers).
  • Clear separation of benefit of MPC treatment over placebo was seen across all subjects (patients who failed 1-2 biologics and also those who failed more than 2 biologics), however this difference was even further augmented in the subgroup who had failed 1-2 biologics, making the results in this sub group even more compelling.
  • ACR20 is the minimum bar to get FDA approval. ACR20 response is the key approvable efficacy endpoint in RA trials acceptable to the US FDA. ACR50 and ACR70 responses are a much higher bar for treatments to achieve but given that they denote 50% and 70% improvement in the signs and symptoms of RA, they are clinically more meaningful and the key differentiating factor in driving physician backing and adoption and also in differentiating one therapy from other.
  • While MPC treated patients performed better over placebo on ACR20 response criteria, the difference in benefit was even more profound on the ACR50 and ACR70 response criteria, which clearly suggests that the drug has biological activity. We note that the ACR70 responses at week 12 with high dose MPC in the trial is much better than the various marketed drugs and JAK inhibitors in late-stage clinical development. We note that the ACR50 responses at week 12 with high dose MPC in the trial is much better than the various marketed drugs and comparable or better than the JAK inhibitors in late-stage clinical development.
  • We re-iterate that that the level of ACR70 responses achieved have been very low across the Board (marketed and JAK inhibitors in mid-late stage trials) and therefore a therapy which could increase the proportion of patients achieving an ACR70 response will be filling an unmet need and likely to find physician backing. We note that although MSB’s ACR70 response is from a small number of patients, it is showing much better trends compared to most therapies and that fact along with the safety result warrants the drug moving into Phase 3.
  • The benefit observed in the trial is well supported by the immunomodulatory mechanism of action of MPCs and the initial positive results seen in pre-clinical sheep RA model.

• This positive data makes us believe that MPCs are well positioned to be a preferred 1st-line agent in treatment of biologic refractory RA patients.

• Biologic refractory (those who have had an inadequate response to or are intolerant to 1 or more TNF-alpha inhibitors) are the most challenging RA patient population and represent high unmet need. MSB estimates that ~one third of RA patients are biologic refractory and in need of effective treatment. What physicians are looking for is a drug which is efficacious, has durable benefit but is also safer than current drugs in this biologic refractory population, given current treatment modalities in this setting are limited by risk of opportunistic infections and malignancies. MPC-300-IV could fill this unmet need.

Next Steps
The benefits seen in this small trial now need to be similarly replicated in larger registration trials (Phase 3). MSB will look to partner the asset to move the product forward into Phase 3 development. We believe that MSB should be able to attract a strategic partner in the next 12 months to move the program forward. Our belief is based on the strength of the results seen so far, as well as the high interest and licensing/M&A activity seen in this space. RA is a space in which most big and specialty pharma companies are active in. This high interest from multiple parties ensures that the negotiating power of a company such as MSB able to provide strong mid-stage results is high. Most of the deals in this space have been between ~$1bn-$1.5bn and front loaded with upfront payments of ~$100-$175m, with some exceptions having upfront payments as high as $725m. Given the multi-billion dollar market opportunity and threat of biosimilars and upcoming patent expiries of the top selling RA drugs we are not surprised either by the high partnering activity nor the high value deals in the space. MSB will report further 24 weeks data from the trial later this year, which would give additional insights into the durability of the clinical benefit seen with MPC treatment. If results at 24 weeks are consistent with benefits observed at 12 weeks, it should further enhance the partnering prospects of MPC-300-IV.
To conclude, this positive data read out makes us believe that MPC-300-IV is well positioned to be a preferred 1st-line agent in treatment of biologic refractory RA patients and we continue to be optimistic on the licensing prospects of the MPC-300-IV product, which has also in the past showed positive results from a proof of concept trial in diabetic kidney disease.

Maintain Buy and Valuation of $3.27
No changes to our estimates. We retain Buy and Valuation of A$3.27/sh. Next catalyst: FY16 results expected on 26^th August 2016.
Disclosure: Bell Potter Securities acted as lead manager in a capital raising in May 2010 and in March 2013 and in a selldown of stock in December 2010 and received fees for that service.

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0	Recommendation:	Buy, Speculative	Previous Close:	$1.135	Valuation:	$3.27