MESOBLAST - GVHD - A BIRD IN THE HAND

A BIRD IN THE HAND

For those of you with the attention span of a Gnat , I thought I would draw attention to the tortoise treatment , which should be gradually crossing the finishing line. The prospects for “Ryoncil” for treating steroid refractory acute GVHD, make it “the bird in the hand”, whiIe Congestive Heart Failure, Chronic Lower Back Pain and now a therapy for Covid 19/ ARDS, are the blockbusters in the “bush”. I consider Ryoncil a tortoise, for an obvious reason. Under the stewardship of Osiris, using another trade name, “Prochymal” (nee Ryoncil),it was first conditionally approved in Canada in May 2012. I understand that it was never launched in this market, because Mesoblast wanted to achieve superior reference pricing post an FDA approval in the US. Before being acquired by Mesoblast, Osiris, did however, license the therapy to JCR ..with very strict territorial rights and designated usage, who subsequently rebadged the therapy “Temcell”. The latter treatment for sr GVHD now enjoys a reported 70% market share in C/D adult disease in Japan for liver, gut and multiple organ conditions. A comprehensive historical review is provided with the link below :

https://www.pmda.go.jp/files/000215658.pdf

SO , why do I mention this now ? Hopefully we are all about to sit down this morning , to watch the well overdue and deserved slaughter of our resident bears. In a scene reminiscent of Les Miserables, cue the song:

https://www.youtube.com/watch?v=9fA9BddSLLU

Yes, folks, he/she/they did “have it coming”. But before one or two of us are guilty of “lightening our load” with our own little bout of profit taking , I thought I would put the current valuation in context.

Temcell has been a huge success in the adult and paediatric market, where all other competitors such as Novartis/ Jakavi ( Jakafi in US/Incyte Pharma) have been active for many years. Jakavi was originally launched by Novartis in Japan in 2014 and has enjoyed many label extensions to other conditions since its original approval for myelofibrosis . Jakafi (Ruxolitinib) is the market leader and gold standard therapy for adult sr aGVHD in the US.

https://www.businesswire.com/news/home/20140708005858/en/Incyte-Achieves-25-Million-Milestone-Approval-Jakavi®

https://www.thepharmaletter.com/article/incyte-earns-60-million-milestone-on-european-reimbursement-for-jakavi

With the last few years of proven market share in Japan against all comers , you would not think it unreasonable that analysts would view the probability as extremely high, that Ryoncil would be very well received to treat the adult market in the US and worldwide.

In fact, when you look at the major adverse effects of Ruxolitinib/Jakafi from its Reach 1 clinical trial (link below) , I think most physicians would be likely to prescribe Ryoncil “off label” for adult use as soon as it receives BLA approval for paediatric.

“The ruxolitinib AE profile was consistent with expectations for ruxolitinib and for patients with SR acute GVHD. The most common treatment-emergent adverse events (TEAEs) of any grade were anemia (65 percent), hypokalemia (49 percent), decreased platelet count (45 percent), peripheral edema (45 percent) and decreased neutrophil count (39 percent). A total of 14 patients had a cytomegalovirus (CMV) event (n=10, infection; n=4, viremia), and all patients who had a CMV event had a positive CMV donor or recipient serostatus or both at baseline. Fatal treatment-related TEAEs were sepsis and pulmonary hemorrhage (one patient each) and were attributed to both ruxolitinib and corticosteroids”

So what difference does this make to the valuation ?...EVERYTHING. The adult market is over three times larger than the paediatric market. From a pharmacoeconomic perspective, children under 12,have slightly longer hospitalisations for the same condition ,but bearing in mind that dosage is based around the patients weight there should be no difference in US pricing. Indeed, Japan appears to differ from the US in setting prices based on the number million cells used ...whereas in the US I believe Jakafi charges per treatment regardless of the number of cells used.

Bell Potter have not allowed for any off label uses, or European licence income in their estimates. To be fair the analyst openly acknowledges this fact and draws attention to the upside opportunity. Many other analysts covering the stock do not have such reservations.

Maxim Jacobs at Edison Research has given, what i believe to be a much more realistic assessment of Mesoblasts prospects for sr aGVHD :

https://www.edisongroup.com/publication/increasingly-positive-on-agvhd/25355/

https://www.edisongroup.com/wp-content/uploads/2020/03/Mesoblast-An-important-next-several-months.pdf

Mesoblast is a research client of Edison Investment Research Limited..so i think it enjoys as the same status as Bell Potter,as regards access to the Company to be guided on market share and pricing. For this reason I can only conclude that it is the Bell Potter analyst deciding to ignore guidance and not recognise a very obvious revenue stream for the Company. She has not even allowed for European sales which I think is over prudent. I would respectfully argue that Maxim Jacobs, has produced a very thorough and well documented review of the prospects for GVHD which leads him to conclude that the GVHD therapy alone should be attributed an NPV valuation of A$1,200.6 BN . He arrived at that valuation after assigning an 80% risk of approval for paediatric and a 50% chance for adult. Indeed this risk assessment was made BEFORE receiving “priority review”,although he had correctly anticipated such a result. His adult number is based around “off label use only” until a label extension is sought.

I would argue that gaining “priority review’ status and going beyond the 74 day rejection letter timetable means that the chance of FDA approval is now surely 95% for our paediatric BLA application with a “PDUFA” date of September 2020. Of course, everyone knows that virtually no therapy which passes its panel review, normally scheduled two months before the PDUFA date, has ever failed to be approved subsequently by the FDA.

Anyone listening to the conference call arranged last year with Prof Joanne Kurtzberg, who is one of the most respected GVHD specialists in the world , heard words to the effect , that she would not hesitate to prescribe Remestemcel/Ryoncil for her adult patients as well . Prof Kurtzberg has also seen some amazing initial results for chronic GVHD which is arguably as big our adult GVHD opportunity.

https://medschool.duke.edu/about-us/our-faculty/joanne-kurtzberg

Now before you go thinking that Edison have got carried away with their valuation, just remember that they do not predict peak sales of US$574m until 2028 !!!

Remember their valuation also will require updating following the IND application for chronic aGVHD which is now in the pipeline !

https://finance.yahoo.com/news/clinically-meaningful-outcomes-using-remestemcel-110010556.html

In their model Edison assume 65% market share in paediatric, even though Ryoncil enjoys superior efficacy in nearly all Grade C/D categories which is easily the largest segment of the market. Post a successful BLA approval, Mesoblast will be the only FDA approved therapy . Indeed, potential toxicity issues in younger patients using Jakafi, make me dumbfounded that we do not assume at least 80% market share.

The reason i am mentioning all the above, is that newcomers to the MSB thread will probably not appreciate that within six months Mesoblast should have an “orphan designated therapy” fully approved , with the potential to justify a market capitalisation of AUD $1.5 billion ....just for the likely opportunity in the steroid refractory acute GVHD market without even including Chronic ! By strange coincidence , at Fridays ASX close, Mesoblast had a market capitalisation , based on a price of AUD$2.73 and 564.29m fully diluted shares, of AUD $1.5 billion.

Conclusion .

In my view revaluation of Mesoblast was well overdue.It is likely that ASX 200 Index inclusion beckons and many analysts should be embarrassed by their dumbed down sum of the parts calculations for a Company which will shortly conclude over six phase three trials. The world is now focussed on our stem cell therapies . In my opinion , if any of MSB’s “blockbuster phase 3 trials prove overwhelming efficacy, the shares will rise tenfold. If not, the prospects for GVHD alone,without considering label extension opportunities such as for HIE or biologic refractory Crohn’s, will mean the downside is far more limited than people realise .

Good luck and please do not rely on the opinions and facts expressed above when making an investment decision. OP