EQUITY RESEARCH. Cantor Fitzgerald latest update ...
March 5, 2020
Mesoblast Ltd. ADR (MESO)
Company Update
MESO's Blockbuster Opportunities "stem" from Innovation
Investment Summary: We reiterate our OW rating and think it is a good time to take another look at MESO's stock ahead of three important and potentially positive catalysts this year that could drive the shares meaningfully higher. These catalysts are: 1) the approval and launch of Ryoncil for pediatric SR aGVHD in 2020, 2) positive Phase 3 data for MPC-06-ID to treat CLBP mid-2020, and 3) positive Phase 3 data for Revascor to treat advanced heart failure mid-2020. The risk/reward is to the upside, ahead of these potential catalysts, in our view. We think the stock could trade down to $5 on negative outcomes and up to $30 if things turn out positive.
Established, well-capitalized company with robust pipeline. The company is well- capitalized to achieve its strategic objectives. MESO also has strong partners that serve to validate the company's technology, help expand its product portfolio worldwide, and offset its cash burn. MESO is partnered with Grunenthal (Not Covered) to develop and commercialize MPC-06-ID in Europe and Latin America. Mesoblast could receive up to $150MM in upfront and milestone payments prior to product launch. Milestone payments could exceed $1B depending on patient adoption. MESO will also receive tiered double-digit royalties on product sales. MESO is also partnered with Tasly (Not Covered) for Revascor in China. Tasly has exclusive cardiovascular rights in China. MESO has received $40MM in an upfront payment and equity placement. MESO is eligible for additional milestones and royalties as well. Finally, in 2018 and 2019, MESO expanded its partnership with JCR (Not Covered) for skin and brain diseases. MESO has rights to the safety and efficacy data generated by JCR for the US and other major markets.
We expect Ryoncil to be approved and launched this year for SR aGVHD. MESO's first US product approval could be Ryoncil (Remestemcel-L) for SR aGVHD this year. If approved, MESO plans to market Ryoncil itself in the US. We think the success of Temcell by MESO's licensee, JCR, in Japan, informs the market opportunity for Ryoncil in the US. aGVHD is a life-threatening complication that occurs in ~50% of patients receiving allogeneic bone marrow transplants (BMTs). Steroid-refractory aGVHD is associated with mortality rates as high as 90% and significant extended hospital stay costs. There is only one approved treatment for SR-GVHD and no approved treatment for children under 12 years old, outside Japan. We estimate SR-aGVHD represents a >$700MM US/EU market opportunity. In preparation for a potential approval and launch this year, MESO is building out an efficient, targeted salesforce. We think MESO can successfully launch Ryoncil on its own because 15 centers account for ~50% of patients.
Revascor and MPC-06-ID two late-stage, blockbuster opportunities. Revascor, for heart failure, targets a large unmet need with a multi-billion-dollar annual market opportunity. MPC-06-ID is another potential blockbuster. Back pain causes more disability than any other condition. Over 7MM patients are estimated to suffer from CLBP due to degenerative disc disease (DDD) in each of the US and EU5.
Most of MESO's pipeline assets are free call options. MESO already has life cycle expansion strategies in place for all its key products. It is looking to use Remestemcel-L to treat aGVHD in adults, cGVHD, biologic refractory Crohn's Disease, Hypoxic Ischemic Encephalopathy, and Epidermolysis Bullosa. MESO is also looking at MPC-300-IV to treat Rheumatoid Arthritis as well as Diabetic Nephropathy, and MESO is studying Revascor for end-stage heart failure............
Acute Graft Versus Host Disease (aGVHD)
GVHD is commonly associated with stem cell transplants that occur with bone marrow and solid organ transplants. White blood cells of the donor’s immune system that remain in the donated tissue (graft) recognizes the recipient (host) as foreign. The acute form (aGVHD) is characterized by selective damage to the liver, skin (rash), mucosa and the gastrointestinal (GI) tract with symptoms manifested within the first 100 days post-transplant. Severity is graded on a range of I-IV (or A-D), with I (A) as the lowest and IV (D) as the highest grade of severity. Patients with Grade IV GVHD usually have a poor prognosis that is currently treated with immunosuppressive agents such as steroids. However, steroid-refractory aGVHD (SR-aGVHD) is associated with mortality rates as high as 90% and significant hospital stay costs.
Remestemcel-L
This product candidate is intravenously (IV) delivered for systemic conditions of excessive inflammation. The MLCs secrete biomolecules involved in immunomodulation to polarize pro-inflammatory monocytes to switch to activated T helper cells 1 and 17 (Th1 and Th17), respectively, to Th2 and T regulatory cells.
MESO acquired the mesenchymal stem cell (MSC) business from Osiris Therapeutics (Not Covered) in 2013. Remestemcel-L are human MSCs harvested from bone marrow of healthy adult donors and expanded ex vivo for immunosuppressive activity. This platform was used to develop Temcell HS Inj. (previously MSC-100-IV/JR-031) and Ryoncil. Temcell HS Inj. was the first approved therapy as a proof-of-concept for this technology platform in 2015 for pediatric and adult patients with aGVHD following allogeneic bone marrow transplant (BMT) in Japan. Protocol 275 and Protocol 280 Expanded Access Program (NCT00759018 and NCT00366145, respectively) trials in children with steroid- refractory (SR)-aGVHD provided evidence that MSC-100-IV is effective when used first-line with a markedly superior overall response at Day 28 (refer to Exhibit 2 below). More information on the Japanese market for aGVHD and JCR Pharmaceutical (Not Covered) partnership for development and launch of Temcell HS Inj. can be found on page 8.
More specifically in the Expanded Access Program, 241 pediatric patients were recruited with SR-aGVHD undergoing hematopoietic stem cell transplant (HSCT) at 50 sites in N. America and Europe over 2007-14. Patients were between the ages of 2 months and 17 years, with aGCHD Grades B-D and that have failed steroid treatment and multiple other agents. The aGVHD indication was classified as the lack of improvement after at least 3 days of methylprednisolone (at least 1 mg/kg/day or equivalent). The data are illustrated in Exhibit 3, noting 14% of patients with complete response and 51% with partial response. Responses were observed for all GVHD grades and did not differ by baseline organ involvement. Additionally, correlation of Day 28 overall response with Day 100 survival was achieved using MSC-100-IV as first-line or salvage therapy after failing steroids and/or additional treatments. Overall response at Day 28 was 65% and Day 100 survival was significantly improved in Day 28 responders at 82% vs. 39% (p<0.0001). These results support the data from the Phase 3 trial to gain approval and launch in the U.S.
Successful approval and launch of Temcell HS Inj. in Japan led to an FDA agreement for a ~60-patient open-label Phase 3 trial for an accelerated U.S. approval pathway. In the U.S., there is only one approved treatment for SR-aGVHD and no approved treatment for children under 12 years old (y.o.) outside of Japan. More than 30,000 allogeneic BMTs are performed globally (>20,000 in U.S./EU) annually, with ~20% of cases pediatric. The U.S. addressable market for aGVHD in children and adults is 8x larger than that in Japan due to greater patient numbers, incidence and pharmacoeconomics. The SR-aGVHD indication represents a >$700MM U.S./EU market opportunity.
Phase 3 Pediatric Trial GVHD001 was a multi-center, single-arm, open-label study to evaluate efficacy and safety to Day 100 (GVHD001) and from Day 100-180 (GVHD002). Fifty-five pediatric patients between the ages of 2 months and 17 y.o. were enrolled that developed aGVHD following allogeneic HSCT failing systemic corticosteroid therapy. Patients recruited had Grade B-D disease involving skin, liver and/or GI tract with a primary endpoint of overall response at Day 28, with secondary endpoint of survival at Day 100.
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