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Mesoblast: Undervalued Due To Remestemcel-L's Substantial GrowthPotential
Sep. 30, 2024 4:24 PM ETMesoblast Limited(MESO) Stock, MEOBF StockJCRRF1 Comment
Myriam Alvarez
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Summary
Mesoblast Limitedis advancing innovative cellular therapies, with Remestemcel-L for pediatricSR-aGVHD nearing FDA approval and a PDUFA date set for January 2025.
Positive Phase 3results indicate that Remestemcel-L significantly improves response rates andsurvival in pediatric patients.
Additionally,Mesoblast's pipeline includes late-stage therapies for chronic low back painand heart failure, both of which are showing promising results and are nearingregulatory approval.
MESO appearssignificantly undervalued compared to its potential, with a strong cashposition and strategic partnerships to support upcoming product launches.
Despite regulatoryand market adoption risks, MESO's upside potential justifies a “Strong Buy”rating for investors familiar with these risks.
Mesoblast Limited (NASDAQ:MESO) promising innovative cellular therapies are quickly progressing towards FDA approval. MESO’s therapies can potentially treat serious conditions and promote tissue repair and immune regulation without needing donor-recipient matching. Its leading product candidate is Remestemcel-L, which has favorable results for treatingsteroid-refractory acute graft-versus-host disease [SR-aGVHD] in pediatricpatients.
The FDA acceptedMESO’s resubmitted biologics license application [BLA], and the PrescriptionDrug User Fee Act [PDUFA] date is January 2025. Additionally, MESO haslate-stage therapies for chronic low back pain [CLBP] and heart failure withreduced ejection fraction [HFrEF]. In my view, the company seems significantlyundervalued compared to its potential and near-term approvals. Moreover, Ibelieve it has sufficient resources for its upcoming product launch. Hence, Irate MESO a “Strong Buy” for investors who understand its regulatory and marketadoption risks.
Ryoncil: BusinessOverview
Mesoblast is abiotechnology company headquartered in Melbourne, Australia, developingcellular therapies for conditions resistant to available treatments.Established in 2004, the firm leverages its proprietary mesenchymal stromalcells [MSCs] platform to generate allogeneic off-the-shelf cell therapies. MESO uses rare bone marrow cells to promote tissue repair and regulate immune reactions.
Source: FinancialResults and Operational Update for the Year Ended June 30, 2024. August 2024.
Initially, MESO’sprocess starts with collecting these cells from healthy donors and expandingthem into a highly consistent and reproducible set. This ensures they can bereplicated at industrial scales for commercial use. It’s worth mentioning thatan essential characteristic of MESO’s platform is its potentially wideapplication across patients and indications. After all, this approach doesn’trequire donor-recipient matching or prior immune suppression in patients.
Currently, thecompany’s pipeline contains various late-stage candidates, such as Remestemcel-L, under the commercial name Ryoncil. This drug is in the regulatory filing process for steroid-refractory acute graft-versus-host disease [SR-aGVHD] in children. This condition occurs after a bone marrow transplant when the immune cells from the donor attack the recipient’s tissues. However, Ryoncil is also in Phase 3 for SR-aGVHD in adults, which would also unlock a much larger total addressable market, or TAM.
Source: FinancialResults and Operational Update for the Year Ended June 30, 2024. August 2024.
Moreover, Rexlemestrocel-L is in Phase 3 for chronic low back pain [CLBP] associated with degenerative disc disease [DDD]. Rexlemestrocel-L, combined with hyaluronic acid [HA], shows promising pain reduction without opioids. The FDA granted it the Regenerative Medicine Advanced Therapy [RMAT] designation for this indication. Rexlemestrocel-L, under the commercial name REVASCOR, is also in Phase 3 for Heart Failure with Reduced Ejection Fraction [HFrEF]. HFrEF is a heart disease in which the left ventricle can’t pump blood efficiently, leading to exhaustion, shortness of breath, and liquid retention. This indication also has the RMAT designation.
Lastly, it’s worthhighlighting that MESO has several strategic partnerships that should expedite its IP’s access to worldwide markets. These agreements include collaborations to develop and commercialize its MSC therapies. For instance, JCR Pharmaceuticals (OTCPK:JCRRF) is entitled to generate MSC therapies for hematological malignancies like GvHD and Hypoxic ischemic encephalopathy [HIE]. Grünenthal holds the exclusive license for Rexlemestrocel-L for treating CLBP in Europe, Latin America, and the Caribbean. Finally, Tasly Pharmaceuticals has exclusive rights over Rexlemestrocel-L for HFrEF medicine in China.
Remestemcel-L: FDAResubmission and Trial Data
In July 2024, MESOresubmitted Ryoncil’s BLA, which the FDA accepted for pediatric patients with SR-aGVHD. Yet, the FDA required additional information regarding chemistry, manufacturing, and controls [CMC]. The FDA's initial Complete Response Letter [CRL] was issued in August 2023 and didn’t raise concerns regarding the drug's efficacy or safety. The Prescription Drug User Fee Act [PDUFA] date is set for January 7, 2025.
Source: FinancialResults and Operational Update for the Year Ended June 30, 2024. August 2024.
This means thatRyoncil [Remestemcel-L] could soon become the first approved treatment forSR-aGVHD for children under 12. The company has entered into a convertible agreement with its largest stockholder to issue $50 million as funding to execute its commercial strategy for launching once Ryoncil is approved.
Furthermore,Ryoncil’s Phase 3 results showed a 70.4% overall response rate [ORR] at day 28. This is substantially better than the prespecified primary endpoint of 45%. The survival rates were markedly higher for patients who responded on day 28 than those who didn’t (47%). In addition, Ryoncil's response was 87% on day 100, showing its long-lasting effects.
Source: FinancialResults and Operational Update for the Year Ended June 30, 2024. August 2024.
Additionally,management is working on the adult version of Ryoncil. They have a Phase 3 trial for this indication that could unlock a potential TAM five times larger than its current pediatric application. The pivotal trial will be conducted with the Blood and Marrow Transplant Clinical Trials Network [BMT C TN]. This entity oversees US transplants, so the trial’s costs should be much lower than traditional trials.
Similarly, Rexlemestrocel-L for CLBP completed its Phase 3 trials with positive results. MESO demonstrated this drug has a 12-month pain reduction, which was one of its primary endpoints. The company is also planning on confirmatory studies before its BLA submission, and its second Phase 3 trial is also enrolling patients. Finally, Rexlemestrocel-L [Revascor] for HFrEF, indicated for adults, is in the end-stage before its subsequent regulatory filling.
Source: FinancialResults and Operational Update for the Year Ended June 30, 2024. August 2024.
Overall, I believeMESO’s pipeline is well-positioned to address unmet needs in heart failure,back pain, and graft-versus-host disease. Each treatment is in the late stageof clinical studies and targets sizeable TAMs, contingent on their respectiveregulatory approvals.
Compelling PriceTag: Valuation Analysis
From a valuationperspective, MESO trades at a $886.6 million market cap, making it a midsizedbiotech in its sector. Its balance sheet holds $63.0 million in cash and equivalents against $114.3 million in borrowings. Its book value stands at $480.4 million, implying a P/B of 1.8. This seems relatively undervalued compared to its sector’s median P/B of 2.5. Additionally, according to Seeking Alpha, MESO is projected to generate $247.7 million in revenues by 2026. This suggests a forward P/S of 3.6. Again, this is slightly below its sector’s median forward P/S of 3.8, so overall, I believe MESO’s valuation seems cheap compared to its peers.
Source: SeekingAlpha.
Moreover, Iestimate MESO’s latest quarterly cash burn was $10.8 million by adding its CFOs and Net CAPEX. This indicates a cash runway of about 5.8 quarters, which isn’t terrible for a company close to launching a major revenue contributor. For context, MESO’s upcoming potential approval for Ryoncil would let it tap into a portion of the global GVHD market, which is forecasted to reach $6.0 billion worldwide by 2033. Furthermore, MESO recently announced it will issue $50.0 million in convertible notes to fund its product launch. Thus, I think MESO’s financing seems more than sufficient for now.
Nevertheless,MESO’s niche market with Ryoncil would be smaller, initially focused onpediatric SR-aGVHD patients. Initially, MESO believes it can targetaround 30,000 patients who undergo allogeneic bone marrow transplants. Out of those 30,000 patients, 20% are pediatric cases, which would comprise Ryoncil’s initial TAM. However, it’s reasonable to expect that post-FDA approval, MESO will work to extend its indication to cover adult cases as well. It’s worth highlighting that Kymriah costs roughly $612,000 per treatment for pediatric patients. So, using that figure as a reference, I would estimate a near-term TAM for MESO on pediatric patients (20% of 30,000 patients) of approximately $3.7 billion.
Source: FutureMarket Insights.
Even if we assumea significantly lower price for MESO’s Ryoncil, it’s clear that its TAM issizeable. So, I think MESO’s $886.6 million market cap seems cheap bycomparison. Furthermore, remember that this is just one of MESO’s late-stage IPs. The company also has Rexlemestrocel-L for Chronic Low Back Pain [CLBP] and REVASCOR for Heart Failure. Both of these are also in Phase 3, and I believe they could obtain FDA approvals by 2025 or 2026.
Therefore, I thinkit’s challenging to be bearish on MESO at this stage. In fact, it seems likeMESO has all the ingredients to be successful eventually and trades at acompelling valuation. Hence, I rate the stock a “Strong Buy” for investors whounderstand its FDA approval risks.
InvestmentCaveats: Risk Analysis
Naturally, it’simportant to note that Remestemcel-L’s FDA approval is not yet guaranteed. TheFDA previously mentioned concerns regarding its chemistry, manufacturing, andcontrols. While I believe MESO already addressed these issues, it’s stillpossible that the FDA may find new problems with its latest resubmission. Ifthis happened, the stock could react negatively. After all, it’s one of MESO’smain value drivers.
Source:TradingView.
Aside from that, Ithink the next set of risks for MESO is market adoption. I think MESO does havea competitive offering with Ryoncil, particularly in SR-aGVHD pediatricpatients. However, I also assume that MESO can extend its indication to adultpatients. So, if MESO fails to extend this drug’s indications, it would meanits TAM is much smaller than I expected. This wouldn’t be a death blow to theinvestment thesis, but it would somewhat cap its upside potential. However,overall, I believe these risks are now relatively low. By comparison, MESO’supside potential seems much larger, which is why I consider its risks more thanjustified at this stage.
Strong Buy:Conclusion
Overall, I thinkMESO is a great biotech investment at this stage. It has a promising productwith a near-term PDUFA date set for January 7, 2025. Moreover, MESO has twoother valuable late-stage IPs that are nearing FDA approval. This means thatMESO could very well be at the cusp of transitioning towards significantrevenues. Moreover, I believe the recent convertible notes announcement shouldgive the company more than enough financing for its newly approved IP's initiallaunch and commercialization. This removes any dilution concerns and furtherde-risks MESO’s bull case. Thus, I rate MESO a “Strong Buy” for investors whounderstand the remaining regulatory and market adoption risks.
Editor's Note: This article was submitted as part of Seeking Alpha's Best Value Idea investment competition, which runs through October 14. With cash prizes, this competition -- open to all analysts -- is one you don't want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!
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