OK Hot Copper. Time to face reality. Long only active managed funds are an endangered species. Those active fund managers that still exist are focussed primarily on surviving the next quarters performance review. Australian biotechs have a limited local investor pool, with competing companies happy to “muddy the waters” as they compete for institutional support. Analysts must also feel conflicted, as they pitch for Corporate Broking fees ...especially when you consider the likes of ASX:CYP (GVHD)and ASXAR (knee osteoarthritis) and many others , who are also hoping for a big slice of the investor funds in certain targeted markets. Mesoblast’s stock quote in the US, MESO:NASDAQ, barely registers any interest, owing largely to the tiny free float , with pitiful volumes traded following its poorly executed Nasdaq listing in 2015. Then we have the balance sheet issues with this Company. How Mesoblast has managed to avoid a major dilutive fundraising is another minor miracle. Shorters of this stock must be cursing the resolve of M&G and Capital International, who as major shareholders have kept the show on the road by stepping up when all around them lost their heads. It has not been easy, with SI needing to drawdown on milestone based facilities levied at punitive rates from both Hercules and NovaQuest. One slip up and Mesoblast would surely had suffered a common ignominy of many a biotech whose cash burn finally caught up with them.
SO WHY SHOULD I BOTHER TO OWN MESOBLAST ?
But despite all the above , the story remains intact .....with huge upside potential. With the exception of an impairment review in 2016, which resulted in a write off of US$61.9m for a macular degeneration therapy, Mesoblast retains a compelling claim to a whole host of inflammatory conditions encompassing several blockbuster therapies. So why the funding issues ? Everything was going tickets-boo until a decision by Teva in June 2016, to hand back its percentage of the cardiovascular rights to avoid funding the ongoing Phase 3 Dream CHF clinical trials for Rexlemostrocel (Revascor). Teva was under severe pressure at the time to lower its debt position following the acquisition of Allergan’s generic business Actavis. This was not Teva’s brightest move as Actavis was one of the top US sellers of opioids in 2006-2012, controlling 34.6% of the market according to the Wall Street Journal.
Despite the fact that Mesoblast had compelling evidence of efficacy having just passed a blinded futility test in April 2016, I understand from a broker that many existing institutional shareholders threw in the towel at the time prompted by an aggressive downgrade by Credit Suisse...they were no doubt aware that Teva would subsequently ditch their equity holding. Indeed when Mallinckrodt stumped up A$29.6m in an equity subscription 6 months later, shareholders could be forgiven for thinking the worst was behind them...however, having stepped up to the plate, Mallinckrodt also had a change of heart and failed to execute on its intended plan to help commercialise Mesoblasts IP. Thereafter , followed a steady stream of equity dribbling on to the stock market much to the annoyance of remaining shareholders.
So why didn’t SI sign a deal with another major Pharma more recently ? I am not sure that he had the option to be perfectly honest ...but I believe that he felt having gone so far and been let down by two successive major players he should press on independently. Besides I understand that many global pharmas require a 55/45% or 60/40% revenue split, until a new therapy clears its Phase 3 , when they might consider a much lower 20/30% for the distribution license for a blockbuster therapy. Alternatively, where distribution expertise was not so important , there are private equity players on the market who are looking to achieve 3 to 4 times capital invested in real terms amortised over the life of the IP and are prepared to take a 5-20% royalty share in promising therapies in the late stages of clinical trials. Looking at the deals financed by the likes of Oxford Finance or Royalty Pharma, I think it would absurd not to believe that Mesoblast could arrange a refinancing at a low coupon or take a royalty share on aGVHD once they gain marketing approval from the FDA for Remestemcel-L...just check out the size of some recent transactions on Royalty Pharma’s website. https://www.royaltypharma.com I understand that there are no early redemption penalties on the Hercules and NovaQuest debt. Post BLA approval you could easily wake up one day to find a complete refinancing of existing debt on superior terms. Pre but certainly, post BLA approval, i would have thought funders would be queuing up to finance adult aGVHD trials when you consider Temcell’s adult market share in aGVHD achieved so far in Japan. In fact it is encouraging that it appears probable that Mesoblast will not have to fund either the independent sponsored trial for chronic aGVHD, the confirmatory trial for Revascors use with LVADS , the European trials for CLBP or the Chinese cardiovascular trials being funded by Tasly. I also sense some significance ? to the fact that Smith and Nephew purchased Osiris recently (ostensibly for their wound portfolio) and now are effective our 1st generation IP licensor, as reflected in the latest Mesoblast presentation. https://www.smith-nephew.com/news-and-media/media-releases/news/smith--nephew-expands-in-high-growth-regenerative-medicine-market-through-acquisition-of-osiris-therapeutics-inc-/ Without the support of Teva, Mesoblast had to reign in the scope of its CHF Phase 3 trial. It was originally designed as two studies of 1200 patients each with a primary endpoint of time to 1st MACE event (similar to most comparable heart trials at that time) reducing it to 1,700 patients ... and following agreement from the FDA, replaced the primary endpoint with a much more modern relevant and cost effective design ...studying the total reduction in MACE events in 600 enriched patients. Indeed this clinical trial focussed on providing a much more intelligent format for looking at the pharmacoeconomics of the total disease burden of CHF. The nature of the trial design will help enormously in upcoming negotiations regarding disbursement and pricing for Revascor, as insurance companies will be able to calculate what reduction in hospitalisations and associated costs result from its use. An excellent comprehensive peer group review of the ongoing Revascor trial was recently published by the AHA which comprehensively covers methods of action and goes in to further detail the adaptations to the trial design : https://www.ahajournals.org/doi/10.1161/CIRCRESAHA.119.314951
Safety Profile
Where should I start ? Perhaps with the obvious. I was told at a recent investor meeting, a shareholder asked:
How many new types of major adverse events have you experienced with your therapies in the last 14 years ? ...as they tried to understand the safety profile of the use of mesenchymal cells. None, replied Prof Itescu . He went on to explain that most of Mesoblast’s clinical trials have used the same master cell bank donors throughout. Furthermore , adult MSC’s are often considered “immune privileged “ (despite having a limited expression of MHC 1 and a few other costimulatory molecules ) and have been well tolerated in all the clinical trials to date. To put this into perspective, we must obviously expect naturally occurring adverse events but there are few signs that our therapies are contributing factors other than some mild indications. Hopefully the Phase 3 trials will confirm that our mesenchymal cells do not just reduce back pain MPC-06 or alleviate bleeding in the left ventricle MPC-150, but they also contribute to limited cell regeneration and function. Indeed the peer group review of Mesoblast’s Dream HF trial (I have provided a link above, quoted below), suggests they utilise “paracrine” mechanisms of action enabling them to be used as therapeutic agents for immunomodulation and ischemic tissue repair . Rexlemostrocel (Revascor), appears to reduce endothelial dysfunction and achieve limited remodelling of the left ventricle. This is clearly shown by the contractile performance of the heart muscle as regards systolic and diastolic performance relative to the control group in the Phase 2 trial results.
“Mesenchymal precursor cells have a unique multimodal mechanism of action that is believed to result in polarization of proinflammatory type 1 macrophages in the heart to an anti-inflammatory type 2 macrophage state, inhibition of maladaptive adverse left ventricular remodeling, reversal of cardiac and peripheral endothelial dysfunction, and recovery of deranged vasculature. The objective of DREAM-HF is to confirm earlier phase 2 results and evaluate whether mesenchymal precursor cells will reduce the rate of nonfatal recurrent HF-related major adverse cardiac events while delaying or preventing progression of HF to terminal cardiac events.” The results of the Phase 2 CHF study in the 150m dosing arm were exceptional with not one single MACE (Major Adverse Cardiac Event)...but still doubts persisted in the scientific community over donor senescence and general health. As noted in Hindawi below : https://www.hindawi.com/journals/sci/2019/9628536/ “Baptista and colleagues demonstrated that MSC’s obtained from people with obesity have significantly impaired proliferation and differentiation potential. Indeed, it seems that the most important factor to consider is the age of the donor”...owing to the challenge of being able to isolate and expand MSC’s form elderly patients to obtain an efficient number of therapeutic cells.” Moreover, it is difficult to isolate an effective population of MSC's from patients with some diseases including diabetes, rheumatoid arthritis and other inflammatory diseases.” The Hindawi article states that the use of MSC’s has not resulted in any spectacular results to date but that obviously excludes Remestemcel becoming the first MSC based therapy to successfully succeed in Phase 3 ! Take time to reflect on the issues referenced above next time someone tells you autologous as opposed to allogenic therapies, are the answer....many of Mesoblasts treated conditions are for elderly patients presenting with multiple inflammatory conditions ...heart disease, diabetes and arthritis being obvious examples! For many years Mesoblast had to persuade the scientific community that adult stromal cells were the answer while others insisted the future lay with embryonic, umbilical cord and even second trimester amniotic fluid. The later is currently being evaluated in a Phase 1 aGVHD trial in Japan:
https://bmjopen.bmj.com/content/9/7/e026403
Much of the frustration felt by Mesoblast shareholders is owing to the stringent FDA requirements on ensuring patient safety with a totally new therapy about which little is known. Once Remestemcel-L and Rexlemostrocel-L are FDA approved, these long drawn out Phase 3 clinical trials, will hopefully be replaced with a whole series of smaller and presumably less lengthy, IND sponsored applications and confirmatory trials for multiple inflammatory conditions . This is the same method by which CSL’s IVIg later extended to 20 or so other indications. Indeed, following Takeda’s proven use of our IP ,for CX 601 (Alofisel) for perinatal fistula , I have high hopes for our own randomised Phase 3 clinical trials for Crohn’s disease, which targeted patients refractory to steroids and immune suppressants. I await the latter clinical trial results (yet to be announced ) with eager anticipation. Mesoblast describes this as a Tier2 opportunity, but one should bear in mind that 8-20% of the 600,000 US patient population need such treatment, with the number growing at 20,000 per annum (source Mesoblast website) . If clinicians decided to intravenously use Remestemcel off label, for say 10,000 patients per year, that would probably amount to $670m per annum of revenues alone based on a 100m dosage costing $67,000 (same price suggested for Alofisel in the Nikkei Asian Review April 29th,2019). Mesoblasts own therapy for Crohns aims to place patients into early remission....which sounds ironic since there will not be any new “perianal fistula” patients to treat if they prove efficacy and put patients into early remission first ( similar to aGVHD).
Competitive Threats
Mesenchymal Cells.....Innovative Mechanism of Action (MOA)... IP Protected and First to market
One of the main risks with long drawn out clinical trials is that someone will trump you at the last minute with better results using a similar MOA or something completely different . Mesoblast has watched, no doubt in deep frustration , whilst one global Pharma after another announced Phase 3 trial results which threatened to derail the Company before it even got started. In the last year we have learnt that therapies based on JAK inhibitors such as Jakafi (Incyte INCY) have failed to show better efficacy in higher grades of GI and Liver aGVHD. As many of you are aware some JAK inhibitors are attracting considerable attention for their side effects. https://www.biopharmadive.com/news/fda-boxed-warning-for-abbvies-jak-inhibitor-clouds-gileads/561186/
Entresto (Novartis NOVN) a combination therapy of valsartan plus sacubitril (a neprilysin inhibitor), has also made limited progress... narrowly missing its primary endpoint in its latest clinical trial for preserved ejection fraction. https://www.pharmaceutical-technology.com/comment/novartis-misses-endpoint/ Then there was a whole class of SGLT2 inhibitors , originally approved as treatments for diabetes such as Farxiga ( Astra AZN) , Jardiance ( Eli Lily and Boehringer and Ingelheim) , Ozempic ( Novo Nordisk) and Invokana ( J&J) which have all achieved creditable results but have not been able to knock the ball out of the park in relation to reducing MACE events but showed some promising reductions in mortality rates. Bear in mind these clinical trials have involved large clinical studies of over 10,000 and surprisingly some managed to prove efficacy in the non diabetic population. The good news is that the SGLT2 trials which I have studied only managed to succeed in Grade 2 CHF and failed to show a meaningful improvement over the control, in Grade 3 or end stage CHF.
Regarding oesteoarthritis, there were big hopes for a another method of action ...this time NGFs ...The big news this year was the reporting of safety concerns form the latest tanezumab OA trials which will come as a great disappointment to Eli Lily and Pfizer. Tanezumab is a monoclonal antibody that is part of an investigational class of non-opioid chronic pain medications known as nerve growth factor (NGF) inhibitors
“SVB Leerink Research analyst Geoffrey Porges noted that the significant safety imbalances in the study, and the marginal efficacy of the drug, effectively signaled the end of this program, in his view, and probably puts the outlook for the entire class in (more) jeopardy. “It is hard for us to imagine how these results could have been much worse. Pfizer indicated that they “plan to review the totality of data” with regulatory authorities, which suggests to us that the co-sponsors will try to find a way to resurrect the program for some subset or sub-population of patients, but recognizes that this result puts the drug’s entire future in doubt,” said Mr Porges.
One of the few remaining competing treatments in the oesteoarthritis space, concerns the use by Paradigm Biopharmaceuticals (PAR ASX ) of repurposed pentosan polysulfate sodium (PPS) for oesteoarthritis and other conditions ...PPS was originally used in the treatment of bladder cancer and has been fast tracked owing to its extensive use as a medication over the last 70 years. I know that PAR is headed by some ex employees and management of Mesoblast, but I do not believe Mesoblast feel this therapy will prove a long term competitive threat....despite some positive news flow regarding being Fast Tracked by the FDA and working with the Icahn School of Medicine ( which is also undertaking the confirmatory LVAD trials for MSB)
I have yet to research PPS properly (also referred to as NaPP) but I would point out straight away that Mesoblast has already undertaken a combination therapy trial using MSC’s and pentosan polysulfate in a back pain study reported years ago as evidenced below: https://thejns.org/spine/view/journals/j-neurosurg-spine/24/5/article-p715.xml MPC 25 has many defined benefits beyond pain reduction as mentioned on its website :you “Mechanism of Action. Preclinical studies have established that MPCs have anti-inflammatory effects and secrete multiple paracrine factors that stimulate new proteoglycan and collagen synthesis by chondrocytes in vitro and by resident cells in the nucleus and annulus in vivo. MPCs have also been shown to produce anti-inflammation factors. Together these effects offer the potential to strengthen the load bearing function of the disc by improving disc anatomy and stability, while also reducing inflammation and pain”
Huge returns.
We should remind ourselves of the pharmocoeconomics of the Remestemcel-L in treating srGVHD. By the time Mesoblast is asked to start treating a child all patients have been either insured by Medicaid or have private insurance. I understand that the total adult and paediatric Japanese srGVHD market is currently over $100m spread over 600 patients per annum being charged between $130-200,000 per treatment ...a price set by a wing of the Japanese Government. https://www.jstage.jst.go.jp/article/hct/6/3/6_16-031/_pdf Owing to the superior efficacy of Remestemcel-L in treating severe cases of aGVHD which require extensive hospitalisation in comparison to Jakafi who has slightly superior results in milder grade 1&2 skin , Mesoblast believes it should be able to charge double the rate for its therapy..and is guiding towards a $300,000 nett of any discounts to PBMs. Whilst this may seem high ...it isn’t . Bear in mind that in May 2019 Novartis won US approval for its gene therapy Zolgensma for spinal muscular atrophy (SMA), the leading genetic cause of death in infants, priced at a one-time record treatment cost of $2.125m. Indeed this is not by any means the only high priced therapy. Recently CAR-T therapies are being approved at $475,000 price points . https://uk.reuters.com/article/uk-novartis-genetherapy/novartis-2-million-gene-therapy-for-rare-disorder-is-worlds-most-expensive-drug-idUKKCN1SU2BB Yes folks, next time your questioning where the next nickel and dime is coming from to pay for the cash burn ,don’t nickel and dime your own likely revenue stream ! Mesoblast is already treating a regular flow of 6-8 kids per month in the US on its Expanded Access Programme for aGVHD . A modest increase in that number to 10 patients per month post a successful BLA approval in the 2nd Half of 2020 would give immediate revenues of $36,000,000 which I would expect to leap over $100m within 18 months as it is used off label in a total GVHD market which is worth over $700m in the US alone. If you one of the deniers sitting on your sofa, plotting a simple chart and resistance points....WAKE UP AND SMELL THE COFFEE.
Potential Market size of adult GVHD ($380m?) , chronic ($200m?) and paediatric ($120m) Within three to four years GVHD could easily be worth in excess of $300m of annual profits to Mesoblast ...and that’s just the US. Make that half a billion dollars with worldwide distribution agreements in years to come . Very short term for the roll out of paediatric aGVHD, the only real extra costs to Mesoblast are 12-15 sales and technical support staff, to be based in the 15 US BMT centres who treat 50% of the paediatric aGVHD patient population. Further expansion into covering the adult market , would involve replicating coverage of many of the same BMT clinics but also adding 25 other locations. All this with an estimated COGS of approx 15% ! Which should reduce further within the next 2 years to single digits...it is easy to see why some institutions who are risk averse are now realising that post BLA approval for Remestemcel-L , Mesoblast could be cheap without even including its blockbuster sales for CLBP and CHF or off label opportunities.
Now I wonder what Novartis , Eli Lily , Pfizer , Astra Zeneca, Johnson & Johnson etc are going to do now their heart or CLBP clinical programmes are shown to have experienced setbacks ? Astra Zeneca already hedged its bets with BioCardia who are rushing to do clinical trials with allogenic stem cells ...fancy that ? Let me guess what the others will do ? https://www.globenewswire.com/news-release/2019/07/25/1887825/0/en/BioCardia-Signs-Exclusive-Development-Agreement-With-AstraZeneca.html Perhaps, I have gone on too long. I will try to cover the multi billion potential of Revascor and MPC 06 in my next post. Please do your own research and do not rely on any of the information or opinions contained in this post when making an investment decision . After all , I could be the cleaner ! GLA.
AR (knee osteoarthritis) and many others , who are also hoping for a big slice of the investor funds in certain targeted markets. Mesoblast’s stock quote in the US, MESO:NASDAQ, barely registers any interest, owing largely to the tiny free float , with pitiful volumes traded following its poorly executed Nasdaq listing in 2015. Then we have the balance sheet issues with this Company. How Mesoblast has managed to avoid a major dilutive fundraising is another minor miracle. Shorters of this stock must be cursing the resolve of M&G and Capital International, who as major shareholders have kept the show on the road by stepping up when all around them lost their heads. It has not been easy, with SI needing to drawdown on milestone based facilities levied at punitive rates from both Hercules and NovaQuest. One slip up and Mesoblast would surely had suffered a common ignominy of many a biotech whose cash burn finally caught up with them.
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