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We see Mesoblast as having the strongest pipeline in the regenerative medicine space. Multiple pivotal trials in End Stage (IV) Heart Failure with Left Ventricular Assist Devices (LVAD), Congestive Heart Failure (CHF stages II-III), Chronic Lower Back Pain (CLBP) with Degenerative Disc Disease (DDD) and Acute Graft Versus Host Disease (A-GvHD) represent the company's lead cell therapy programs. Our analysis of the Phase 2 data that support these trials coupled with their design gives us confidence that we may see a positive outcome in one or all of the trials when they report data by year-end. As such we are launching coverage with a Buy rating and $17.00 price target.
Four lead programs are the drivers for Mesoblast:
- Class IV End-Stage Heart Failure. This is a trial in very ill patients who are being supported by Left Ventricular Assist Devices (LVAD). The idea is to help restore the heart muscle by injecting cells (MPC-150) at the time the LVAD is implanted. The trial is a Phase 2b, 159 patient study, (enrollment is complete), which has received the Regenerative Medicine Advanced Therapy (RMAT) designation. The primary endpoint is temporary weans from LVAD at six months. We expect data by Q4 of this year and possibly at the American Heart Association meeting in November. Good data from this single study should support approval. The LVAD opportunity itself is small however we note that the same product and dose are being used in the larger Class II-III HF trial. As such, we might view the LVAD trial as a surrogate for the larger HF opportunity.
- Class II-III, Heart failure (HF). This is a blockbuster market representing conservatively a half million patients in the U.S. alone. Success in the HF space could be transformative for the company.Phase 3, event-driven trial which has enrolled over 465 patients and is on track to complete enrollment (N=600) this year. The trial has been enriched for HF patients with a high risk of experiencing HF-MACE based on an entry criteria around those patients who experienced a prior hospitalization (past nine months), and have significantly elevated baseline NT-proBNP a marker for heart disease. Based on event rates we expect data six months after the last patient is treated. One could argue the longer it takes to get data, the more likely there is a therapeutic effect. The endpoint is recurrent non-fatal heart failure-related major adverse events (HF-MACE) in patients with left ventricular dysfunction as well as delay or prevention of progression to end-stage HF and terminal cardiac events.
- Steroid Refractory Acute GvHD. Mesoblast announced in February that remestemcel-L; (MSC-100-IV), met the primary endpoint (a 68% 28-day overall response rate, p=0.0003 versus historical controls of 45%) in a Phase 3 trial to treat steroid-refractory acute graft-versus-host disease (GvHD). The complete data set is expected this summer. The product has both orphan and fast track designation for children with SR-A-GvHD. We expect the company to file for approval by 1Q19 after a successful trial.
- Chronic Lower Back Pain (CLBP) with Disc Degeneration Disease (DDD). This is a Phase 3 (N=360) trial evaluating the utility of (MPC-06-ID) to alleviated CLBP associated with DDD. The study has completed enrollment. The primary endpoints are the durable pain reduction and functional improvement at 24 months, both of which were met in the Phase 2 study, (p<0.05 for 6 million MPCs vs. saline) using Intent to Treat Analysis.
Raising capital can be a challenge. One of the biggest challenges amongst regenerative medicine companies has been raising capital at favorable terms and running correctly powered trials. Mesoblast since its inception, has done a good job with both, delivering a mix of traditional and creative financings while approaching the completion of multiple clinical programs. Mesoblast origins began with its Australian roots raising capital from a combination of European institutions and Australian retail investors. The company has raised significant amounts of capital around "rights of first refusal" agreements. These include the initial partnership with Cephalon which then became Teva (TEVA; not rated). Rights of first refusal with Celgene (CELG; not rated) and most recently with Mallinckrodt (MNK; not rated). The financing environment remains a challenge. We see multiple scenarios for the company to raise capital depending on the reported clinical data and how regulators (U.S. and Europe) will act in regards to changing landscape and the requirements for approval of cell therapy products. It is important to understand that cell therapy products such as Mesoblast's MPC line have demonstrated an excellent safety record so regulators could approve indications in CHF (class II-IV), CLBP-DDD, and SR-A GvHD in the U.S. and Europe with-out a second supporting trial which one would traditionally expect. As this becomes better understood we should see a corresponding rise in valuation which then would allow the company to raise capital at favorable terms. We may also see multiple partnerships. In our modeling assumptions we assume for the CHF Class II-III indication and CLBP-DDD that a second confirming trial will be required for approval. One could argue that since the product and dose is the same in the CHF Class IV with LVAD trial that regulators could accept that as a surrogate for a second trial. In pediatric SR-A GvHD we know the current trial is registrational. For adults we assume a separate trial will be required for approval.
What makes Mesoblast's cells unique? Mesoblast selects its cell population using monoclonal antibodies (mAb) which supports a more uniform, homogeneous product. The mAb's allows the company to select early-stage mesenchymal precursor cells (MPC). These cells are believed to be unique as they express STRO-1, a surface marker only present on the earliest precursor cells of the MSC lineage. These cells themselves secrete potent cytokines (potentially more potent than MSCs later down the lineage). Also unique to these precursor cells is their lack of expression of certain factors, CD40, CD86 which makes them less immunogenic. Equally important is the fact that Mesoblast has a manufacturing commitment with Lonza which has a facility in Singapore for the production of these products. We also note that Mesoblast and Japanese partner, JCR Pharmaceuticals (To: 4552; not rated) successfully technology transferred the manufacturing process for MSC-100-IV, which is now manufactured by JCR in Japan.
Capital through catalysts. Based on our math, Mesoblast has access to enough capital to reach key inflection points in ESHF-LVAD (Class IV), HF (Class II-III), Chronic Lower Back Pain (CLBP) with degenerative disc disease (DDD) and Acute Graft versus Host Disease (A-GVHD). The company recently put in place a $75M debt facility, (and accessed $35M). At the end of March 2018, Mesoblast reported $59M in cash and spent $19M in the quarter.
Valuation. Our therapeutic models are patient-based and reflect our assumptions for the product launch dates, product attributes, and pricing, to determine the future revenue streams. We apply a probability of success in these models. For GvHD we use 70% as the product is approved today in Japan and already reported positive top-line data from the current Phase 3, registrational trial. For all the other indications, CHF (class II, III and IV) and for CLBP we use a lower 50% as the basis for these trials was small Phase 2 studies, albeit with good results. These metrics then flow into our valuation models. For Mesoblast we use our maximum discount rate of 30%, which is in addition to our therapeutic probability of success rate. We select 30% as the company is not yet profitable and most of the products are still dependent on the outcome of the clinical trial. Our valuation conclusion is an equally weighted average of our FCFF, EPS, and sum-of-the-parts analysis. We use a fully diluted end-year share count and assume multiple raises.
Risks to our thesis, include the following: (1) clinical and (2) regulatory risks. These include that the trial does not go as planned, and or unforeseen complications could arise that could result in clinical delays, clinical failures or unforeseen regulatory risks. (3) Finance risk, specifically the company's ability to raise capital on favorable terms. (4) Intellectual Property (IP) risk. (5) Partnership risk. (6) Commercial risk. We review these and other risks in the risk section of this report.
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