Mesoblast (MSB). BELL POTTER Speculative See Key risks on Page 6...

Mesoblast (MSB). BELL POTTER
Speculative
See Key risks on Page 6 & Biotechnology Risk Warning on Page 8 Speculative securities may not be suitable for Retail clients
30 January 2020
  Expected Return
Capital growth Dividend yield
Total expected return
Company Data & Ratios
Enterprise value Market cap Issued capital Free float
Avg. daily val. (52wk) 12 month price range
Price Performance
71.7% 0.0% 71.7%
$1.61bn $1.61bn 537.1m 83.9% $2.50m $1.135- $3.21
Inflexion points upcoming for 3 assets in CY20
2QFY20 –Key Highlights
MSB reported US$2.0m (up 61% y/y, up 5% over 1Q20) in royalties on GvHD product Temcell in 2Q20 (vs. BPe US$1.9m). We est. Temcell in-market sales for FY20 at US$32m, translating to ~US$8m in royalties for MSB. We est. this would represent a 32% penetration of the overall addressable market (or ~64% of the most severe cases) in Japan within 4 years from launch. According to JCR, continued increase is driven in part by the fact that facilities that cover more than 90% of transplants in Japan are now using the product. We believe this is a very strong adoption curve and has important read throughs for Ryoncil in the US market, which we believe will have even a faster growth trajectory. MSB also reported US$2.5m milestone revenue from Grunenthal on back pain deal in 2Q20 (timing of which was slightly ahead of our est.).
MSB reduced its operating cash flow by 16% in 2Q20 vs. pcp which was driven by reduced R&D spend. MSB ended 2Q20 with US$81.3m cash. With additional US$35m available on existing debt facilities and US$27.5m milestone due from Grunenthal over next 12 months, MSB has cash runway into 2HCY21. Hercules Capital has extended the timeline for drawdown of last tranche to 4QCY20.
MSB progressed towards key inflexion points for its 3 Phase 3 assets. FDA agreed on Ryoncil as brand name for remestemcel-L for SR-aGvHD. As part of its rolling BLA submission, MSB filed the clinical data module which included analyses of 309 children across 3 studies treated with Ryoncil and new control data. The last CMC module will be filed in Jan’20, with approval and launch expected in 2HCY20. Phase 3 trial for Revascor for advanced heart failure has now accrued sufficient events for trial completion. The trial also got its 10th positive recommendation from DMC to continue as planned. Last patient/last visit is expected to complete by end of Jan’20, with results expected by mid-CY20. The low back pain Phase 3 trial in US is on track to report in mid-CY20 (with 24 month follow up to complete in 1HCY20).
Revisions to our model resulted in a 5% decrease in our Net loss forecast for FY20 driven primarily by lower interest expense and large percentage increase in our net loss forecast for FY21 driven by reversal of an incorrect non-cash gain entry. EBITDA changes if any were not material. Our DCF valuation (rounded off) for MSB has modestly lifted to A$5.15/sh (was A$5.10/sh). We retain Buy (spec.).
Price (A$)
Absolute (%)


Earnings and Valuation Changes
We have revisited our assumptions for MSB and made adjustments to our forecasts based on MSB’s quarterly cash flow statement for 2QFY20, which have impacted earnings and valuation.
Key assumption changes
• MSB reported royalty revenue of US$2.0m for 2QFY20 from JCR on Temcell. This was mostly in-line with our estimates (BPe US$1.9m). We have modestly increased our FY20 revenue estimates for Temcell.
• MSB received an additional US$2.5m milestone from Grunenthal in 2QFY20. We had assumed US$5m gets received in 2HFY20 and have adjusted our forecasts accordingly with US$2.5m in each half of FY20 now.
• We have moved our assumed drawdown of US$25m from the Hercules debt facility to 1HFY21 (was 1HFY20). This has reduced our interest expense forecasts for FY20, which was partially offset by lower interest income due to lower cash balance on deferring the drawdown. Hercules has extended the timeline for the drawdown of this final tranche now to 4QCY20. We assume MSB will draw on the facility in early 3QCY20. The interest rate on the Hercules Capital loan has also reduced (9.70% at end of Dec’19 vs. 9.95% at end of Sep’19). This has modestly reduced our interest expense forecasts from FY21 onwards.
• We continue to assume that the contingent consideration (recorded as current provision) payable to Osiris on approval of Ryoncil for aGvHD in US gets paid in MSB shares. However we now assume a higher issue price (A$3.5/sh vs. A$3/sh assumed earlier) for these shares to satisfy US$20m contingent consideration obligation in FY21.
• We note that we had erroneously recorded the reduction in contingent consideration as a non-cash gain in the P&L for FY21 in our last update, therefore we have reversed that. This has resulted in an increase in our net loss forecast for FY21.
• We have increased our capex estimate for FY20 to US$1.2m (based on the higher than expected spend in 2Q20). We expect capex will revert back to mostly historical levels from FY21 onwards. We believe the increase in capex is part of the pre-launch preparatory activities including manufacturing ongoing for Ryoncil.
• We have updated our model for the recent exercise and cancellation of options as per Appendix 2A’s filed by MSB.
• MSB reported a lower operating cash outflow at the end of 2QFY20 than our forecast, which we believe is driven by working capital. We now expect to see a higher Creditors balance for 1HFY20 and FY20-FY22, than our previous forecast.
• We have also removed our COGS forecast for FY20 as we don’t expect MSB to report it as a separate line item for the year.
• We have updated our model with revised BPe USD/AUD currency assumptions for FY20 onwards to 0.69-0.74 (was 0.70-0.73).
• We have adjusted our DCF for time creep.
Following the above changes, the net result is a 5% decrease in our Net Loss forecast for FY20 driven primarily by lower interest expense forecast and a large increase in our net loss forecast for FY21 driven by reversal of an incorrect non-cash gain entry. There were no changes to our EBITDA forecast for FY21/FY22 and changes to our EBITDA forecast for FY20 was not material. Near term earning adjustments, impact of currency revisions and adjusting our DCF for time creep has led to a modest lift in our valuation (rounded off)
Upside risk to our valuation
• Under the Tasly deal on MSB’s cardiovascular products for China, MSB also stands to receive US$25 million on each achievement of product regulatory approvals in China for both MPC-150-IM and MPC-25-IC, double-digit escalating royalties on net product sales and six additional undisclosed escalating milestone payments upon the product candidates reaching certain sales thresholds. At this stage we do not model royalties or the US$50m in product approval milestones or the undisclosed 6 sales milestones attached to the deal. We intend to model royalties and approval and sales milestones once we get greater clarity on the timelines and regulatory path forward for China, which represents a potential upside to our estimates.
At this stage we only model Ryoncil (remestemcel-L) for Steroid refractory acute GvHD (SR- aGvHD) in children for the US and risk adjust our revenues at 85%. FDA approval will allow us to remove the risk adjustment and will be an upside to our forecast. We do not model EU opportunity. We also do not include any value for Ryoncil for the expanded indication into high risk adults (those with gut and liver involvement) for SR- aGvHD or for chronic GvHD in children for which an investigator initiated trial is planned. It is MSB’s intention to pursue a trial in the high risk adult SR aGvHD population in the future to expand the label for Ryoncil and the recent approval of Jakafi may help MSB by providing a precedence. We also do not include any value at this stage for potential off-label usage in adults following the approval of the product for children. Once MSB initiates clinical trials in the high risk adult population, it would be a source of considerable upside to our valuation, given the adult opportunity is expected to be 3x times that of the paediatric opportunity.
MSB has recently expanded its relationship with partner JCR pharmaceuticals in Japan for Temcell to include now a second indication for wound healing in patients with Epidermolysis Bullosa (EB) and a third indication for hypoxic ischemic encephalopathy in neonates (HIE). EB is an orphan disease for which JCR has already obtained an orphan drug designation for Temcell in Japan. JCR intends to pursue label expansion for Temcell by obtaining approval for EB and HIE (Temcell is already approved and marketed for GvHD in Japan). HIE is early stage with a trial started for it in July’19. EB is currently on hold with JCR in discussions with regulators to determine the best way to prove its efficacy (likely from a company sponsored trial as previous data is from an investigator initiated trial). MSB is eligible to receive undisclosed royalties on sales of Temcell for EB and HIE in Japan. They could also potentially use all data generated in Japan to pursue the EB or HIE indication for Ryoncil in other markets including US. At this stage we include no value from EB or HIE for Temcell in Japan or in other markets and hence this opportunity represents a source of upside to our valuation in future.
Under MSB’s December 2017 patent license agreement with Tigenix (now a wholly owned subsidiary of Takeda), apart from the initial €10m that we modelled, MSB also stands to receive an additional €10.0m when Takeda reaches certain product regulatory milestones and single digit royalties on net sales of Alofisel. Alofisel was approved in Europe in March 2018 for the treatment of complex perianal fistulas in adult patients with nonactive/mildly active luminal Crohn’s disease, when fistulas have shown an inadequate response to at least one conventional or biologic therapy. We understand Takeda is currently involved with the NICE and other regulatory authorities on pricing and reimbursement for the product and in the meanwhile has been allowing access to the product under an EAP (expanded access program). A US launch is expected for the product in 2022 (subject to trial results in 2021). As per EvaluatePharma in 2024, worldwide consensus sales for Alofisel are forecast to reach US$155 million. At this stage we do not model the regulatory milestones (€10.0m) or royalties from Alofisel, which represents a potential upside to our valuation.
MSB could potentially also license out rights for its back pain product for Japan and China in separate deals. At this stage we have only included deal values for Grunenthal for EU/LATAM and our assumed deal for the US market. Partnerships for China and Japan therefore would represent an upside to our forecasts.
Analyst
Tanushree Jain 612 8224 2849 John Hester 612 8224 2871
Authorisation
TS Lim 612 8224 2810
Recommendation
Buy (unchanged)
Price
$3.00
Valuation
$5.15 (previously $5.10)
Risk
Speculative
GICS Sector
Pharmaceuticals & Biotechnology
Mesoblast (MSB)
Speculative
See Key risks on Page 6 & Biotechnology Risk Warning on Page 8 Speculative securities may not be suitable for Retail clients
30 January 2020
  Expected Return
Capital growth Dividend yield
Total expected return
Company Data & Ratios
Enterprise value Market cap Issued capital Free float
Avg. daily val. (52wk) 12 month price range
Price Performance
71.7% 0.0% 71.7%
$1.61bn $1.61bn 537.1m 83.9% $2.50m $1.135- $3.21
Inflexion points upcoming for 3 assets in CY20
2QFY20 –Key Highlights
MSB reported US$2.0m (up 61% y/y, up 5% over 1Q20) in royalties on GvHD product Temcell in 2Q20 (vs. BPe US$1.9m). We est. Temcell in-market sales for FY20 at US$32m, translating to ~US$8m in royalties for MSB. We est. this would represent a 32% penetration of the overall addressable market (or ~64% of the most severe cases) in Japan within 4 years from launch. According to JCR, continued increase is driven in part by the fact that facilities that cover more than 90% of transplants in Japan are now using the product. We believe this is a very strong adoption curve and has important read throughs for Ryoncil in the US market, which we believe will have even a faster growth trajectory. MSB also reported US$2.5m milestone revenue from Grunenthal on back pain deal in 2Q20 (timing of which was slightly ahead of our est.).
MSB reduced its operating cash flow by 16% in 2Q20 vs. pcp which was driven by reduced R&D spend. MSB ended 2Q20 with US$81.3m cash. With additional US$35m available on existing debt facilities and US$27.5m milestone due from Grunenthal over next 12 months, MSB has cash runway into 2HCY21. Hercules Capital has extended the timeline for drawdown of last tranche to 4QCY20.
MSB progressed towards key inflexion points for its 3 Phase 3 assets. FDA agreed on Ryoncil as brand name for remestemcel-L for SR-aGvHD. As part of its rolling BLA submission, MSB filed the clinical data module which included analyses of 309 children across 3 studies treated with Ryoncil and new control data. The last CMC module will be filed in Jan’20, with approval and launch expected in 2HCY20. Phase 3 trial for Revascor for advanced heart failure has now accrued sufficient events for trial completion. The trial also got its 10th positive recommendation from DMC to continue as planned. Last patient/last visit is expected to complete by end of Jan’20, with results expected by mid-CY20. The low back pain Phase 3 trial in US is on track to report in mid-CY20 (with 24 month follow up to complete in 1HCY20).
Revisions to our model resulted in a 5% decrease in our Net loss forecast for FY20 driven primarily by lower interest expense and large percentage increase in our net loss forecast for FY21 driven by reversal of an incorrect non-cash gain entry. EBITDA changes if any were not material. Our DCF valuation (rounded off) for MSB has modestly lifted to A$5.15/sh (was A$5.10/sh). We retain Buy (spec.).
Price (A$)
Absolute (%)
Rel market (%)
(1m)
2.07
44.93
41.45
(3m)
1.77
69.49
64.46
(12m)
1.34
123.88
103.69
  Absolute Price
Earnings Forecast
Year end 30th June
Sales (US$m)
EBITDA (US$m)
NPAT (reported) (US$m) NPAT (adjusted) (US$m) EPS (reported) (USc) EPS (adjusted) (USc) EPS growth (%)
PER (x)
EV/EBITDA (x)
Dividend (¢ps)
Yield (%)
Franking (%)
ROE (%)
$3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0
2018A 2019A
18.8 16.0 -71.9 -78.7 -35.3 -89.8 -66.0 -98.8
-7.6 -18.2 -14.2 -20.0 N/A N/A N/A N/A -15.2 -13.9 0.0 0.0 0.0% 0.0% N/A N/A -7.4% -10.8%
2020E 2021E
57.7 90.1 -42.4 -17.5 -56.2 -37.6 -58.2 -37.6 -10.9 -6.9 -11.2 -6.9
N/A N/A
N/A N/A -25.7 -62.3 0.0 0.0 0.0% 0.0% N/A N/A -6.1% -3.8%
2022E
69.9 -54.7 -75.8 -75.8 -13.4 -13.4
N/A
N/A -19.9 0.0 0.0% N/A -7.0%
   Jan Apr Jul Oct Jan Apr Jul Oct
18 18 18 18 19 19 19 19 MSB S&P 300 Rebased
SOURCE: IRESS
BELL POTTER SECURITIES LIMITED ABN 25 006 390 7721
AFSL 243480
and
Note: Revenue includes R&D tax incentive, commercial milestone and royalty revenue from launch of TEMCELL GvHD product in Japan, revenue from launch of GvHD and CHF in US and potential upfront and milestone from CLBP deal.SOURCE: BELL POTTER..

Mesoblast (MSB) 30 January 2020
Earnings and Valuation Changes
We have revisited our assumptions for MSB and made adjustments to our forecasts based on MSB’s quarterly cash flow statement for 2QFY20, which have impacted earnings and valuation.
Key assumption changes
• MSB reported royalty revenue of US$2.0m for 2QFY20 from JCR on Temcell. This was mostly in-line with our estimates (BPe US$1.9m). We have modestly increased our FY20 revenue estimates for Temcell.
• MSB received an additional US$2.5m milestone from Grunenthal in 2QFY20. We had assumed US$5m gets received in 2HFY20 and have adjusted our forecasts accordingly with US$2.5m in each half of FY20 now.
• We have moved our assumed drawdown of US$25m from the Hercules debt facility to 1HFY21 (was 1HFY20). This has reduced our interest expense forecasts for FY20, which was partially offset by lower interest income due to lower cash balance on deferring the drawdown. Hercules has extended the timeline for the drawdown of this final tranche now to 4QCY20. We assume MSB will draw on the facility in early 3QCY20. The interest rate on the Hercules Capital loan has also reduced (9.70% at end of Dec’19 vs. 9.95% at end of Sep’19). This has modestly reduced our interest expense forecasts from FY21 onwards.
• We continue to assume that the contingent consideration (recorded as current provision) payable to Osiris on approval of Ryoncil for aGvHD in US gets paid in MSB shares. However we now assume a higher issue price (A$3.5/sh vs. A$3/sh assumed earlier) for these shares to satisfy US$20m contingent consideration obligation in FY21.
• We note that we had erroneously recorded the reduction in contingent consideration as a non-cash gain in the P&L for FY21 in our last update, therefore we have reversed that. This has resulted in an increase in our net loss forecast for FY21.
• We have increased our capex estimate for FY20 to US$1.2m (based on the higher than expected spend in 2Q20). We expect capex will revert back to mostly historical levels from FY21 onwards. We believe the increase in capex is part of the pre-launch preparatory activities including manufacturing ongoing for Ryoncil.
• We have updated our model for the recent exercise and cancellation of options as per Appendix 2A’s filed by MSB.
• MSB reported a lower operating cash outflow at the end of 2QFY20 than our forecast, which we believe is driven by working capital. We now expect to see a higher Creditors balance for 1HFY20 and FY20-FY22, than our previous forecast.
• We have also removed our COGS forecast for FY20 as we don’t expect MSB to report it as a separate line item for the year.
• We have updated our model with revised BPe USD/AUD currency assumptions for FY20 onwards to 0.69-0.74 (was 0.70-0.73).
• We have adjusted our DCF for time creep.
Following the above changes, the net result is a 5% decrease in our Net Loss forecast for FY20 driven primarily by lower interest expense forecast and a large increase in our net loss forecast for FY21 driven by reversal of an incorrect non-cash gain entry. There were no changes to our EBITDA forecast for FY21/FY22 and changes to our EBITDA forecast for FY20 was not material. Near term earning adjustments, impact of currency revisions and adjusting our DCF for time creep has led to a modest lift in our valuation (rounded off)
Page 2

Mesoblast (MSB)
30 January 2020
for MSB to A$5.15/sh (was A$5.10/sh). We retain our Buy (speculative) recommendation.
Table 1 - Key Changes to our last published FY20-22 Forecasts
  FY2020E
FY2021E
FY2022E
Old
New
Change (%)
Old
New
Change (%)
Old
New
Change (%)
Revenues
Interest Income
Interest Expense
Opex
EBITDA
EBIT
NPAT (adjusted)
Adjusted Diluted EPS (cents)
57.5 0.9 -14.2 100.1 -43.8 -47.2 -61.0 -11.8
57.7 0.8 -12.7 100.1 -42.4 -45.8 -58.2 -11.2
0% -15% -11% 0% -3% -3% -5% -5%
90.1 1.0 -17.6 98.6 -17.5 -20.9 -17.5 -3.2
90.1 0.8 -17.4 98.6 -17.5 -20.9 -37.6 -6.9
0% -21% -1% 0% 0% 0% 115% 115%
69.9 1.1 -18.8 107.6 -54.7 -58.2 -75.9 -13.4
69.9 0.9 -18.6 107.6 -54.7 -58.2 -75.8 -13.4
0% -11% -1% 0% 0% 0% 0% 0%
   ALL AMOUNTS IN USD IN MILLIONS EXCEPT EPS. SOURCE: BELL POTTER SECURITIES ESTIMATES
Our DCF valuation model is based on a WACC of 21% and a terminal growth rate of 1%.
Table 2 - Summary of Revised Valuation
  Forecasts
  Base case (US$m)
Base case (A$m)
Enterprise Value from DCF
Add: Cash at end 2QFY20
Add: Temcell royalty revenue for 2QFY20 Less: Debt
2142.4 81.3 2.0 -83.7
2887.6 118.4 2.9 -121.8
Equity Value
2142.0
2887.0
Total diluted shares (million)
563.2
563.2
Value per share (US$/A$)
$3.80
$5.13
SOURCE: BELL POTTER SECURITIES ESTIMATES
Table 3 - MSB- Probability-Weighted Sum-of parts Valuation Summary
  Asset
Identifier
Stage
Partnering Status
First Fiscal Year of sales (Est.)
Peak Market share
Peak Sales Global (US$m)
Probability of success
Probability adjusted NPV (US$m)
Value per share (US$)
% Mix
SR Acute GvHD (Japan)
Steroid Refractory Acute GvHD (Pediatric) -US
Revascor - End Stage CHF with LVAD (US) Chronic Discogenic lower back pain (CLDBP)
Revascor - Congestive Heart Failure (CHF) Diabetic Nephropathy
Rheumatoid Arthritis (RA)
TEMCELL RYONCIL
MPC-150-IM MPC-06-ID
MPC-150-IM MPC-300-IV MPC-300-IV
Approved BLA filing in process Phase IIb Phase III
Phase III Phase II Phase II
JCR Pharma
Will launch directly in US
NIH Funding Trial, will look to partner Grunenthal (EU/LATAM), in negotiations with potential partners Will look to partner
Will look to partner Will look to partner
2016 2021
2022 2024
2023 2024 2024
50.0% 50.0%
85.0% 10.0%
15.0% 10.0% 10.0%
$52 $117
$352 $5,187
$7,442 $1,378 $1,597
100.0% 85.0%
40.0% 44.0%
60.0% 14.5% 20.0%
$45 $166
$37 $824
$1,080 $71 $176
$0.08 $0.29
$0.07 $1.46
$1.92 $0.13 $0.31
2.1% 7.7%
1.7% 38.5%
50.5% 3.3% 8.2%
Other Pipeline/Non-allocated
Cash (incl. receivable Temcell royalty for 2QFY20)
Debt
NA NA
NA
NA NA
NA
NA NA
NA
NA NA
NA
NA NA
NA
NA NA
NA
($260)
$83
($84)
-$0.46
$0.15 -$0.15
-12.1%
3.9% -3.9%
Equity Value
$2,139
$3.80
100%
  ALL ASSETS ABOVE SHADED IN GREY ARE TIER 1 PRODUCTS AND THE KEY FOCUS FOR MSB. GLOBAL PEAK SALES ARE PRE-RISK ADJUSTMENT. SOURCE: BELL POTTER SECURITIES ESTIMATES
Upside risk to our valuation
• Under the Tasly deal on MSB’s cardiovascular products for China, MSB also stands to receive US$25 million on each achievement of product regulatory approvals in China for both MPC-150-IM and MPC-25-IC, double-digit escalating royalties on net product sales and six additional undisclosed escalating milestone payments upon the product candidates reaching certain sales thresholds. At this stage we do not model royalties or the US$50m in product approval milestones or the undisclosed 6 sales milestones attached to the deal. We intend to model royalties and approval and sales milestones once we get greater clarity on the timelines and regulatory path forward for China, which represents a potential upside to our estimates.
Page 3

Mesoblast (MSB)
30 January 2020
•
At this stage we only model Ryoncil (remestemcel-L) for Steroid refractory acute GvHD (SR- aGvHD) in children for the US and risk adjust our revenues at 85%. FDA approval will allow us to remove the risk adjustment and will be an upside to our forecast. We do not model EU opportunity. We also do not include any value for Ryoncil for the expanded indication into high risk adults (those with gut and liver involvement) for SR- aGvHD or for chronic GvHD in children for which an investigator initiated trial is planned. It is MSB’s intention to pursue a trial in the high risk adult SR aGvHD population in the future to expand the label for Ryoncil and the recent approval of Jakafi may help MSB by providing a precedence. We also do not include any value at this stage for potential off-label usage in adults following the approval of the product for children. Once MSB initiates clinical trials in the high risk adult population, it would be a source of considerable upside to our valuation, given the adult opportunity is expected to be 3x times that of the paediatric opportunity.
MSB has recently expanded its relationship with partner JCR pharmaceuticals in Japan for Temcell to include now a second indication for wound healing in patients with Epidermolysis Bullosa (EB) and a third indication for hypoxic ischemic encephalopathy in neonates (HIE). EB is an orphan disease for which JCR has already obtained an orphan drug designation for Temcell in Japan. JCR intends to pursue label expansion for Temcell by obtaining approval for EB and HIE (Temcell is already approved and marketed for GvHD in Japan). HIE is early stage with a trial started for it in July’19. EB is currently on hold with JCR in discussions with regulators to determine the best way to prove its efficacy (likely from a company sponsored trial as previous data is from an investigator initiated trial). MSB is eligible to receive undisclosed royalties on sales of Temcell for EB and HIE in Japan. They could also potentially use all data generated in Japan to pursue the EB or HIE indication for Ryoncil in other markets including US. At this stage we include no value from EB or HIE for Temcell in Japan or in other markets and hence this opportunity represents a source of upside to our valuation in future.
Under MSB’s December 2017 patent license agreement with Tigenix (now a wholly owned subsidiary of Takeda), apart from the initial €10m that we modelled, MSB also stands to receive an additional €10.0m when Takeda reaches certain product regulatory milestones and single digit royalties on net sales of Alofisel. Alofisel was approved in Europe in March 2018 for the treatment of complex perianal fistulas in adult patients with nonactive/mildly active luminal Crohn’s disease, when fistulas have shown an inadequate response to at least one conventional or biologic therapy. We understand Takeda is currently involved with the NICE and other regulatory authorities on pricing and reimbursement for the product and in the meanwhile has been allowing access to the product under an EAP (expanded access program). A US launch is expected for the product in 2022 (subject to trial results in 2021). As per EvaluatePharma in 2024, worldwide consensus sales for Alofisel are forecast to reach US$155 million. At this stage we do not model the regulatory milestones (€10.0m) or royalties from Alofisel, which represents a potential upside to our valuation.
MSB could potentially also license out rights for its back pain product for Japan and China in separate deals. At this stage we have only included deal values for Grunenthal for EU/LATAM and our assumed deal for the US market. Partnerships for China and Japan therefore would represent an upside to our forecasts.
•
•
•
Page 4

Mesoblast (MSB) 30 January 2020
Key Near-term Catalysts
• Completion of BLA filing for paediatric GvHD for Ryoncil in Jan’20- In June’19 MSB initiated its rolling BLA submission for use of Ryoncil to treat children with steroid refractory aGvHD. MSB recently submitted clinical data which covered a total of 309 children with aGvHD from 3 separate studies (incl. Phase 3 trial and EAP) and new contemporaneous control data. Recall, Ryoncil successfully met its Day 28 primary endpoint showing improved overall response (69% vs. 45% historical controls, p=0.0003) and continued to show safety and improved overall survival at both Day 100 (75%, with 87% survival in Day 28 responders) and Day 180 (Overall Survival 69%, with 79% survival in Day 28 responders) in the Phase 3 trial in the US. It has Fast Track designation which should make it eligible for priority review. MSB expects to complete filing the last module in Jan’20, with potential approval and launch in 2HCY20. MSB is establishing a small sales force (~15 sales reps) ahead of US launch.
• Initiation of Phase 3 trial for Revascor in end stage Heart Failure patients requiring LVAD in 1QCY20: MSB met with the FDA in July’19 to discuss definitive pathway for approval for Revascor in LVAD patients with end stage HF. FDA has agreed for MSB to run a single Phase 3 confirmatory trial with reduction in mucosal bleeding as primary end point and improvement in various parameters of cardiovascular function as secondary endpoints. MSB has agreement with InCHOIR to run this trial and the protocol has now been agreed on. We expect the trial will start recruiting patients in 1QCY20, following FDA sign off on the protocol. The Phase 2b trial successfully achieved the clinically meaningful and approvable endpoint of reduction in incidence of GI bleeding, a serious and common complication of LVAD with high morbidity associated with it. The product has an RMAT (Regenerative Medicine Advanced Therapy) and an orphan drug designation.
• Top line results from Revascor’s (MPC-150-IM) Phase 3 advanced CHF trial by mid CY20 and potential partnering deal: This double-blind, placebo controlled trial has enrolled 566 moderate to advanced heart failure (CHF) patients (class II/III), across 55 sites in North America. Enrollment was completed in Feb’19 and in Dec’19 the trial accrued more than 531 events for the primary endpoint (in excess of those required for trial completion). Final study visits for all surviving patients have now been initiated with last patient/last visit expected by end Jan’20. Top-line results from the trial are expected by mid CY20. Partnering negotiations are ongoing for the product. A partnering deal over the next 9 months could act as a significant re-rating catalyst.
• Increase in royalties from TEMCELL in Japan: JCR Pharmaceuticals launched its GvHD product TEMCELL on 24th Feb’ 16. MSB has received the US$6.5m in pre- commercial and commercial milestones on TEMCELL as part of the deal. Under the deal royalties in the mid 20% range are also payable by JCR. MSB has recorded ~US$14.4m in royalty revenues to date. Royalty in FY19 grew 37% y/y, with 2QFY20 the strongest quarter for sales to date. We assume that at peak sales of US$52m; MSB will receive ~US$13m in royalty revenues from TEMCELL from GvHD indication alone.
• Top line results from Phase 3 trial by mid CY20 and potential US partnering deal for MSB’s chronic discogenic lower back pain (CLBP) product in FY20: The ongoing Phase 3 trial finished enrolment in 1QCY18. All patients are expected to complete their 24 month assessment for safety and efficacy in 1HCY20. Top line results are expected by mid CY20. The $1bn deal with Grunenthal for EU and LATAM is the start of more deals to come in our view. MSB remains in active discussions with several potential strategic partners for other territories for its CLBP product. We assume that a $1bn US deal for CLBP is inked in FY20 and assume a US$100m (non-risk adjusted) upfront and near term milestone in our forecasts.
Page 5

Mesoblast (MSB)
30 January 2020
Mesoblast (ASX: MSB, NASDAQ:MESO)
COMPANY DESCRIPTION
The Melbourne-based Mesoblast (MSB) is a biotechnology company commercialising the therapeutic use of mesenchymal lineage cells (MPCs and MSCs) – a kind of adult stem cell. MSB’s MPC technology allows these cells to be extracted from the bone marrow of donors, grown into therapeutic quantities and administered ‘allogeneically’ – ie, to patients that are not related to the donor. It has one of the most diversified pipelines, with 3 Tier 1 products in late stage. The first product for GvHD launched in Japan in 1QCY16. Substantial shareholders include CEO Silviu Itescu, M&G and Thorney.
INVESTMENT STRATEGY
MSB is the leading allogeneic stem cell player with several late-stage clinical assets in multiple therapeutic indications. We expect progress of the Tier 1 products towards commercial launch and monetisation to be the key value driver for MSB. In recent months MSB has organised non-dilutive financing both through debt facility agreements and its strategic licensing agreement with Tasly for China and Grunenthal for EU and LATAM. It has completed enrolment in 2 phase 3 trials (back pain and CHF) with results expected by mid CY20, likely to be a key inflexion point for the stock. MSB’s US BLA submission for its GvHD product is in progress with approval and launch expected in 2HCY20. MSB’s meeting with the FDA has clarified path to approval for Revascor in LVAD patients with end stage CHF and MSB will now run through InCHOIR a Phase 3 confirmatory trial. The company’s first marketed product Temcell for GvHD in Japan is doing well, and royalties increased by 37% in FY19 and 61% in 2QFY20. Another partnership deal in FY20 for the back pain or CHF product could result in substantial cash injection, further extend MSB’s cash runway and continue it’s re-rating. Index (ASX-200) inclusion can also be a catalyst.
KEY RISKS
We see the following key stock specific risks to our investment thesis on Mesoblast:
• Clinical risk: There is a risk that MSB’s clinical trials fail to reach their endpoints. Failure of a Phase III trial may significantly impact markets confidence on Mesoblast’s technology and in case of an un-partnered product will reduce its partnering prospects.
• Commercialisation risk: MSB needs a partner to undertake commercialisation for its pipeline products. The ability of MSB’s products to finally reach the market will depend on them doing a partnering deal. We currently assume the back pain asset is also partnered for the US market in FY20. Delays or failure in attracting a suitable partner at terms as we have postulated will negatively impact our forecasts.
• Manufacturing risk: The key success of Mesoblast’s business model is dependent on its ability to manufacture its stem cells on commercial scale as well as at a cost- effective price. Mesoblast has partnered with Lonza to manufacture its stem cells. Our underlying assumption is that together the companies will be able to drive down the COGS by driving efficiencies in the manufacturing process. Failure to cost-effectively manufacture would impact our valuation.
• Regulatory risk: Successful commercialisation of MSB’s products is ultimately dependent on getting approval from the regulatory authorities to commercially launch the product. Failure to satisfy regulatory requirements could mean that the product will fail to reach the market.
• Funding risk: We estimate that MSB has cash runway into 2HCY21 with ~US$81.3m cash and additional US$62.5m available through existing debt facilities and near term milestones from partner Grunenthal. Further extension is expected through new debt facilities and partnering deals. Failure to attract a partner is likely to impact MSB’s ability to service its debt and would require MSB to raise additional capital. There is no guarantee that such funds will be available or at suitable terms.
MSB has 3 late stage Tier 1 products
Page 6

Mesoblast
as at 30 January 2020
Mesoblast (MSB)
Recommendation Buy, Speculative
Price   $3.00
Valuation $5.15
30 January 2020
  Table 4 - Financial summary
   Mesoblast (MSB) Share price (A$) $3.000 As at 30 January 2020 Market cap (A$m) 1611.2
Profit and Loss
Total Operating costs -90.7 -94.7
Tax 0.0 0.0
-100.1 -98.6 -107.6
0.0 0.0 0.0
2020E 2021E 2022E
-56.2 -37.6 -75.8 12.7 12.6 8.1 -2.5 -15.8 -1.1
0.0 0.0 0.0
0.0 0.0 0.0 -0.1 0.0 0.0
0.0 0.0 0.0 -1.4 -1.4 -1.4 47.8 36.9 94.6
0.5 -4.4 25.3
Valuation data
EPS growth (%)
Franking (%)
Profitability ratios
Return on assets (%) Return on equity (%)
Liquidity and leverage ratios
Y/e June 30
Net debt (cash) (US$m)
Net debt/equity (%)
Net interest cover (x)
N/A N/A N/A N/A N/A
N/A N/A N/A N/A N/A
-9.5% -15.1% -8.9% -5.7% -11.1% -7.4% -10.8% -6.1% -3.8% -7.0%
2018A 2019A 2020E 2021E 2022E
Y/e June 30 (US$m)
Revenue
Gross profit (loss)
2018A 2019A
18.8 16.0 18.8 16.0
2020E 2021E 2022E
57.7 90.1 69.9 57.7 81.1 52.9
Y/e June 30
Net profit (US$m) adjusted EPS (USc)
2018A
-66.0 -14.2
2019A
-98.8 -20.0
2020E
-58.2 -11.2
2021E
-37.6 -6.9
2022E
-75.8 -13.4
   EBITDA -71.9 -78.7 -42.4 -17.5
Depreciation & Amortisation -2.7 -2.1 -3.4 -3.5
EBIT -74.6 -80.8 -45.8 -20.9
-54.7 P/Eratio(x) N/A -3.5 CFPS (c) -16.1 -58.2 Price/CF (x) -18.6 -17.6 DPS(c) 0.0
N/A N/A N/A N/A -11.7 -8.9 -7.5 -12.2 -25.7 -33.8 -39.9 -24.6
Net interest & Other Income/(expense) 8.6 -18.0 Pre-tax profit (loss) -66.0 -98.8
-12.3 -16.7 -58.2 -37.6
0.0 0.0 0.0 0.0 -75.8 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%
Adjusted Net Profit (Loss)
Less minority interests
Net profit (loss) to shareholders Reported net profit (loss) to shareholders
-66.0 -98.8 0.0 0.0 -66.0 -98.8 -35.3 -89.8
-58.2 -37.6 -75.8 EV/EBITDA -15.2 -13.9 -25.7 -62.3 -19.9 0.0 0.0 0.0 EV/EBIT -14.6 -13.5 -23.8 -52.0 -18.7
-58.2 -37.6 -75.8
-56.2 -37.6 -75.8
Share price now (A$)
Valuation: (A$)
Premium (discount) to price
Re c o m m e n d a t i o n : Risk Rating
$3.00
$5.15 71.7% B u y Speculative
Cashflow
Y/e June 30 (US$m)
Reported NPAT Non-cash items
Working capital
Other operating cash flow
Investments
Other investing cash flow
Dividends paid
Payment of lease liabilities Financing cashflow
Net change in cash
Balance sheet
Non-current receivables Intangible assets
Other non-current assets
2018A 2019A
-35.3 -89.8 -30.8 11.6 -8.9 20.4 0.0 0.0
0.0 0.0 -1.0 -0.7
0.0 0.0
0.0 0.0
68.6 71.6 -7.6 12.8
21.6 30.9 38.7 82.9 2.4% 3.4% 4.0% 8.4% N/A N/A N/A N/A
57.8 N/A N/A
36.3
-25.5
   Operating cashflow -75.0 -57.8 -46.0 -40.8 -68.8 Y/e June 30
EBITDA/revenue (%) Capex -0.2 -0.3 -1.2 -0.5 -0.5 EBIT/revenue (%)
2018A 2019A 2020E 2021E 2022E
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
   Investing cashflow -1.2 -1.0 -1.3 -0.5 -0.5 Return on funds empl’d (%) -10.9% -17.6% -10.3% -6.3% -12.2% Dividend cover (x) N/A N/A N/A N/A N/A
Change in borrowings 31.3 42.0 0.0 35.0 0.0 Effective tax rate (%) 0.0% 0.0% 0.0% 0.0% 0.0% Equity issued 37.3 29.7 49.2 3.3 96.0
Cash at end of period* 37.8 50.4 50.9 46.5 71.8
Current ratio (x)
4.2 1.4 1.0 1.7 1.5
* Includeseffect of exchange rate fluctuationson cash balance
Interims
Free cash flow -75.2 -58.1 -47.2 -41.3 -69.3 Y/e June 30 (US$m) 2H18A 1H19A 2H19A 1H20E 2H20E
   Y/e June 30 (US$m) 2018A 2019A
Cash 37.8 50.4 Current receivables 50.4 4.1 Inventories 0.0 0.0 Other current assets 12.9 8.0 Current assets 101.1 62.5
PPE 1.1 0.8 Right-of-use assets 0.0 0.0
2020E 2021E 2022E
50.9 46.5 71.8 4.8 5.6 6.7 0.0 15.0 15.0 6.2 6.2 6.2
61.9 73.4 99.8
1.4 1.2 1.0 3.5 2.3 1.1
EBITDA
Depreciation & Amortisation
EBIT
Net interest & Other Income/(expense) Pre-tax profit (loss)
Tax
Adjusted Net Profit (loss)
Less minority interests
Net profit (loss) to shareholders
-44.5 -1.4 -45.9 -0.5 -46.4 0.0 -46.4 0.0 -46.4
-40.1 -1.1 -41.2 -6.5 -47.7 0.0 -47.7 0.0 -47.7
-38.5 -1.0 -39.6 -11.5 -51.1 0.0 -51.1 0.0 -51.1
-24.2 -1.8 -26.0 -6.6 -32.6 0.0 -32.6 0.0 -32.6
-18.3 -1.6 -19.8 -5.7 -25.5 0.0 -25.5 0.0 -25.5
  0.0 0.0 584.6 583.1 5.7 5.6
0.0 0.0 0.0 581.5 580.0 578.4 5.3 5.3 5.3
Revenue 3.5 13.2 2.8 21.3
Reported net profit (loss) to shareholders -42.0 -44.1 -45.7 -30.7
Revenue Summary
Non-current assets 591.4
Total assets 692.4
Payables 18.9 Debt 59.4 Provisions 48.0
589.6
652.1
13.1 81.3 55.6
0.0 21.1 171.1
910.4 40.6 -470.0 481.1
652.1
494.4
591.7
653.6
16.1 89.6 57.5
4.4
9.2
176.8
959.9 44.1 -527.1 476.8
653.6
517.8
588.8 585.8
662.1 685.5
16.1 16.1 129.4 129.7 37.5 37.5 3.0 1.7 9.2 9.2 195.2 194.1
983.2 1,079.2 48.4 52.8 -564.7 -640.6 466.9 491.4
662.1 685.5
542.0 565.3
Y/e June 30 (US$m)
2018A 2019A 2020E 2021E 2022E
Lease Liabilities Other liabilities Total liabilities
0.0 20.1 146.4
CLBPdeal - Grunenthal (upfront/milestones)
CLBPdeal - Potential US (risk adjusted upfront/milestones) R&D Tax incentive
Total Revenues
11.8 0.0 0.0 0.0 0.0 10.0 10.0 0.0 0.0 0.0 0.0 20.0 35.0 10.0 0.0 0.0 19.8 24.2 0.0 1.8 0.0 0.0 0.0 0.0 18.8 16.0 57.7 90.1 69.9
Temcell Royalties (Japan)
Temcell Milestones (Japan)
Ryoncil GvHD risk adjusted revenue (US)
Revascor risk adjusted (LVAD/CHF) Royalties
Tigenix License Payment
UpfrontfromTaslydealinChina 0.0
3.6 5.0 7.9 9.5 11.7 1.5 1.0 0.0 0.0 0.0 0.0 0.0 0.0 21.4 44.1 0.0 0.0 0.0 0.0 4.0
Issued Capital
Reserves 36.7
Accumulated (deficit)/ Retained Earnings
Total shareholders funds Total funds employed
W/A shares on issue
889.5 -380.2
546.0 692.4
465.7
  SOURCE: BELL POTTER SECURITIES ESTIMATES
Page 7

Mesoblast (MSB)
30 January 2020
   Recommendation structure
Buy: Expect >15% total return on a 12 month view. For stocks regarded as ‘Speculative’ a return of >30% is expected.
  Hold: Expect total return between -5% and 15% on a 12 month view
  Sell: Expect <-5% total return on a 12 month view
  Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet.
Such investments may carry an exceptionally high level of capital risk and volatility of returns.
  Research Team Staff Member
TS Lim
Industrials
Steven Anastasiou James Filius
Sam Haddad
Alex McLean Hamish Murray Chris Savage Jonathan Snape Damien Williamson Healthcare/Biotech John Hester Tanushree Jain Financials
TS Lim
Lafitani Sotiriou Resources Peter Arden David Coates Stuart Howe Associate Joseph House
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