COVID-19 ARDS Phase III readout later this year

Mesoblast 1 July 2020 Update
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Mesoblast

COVID-19 ARDS Phase III readout later this year

Development update

Pharma & biotech

1 July 2020

Price

A$3.32

Market cap

A$1,939m

US$0.67/A$

Net cash (A$m) at 31 March 2020 + May offering

88.5

Shares in issue

583.9m

Free float

85.3%

Code

MSB

Primary exchange

ASX

Secondary exchange

Nasdaq

Share price performance

%

1m

3m

12m

Abs

(18.8)

134.7

120.3

Rel (local)

(20.5)

99.8

146.0

52-week high/low

A$4.17

A$1.10

Business description

Mesoblast is an Australia-based biotechnology company developing adult stem-cell therapies based on its proprietary MPC and MSC platforms. Its lead programs are in pediatric aGvHD, heart failure and lower back pain. Approval is expected in the US for Ryoncil for aGvHD in 2020.

Next events

Heart failure and back pain Phase III data

Mid-CY20

Ryoncil FDA approval

Q320

COVID-19 ARDS Phase III data

Q420

Analysts

Maxim Jacobs

+1 646 653 7027

Wiktoria O’Hare

+1 646 653 7028

Mesoblast is a research client of Edison Investment Research Limited

Mesoblast has initiated a 300-patient randomized, controlled Phase III trial of remestemcel-L (Ryoncil for the acute graft versus host disease (aGvHD) indication) in COVID-19 patients with moderate/severe acute respiratory distress syndrome (ARDS) who are on ventilator support. The primary endpoint is all-cause mortality up to 30 days post randomization. Recruitment is expected to complete in three to four months, although there are three interim analyses (after 30%, 45% and 60% enrolment) where the trial can be stopped early for efficacy or futility. Based on this, we expect a readout some time in H220, closer to the end of the year if the trial is not halted at an interim analysis.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/18

17.0

(68.6)

(8.14)

0.0

N/A

N/A

06/19

16.0

(86.5)

(15.69)

0.0

N/A

N/A

06/20e

61.2

(45.6)

(6.92)

0.0

N/A

N/A

06/21e

50.9

(47.4)

(8.12)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Compassionate use data may indicate efficacy

Data in 12 moderate/severe COVID-19 related ARDS patients who were treated as part of an emergency compassionate use IND at Mount Sinai Hospital in New York provide a signal of the efficacy of remestemcel-L. Nine of the 12 (75%) came off ventilator support and were discharged from hospital, which compares positively with the 9% who were extubated at other New York hospitals.

High unmet medical need in COVID-19 ARDS patients

COVID-19 patients with ARDS have mortality rates that range between 26% and 62% for patients admitted into critical care at any point, and between 65.7% and 94% in patients who received mechanical ventilation. Even without an underlying COVID-19 infection, ARDS has 40% mortality and Mesoblast expects to investigate remestemcel-L in non-COVID-19 ARDS patients (of which there are approximately 120,000 admitted to US hospitals every year) in future trials.

Key Phase III data in HF and back pain coming soon

There are currently two Phase III readouts expected in mid-2020. These are the DREAM HF-1 Phase III trial of Revascor in 566 advanced heart failure (HF) patients and the MPC-06-ID trial in 404 chronic lower back pain patients.

Valuation: A$4.6bn or A$7.89 per share

We have adjusted our valuation from A$4.2bn or A$7.89 per share (A$7.51 per diluted share) to A$4.6bn or A$7.89 per share (A$7.53 per diluted share). The total valuation increased mainly due to rolling forward our NPV and higher net cash following a US$90m offering in May, which was partially offset by increased expected manufacturing expenses. On a per-share basis, the increase in total valuation was offset by a higher number of shares outstanding.

An opportunity to make a difference

COVID-19 has ravaged the globe, with more than 10.5 million people having been afflicted by the disease (mostly in just the last six months) and around 510,000 deaths, including almost 130,000 deaths in the US alone (out of 2.7 million cases). While 81% of patients have mild disease, which sometimes may be no more serious that a common cold, 14% have a severe form and 5% become critically ill with organ failure.1 Patients with COVID-19 who progress to ARDS are at an especially high risk of death. COVID-19 patients with ARDS have mortality rates that range between 26% and 62% for patients admitted into critical care at any point, and between 65.7% and 94% in patients who received mechanical ventilation.2 Even without an underlying COVID-19 infection, ARDS has 40% mortality3 with approximately 120,000 patients admitted to US hospitals every year.4

  Berlin et al., Severe COVID-19. The New England Journal of Medicine May 15, 2020 DOI: 10.1056/NEJMcp2009575.

  Gibson et al., COVID-19 ARDS: clinical features and differences to “usual” pre-COVID ARDS. The Medical Journal of Australia April 24, 2020.

  Laffey et al., Epidemiology, Patterns of Care, and Mortality for Patients with Acute Respiratory Distress Syndrome in Intensive Care Units in 50 Countries. Journal of the American Medical Association February 23, 2016 Volume 315, Number 8.

  Eworuke et al., National incidence rates for Acute Respiratory Distress Syndrome (ARDS) and ARDS cause-specific factors in the United States (2006–2014). Journal of Critical Care 47 (2018) 192–197.

In April, Mesoblast reported data from a compassionate use trial in 12 patients with moderate/severe ARDS due to COVID-19 who were treated with two intravenous infusions of remestemcel-L. Nine of the 12 (75%) came off ventilator support and were discharged from hospital, which compares positively with the 9% who were extubated at other New York hospitals.5 The rationale for remestemcel-L efficacy is that through its anti-inflammatory effects it reduces the cytokine storm that causes ARDS.

Additional support for the use of remestemcel-L in respiratory disease comes from a post-hoc analysis of a trial of remestemcel-L in chronic obstructive pulmonary disease (COPD), data for which was presented at the 2020 International Society for Cell and Gene Therapy (ISCT) annual meeting in late May. The Phase II study was a randomized controlled trial of 60 COPD patients dosed with four monthly doses of remestemcel-L. There were statistically significant improvements in forced expiratory volume, forced vital capacity and six-minute walk test distance (all p<0.01). The effect was greatest in patients with the highest level of inflammation as measured by C-reactive protein (CRP). Patients with CRP of greater than 4mg/L were able to walk 55m further than placebo patients in the six-minute walk test (p=0.004). COPD is a different disease than COVID-19 and a different dosing regimen was applied but these data (and the basis that the greatest degree of response was seen in those with the highest CRP levels) may provide a signal that remestemcel-L may show some efficacy in treating COVID-19 patients with ARDS.

Following the compassionate use trial results, Mesoblast initiated a 300-patient randomized, controlled US Phase III trial of remestemcel-L (Ryoncil for the aGvHD indication) in COVID-19 patients with moderate/severe ARDS who are on ventilator support. The primary endpoint is all-cause mortality up to 30 days post randomization. The first patient was dosed in early May and recruitment is expected to complete in three to four months. However, there are three interim analyses (after 30%, 45% and 60% enrolment) where the trial can be stopped early for efficacy or futility. Based on this, we expect a readout some time in H220, closer to the end of the year if the trial is not halted at an interim analysis.

With regard to the market opportunity in COVID-19-related ARDS, if we assume a similar-sized second wave and 5% of patients being eligible for remestemcel-L therapy, the total addressable market in the US could be around 90,000 COVID-19 related ARDS patients with an additional 74,000 in the EU and UK. However, it is unclear how many case numbers will develop in future as subsequent waves may decrease or increase in size (similar to the 1918 influenza pandemic). Additionally, it is not known how the product will be priced, but we currently assume a US launch price for Ryoncil (which is the same product) in aGvHD of US$285,000 per course. Ryoncil’s dosing regimen is infusions twice a week for four weeks, while remestemcel-L in ARDS dosing is just two infusions. Based on this, pricing for ARDS could be one quarter of the Ryoncil pricing, or US$71,250. These pricing and patient assumptions indicate that the addressable market could be worth US$6.4bn in the US and US$5.3bn in the EU and UK in ARDS related to COVID-19. However, it is important to note that actual pricing may be higher or lower than our estimate and the company has provided no indication of what the pricing may be. It is always possible that the product will have a different brand than Ryoncil so its pricing may have little to nothing to do with Ryoncil pricing and will instead be based on the pharmacoeconomic benefit seen in this specific market (which can be considerable given the years or decades that could be added to someone’s life if the drug proves efficacious in those who might otherwise succumb to the disease). That said, we are not yet including remestemcel-L in COVID-19 related ARDS in our model as the market is still developing, with patient numbers in future years and the competitive landscape largely unknown (including from vaccines that may have a major impact on the market, if successfully developed).

Additionally, Mesoblast has indicated that it expects to pursue other segments of the ARDS market, especially those related to viral or bacterial infection. Data suggest that 44.9%6 of ARDS patients have pneumonia, so this could be a meaningful market with over 50,000 patients (out of approximately 120,000 in total) in the US. Using the above pricing, this could be a US$3.6bn market in the US and one that does not necessarily depend on the progression of a specific pathogen. Outside the US, studies indicate that the non-COVID-19 ARDS incidence rates in the EU countries are lower and vary across regions. US incidence rates are approximately 36 cases per 100,000 population, while EU incidence rates range from 3.0 in Germany7 to 7.2 in Spain.8

  Eworuke et al., National incidence rates for Acute Respiratory Distress Syndrome (ARDS) and ARDS cause-specific factors in the United States (2006–2014). Journal of Critical Care 47 (2018) 192–197.

  Lewandowski et al., Incidence, severity, and mortality of acute respiratory failure in Berlin, Germany. American Journal of Respiratory and Critical Care Medicine. 1995;151:1121-5.

  Villar et al., The ALIEN study: incidence and outcome of acute respiratory distress syndrome in the era of lung protective ventilation. Intensive Care Medicine (2011) 37:1932–1941

Outside of COVID-19 and ARDS, Mesoblast is awaiting an FDA decision on the biologic license application (BLA) for Ryoncil for steroid-refractory aGvHD. The BLA was accepted for priority review and the PDUFA date is 30 September 2020. If approved, the company expects to launch the product in Q4 of CY20. For Revascor, a readout on the DREAM HF-1 Phase III trial in 566 advanced HF patients is expected in mid-CY20. The primary endpoint is a reduction in recurrent heart failure-related major adverse cardiac events such as heart failure-related hospitalization and cardiac death. The MPC-06-ID Phase III trial is also on track to provide data by the middle of this year. It enrolled 404 patients with chronic lower back pain due to degenerative disc disease and had a composite primary endpoint that included measures of pain and disability/function at 12 and 24 months.

Valuation

We have adjusted our valuation from A$4.2bn or A$7.89 per share (A$7.51 per diluted share) to A$4.6bn or A$7.89 per share (A$7.53 per diluted share). The total valuation increased mainly due to rolling forward our NPV and higher net cash following a US$90m offering in May, which was partially offset by increased expected manufacturing expenses. On a per-share basis the increase in total valuation was offset by a higher number of shares outstanding.

Exhibit 1: Mesoblast valuation table

Product

Indication

Prob. of success (%)

Launch (FY)

Peak sales (US$m)

rNPV (A$m)

Active projects

MSC-100-IV

Acute graft versus host disease (GvHD)

Range 50–80%

2021

574

1,292.5

Revascor (MPC-150-IM)

Congestive heart failure (CHF)
(includes use with LVAD)

50%

2023

3208

2,037.3

MPC-06-ID

Intervertebral disc repair

50%

2022

3302

1,727.8

On-hold projects

MPC-300-IV

Diabetic nephropathy

5.0%

On hold

2186

51.9

MPC-300-IV

Rheumatoid arthritis

5.0%

On hold

1,350

29.5

MPC-25-IC

Acute myocardial infarction (AMI)

5.0%

On hold

1057

46.0

MPC-25-Osteo

Lumber fusion

5.0%

On hold

662

19.5

Total value

5,204.5

R&D expenses

(315.9)

Manufacturing expenses

(85.5)

G&A expenses

(128.8)

Net cash (at 31 March 2020 + May offering)

88.5

Non-dilutive funding interest and repayments

(159.0)

Total (A$m)

 

 

 

4,604

Shares (m)

 

 

 

583.9

Value per share (A$)

7.89

Options outstanding (2019 onwards) (m)

27.17

Fully diluted shares in issue (m)

611.1

Fully diluted value per share (A$)

 

 

7.53

Source: Edison Investment Research

Financials

Mesoblast reported revenues of US$12.2m for Q320 (the period ending 31 March 2020), US$2.1m of which was related to royalties on Temcell sales in Japan (up 99% year-on-year), and US$10.0m milestone revenue recognized in relation to its partnership with Tasly in China. For the first nine months of FY20, total revenues were US$31.5m (up 113% compared to the same period in the prior financial year), due to US$15m in upfront and milestone payments that were part of the Grϋnenthal licensing agreement for MPC-06-ID, and the US$10m milestone with Tasly. The operating cash burn rate was US$36.8m for the first nine months of FY20. We have increased our FY21 estimate for revenues by US$2.4m, mainly as we have been impressed with the momentum of the Temcell royalties. We have also increased our FY20 estimates for manufacturing and commercialization expenses by US$10m and our SG&A estimate by US$3.1m due to higher run rates than we had modelled.

For the period ending 31 March 2020, Mesoblast reported cash and equivalents of US$60.1m, with US$87.0m in debt. Subsequent to the quarter, the company raised US$90m (A$138m) in gross proceeds in an equity offering at A$3.20 per share for 43m shares; net proceeds were US$85.1m. We calculate pro forma net cash at A$88.5m (calculated as cash at the end of the quarter plus the net proceeds of the offering, less the debt). We had previously forecast US$50m in financing requirements for FY21, but have now removed that as this raise satisfies that requirement. Based on current forecasts, we do not believe Mesoblast needs to raise additional capital.

Exhibit 2: Financial summary

US$'000s

2018

2019

2020e

2021e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

 

16,975

16,003

61,244

50,907

Cost of Sales

0

0

0

0

Gross Profit

16,975

16,003

61,244

50,907

R&D Expenses

(62,289)

(57,531)

(50,000)

(50,000)

Manufacturing & Commercialization Expenses

(4,040)

(14,466)

(22,000)

(10,500)

SG&A Expenses

(18,165)

(18,293)

(19,025)

(18,245)

EBITDA

 

 

 

(66,207)

(75,373)

(32,005)

(35,094)

Operating Profit (before amort. and except.)

 

 

 

(67,116)

(75,935)

(32,505)

(35,594)

Intangible Amortization

(1,741)

(1,577)

(1,750)

(1,750)

Exceptionals

10,541

(6,264)

(1,152)

0

Share-based payments

(6,198)

(4,368)

(5,330)

(5,330)

Operating Profit

(64,514)

(88,145)

(40,736)

(42,674)

Net Interest

(1,463)

(10,609)

(13,124)

(11,829)

Profit Before Tax (norm)

 

 

 

(68,579)

(86,544)

(45,629)

(47,423)

Profit Before Tax (FRS 3)

 

 

 

(65,977)

(98,754)

(53,860)

(54,502)

Tax

30,687

8,955

7,728

0

Profit After Tax (norm)

(37,892)

(77,589)

(37,901)

(47,423)

Profit After Tax (FRS 3)

(35,290)

(89,799)

(46,132)

(54,502)

Average Number of Shares Outstanding (m)

465.7

494.4

548.0

584.0

EPS - normalised fully diluted (c)

 

 

 

(8.14)

(15.69)

(6.92)

(8.12)

EPS - normalised (c)

 

 

 

(8.14)

(15.69)

(6.92)

(8.12)

EPS - (IFRS) (c)

 

 

 

(7.58)

(18.16)

(8.42)

(9.33)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

 

591,372

589,593

596,397

597,897

Intangible Assets

584,606

583,126

581,943

582,443

Tangible Assets

1,084

826

1,965

2,965

Investments

5,682

5,641

12,489

12,489

Current Assets

 

 

 

101,071

62,522

156,013

109,433

Stocks

0

0

0

0

Debtors

50,366

4,060

3,001

3,001

Cash

37,763

50,426

146,697

100,117

Other

12,942

8,036

6,315

6,315

Current Liabilities

 

 

 

(24,003)

(44,331)

(76,689)

(76,689)

Creditors

(18,921)

(13,060)

(19,478)

(19,478)

Deferred revenue

(5,082)

(17,264)

(30,211)

(30,211)

Short term borrowings

0

(14,007)

(27,000)

(27,000)

Long Term Liabilities

 

 

 

(122,432)

(126,732)

(101,288)

(74,288)

Long term borrowings

(59,397)

(67,279)

(59,951)

(32,951)

Deferred revenue

0

0

0

0

Other long-term liabilities

(63,035)

(59,453)

(41,337)

(41,337)

Net Assets

 

 

 

546,008

481,052

574,433

556,353

CASH FLOW

Operating Cash Flow

 

 

 

(74,563)

(54,572)

(22,406)

(14,838)

Net Interest

(449)

(3,217)

(12,952)

(11,390)

Tax

0

0

0

0

Capex

(201)

(279)

(1,500)

(1,500)

Acquisitions/disposals

(952)

0

0

0

Financing

40,566

30,258

136,659

0

Dividends

0

0

0

0

Other

(31,742)

21,203

0

0

Net Cash Flow

(67,341)

(6,608)

99,801

(27,728)

Opening net debt/(cash)

 

 

 

(45,761)

21,634

30,860

(59,746)

Loan movements

0

0

0

0

Other

(54)

(2,619)

(9,195)

8,149

Closing net debt/(cash)

 

 

 

21,634

30,860

(59,746)

(40,166)

Source: Mesoblast accounts, Edison Investment Research


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General disclaimer and copyright

This report has been commissioned by Mesoblast and prepared and issued by Edison, in consideration of a fee payable by Mesoblast. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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