Here is an earlier fuller analysis from Oct 2019 which made me sell most albeit way from the top but at a profit
Mesoblast'scommerzial business model is unclear. Since acquiring the rights todevelop mesenchymal precursor cell, or MPC, therapies in 2004 thefirm has been pursuing R&D without yet reaching the productapproval and registration stage. Mesoblast purchased a furthertechnology called mesenchymal stem cell, or MSC, from OsirisTherapeutics in 2013. Despite this technology having phase-threetrials under way at the time of acquisition by Mesoblast it also doesnot yet have a marketed product.Commercializationof Mesoblast's products and pipeline can be achieved by three routes:stand-alone; with a partner; or selling the rights to commercializeand develop pipeline products in exchange for technology fees andlicence revenues. For the first anticipated product to market,remestemcel-L for the treatment of acute Graft Versus Host Disease,or aGVHD, in children in the U.S., the company has indicated itintends to bring the product to market without a partner. Thisrequires investment in people and a strategy to sell and distributethe product as well as gain reimbursement from payors. We assume thatMesoblast will choose to take other products to market with a partnerin the U.S. and Europe where multiple reimbursement geographies addcomplexity and will continue to licence its intellectual property inall other markets.Mesoblast'sproduct pipeline is well advanced relative to other stem cell therapyR&D. Of its T 1 product candidates three of the five have been inextended phase 3 trials and the remainder are in phase 2. Thepotential aGVHD therapy has been granted orphan status in the U.S.and the other two Tier 1 potential products are specialty focus. Thelargest potential value treatment, Revascor, is aimed at advanced andend stage congestive heart failure where the patient has a leftventricular assistance device. Although the potential market sizehere is large, the technique of administering the Mesoblast productcandidate reduces the potential reach. The other potential product isaiming at treating chronic lower back pain caused by degenerativedisc disease as an alternative to ongoing opioids or surgery, and hasa broader reach.Despitestem cell research being conducted for decades, there are extremelyfew FDA approved therapies on the market. Should Mesoblast gainapproval it would have the first MSC and MPC derived products in theU.S. The underlying intellectual property acquired by Mesoblast wouldearn the developers ongoing royalties should the products get tomarket.Thecompetitive environment is not benign. Incyte's non-stem cell drug,Jakafi, was granted FDA approval in May 2019 for treating the samesteroid-refractory aGVHD as Mesoblast is targeting and there aremultiple alternative drugs for this same disease in phase-two trialsin the U.S. and Europe.Obtainingreimbursement for therapies is key to realizing their marketpotential. Currently Mesoblast have no expertise in this area and weexpect them to staff up in this area prior to possible launches. TheOsiris developed MSC product for treating aGVHD in children was givenconditional approval in Canada in 2012, prior to being acquired byMesoblast, however according to a paper covering the clinicalchallenges and therapeutic opportunities of MSC quoting the CanadianHouse of Commons in 2016 stated it “went nowhere because itcouldn't get reimbursed". The development and commercializationof this cell therapy in Japan was also licensed by Osiris to JCRPharmaceuticals in 2003 and the product launched with reimbursementfrom the Japanese National Health Insurance in 2016.Mesoblasthas not communicated a funding strategy to get the company through toa free cash flow positive situation which we expect could come infiscal 2025 or 2026. To date the company have done many rounds ofshare issuances and started to take on high cost debt funding. Saleof technology rights to third parties, in exchange for licencerevenues, is an alternative source of funding. This brings forwardcash flow but ultimately limits long term profit upside.Thecompany has been pursuing R&D on their product pipeline for manyyears and at this stage product approval remains elusive, although wedo anticipate this to change in the next two years. Without thecommunication of a commercialization or funding strategy realisationof the pipeline's value remains unclear and highly variable. Economic MoatDespitehaving registered patents surrounding their biotech, without marketedproducts or a proven business model we believe that Mesoblast has notcarved a moat. The company has yet to get one of its own developedand commercialized products to market since purchasing the rights tothe cell technologies in 2004 and 2013. While we acknowledge that theproducts Mesoblast is researching are innovative in nature, it is notclear that the company has any advantage in R&D and access tofunding has resulted in them suspending research for the majority oftheir Tier 2 product pipeline.Sincelisting in 2004, Mesoblast have yet to develop an approved revenuegenerating product. Timelines for product launches have beenconsistently moved out with some academic research suggesting thatadvanced clinical trials in Mesoblast's field of research is fallingshort of earlier pre-clinical expectations. Most stem cell researchis being conducted by small biotech companies rather than “BigPharma" suggesting they are finding more promising areas todirect their R&D spend to. When Teva acquired Cephalon,Mesoblast's strategic alliance partner for one of its potentialproducts, it chose to walk away from its rights and not investfurther in the development.Mesoblastdoesn't appear to have any specific R&D advantage. Mesoblast hastwo product candidate suites, mesenchymal precursor cells, or MPC,and mesenchymal stem cells, or MSC. The MPC technology was acquiredby Mesoblast in 2004 from Medvet Science in Australia, who stillretain intellectual property rights, the most advanced MPC productcandidate is in phase 3 trials with an earliest possible launch date,if successful, of fiscal 2022. The MSC technology acquired fromOsiris technologies in 2013 which has been in phase 3 testing for thetreatment of acute graft versus host disease, or aGVHD, since 2006and has not yet been approved as a product. There are many otherbiotech companies also testing MSC products.Theoriginal acquired patents have been extended to between 2026 and 2031but many subsequent patents have been registered in the U.S. andEurope which Mesoblast views as its key markets. New biologic drugregistrations are granted 12 years exclusivity in the U.S. from thetime of licensing and 10 years in the European Union.Mesoblast'business model is not defined or tested and management have noexperience commercializing a product. The company is currently hiringa team to deal with the FDA approval, reimbursement and salesprocesses to support the aGVHD product candidate in the U.S.Theultimate business model could be a high gross margin revenue streamearned on own product revenues or simply a royalty stream fromlicensing the technology which typically runs in the highsingle-digit to low double-digit range. The original intellectualproperty licensors, being Medvet Science and Osiris, are entitled toroyalties on commercial product sales whether by Mesoblast or asub-licensee and manufacturing is outsourced to the Swiss listedLonza Group.Itwould require a proven business model and profitable patented andmarketed products for Mesoblast to earn a moat rating.
Bull Points (Last Updated: 02-Oct-2019) Mesoblast has one of the most advanced biotech pipelines with three product candidates in extended third-phase trials and is relatively close to realising the pipeline potential. Registration of a product after decades of R&D will boost investor sentiment. Mesoblast is a potential take-out target for a Big Pharmaceutical company given the intellectual property portfolio.
Bear Points (Last Updated: 02-Oct-2019) Reimbursement risk may mean all Mesoblast's R&D amounts to nothing as was the case with the conditional approval of aGVHD therapy in Canada. Mesoblast's R&D spend is inefficient because of having a narrow universe to make capital allocation decisions across. The company is selling lots of its long-term upside potential via the licence agreements it is using
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