This is only for information purposes so dont come knocking on my door .....V Lodge Partners Research
NASDAQ Code
ASX Price
ADR Price
Shares on Issue
Market Capitalisation
12 Month Price Range
ASX Turnover (Shares, April 16)
MSB MESO
$1.93 USD7.00
381m
$740m
$1.14 - $4.16
17.0m
Board of Directors
Mr Brian Jamieson
Prof Silviu Itescu
Mr William M. Burns
Mr Donal O’Dwyer
Dr Eric A. Rose
Mr Michael Spooner Dr Ben-zion Weiner
Chairman (Non-Exec)
MD & CEO
Non-Exec. Dir.
Non-Exec. Dir.
Non-Exec. Dir.
Non-Exec. Dir.
Non-Exec. Dir.
Share Price Chart
ASX: MSB
NASDAQ: MESO
Source: Iress
Conclusion: The Q3 results and presentation indicate that Mesoblast is travelling very well, while the increased conviction in the answers to questions during the Q&A are a distinct positive, particularly in terms of partnering, existing partners and funding requirements.
Event: Mesoblast announced its 3Q 2016 and nine month 2016 financial results this morning. Post the results, a webcast and conference call were held.
Results: Mesoblast posted a loss for the quarter of US$16.9 million. More importantly, net cash outflows were US$22 million, while cash at the bank stood at US$99.9 million at the end of the quarter.
Based on a burn consistent with that of Q3, the company has 4.5 quarters of cash remaining.
Revenues were US$4.1 and included a $3.5 million milestone payment from Mesoblast’s Japanese partner, JCR Pharmaceuticals, as well as royalties from JCR’s first commercial sales.
Presentation & Q&A: Mesoblast’s presentation was fairly standard and largely consistent with previous presentations. The Q&A session was highly interesting and a considerable portion of the body this report is dedicated to it.
The Q&A focussed on these main issues:
The recommendation by the Data Monitoring Committee overseeing the phase III congestive heart failure (CHF) study that an early interim analysis indicated the trial should continue.
The fact that Teva has not been contractually obliged to fund the phase III CHF program since the early interim analysis was completed, but continues to do so.
Partnering of the companies programs, with a significant near-term deal for MPC-06-ID for chronic lower back pain likely to be consummated in the current or next quarter.
As expected, the unexercised expiry of the Celgene’s right of first refusal over certain of Mesoblast’s programs.
Discussion: Overall, Mesoblast is in good shape.
The financial results were in line with guidance and expectations, with no new caveats placed on future near-term financial performance.
It is pleasing to see revenues from sales of the company’s first product, Temcell®, marketed by JCR Pharmaceuticals, hit the P&L.
Regarding two questions consistently put to Mesoblast, there was a notable strengthening of conviction in the company’s answers. The first question is that of near/medium term funding, which the company appears adamant will come from a partnering. The second is the level of Teva’s commitment to the CHF program, which Mesoblast simply doesn’t appear to be worried about.
It is clearly a positive that the DMC found that the phase III CHF trial should continue, although this was always a low risk event. It is unfortunate that investors won’t be given a look at the results of the interim analyses, but it is always better to follow the recommendations of the US Food and Drug Administration, where possible.
Mesoblast Ltd
Lodge Partners Pty Ltd 2 Thursday, 12 May 2016
Results were in line with guidance and expectations
Current funding has/will enable the company to meet key milestones
First Temcell® royalties from commercial sales
MPC-06-ID for chronic low back pain will be licensed in the current quarter or next
DMC recommends the
phase III CHF trial should proceed
Written advice from the FDA indicate interim results should not be released
Teva is clearly in for the long haul
Temcell® revenues recognised, potentially up to $400k
Event: Mesoblast announced its 3Q 2016 and nine month 2016 financial results this morning. Post the results, a webcast and conference call were held.
Financials: Mesoblast’s results for Q3 were not surprising in the light of previous guidance and, of course, the company’s recently released Appendix 4C. The company had cash outflows of US$22 million for the quarter and cash reserves of US$100 million at the end of it. Assuming consistent burn, Mesoblast has 4.5 quarters of cash remaining.
The results presentation indicates that Mesoblast has been and is managing its cash reserves to see it realise the following value inflexion points, as stated (see Figure 1):
Phase III congestive heart failure (CHF) program (presumably, the early interim analysis, passed)
Phase II rheumatoid arthritis (RA) program (passed)
Filing of Biologics License Application (BLA) for MSC-100-IV for paediatric acute graft vs. host disease (aGvHD, Q2-Q3 FY17)
It was also nice to see the first royalty revenues from the sale of Temcell® in Japan by JCR Pharmaceuticals, Mesoblast’s Japanese partner for the acute graft vs. host disease (aGvHD) therapeutic.
During the results presentation the issue of the company’s cash requirements was consistently dealt with by pointing to partnering. The main candidate of licensing is MPC-06-ID for chronic low back pain (CLBP), as a result of degenerative disc disease. While not contained in the company’s releases, the clear impression from the presentation was that a deal for MPC-06-ID would be done this quarter or next (Q1 FY17).
Notes from the conference call: There were numerous questions asked during the Q&A after the conference call. Our notes on the main points made during the Q&A were:
On the 4th of April 2016, the Data Monitoring Committee (DMC) overseeing the Mesoblast-Teva Pharmaceuticals phase III trial of MPC-150-IM for the treatment of congestive heart failure (CHF) recommended that the study continue according to protocol, effectively meaning MPC-150-IM has passed its first interim analysis hurdle.
o Mesoblast also stated, based on written advice from the US food and Drug Administration (FDA), that it would not be releasing results from the current or future interim analyses of the phase III CHF trial. The reason is that the results from such analyses can influence the study and, consequently, the study results and, if the company were to release the results, the FDA could choose ignore the trial if it were included in a BLA.
o The current (early) interim analysis was conducted on the first 175 patients, with enrolment now believed to be close to 250.
o Enrolment in the trial is expected to increase rapidly going forward, as numerous additional European sites begin enrolling patients.
o Professor Itescu also stated that the trial’s ClinicalTrials.gov entry was up-to-date and accurate. That entry can be found here.
Mesoblast’s CEO, Silviu Itescu, would not speculate on Teva Pharmaceutical’s intentions toward their partnership with Mesoblast, only saying that Teva has been contractually able to opt-out of the partnership since the early interim analysis was completed and that Mesoblast saw no sign or symptom that they intended to do so.
o Later on the call, when asked what the effect on cash flow would be if Teva chose to opt-out of the partnership, Prof Itescu, again, strongly implied that the risk of Teva opting-out was low to non-existent, replying that it was not a question the company needed to contemplate or answer.
The first revenues from JCR’s Mesoblast-licensed product Temcell® have been recognised. They weren’t reported in Mesoblast’s most recent Appendix 4C, because the revenues haven’t turned into cash flow yet (i.e. payment has not yet been received). o While it is not entirely clear, revenues attributable to commercial sales of Temcell® may have been up to $400k (Mesoblast is believed to receive a royalty on sales of Temcell® from JCR in the mid-20% range).
Mesoblast Ltd
Lodge Partners Pty Ltd 3 Thursday, 12 May 2016
The Celgene ROFR has expired unexercised, as expected, but the companies remain in discussions
The strong phase II RA results may have caused a re-think in strategy
MPC-06-ID will be the next product partnered
FDA guidance has provided the final questions potential partners wanted answered
Partnering discussions across numerous other products
Continued solid progress
We view a licensing deal for MPC-06-ID in the current or next quarter as almost a certainty
Teva WILL continue to fund the existing phase III CHF program
Expiry of the Celgene ROFR was expected
Several questions were asked about Mesoblast’s partnering activities:
o Prof Itescu said that the Celgene right of first refusal (ROFR) over several of Mesoblast’s programs had expired, but that Celgene remains a committed shareholder and discussions between the two companies were continuing, but on a scale broader than that covered by the ROFR.
During the Q&A, there was a hint that the phase II rheumatoid arthritis (RA) results, recently released by Mesoblast, were strong enough to cause the company to re-assess its plans for its intravenous product(s). While the RA product, MPC-300-IV, was not a subject of the ROFR, other IV products (principally, MSC-IV-100 for Crohn’s disease) were and the suggestion was that Mesoblast felt it was wise to reassess how to maximise the value of these products in terms of how and who they would be best licenced.
o The main licensing opportunity discussed was MPC-06-ID for CLBP and Prof Itescu stated that he hoped something could be announced near-term.
Partnering discussions for this product appear to be very advanced. The primary hold-up has been that potential licensees wanted clarity regarding the remainder of the development plan for the product, as per the company. Mesoblast has since received written advice from the FDA on the topic and has incorporated that advice into the MPC-06-ID development plan. It is expected that these actions have provided the clarity potential licensees are seeking.
In response to a question regarding capital requirements, it was said that Mesoblast was not thinking about capital raising, but was looking for money from partners near-term.
o With respect to MSC-100-IV (Mesoblast’s Temcell® equivalent), the company has left the door open to selling the product itself, although, it is in discussions with potential partners at present. o Of the remaining programs, Prof Itescu said that the company was in substantial discussions regarding MPC-300-IV for RA and MSC-100-IV (Crohn’s disease).
Discussion: The Mesoblast story has been fairly consistent now for a number of years. The company has been making steady progress, while facing the standard questions posed to similar therapeutic development companies. Those questions are what will be your next source of funding and how committed are your partners?
During the results presentation, Mesoblast’s CEO was seemed more definitive than he has been in the past. The next source of funding will be a partnering deal and the issue of Teva opting out of their license for MPC-150-IM is not an issue they are contemplating.
While it is extremely hard to confirm partnering discussions, Prof Itescu appeared to put his reputation on the line during the conference call this time and the clear indication was that a deal would be done on MPC-06-ID for CLBP. Timing for a deal was also clearly near-term, with the impression that an announcement would be made this quarter or next (Q4 FY16 or Q1 FY17).
The only way to determine the commitment of a partner is to judge it by their actions, because they will typically say little on the topic, unless it is in their clear interest to do so. As we have written before (Lodge partners Report, 22nd February 2016), there is a long list of actions that Teva has undertaken demonstrating they are fully committed to the partnership. Teva does lack a sales force in the cardiology area, so it would not be a surprise for them to on-licence the rights to MPC-150-IM to another company better positioned to market the product post-approval.
These types of deals are, in fact, quite common throughout the industry. Larger pharmaceutical companies are logical. They aim to maximise the revenues they receive from a product and their business, rather than simply maximising the percentage of revenues from a product they receive. We now find any continued debate about Teva’s intentions, without new information, as a waste of time.
It came out during the Q&A session of the conference call that the Celgene ROFR had expired unexercised. We concluded quite some time ago that the ROFR was unlikely to be exercised, based on signals from Mesoblast (principally, that the ROFR was barely
Mesoblast Ltd
Lodge Partners Pty Ltd 4 Thursday, 12 May 2016
We believe a JV between Mesoblast and Celgene is more likely than a straight licencing deal
Withholding the results of interim analyses is clearly the right thing to do
Mesoblast will be viewed differently by the market and its share price likely a lot higher in a year’s time
mentioned by Mesoblast post the original announcement). Nonetheless, we believe the weakness in Mesoblast’s share price recently has been due to those who doggedly held to the belief it would be exercised.
Prof Itescu said that discussions with Celgene were continuing in the light of the phase II RA results with MPC-100-IV, a product not included in the original ROFR, but similar to one that was.
We are of the opinion that something may well occur with Celgene, but we think it is more likely that any resultant relationship will take the form of a joint venture (JV), rather than a straight licensing deal. Regardless, the strength of the phase II RA results indicate that Mesoblast will find a partner for the product.
It will disappoint investors to learn that they will not see interim results from the phase III CHF program. The fact of the matter, though, is that the FDA and the company are correct in not publicising them. Clinical trials can be very delicate constructs and history is littered with potentially good drugs that have failed trials or had their results called into question because actions by the sponsor could have or did affect the results of a trial. For example, if it got out through an interim analysis that the MPC-150-IM was working for CHF, patients treated with placebo would likely start to feel better because of the placebo effect. Investigators may also be tempted to include patients in the study they otherwise wouldn’t, because of the belief, even if subconscious, that the patient was likely to benefit from the therapy. The net result could very well be that an extremely expensive clinical trial becomes useless in terms of its original aim.
Mesoblast appears to be in a good position. A significant licensing deal, as mentioned by the company, would add solidity to that position and provide them further strength in negotiating future licensing deals. The danger period for Teva opting out of the CHF program, even for the eyes of the most sceptical investors, must have past or, at least, be very close to passing, which will take the last of the pressure off the stock from that source.
Figure 1 indicates that there are numerous milestones the company will reach over the near-term. If the company continues to hit milestones as strongly as it has in the past, a year from now, the company is likely to be viewed very differently and its share price will be much higher than it presently is.
Figure 1. Mesoblast major product deliverables (source: company presentation)
Conclusion: The Q3 2016 results and associated presentation were consistent with previous presentations and the results were consistent with the expectations set by management. The Q&A session post the presentation was particularly interesting and tended, in our view, to indicate a company that has become much more certain of obtaining key outcomes it seeks. Vin
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