Impressive signs of efficacy in rheumatoid arthritis

Mesoblast 18 February 2016 Update

Mesoblast

Impressive signs of efficacy in rheumatoid arthritis

Clinical results

Pharma & biotech

18 February 2016

Price

A$1.35

Market cap

A$513m

A$1.4/U$

Net cash (US$m) at 31 December 2015

120.8

Shares in issue

380.1m

Free float

66.1%

Code

MSB

Primary exchange

ASX

Secondary exchange (ADR)

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(16.9)

(35.7)

(66.6)

Rel (local)

(17.1)

(34.4)

(60.6)

52-week high/low

A$4.5

A$1.2

Business description

Mesoblast is developing adult stem cell therapies based on its proprietary MPC and culture-expanded MSC platforms. It has multiple late-stage clinical trials across four areas: immunologic/inflammatory (Phase III), spine disease (Phase III), cardiovascular (Phase III) and cancer (Phase III).

Next events

Phase III interim safety analysis MSC-150-IM in CHF

Q216

Phase II MPC-300-IV full results including cohort 2 in RA

Q316

Paediatric Phase III GvHD interim analysis

Q316

Analysts

Katherine Genis

+1 646 653 7026

Dennis Hulme

+61 (0)2 9258 1161

Mesoblast is a research client of Edison Investment Research Limited

Mesoblast has reported impressive efficacy data from the first cohort of the Phase II trial of its mesenchymal precursor cell (MPC) product in rheumatoid arthritis (RA), ahead of full results due in Q316. Key catalysts next quarter will be the first interim analysis from the pivotal MPC-150-IM heart failure trial, together with an update to trial timelines following the halving of the trial to 600 patients. The launch of Temcell in Japan for graft vs host disease this quarter will bring a royalty stream from partner JCR Pharmaceuticals. We lift our valuation to A$7.36 per share (from A$7.20).

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

06/14

25.1

(75.5)

(23.6)

0.0

N/A

N/A

06/15

32.4

(94.9)

(29.6)

0.0

N/A

N/A

06/16e

22.0

(76.6)

(21.6)

0.0

N/A

N/A

06/17e

23.4

(77.8)

(20.5)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Note: company has changed reporting currency to US$.

Impressive signs of efficacy from RA first cohort

Mesoblast announced impressive early results from the first cohort of its Phase II trial of MPC-300-IV MPC therapy in RA patients who are refractory to biologics such as TNF alpha. Patients treated with 1m cells/kg showed ACR20 responses in 47% of MPC-treated patients vs 25% on placebo, ACR70 response in 27% vs 0% on placebo, and remission at 12 weeks (DAS28/CRP<2.6) of 20% vs 0% on placebo. These data represent impressive efficacy in refractory patients: they are comparable to response rates seen to TNF alpha biologics in first-line therapy, and better than the approved JAK inhibitor Xeljanz in comparable biologic refractory patients (ACR70 in 10-14% of patients). No statistical analysis was presented. Final results of the trial including the high dose cohort (2m cells/kg) are due in Q316.

First interim analysis of CHF trial in Q216

The interim safety analysis for the pivotal CHF trial, which is due in Q216, will also assess responses in surrogate measures of efficacy such as systolic and diastolic volumes as indicators of the effects of the MPCs on the heart. The FDA has previously agreed that the primary endpoint can be changed to the rate of recurrent HF MACE (adverse events, previously time to first MACE event). The higher number of expected recurrent HF-MACE events has allowed the trial to be reduced from 1,165 to 600 patients without any loss of statistical power. Updated timelines for the revised trial, including the timing of the interim analysis of the primary efficacy endpoint, will be disclosed in Q216 in conjunction with partner Teva.

Valuation: Lifted to A$2.8bn (A$7.36/sh) from A$2.7bn

Cash outflow of US$19.8m in Q216 was 25% below preceding quarters, in line with foreshadowed cost reductions. Cash of US$120.8m on 31 December will fund operations to end FY17 and allow Mesoblast to deliver potential value inflection points including GvHD Phase III results (Q416), back pain Phase III interim analysis (Q416) and full results in the RA trial (Q316). We increase our DCF-based valuation to A$2.8bn (vs A$2.7bn) due to a higher probability of success in RA (20% vs 10%).

Financial Summary

Exhibit 1: Financial summary

US$000s

2014

2015

2016e

2017e

Year-end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

25,123

32,403

21,963

23,350

Cost of Sales

0

0

0

0

Gross Profit

25,123

32,403

21,963

23,350

R&D Expenses

(50,929)

(62,649)

(51,999)

(53,559)

SG&A Expenses

(24,403)

(29,636)

(23,709)

(24,420)

EBITDA

 

 

(83,916)

(99,001)

(81,028)

(80,412)

Operating Profit (before amort and except)

 

 

(83,916)

(99,001)

(81,028)

(80,412)

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Share-based payments

0

0

0

0

Operating Profit

(83,916)

(99,001)

(81,028)

(80,412)

Net Interest

8,386

4,070

4,428

2,635

Profit Before Tax (norm)

 

 

(75,530)

(94,931)

(76,600)

(77,777)

Profit Before Tax (FRS 3)

 

 

(75,530)

(94,931)

(76,600)

(77,777)

Tax

(4)

0

0

0

Profit After Tax (norm)

(75,534)

(94,931)

(76,600)

(77,777)

Profit After Tax (FRS 3)

(75,534)

(94,931)

(76,600)

(77,777)

Average Number of Shares Outstanding (m)

319.5

320.9

355.4

380.1

EPS - normalised (c)

 

 

(23.64)

(29.59)

(21.55)

(20.46)

EPS - normalised fully diluted (c)

 

 

(22.76)

(28.48)

(20.82)

(19.82)

EPS - (IFRS) (c)

 

 

(23.64)

(29.59)

(21.55)

(20.46)

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

 

 

655,222

659,306

660,306

661,306

Intangible Assets

648,005

650,241

650,241

650,241

Tangible Assets

4,411

4,398

5,398

6,398

Investments

2,806

4,667

4,667

4,667

Current Assets

 

 

191,931

122,460

103,618

24,841

Stocks

0

0

0

0

Debtors

5,744

3,972

8,000

8,000

Cash

185,003

110,701

87,831

9,054

Other

1,184

7,787

7,787

7,787

Current Liabilities

 

 

(40,199)

(48,407)

(40,342)

(40,342)

Creditors

(34,525)

(43,246)

(38,504)

(38,504)

Deferred revenue

(5,674)

(5,161)

(1,838)

(1,838)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(268,395)

(265,372)

(259,387)

(257,537)

Deferred revenue

(37,508)

(22,505)

(18,500)

(16,650)

Other long term liabilities

(230,887)

(242,867)

(240,887)

(240,887)

Net Assets

 

 

538,559

467,987

464,195

388,268

CASH FLOW

Operating Cash Flow

 

 

(86,515)

(104,079)

(89,798)

(80,412)

Net Interest

11,609

3,043

4,428

2,635

Tax

0

0

0

0

Capex

(1,712)

(2,204)

(1,000)

(1,000)

Acquisitions/disposals

0

0

0

0

Financing

2,196

45,852

63,500

0

Dividends

0

0

0

0

Other

(36,490)

(2,860)

0

0

Net Cash Flow

(110,912)

(60,248)

(22,870)

(78,777)

Opening net debt/(cash)

 

 

(292,449)

(185,003)

(110,701)

(87,831)

HP finance leases initiated

0

0

0

0

Other

3,466

(14,054)

0

0

Closing net debt/(cash)

 

 

(185,003)

(110,701)

(87,831)

(9,054)

Source: Edison Investment Research, company accounts

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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