Member FINRA/SIPC
INSTITUTIONAL RESEARCH
Regenerative Medicine
UPDATE REPORT
Toll-Free: 561-391-5555 ⬧
www.DawsonJames.com ⬧ 1 North Federal Highway - Suite 500 ⬧ Boca Raton, FL 33432
Mesoblast (NASDAQ/MESO, ASX/MSB)
BUY: Stay Tuned for Data, Tweaking Our PT from $14 to $15
As Mesoblast approaches a year of pivotal data and other catalysts we believe the valuation can push higher. We make a few small adjustments in our model as we project out the next ten years. The result is our price target slightly adjusts higher from $14 to $15.00 per share. We emphasize that good clinical data in DDD or HF becomes transformative for the company and as a result our probability of success metric would rise.
January 28, 2020
Investment Highlights
aGvHD is Next – Rolling BLA in Acute Graft versus Host Disease (aGvHD). Mesoblast announced efficacy and safety data as part of the rolling BLA has been submitted to U.S. regulators. This could set a timeline where we could see a U.S. commercial launch later this year. We expect Europe to be a year behind the U.S., followed by expansion from pediatric to the adult marketplace. We provide our model and assumptions for each product. Suffice to say, success in GvHD alone, in our opinion, supports the current valuation of the company.
The Hippocratic Oath – Do No Harm. Regenerative Medicine is in a unique space and often is confused and compared to CAR-T and Gene Therapy. One reoccurring theme that differentiates the Regen. Space is Risk versus Reward. We can view this as safety versus efficacy and the commercial potential for clinical success versus valuation. We feel confident that the safety profile of both allogeneic (other people’s) cells and autologous (your own cells) has been very well understood and established. We see this as a differentiator in comparison to other cell and gene therapy therapeutics, where we must carefully balance the adverse events versus the efficacy (& its sustainability). We also see distressed valuations often stacked against therapeutics that are addressing blockbuster markets. Mesoblast has established a strong clinical record with a series of Phase 1, Phase 2, and now pivotal trials that have demonstrated the safety profile and which address blockbuster markets such as Heart Failure.
Heart Failure (HF) is a Blockbuster Opportunity. Advanced stage and end-stage heart failure impact more than eight million people in the U.S. alone. Treatment options today tend to work on easing symptoms with just a modest effect on the therapeutic course of the disease. Advanced stage heart failure has the highest event rate, costing the U.S. healthcare system $115B per year and accounts for more than two-thirds of all hospital expenditures. Mesoblast is close to completing its Phase 3 trial of Revascor in HF. This is an event-driven trial, and the trial has now surpassed the number of events required (for trial completion). Final study visits for patients should occur this or next month.
A New Treatment Paradigm in Back Pain – Moving Beyond Steroids and Opiates.
From the time man crawled out of the primordial ooze and stood upright as a biped, back-pain followed. Chronic lower back pain (CLBP) likely results in more disabilities than just about any other condition. With the recognition of the hazards of prescribing opiates to treat pain (the symptom), versus addressing the underlying cause, such as a herniated disc and in its final stages spinal fusion (surgery), a new modality is needed. Mesoblast’s CLBP could be the solution, literally swapping cells for steroids for injection into the intra-vertebral space, supporting repair of the underlying cause, disc herniation, and the resulting inflammation.
Please find Important Disclosures beginning on Page 7.
Page 1 of 8
Jason Kolbert
Healthcare Research
[email protected] Current Price $10.15 Price Target $15.00
Es timates F2019E F2020E F2021E
Expenses ($000s)
www.dawsonjames.com The Achilles Heel of Cell Therapy - Manufacturing, Manufacturing, and Manufacturing. Mesoblast has been working with Lonza (LZAGY-Not rated) on developing and perfecting the process for manufacturing. Tightly controlling the doublings and number of passages, without compromising cell integrity. Given the size of the markets (CHF, DDD), the ability to have an off-the-shelf ready product is likely to be a key area of concern for the regulators. We have carefully noted over the years, the effort behind the process, and the time and resources that Mesoblast has allocated with Lonza to achieve production goals. What’s important to understand is that as an allogenic product, the process, while arduous, is not comparable to the obstacles presented in gene Therapy and or the CAR-T space.
3 X 3 - Commercialization is Right Around the Corner. With three products in Phase 3 trials, commercialization is coming soon. Add it up, the low risk of adverse events, the ability to manufacture millions of doses, and the unmet medical needs in blockbuster market opportunities such as HF and DDD. We could see an industry shift as regenerative Medicine is recognized.
Efficiently Raising the Capital to Get There – Multiple Levers to Pull. Mesoblast has already accomplished what no other regenerative medicine company has done, in terms of capital raising through a range of methods from a who’s who list of partnerships, creative loans, and smart raises down under (Australia) with an eye towards managing shareholder value and dilution. Along the way, the company is building institutional relationships from its retail base established in their home country and here too. We are not concerned about the transition we see ahead (retail to institutional), which we believe is data-driven, exactly as it was for the CAR-T companies like Kite (KITE-Not rated), Juno (JUNO-Not rated) and BlueBird (BLUE Not Rated).
Partnerships. The most recent addition to Mesoblast’s ever-growing list of partnerships is Grunenthal (ALM-Spain – Not rated) for Europe & Latin America. Roughly Grunenthal agreed to $150M in upfront payments and milestones ($45M in year one with $15M on signing) for DDD indication. The deal follows the Tasly Pharmaceuticals (600535-Shanhai – Not Rated) partnership for China. Back in 2011 a manufacturing partnership with Lonza (facility is on the ground in Singapore) and in 2010, the first partnership with cephalon (CEPH-Not Rated, acquired by Teva-Teva Not rated) which supported the CHF program until Teva as (in our opinion), as result of Teva’s own internal chaos, terminated the partnership relinquishing all rights after investing millions and initiating the pivotal CHF program.
IP Too ... & it has Already Paid off. In 2013, Mesoblast acquired Prochymal, known today as Mesoblast’s Remestemcel and in Japan, Mesoblast’s partner, JCR Pharma’s (TO:4552-Not Rated) sells the product as TEMCELL for GvHD. This happened as a result of a deal struck with Osiris (OSIR-Not Rated). In the process, Mesoblast substantially strengthened its existing IP estate. So much so that when Japanese Pharma giant Takeda (TAK-Not rated) acquired EU company Tigenix (TIG – Not rated), they needed to pay Mesoblast (licensing agreement) as a result of infringing on Mesoblast’s substantial IP estate.
Valuation. This is a complex discussion in terms of how does one value a company with both a commercially approved product, multiple partnerships, and 3 x 3 (three products in three pivotal trials, GvHD, Back Pain, and CHF). We model each product out to 2030. We provide a detailed explanation of our assumptions (pricing, timing) for each therapeutic model, and then “haircut” our estimates by a probability of success factor, based on the clinical stage of development and our assessment of the indication. For well-established companies with highly predictable revenues, we typically select a risk rate (r) of 10 percent, for early-stage growth companies like Mesoblast, we select our maximum risk rate of 30%. We assume dilution (we never let the projected balance sheet go negative) and use a fully diluted 2030 projected share count. These factors are then applied to our Free Cash Flow to the Firm (FCFF), Discounted EPS (dEPS), and Sum-of-the-Parts (SOP) models, which are equally weighted and rounded to the nearest whole number to derive a $15.00 price target.
How Does Clinical Success Change the Projected Valuation? For example, we assume just a 40% success probability in the CHF indications (even though the trial is pivotal). If Mesoblast announces positive clinical data, it suggests the probability goes up. At 100%, this change alone would drive a substantially higher valuation target.
Risk to our thesis, include the following: (1) clinical and regulatory; (2) commercial; (3) employee; (4) financial; (5) legal and intellectual property; and (6) partnership. We review these and other risks in the risk section of this report.
Mesoblast 1/28/20 Page 2 of 8
Exhibit 1. GvHD Model(s)
Pediatric GvHD - USA
Allogenic Stem Cell Transplants Market Size Growth (Annual)
Ped. & Adult Acute GvHD (grades II-IV) Pediatric Steroid Refractory Acute GvHD (Grades II-IV) Market Share Penetration Number of Patients Procedures
Cost of Therapy Price Change Probability of Success Pediatric Acute GvHD Grades II-IV Revenues (M)
Adult GvHD - USA
Allogenic Stem Cell Transplants Market Size Growth (Annual) Ped. & Adult Acute GvHD (grades II-IV) Adult Steroid Refractory (liver involvement / high risk, Grades II-IV) Market Share Penetration Number of Patients Procedures
Cost of Therapy Price Change Probability of Success Adult Acute GvHD Revenues (M)
Pediatric GvHD - EU
Allogenic Stem Cell Transplants Market Size Growth (Annual) Ped. & Adult Acute GvHD (grades II-IV) Pediatric Steroid Refractory Acute GvHD (Grades II-IV) Market Share Penetration Number of Patients Procedures
Cost of Therapy Price Change Probability of Success Pediatric Acute GvHD Grades II-IV Revenues (M)
Adult GvHD - EU
Allogenic Stem Cell Transplants Market Size Growth (Annual) Ped. & Adult Acute GvHD (grades II-IV) Adult Steroid Refractory (liver involvement / high risk, Grades II-IV) Market Share Penetration Number of Patients Procedures
Cost of Therapy Price Change Probability of Success Adult Acute GvHD Revenues (M)
GvHD - Japan
Allogenic Stem Cell Transplants Market Size Growth (Annual) Ped. & Adult Acute GvHD (grades II-IV) Number of Patients Procedures Market Share Penetration Number of Patients Procedures
Cost of Therapy Revenues Japan Annual Royalty/Revenues to Mesoblast: 20% % Growth (qtrly)
Source: Dawson James
www.dawsonjames.com Modeling Assumptions for GVHD (Remestemcel-L)
1. We assume a 2% annual market size growth for all patients with GvHD.
2. We assume the cost of therapy for GvHD is $250,000 in the U.S. and will decrease to $212,200 by 2030.
3. We assume the cost of therapy for GvHD is $230,000 in the E.U. and will decrease to $195,224 by 2030.
4. We assume the cost of therapy for GvHD in Japan will decrease to $125,000 by 2030.
5. We assume market share penetration for pediatric GvHD in the U.S. will be 3% in 2019 and increase to 85% by 2030.
6. We assume market share penetration for adult GvHD in the U.S. will be 25% beginning in 2022 and will increase to 85% by
2030.
7. We assume market share penetration for pediatric GvHD in the EU will be 3% in 2019 and increase to 85% by 2030.
8. We assume market share penetration for adult GvHD in the EU will be 25% beginning in 2022 and increase to 85% by 2030.
9. We assume market share penetration for GvHD in Japan to be 30% by 2030.
10. We assume the probability of success for all GvHD patients is 70%.
Exhibit 2. Free Cash Flow Model
www.dawsonjames.com Valuation: Our valuation methodology begins with our projected revenues from our product models. We apply assumptions for the timing of approval, launch dates, and product attributes to estimate revenues. These estimates feed into our income statement through the year 2030. The result of these projections is then fed into our income statement projections. Our price target is derived from an equal-weighted average of free cash flow to the firm (FCFF), discounted EPS (EPS), and sum-of-the-parts (SOP) models. A 30% discount is then applied and rounded to the nearest whole number to derive our price target. A higher risk rate of 30% is applied (vs. 15% or 10%) since Mesoblast is a microcap company with drug candidates in clinical trials that have yet to gain FDA approval.
DCF Valuation Using FCF (mln):
units (m illions - $)
EBIT
TaxRate
EBIT(1-t)
CapEx Depreciation Change in NWC FCF
PV of FCF
Discount Rate
Long Term Growth Rate
Free Cash Flow Terminal Value YE 2030
NPV NPV-Debt Shares out (M) NPV Per Share
2018A 2019A 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
(66) (105) (74) (96) (58) 103 499 1,025 2,396 3,419 4,374 4,402 4,429
0% 0% 3% 0% 0% 15% 25% 30% 35% 36% 36% 36% 36%
Average
$
15
Price Target $ 16
Year
2020
Exhibit 3. Discounted-EPS Model
(66)
(66) (111)
30% 1%
9,873 716
2,387 84 144 $ 16
(105) (72) (96) (58) 87
(105) (72) (96) (58) 87 (137) (72) (74) (34) 40
375 717 1,557 2,188 2,800 2,817 2,835
375 717 1,557 2,188 2,800 2,817 2,835 131 193 323 349 343 266 206
2030E
Source: Dawson James
2020 Year of EPS 2030 Earnings Multiple 10 Discount Factor 30%
Discount Rate and Earnings Multiple Varies, Year is Constant 2030 EPS
14 10% 15% 20% 25% 30% 35%
1
$7.57 $4.85 $3.17 $2.11 $1.42 $ 0.98
Selected Year EPS $ 19.63 NPV $14
Earnings Multiple
5 10
15 20 25 30 35
$37.84 $24.26 $15.85 $10.54 $7.12 $ 4.88 $75.68 $48.52 $31.70 $21.08 $14.24 $ 9.76
$113.52 $151.36 $189.20 $227.04 $264.88
$72.78 $47.55 $31.61
$97.04 $63.40 $42.15 $121.30 $79.26 $52.69 $145.56 $95.11 $63.23 $169.82 $110.96 $73.77
$21.36 $ $28.48 $ $35.60 $ $42.72 $ $49.83 $
14.64 19.53 24.41 29.29 34.17
Exhibit 4. Sum-of-the-Parts Model
Source: Dawson James
Mesoblast Sum of the Parts
LT Gr Discount Rate Yrs. to Mkt % Success Peak Sales MM's NPV
Revascor - CHF (Class II - III) U.S.
1% 30% 5 25% $5,152
$17,766
NPV
$4.14
Revascor - CHF - LVAD: Class IV
1% 30% 2 25% $361
$1,246
NPV
$0.64
Revascor - CHF (Class II - III) EU
1% 30% 6 25% $3,895
$13,431
NPV
$2.41
Acute Pediatric GvHD - U.S.
1% 30% 1 70% $142
$490
NPV
$0.91
Acute Adult GvHD U.S.
1% 30% 3 70% $319
$1,101
NPV
$1.21
Acute Pediatric GvHD - E.U.
1% 30% 2 70% $108
$372
NPV
$0.53
Acute Adult GvHD E.U.
1% 30% 3 70% $383
$1,322
NPV
$1.46
CLBD-DDD U.S.
1% 30% 2 30% $984
$3,392
NPV
$2.08
TEMCELL
1% 10% 0 75% $20
$222
NPV
$0.58
Other Indications
1% 30% 5 30% $0
$0
NPV
$0.00
Net Margin
50%
MM Shrs OS
2030E
144
Total
$14
Source: Dawson James
Mesoblast
1/28/20
Page 4 of 8
Exhibit 5. Income Statement
Mesoblast, Inc. Income Statement (M)
Mesoblast: YE June 30
2019A
Sept.
1Q20A
Dec. March June
2Q20 3Q20 4Q20 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E
Milestone / Partnership Revenues 14 15
% Sequential Growth
Revasco in CHF U.S. - - % Sequential Growth
Revascor in CHF; EU - - - % Sequential Growth
Discogenic Disc Chronic Lower Back (U.S.)
% Sequential Growth
Remestemcel-L GvHD - USA - Pediatric 1 - % Sequential Growth
Remestemcel-L GvHD - USA - Acute Adult - - - % Sequential Growth
Remestemcel-L GvHD - EU Pediatric - - % Sequential Growth
Remestemcel-L GvHD - EU Acute Adult - - - % Sequential Growth
Product Revenues 15 15 - TemCell GvHD - Japan Adult & Pediatric 1 2
Product & Royalty Revnues 17 17 Expenses
MesoBlast COGS -
COGS % Sales 0% 0%
- -
- - - - -
- -
- - - - -
- - - - -
- 30 - -
- -
- -
-- --
- 139
204 -
279 102 71 77
-
733
12
745
511 -
421
99
139
75
83
1,327
13
1,341
1,024 1,541 2,061 664 1,110 1,558 566 627 689
96 97 99
201 219 224
73 74 75
161 247 268
2,784 3,914 4,974
14 16 17
2,799 3,930 4,991
278 391 497
-10% -10% -10%
69 65 66 18 18 17 38 37 36
403 511 617
2,396 3,419 4,374
2,067 2,073
1,563 1,567
693 698
101 103
228 233
77 77
274 279
5,003 5,031
18 19
5,021 5,050
500 503
-10% -10%
67 67 16 16 35 35
619 621
4,402 4,429
R&D 60 Manufacturing & Commercialization 15 Management & Adminastration 22
13151619 3 4 4 6 5 3 3 1
-15%
76 20 39
245
-14%
73 19 38
316
Total expenses
Oper. Inc. (Loss)
Oper Margin
Fair Value Remeasurement (contingent consideration) Finance Cost/Interest Expense
Changes in the fair value of available-for-sale financial assets Exchange differences on translation of foreign operations Interest Payments
Other comprehensive loss/income for the period, net of tax Total other income
Pre-tax income
Pretax Margin
Tax benefit (or expense)
Tax Rate
Net Income
Net Margin
EPS
Non GAAP EPS (dil)
Wgtd Avg Shrs (Bas) - '000s Wgtd Avg Shrs (Dil) - '000s
Source: Dawson James
97
(80) (6)
(1) (11)
(20)
(105)
9
2122232692133147
186
103
Mesoblast
1/28/20
Page 5 of 8
(4)
0 0
3 4
(8)
2
0%
(20)
- -
(20)
-
0%
(21) (24) (70)
- -3 - -4
(21) (24) (74)
- - 2
0% 0% 3%
(96)
(58)
499 1,025
2
2
0%
2
2
0%
2
2
0%
153080
779
223789
www.dawsonjames.com-
91656
0% 30% -20% -20%
63666973 16322621 13253637
110 186
61 -
19 -
93 -
47 -
278
11
289
-
- ---------
(96)
-
0%
(58) 103 499 1,025 2,396 3,419 4,374 4,402 4,429
- (15) (125) (307) (838) (1,231) (1,575) (1,585) (1,595)
0% 15% 25% 30% 35% 36% 36% 36% 36%
(97)
$ (0.72) $ (0.06) $ (0.17) $ (0.18) $ (0.20) $ (0.61) $ (0.69) $ (0.41) $ 0.62 $ 2.66 $ 5.07 $ 10.96 $ 15.33 $ 19.54 $ 19.59 $ 19.63
(6)
106 106 119 106 106 119
(20)
(21) (24) (72)
(96)
139 139
(58) 87 375 717 1,557 2,188 2,800 2,817 2,835
119 119 116 119 119 116
140 140
140 140
141 142 142 143 143 144 144 141 142 142 143 143 144 144
-------
www.dawsonjames.com Risk Analysis
In addition to the typical risks associated with development stage specialty pharmaceutical companies, potential risks specific to Mesoblast are as follows:
Clinical and regulatory risk. Lead products must start and complete clinical trials. Trials may not produce results sufficient for regulatory approval.
Commercial risk. There are no assurances that the company will be able to secure favorable pricing, commercially launch products, and achieve significant market share to become profitable.
Employee risk. Mesoblast. has an experienced and dedicated management team, many of whom have been with the company since its founding. The company plans to bring its proposed products to market in the next two years, and as such, transitioning from a clinical to a commercial team will be a critical success factor. The success of the business may depend on the experience, abilities, and continued services of its senior officers, sales staff, and key scientific personnel.
Financial risk. The company may need to raise capital in the marketplace in order to support operations. There are no assurances that the company will be able to successfully raise capital and or do so on favorable terms.
Legal and intellectual property risk. The company may have to defend its patents and technical know-how, and there can be no assurances that the patents will not be infringed or will be held as valid if challenged, and or that the company may infringe on third party’s patents.
Partnership risk. Mesoblast may seek partnerships for clinical development support and commercialization. We have no specific knowledge of any discussions with possible partners today, and there can be no assurances that the company will be able to secure a favorable partnership.
Mesoblast 1/28/20 Page 6 of 8
www.dawsonjames.com Important Disclosures:
Companies that May Be Mentioned in this report which Mesoblast has worked with or which maybe relative to Mesoblast include the list below. None of these companies are rated.
BlueBird
Cephalon
Grunethal
JCR Pharma
Juno
Kite
Lonza
Osiris
Takeda (which acquired Tigenix)
Teva
Tasly
Price Chart:
Price target and rating changes over the past three years: Initiated – Buy – December 19, 2019 – Price Target $14.00 Update – Buy – January 16, 2020 – Price Target $14.00 Update – Buy – January 16, 2020 – Price Target $14.00 Update – Buy – January 28, 2020 – Price Target $15.00
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is a member of the Financial Industry Regulatory Authority (“FINRA”
and the Securities Investor Protection Corporation (“SIPC”
.
The Firm does not make a market in the securities of the subject company(s). The Firm has NOT engaged in investment banking relationships with MESO in the prior twelve months, as a manager or co-manager of a public offering and has NOT received compensation resulting from those relationships. The Firm may seek compensation for investment banking services in the future from the subject company(s). The Firm has received other compensation from the subject company(s) in the last 12 months for services unrelated to managing or co-managing of a public offering.
Neither the research analyst(s) whose name appears on this report nor any member of his (their) household is an officer, director or advisory board member of these companies. The Firm and/or its directors and employees may own securities of the company(s) in this report and may increase or decrease holdings in the future. As of December 31, 2020, the Firm as a whole did not beneficially own 1% or more of any class of common equity securities of the subject company(s) of this report. The Firm, its officers, directors, analysts or employees may affect transactions in and have long or short positions in the securities (or options or warrants related to those securities) of the company(s) subject to this report. The Firm may affect transactions as principal or agent in those securities.
Mesoblast 1/28/20 Page 7 of 8
Analysts receive no direct compensation in connection with the Firm's investment banking business. All Firm employees, including the analyst(s) responsible for preparing this report, may be eligible to receive non-product or service specific monetary bonus compensation that is based upon various factors, including total revenues of the Firm and its affiliates as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by investment banking activities, including but not limited to shares of stock and/or warrants, which may or may not include the securities referenced in this report.
Although the statements in this report have been obtained from and are based upon recognized statistical services, issuer reports or communications, or other sources that the Firm believes to be reliable, we cannot guarantee their accuracy. All opinions and estimates included in this report constitute the analyst’s judgment as of the date of this report and are subject to change without notice.
Information about valuation methods and risks can be found in the “STOCK VALUATION” and “RISK ANALYSIS” sections of this report.
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Rating Definitions:
1) Buy: The analyst believes the price of the stock will appreciate and produce a total return of at least 20% over the next 12-18 months;
2) Neutral: The analyst believes the price of the stock is fairly valued for the next 12-18 months;
3) Sell: The analyst believes the price of the stock will decline by at least 20% over the next 12-18 months and should be sold.
The following chart reflects the range of current research report ratings for all companies followed by the analysts of the Firm. The chart also reflects the research report ratings relating to those companies for which the Firm has performed investment banking services.
Analyst Certification:
The analyst(s) whose name appears on this research report certifies that 1) all of the views expressed in this report accurately reflect his (their) personal views about any and all of the subject securities or issuers discussed; and 2) no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report; and 3) all Dawson James employees, including the analyst(s) responsible for preparing this research report, may be eligible to receive non-product or service specific monetary bonus compensation that is based upon various factors, including total revenues of Dawson James and its affiliates as well as a portion of the proceeds from a broad pool of investment vehicles consisting of components of the compensation generated by investment banking activities, including but not limited to shares of stock and/or warrants, which may or may not include the securities referenced in this report.
www.dawsonjames.com
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