Moving closer to key catalysts

Mesoblast 3 January 2020 Update
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Mesoblast

Moving closer to key catalysts

Financial update

Pharma & biotech

3 January 2020

Price

A$2.05

Market cap

A$1100m

US$0.69/A$

Net cash (A$m) at 30 September 2019 + offering

2.2

Shares in issue

536.7m

Free float

86.2%

Code

MSB

Primary exchange

ASX

Secondary exchange

Nasdaq

Share price performance

%

1m

3m

12m

Abs

11.7

(4.2)

62.1

Rel (local)

14.3

(5.0)

33.9

52-week high/low

A$2.21

A$1.17

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 Remestemcel-L for aGvHD in 2020.

Next events

Remestemcel-L filing completion

Q120

Revascor Phase III data

Mid-2020

MPC-06-ID Phase III completion

H120

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 is approaching some very key catalysts. The company expects to complete its filing of Remestemcel-L in pediatric acute graft versus host disease (aGvHD) in January, which if approved, will launch in 2020. For Revascor for advanced heart failure, the required accrual of primary endpoint events in its Phase III occurred in December, with data expected by mid-2020. Additionally, the last patient visit for the 24-month follow-up in the Phase III for MPC-06-ID in low back pain is expected to occur in H120 with data likely later in the year.

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

(38.7)

(5.78)

0.0

N/A

N/A

06/21e

48.5

(49.8)

(9.28)

0.0

N/A

N/A

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

Remestemcel-L aGvHD filing to complete in January

Mesoblast is in the process of completing its rolling biologics license application (BLA) submission to the FDA, which it began in May. Once the filing is complete, the FDA will notify the company within 60 days of its acceptance and whether it will have a six-month priority review or a 10-month standard review. We currently expect that it will receive a priority review due to the innovative nature of the therapy and the positive safety and efficacy data in an indication with unmet need.

Revascor Phase III in heart failure readout mid-2020

The company announced that the required accrual of primary endpoint events in its DREAM HF-1 Phase III trial in 566 advanced heart failure patients has occurred. The primary endpoint is a reduction in recurrent heart failure-related major adverse cardiac events such as heart-failure related hospitalization and cardiac death.

MPC-06-ID Phase III expected to complete in H120

The ongoing 404-patient Phase III in lower back pain has completed recruitment, with the last follow-up visit expected in H120 with data coming later in the year. As a reminder, in September Mesoblast announced a partnership for the EU and Latin America with Grϋnenthal, which includes the possibility of receiving more than US$1bn in milestone payments (US$15m of which are upfront) and tiered double-digit royalties.

Valuation: A$4.2bn or A$7.91 per share

We have increased our valuation from A$4.1bn or A$7.56 per share (A$7.20 per diluted share) to A$4.2bn or A$7.91 per share (A$7.53 per diluted share) mainly due to rolling forward our NPV and lower R&D expenses. This was partially offset by lower net cash. A number of key valuation inflection points are coming up for the company in the next 12 months including a potential FDA approval and data from two Phase III trials.

Fiscal first quarter results

Mesoblast reported revenues of US$17.0m for the first quarter of FY20 (the period ending 30 September 2019), which mainly comprises an upfront payment of US$15m attributable to the Grϋnenthal agreement for MPC-06-ID for lower back pain. As a reminder, in September Mesoblast announced a licensing agreement with Grϋnenthal to develop and commercialize MPC-06-ID in Europe and Latin America. As part of this agreement, Mesoblast will receive milestone payments that could exceed US$1bn, including US$15m on signing, US$20m on receiving regulatory approval to begin a confirmatory Phase III in Europe and US$10m for other clinical and manufacturing outcomes expected in the next 12 months (US$45m in total in the first year of the agreement). Mesoblast will also receive tiered double-digit royalties on sales. Importantly, Mesoblast retains the rights for key markets such as the US and Japan. Separately, royalties on Temcell sales in Japan were US$1.9m for the first quarter, up 85% compared to a year ago. R&D expenditure was US$12.4m for the quarter, down 33% as much of the Phase III clinical trial work has been winding down.

We have kept our forecasts substantially the same except for R&D expenses, which we reduced by US$5m for the year due to a lower than expected run rate.

Valuation

We have increased our valuation from A$4.1bn or A$7.56 per share (A$7.20 per diluted share) to A$4.2bn or A$7.91 per share (A$7.53 per diluted share) mainly due to rolling forward our NPV and lower R&D expenses. This was partially offset by lower net cash. A number of key valuation inflection points are coming up for the company in the next 12 months including a potential FDA approval and data from two Phase III trials.

Exhibit 1: Valuation of Mesoblast

Product

Indication

Probability 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%

2020

574

1,200.6

Revascor (MPC-150-IM)

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

50%

2023

3,208

1,926.1

MPC-06-ID

Intervertebral disc repair

50%

2022

3,302

1,634.0

MPC-300-IV

Diabetic nephropathy

5.0%

On hold

2,186

49.1

On-hold projects

MPC-300-IV

Rheumatoid arthritis

5.0%

On hold

1,350

27.9

MPC-25-IC

Acute myocardial infarction (AMI)

5.0%

On hold

1057

43.5

MPC-25-Osteo

Lumber fusion

5.0%

On hold

662

18.4

Total value

4,899.7

R&D expenses

(307.6)

Manufacturing expenses

(68.1)

G&A expenses

(126.8)

Net cash (at 30 September 2019 + October offering)

2.2

Non-dilutive funding interest and repayments

(153.9)

Total (A$m)

 

 

 

4,245

Shares (m)

 

 

 

536.68

Value per share (A$)

7.91

Options outstanding (2019 onwards) (m)

27.17

Fully diluted shares in issue (m)

563.85

Fully diluted value per share (A$)

 

 

 

7.53

Source: Edison Investment Research

Financials

For the period ending 30 September 2019, Mesoblast reported cash and equivalents of US$34.5m with US$18.9m in current borrowings and an additional US$64.9m in long-term borrowings. Subsequent to the quarter, the US$15m cash for the upfront payment from Grϋnenthal was received on 1 October and on 3 October the company raised gross proceeds of A$75m (US$50.5m) through a placement of 37.5m shares. Due to the recent cash inflows, we forecast no additional financing requirement for FY20 and US$50m in FY21, which we record as illustrative debt.

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

48,510

Cost of Sales

0

0

0

0

Gross Profit

16,975

16,003

61,244

48,510

R&D Expenses

(62,289)

(57,531)

(50,000)

(50,000)

Manufacturing & Commercialization Expenses

(4,040)

(14,466)

(10,500)

(10,500)

SG&A Expenses

(18,165)

(18,293)

(18,920)

(18,745)

EBITDA

 

 

 

(66,207)

(75,373)

(25,349)

(37,751)

Operating Profit (before amort. and except.)

 

 

 

(67,116)

(75,935)

(25,599)

(38,001)

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)

(33,830)

(45,081)

Net Interest

(1,463)

(10,609)

(13,124)

(11,829)

Profit Before Tax (norm)

 

 

 

(68,579)

(86,544)

(38,723)

(49,830)

Profit Before Tax (FRS 3)

 

 

 

(65,977)

(98,754)

(46,954)

(56,910)

Tax

30,687

8,955

7,728

0

Profit After Tax (norm)

(37,892)

(77,589)

(30,995)

(49,830)

Profit After Tax (FRS 3)

(35,290)

(89,799)

(39,226)

(56,910)

Average Number of Shares Outstanding (m)

465.7

494.4

536.7

536.7

EPS - normalised fully diluted (c)

 

 

 

(8.14)

(15.69)

(5.78)

(9.28)

EPS - normalised (c)

 

 

 

(8.14)

(15.69)

(5.78)

(9.28)

EPS - (IFRS) (c)

 

 

 

(7.58)

(18.16)

(7.31)

(10.60)

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

593,193

593,805

Intangible Assets

584,606

583,126

582,731

582,981

Tangible Assets

1,084

826

978

1,340

Investments

5,682

5,641

9,484

9,484

Current Assets

 

 

 

101,071

62,522

85,206

81,124

Stocks

0

0

0

0

Debtors

50,366

4,060

2,857

2,857

Cash

37,763

50,426

74,149

70,067

Other

12,942

8,036

8,200

8,200

Current Liabilities

 

 

 

(24,003)

(44,331)

(70,092)

(70,092)

Creditors

(18,921)

(13,060)

(14,264)

(14,264)

Deferred revenue

(5,082)

(17,264)

(36,977)

(36,977)

Short term borrowings

0

(14,007)

(18,851)

(18,851)

Long Term Liabilities

 

 

 

(122,432)

(126,732)

(108,547)

(139,696)

Long term borrowings

(59,397)

(67,279)

(64,881)

(96,030)

Deferred revenue

0

0

0

0

Other long term liabilities

(63,035)

(59,453)

(43,666)

(43,666)

Net Assets

 

 

 

546,008

481,052

499,760

465,141

CASH FLOW

Operating Cash Flow

 

 

 

(74,563)

(54,572)

(13,984)

(23,228)

Net Interest

(449)

(3,217)

(12,952)

(11,390)

Tax

0

0

0

0

Capex

(201)

(279)

(612)

(612)

Acquisitions/disposals

(952)

0

0

0

Financing

40,566

30,258

51,370

0

Dividends

0

0

0

0

Other

(31,742)

21,203

0

0

Net Cash Flow

(67,341)

(6,608)

23,823

(35,231)

Opening net debt/(cash)

 

 

 

(45,761)

21,634

30,860

9,583

Loan movements

0

0

0

0

Other

(54)

(2,619)

(2,546)

0

Closing net debt/(cash)

 

 

 

21,634

30,860

9,583

44,814

Source: Edison Investment Research, company reports


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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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.

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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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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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

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United States of America

Sydney +61 (0)2 8249 8342

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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

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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.

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

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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