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benelong
Repost again so it's visible to everyone rather than get vanished in the other non factual discussions
Lodge Partners Pty Ltd 1 Friday, 17 June 2016 Lodge Partners Research ABN: 25 053 432 769 AFSL: 246271 Event Commentary Mesoblast Ltd (MSB) Marc Sinatra +61 3 9200 7050
[email protected] Re-gains key asset, keen to move forward Company Data ASX Code NASDAQ Code ASX Price ADR Price Shares on Issue Market Capitalisation 12 Month Price Range ASX Turnover (Shares, May 16) MSB MESO $1.145 USD4.13 381m $436m $1.11 - $4.16 1.9m Board of Directors Mr Brian Jamieson Prof Silviu Itescu Mr William M. Burns Mr Donal O’Dwyer Dr Eric A. Rose Mr Michael Spooner Dr Ben-zion Weiner Chairman (Non-Exec) MD & CEO Non-Exec. Dir. Non-Exec. Dir. Non-Exec. Dir. Non-Exec. Dir. Non-Exec. Dir. Shareholders Silviu Itescu Cephalon M&G Group Capital Group Thorney Celgene 20.1% 16.5% 9.5% 7.5% 5.2% 4.2% Event: Mesoblast Limited announced earlier this week that it had regained the rights to the cardiovascular (CV) applications of its stem cells (including congestive heart failure (CHF)) licenced to Teva Pharmaceuticals (NASDAQ: TEVA). In the deal: No financial consideration is payable to Teva, Mesoblast gains control of all rights and revenues that may flow from CV applications of its stem cells, Teva retains rights to Mesoblast’s stem cells in certain other areas of application (e.g. neurology). Discussion: As we have stated before, Mesoblast’s product, MPC-150-IM, was never a great fit for Teva, given Teva’s therapeutic areas and generics focus. Therefore, it is completely plausible that Teva has handed back the program/product for strategic reasons. With Teva’s recent USD40.5b acquisition of rival generics company, Allergan (NYSE: AGN), Teva’s generics focus becomes even stronger and the rationale for handing back Mesoblast’s CV assets stronger, as well (discussed further overleaf). Teva was contractually obligated to run the phase III trial CHF up until the point of the first interim analysis, which Mesoblast reported as having been completed in its recent US quarterly report. The result of that analysis was that the data monitoring safety board (DSMB) overseeing the trial recommended that the trial continue. It is important to note that DSMBs are independent of the trial’s sponsor (Teva) and other related parties (Mesoblast). As per protocol, no one outside the DSMB is allowed to see the un-blinded and Mesoblast has confirmed neither they nor Teva have seen the data. As such, investors can essentially rule out product performance as a reason why Teva handed back the project (discussed further overleaf). Mesoblast will be responsible for funding the current phase III CHF trial. The company has said that it has been offered an equity finance facility, enabling the company to meet its new funding needs. We believe the details of the facility will be known within the next two weeks. It is likely the facility will involve monetizing future cash flows from MPC-150-IM. We expect that funding the remainder of the current phase III CHF trial will require USD30m to USD50m. Teva initially moved very slowly with MPC-150-IM, given the incompatibility of the asset with its strategy, and only started moving more quickly a yearor-so ago. Mesoblast now has the opportunity to reinvigorate it. Factors to take into account are: The majority of capital required for the phase III CHF clinical trial has already been spent, As a more nimble company, Mesoblast will be able to take advantage of opportunities a large conservative company like Teva cannot (e.g. the new Japanese pathway for approval of stem cell products), The recent availability of a new cardiac catheter will mean a wider variety of centres will be able to participate in the company’s current phase III CHF trial, likely speeding trial recruitment. Mesoblast has stated that they will aim to re-licence the program at the appropriate time to an appropriate partner, with a focus on companies which can easily handle stem cell-based products and have good CV sales and marketing infrastructure in the US, EU and, importantly, Japan. Mesoblast Ltd Lodge Partners Pty Ltd 2 Friday, 17 June 2016 There is real potential for Mesoblast to do better with MPC-150-IM back in their hands, than with it in Teva’s hands The prize is big, but so is the commitment, dollar and resource wise, required to bring a product like MPC-150-IM to market Financially, the commitment quickly reaches USD500m, before any real revenues are received Allergan is a massive acquisition, which pushes Teva, strategically further away from products like MPC-150-IM, making it a likely target for cutting costs It is highly important that the data being collected during a phase III trial remain tightly controlled by independent individuals We believe it will be fairly easy for Mesoblast to assume responsibility for the phase III CHF trial, given they have been part of a steering committee, with Teva executives, guiding the trials and that the contract research organisation running the trial will not change. We also believe the Teva representative on Mesoblast’s board will remain and that Teva has signalled its intention to retain their shareholding in Mesoblast. Given Teva has retained certain rights to Mesoblast’s technology, this intention rings true. Notably, It will also continue to give Teva exposure to Mesoblast’s CV assets. A deal for Mesoblast’s degenerative disc disease product, MPC-06-ID, widely speculated to be near-term and on the cards, would ameliorate any issues Teva’s departure has created. In the following section of this report, we take a closer look at the two potential reasons, mentioned earlier, Teva could have handed back CV rights to Mesoblast. Strategic Reasons (Mesoblast’s contention and our belief) Peak sales of MPC-150-IM have been estimated in the USD billions (e.g. Credit Suisse, USD4.1b) by a number of firms including ours. So, why would a company like Teva not want to continue with the program? Here, it must be remembered that, while the prize is big, so is the money that must be spent to attain it. Based on a write-off it has been reported Teva is likely to make regarding MPC-150-IM, it has put approximately USD120m into the product already. Add what we believe the remainder of the trial will cost (USD40m) and the first phase III trial comes with a price tag of USD160m. For simplicity sake, assume the second phase III trial will also cost USD160m. Next, add in the costs of preparing regulatory applications to the US Food and Drug Administration FDA, European Medicines Agency and the Japanese regulators (say, $30m). Then comes the big one, you need to build out a CV sales force which will cover the major markets (US, EU and Japan). Employing 500 sales reps at USD100k, will cost you $50m. You probably need to, at least, add a further $50m for training and infrastructure to support them and, that again ($50m), for marketing the product. You will need to start building the sales force well before regulatory approvals are obtained and you will, probably, need to carry these costs before you see any real sales, say two years. These numbers are very much a back of the envelop calculation, but they illustrate how easily it is to arrive at a commitment of in excess of USD500m (USD530m, in our example) required before you start to see cash flowing inwards from it. There is, also, of course, the issue of a milestone payment, likely north of USD1b that would fall due to Mesoblast, we believe, upon regulatory approval of MPC-150-IM. The payment would come due at a point in time where incoming cash flows are more certain and it could probably be renegotiated, but, nonetheless, it is a big outgoing well before any significant incoming revenues. Obviously, you need to view that spend in the light of the company spending it. Teva is a very conservative generics company, which had developed a bit of a taste for intellectual property protected branded drugs. With those protected drugs off or coming off patent and their efforts at acquiring further branded drugs having largely failed, they faced a major decision. Understandably, Teva chose to go back to its roots and agreed to acquire Allergan, in an USD40.5b deal that saw the largest generics company buying the third largest. USD33.8b of the purchase price was payable in cash. Obviously, with the Allergan acquisition, MPC-150-IM moved even further from the core of Teva’s strategy. Just as importantly, it was now in an entity highly focussed on finding/saving cash to ensure the success of its Allergan acquisition. Had Allergan had a CV sales force, Teva’s decision may have been different. Unfortunately for Mesoblast it didn’t. While all the signals were there that Teva would stay from an investor’s perspective, signals don’t always equal outcome. In this case, understandably so. Product Performance Reasons (Not our view) To understand why we don’t believe that data coming from the current phase III trial is the reason Teva handed back MPC-IM-150, It is necessary to understand how pivotal trials are generally run. Key part of clinical trial design is to try and ensure that the information being obtained from the trial doesn’t, in turn, affect the trial. For example, if it were being observed that a certain subgroup of patients were clearly benefitting from a treatment, doctors may begin to enrol more of that type of patient in the trial. This could then lead to an erroneous finding that the treatment works for all patients, when, in fact, in the real world, it is only a small number of patients that will benefit from the therapy, while the majority won’t gain any benefit, but still suffer the side effects of the drug. To avoid these sorts of potential influences, which are much more common than people might think, trials are designed ensure that the data being collected in a trial is collected in a manner that Mesoblast Ltd Lodge Partners Pty Ltd 3 Friday, 17 June 2016 A data safety monitoring board controls data from a clinical trial. It is independent of those with a vested interest in the results The DSMB advises the sponsors only as to whether a trial should continue or be halted Given the nature of the phase III CHF trial. It is essentially impossible for those involved to determine if the drug is working or not by simple observation makes it as hard as possible for conclusions to be reached before the trial is complete. This is why, where possible, clinical trials will be double blind. That is, neither the doctor nor the patient knows whether they are receiving the placebo or the drug being studied. The issue with these designs is that they can lead to patients being exposed to safety risks. They can also see large amounts of money spent on trials destined to fail or drugs that are clearly working being delayed from the market. For these reasons, a DSMB is assigned to oversee trials. They are usually composed of around five people and will include, at least, one specialist statistician, as well as well experts in the field being studied. A DSMB is independent of those with a significant vested interest in the trial and is comprised of similarly independent individuals. At pre-specified points during a trial, the DSMB will examine the un-blinded data collected from the study to that point. They will then advise the sponsors of one of the following, that the trial should: Proceed as planned, Be halted for safety reasons (i.e. the drug is demonstrating an unacceptable safety profile), Be halted for futility (i.e. the drug is highly unlikely to show a benefit should the trial continue to its intended conclusion), Be halted for outstanding benefit (i.e. to let the trial continue to its intended conclusion would unnecessarily delay supply of the drug to those who would benefit). Other than the recommendation above, the DSMB must not divulge any information about the drug’s performance in the trial. The penalty is severe if information is divulged formally or informally. The regulator (FDA, EMA, etc) can invalidate the results due to potential bias and request that the sponsor conduct a new trial. That is, the results from a $150m study can very quickly become worthless. Obviously, if the effects of a treatment are so extreme that they are easily recognised, it is possible for anecdotal information to leak from a study. Given the nature of the MPC-IM-150 study, this is not an issue, though. The product’s effects would be very hard to detect and no one person would see enough patients to arrive at a feeling, much less, an opinion on whether the product was working. As we have written before, there is ample evidence in the published literature demonstrating that adult stem cells positively impact patients with CHF. Most recently, a paper was published in the high impact journal, Lancet, demonstrating a significant 37% reduction in the number of cardiac events suffered by CHF patients after treatment with adult stem cells compared to placebo (Lancet. 2016 Apr 5. pii: S0140-6736(16)30137-4). Given the above, we find it very difficult to believe Teva would have had any idea how MPC- 150-IM was performing in the trial prior to handing back the program. To Conclude There is a clear line of logic, supported by facts, indicating the Teva handed back MPC-IM-150 for solely strategic reasons. Mesoblast Ltd Lodge Partners Pty Ltd 4 Friday, 17 June 2016 Disclaimer In accordance with section 949A of the Corporations Act 2001, any recipient of the information contained in this document should note that information is general advice in respect of a financial product and not personal advice. Accordingly the recipient should note that: (a) the advice has been prepared without taking into account the recipient's objectives, financial situations or needs; and (b) because of that, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient's objectives, financial situation and needs. 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