Novartis licenses ARDS program

Mesoblast 30 November 2020 Update
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Mesoblast

Novartis licenses ARDS program

Development update

Pharma & biotech

30 November 2020

Price

A$4.07

Market cap

A$2,388m

US$0.73/A$

Net cash (US$m) at September 2020

17.1

Shares in issue

586.6m

Free float

78.5%

Code

MSB

Primary exchange

ASX

Secondary exchange

Nasdaq

Share price performance

%

1m

3m

12m

Abs

33.9

(21.7)

121.8

Rel (local)

22.7

(27.5)

126.2

52-week high/low

A$5.50

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, ARDS and lower back pain, all of which are in Phase III or later.

Next events

Heart failure and back pain Phase III data

Q4 CY20

Remestemcel-L COVID-19 related ARDS Phase III completion

Q1 CY21

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Mesoblast is a research client of Edison Investment Research Limited

Mesoblast announced that Novartis has signed a partnership with the company to develop remestemcel-L for acute respiratory distress syndrome (ARDS), whether or not the ARDS was caused by COVID-19. This is an important validation of both the platform as well as its application in the treatment of respiratory disease. Novartis will make a US$25m upfront payment and an additional US$25m equity investment. Mesoblast may receive a total of US$505m in development milestones, an additional US$750m in sales milestones and tiered double-digit royalties. Additionally, Novartis will fully fund global clinical development for all-cause ARDS and potentially other respiratory indications.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/19

16.0

(86.5)

(15.69)

0.0

N/A

N/A

06/20

31.6

(79.6)

(13.28)

0.0

N/A

N/A

06/21e

72.9

(60.4)

(10.29)

0.0

N/A

N/A

06/22e

8.6

(92.8)

(15.83)

0.0

N/A

N/A

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

COVID-19 ARDS Phase III ongoing

Mesoblast has an ongoing 300-patient randomized, controlled Phase III trial of remestemcel-L in COVID-19 related moderate/severe ARDS patients. Enrolment has surpassed 180 patients and is expected to complete in calendar Q121, with one interim analysis remaining (two have already been conducted). At the interim analysis, the trial can be stopped early for efficacy or futility.

Update on Ryoncil in SR-aGVHD

On 30 September the FDA issued a complete response letter (CRL) for Ryoncil in pediatric SR-aGVHD patients, stating that at least one additional randomized controlled trial (in either pediatric or adult patients) would be necessary for approval. Mesoblast is likely to appeal this decision through the FDA dispute resolution pathway though the timing is unclear. If Mesoblast’s appeal is unsuccessful, we think approval is unlikely before FY23 at the earliest.

Key Phase III data in HF and back pain coming soon

There are currently two Phase III readouts expected in Q4 CY20. These are the DREAM HF-1 Phase III trial of Revascor in 566 advanced heart failure patients and the MPC-06-ID trial in 404 chronic lower back pain patients.

Valuation: A$4.9bn or A$8.41 per share

We have increased our valuation to A$4.9bn or A$8.41 per share (A$7.88 per diluted share) from A$4.6bn or A$7.89 per share (A$7.53 per diluted share). The increase is mainly due to adding the ARDS program into our valuation now that it has been licensed by Novartis. We also rolled forward our NPV. These were offset in part by shifting Ryoncil approval to 2023, lowering the probability of success to 60% from 80% as well as lower net cash.

A significant validation

Mesoblast announced that Novartis has signed a partnership with the company to develop remestemcel-L for ARDS, whether or not the ARDS was caused by COVID-19, as well as potentially other conditions. This is an important validation of both the platform as well as its application in the treatment of respiratory disease, an area of intense focus for Novartis. Novartis will make a US$25m upfront payment and an additional US$25m equity investment. Mesoblast may receive a total of US$505m in development milestones, an additional US$750m in sales milestones and tiered double-digit royalties. Additionally, Novartis will fully fund global clinical development for all-cause ARDS and potentially other respiratory indications once the all-cause ARDS Phase III is initiated (though this is dependent upon the successful completion and outcome of the COVID-19 related ARDS study). Mesoblast will be responsible for both clinical and commercial manufacturing and Novartis will purchase commercial product from the company. There are also US$50m in manufacturing milestones related to the successful implementation of a next-generation manufacturing process. Novartis will be responsible for any capital expenditure related to increasing capacity requirements for the manufacture of remestemcel-L.

Outside of respiratory indications, Novartis also has an option to become the commercial distributor of Ryoncil (the brand name of remestemcel-L in graft versus host diseases). For most non-respiratory indications, Novartis and Mesoblast may fund development and commercialization on a 50/50 profit share basis.

With regard to the market opportunity in COVID-19-related ARDS, this is a little difficult to quantify given the recent excellent vaccine data, which may dramatically affect the size of that market. However, ARDS outside of COVID-19 is a well-documented unmet medical need. US incidence rates are approximately 36 cases per 100,000 population (indicating approximately 120,000 patients per year), while EU incidence rates range from 3.0 in Germany1 to 7.2 in Spain.2

  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

Mesoblast is currently conducting a 300-patient randomized, controlled US Phase III trial of remestemcel-L 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 the first calendar quarter of 2021. Interim analyses were conducted after 30% and 45% enrolment was achieved and the trial was recommended to continue as planned. An additional interim analysis is expected after 30 days of follow-up once 60% enrolment is achieved. As the company announced that it has over 180 patients enrolled, we would expect the final interim analysis in mid-late December. At the interim analysis, the trial can be stopped early for efficacy or futility.

Ryoncil

Mesoblast has announced that the FDA has issued a CRL on 30 September for Ryoncil in pediatric SR-aGVHD patients, stating that at least one additional randomized controlled trial (in either pediatric or adult patients) would be necessary for approval. This has occurred even though the FDA’s Oncologic Drugs Advisory Committee (ODAC) voted nine to one in August that the available data support the efficacy of Ryoncil in pediatric SR-aGVHD patients. The company had a Type A meeting with the FDA on 17 November to discuss a potential accelerated approval with a post-approval requirement for an additional study, but at present it appears the FDA will not agree to this. If the formal minutes of the meeting (expected within 30 days of the event) confirm this, Mesoblast will request a further Type A meeting to initiate the FDA dispute resolution pathway. If this also proves unsuccessful, we estimate approval could then occur in FY23 at the earliest.

While the FDA decision is disappointing, the US pediatric indication represents only US$103m of the US$574m in peak sales we model for the product in the US and EU. The adult market was always going to require its own randomized controlled trial and we believe the US adult market represents almost triple the opportunity as the pediatric market in the US (US$300m in peak sales).

Heart failure and back pain

For Revascor, the necessary number of primary endpoint events has occurred in the DREAM HF-1 Phase III trial in 566 advanced heart failure patients and final study visits have been completed. A quality review of all data is ongoing at all sites. Study data are expected by the end of the calendar year. 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 expected to provide data by the end of this year. It enrolled 404 patients with chronic lower back pain due to degenerative disc disease and has a composite primary endpoint that includes measures of pain and disability/function at 12 and 24 months. As with the DREAM HF-1 trial, final study visits have been completed with a quality review of all data ongoing. Two Phase III trials will likely be necessary for approval in this indication and a confirmatory European Phase III is being planned with partner Grϋnenthal.

Valuation

We have increased our valuation to A$4.9bn or A$8.41 per share (A$7.88 per diluted share) from A$4.6bn or A$7.89 per share (A$7.53 per diluted share). The increase is mainly due to adding the ARDS program into our valuation now that it has been licensed by Novartis. However due to the lack of significant data we are currently only assuming a 30% chance of success, though that will change as we learn more about the efficacy profile. We forecast US$1.7bn in potential peak sales, the vast majority of which comes from the US market due to the higher incidence in the country as well as the greater propensity to prescribe higher priced medicines. It is important to note that our valuation for this program does not include any value of the COVID-19 related ARDS indication (due mainly to the difficulty in forecasting that number going forward) and does not include any milestone payments as their details are unknown.

In addition to adding ARDS, we also rolled forward our NPV. These changes were offset in part by shifting Ryoncil approval to 2023, lowering the probability of success to 60% from 80% as well as lower net cash. The impact from the delay on our valuation was relatively minimal as the US pediatric market is a relatively small portion (<20% of peak sales) of the total Ryoncil opportunity, and as stated previously, we had already anticipated that the adult market was going to require its own randomized controlled trial.

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%-60%

2023

574

1,058.6

MSC-100-IV

ARDS

30%

2024

1,736

335.7

Revascor (MPC-150-IM)

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

50%

2023

3,208

2,225.2

MPC-06-ID

Intervertebral disc repair

50%

2022

3,302

1,886.8

On-hold projects

MPC-300-IV

Diabetic nephropathy

5.0%

On hold

2,186

56.7

MPC-300-IV

Rheumatoid arthritis

5.0%

On hold

1,350

32.2

MPC-25-IC

Acute myocardial infarction (AMI)

5.0%

On hold

1,057

50.3

MPC-25-Osteo

Lumber fusion

5.0%

On hold

662

21.3

Total value

5,666.7

R&D expenses

(345.4)

Manufacturing expenses

(113.7)

G&A expenses

(138.0)

Net cash (A$m at 30 September, 2020)

23.5

Non-dilutive funding interest and repayments

(161.7)

Total (A$m)

 

 

 

4,931

Shares (m)

 

 

 

586.6

Value per share (A$)

8.41

Options outstanding (2020 onwards) (m)

38.91

Fully diluted shares in issue (m)

625.50

Fully diluted value per share (A$)

 

 

7.88

Source: Edison Investment Research

Financials

Mesoblast reported total revenue for the first quarter of FY21 (the period ending 30 September 2020) of US$1.3m, down from US$17.0m in the same period in the prior year. Most of this difference was due to the inclusion of US$15m in payments that were part of the Grϋnenthal licensing agreement in Q1 FY20 revenues. Also, royalties on sales of Temcell in Japan fell from US$1.9m to US$1.3m as JCR had a temporary shutdown in production in order to expand facility capacity due to increasing demand beyond the initial forecast. R&D increased to US$19.3m from US$12.4m mainly due to the expense of the Phase III trial in COVID-19 patients with moderate/severe ARDS and pre-commercial activities for remestemcel-L. Manufacturing expenses increased from US$2.7m to US$11.9m due to the production of supply for the COVID-19 Phase III and building up inventory for the Ryoncil launch. Management and administration expenses also increased to US$7.7m from US$5.5m due to higher share-based payments to employees and consultants and increased overheads.

We have increased our FY21 revenue estimate to US$72.9m from US$50.9m due to the addition of the Novartis upfront payment as well as the shift of US$30m in Grϋnenthal milestone payments we previously forecast for FY20 into FY21. This was partially offset by the removal of Ryoncil revenues from our model for the year. Our FY21 R&D estimate has increased by US$13.6m (due to the costs associated with the COVID-19 related ARDS Phase III), our manufacturing expense estimate by US$16.8m and our SG&A estimate by US$12.0m. We are introducing FY22 estimates, which feature US$8.6m in revenues and do not assume any additional milestone payments (the vast majority of our estimate is comprised of Temcell royalties).

For the period ending 30 September 2020, Mesoblast reported cash and equivalents of US$108m, with US$34.9m in short-term debt and an additional US$56.1m in long-term debt. Our forecasts for Mesoblast’s financing needs in part depend on whether Ryoncil sales start sooner than anticipated, potential future partnership royalties/milestones, as well as the company’s aggressiveness in investing in the business. Additionally, we have not yet included the US$25m equity investment from Novartis and will do so once the transaction closes. That said, we had not been forecasting a need to raise additional capital (as we previously assumed US approval of Ryoncil in CY20) but with this apparent Ryoncil approval delay, we are now forecasting a need to raise US$140m by the end of FY23 (modelled as illustrative debt).

Exhibit 2: Financial summary

US$'000s

2019

2020

2021e

2022e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

 

16,003

31,614

72,850

8,600

Cost of Sales

0

0

0

0

Gross Profit

16,003

31,614

72,850

8,600

R&D Expenses

(57,531)

(52,993)

(63,592)

(57,233)

Manufacturing & Commercialization Expenses

(14,466)

(22,782)

(27,338)

(13,669)

SG&A Expenses

(18,293)

(20,142)

(30,214)

(21,149)

EBITDA

 

 

 

(75,373)

(64,758)

(46,275)

(83,197)

Operating Profit (before amort. and except.)

 

 

 

(75,935)

(66,851)

(48,368)

(85,290)

Intangible Amortization

(1,577)

(1,574)

(1,750)

(1,750)

Exceptionals

(6,264)

1,380

15,107

0

Share-based payments

(4,368)

(7,522)

(5,434)

(5,434)

Operating Profit

(88,145)

(74,567)

(40,446)

(92,474)

Net Interest

(10,609)

(12,788)

(11,991)

(7,552)

Profit Before Tax (norm)

 

 

 

(86,544)

(79,639)

(60,359)

(92,841)

Profit Before Tax (FRS 3)

 

 

 

(98,754)

(87,355)

(52,437)

(100,026)

Tax

8,955

9,415

0

0

Profit After Tax (norm)

(77,589)

(70,224)

(60,359)

(92,841)

Profit After Tax (FRS 3)

(89,799)

(77,940)

(52,437)

(100,026)

Average Number of Shares Outstanding (m)

494.4

528.8

586.6

586.6

EPS - normalized fully diluted (c)

 

 

 

(15.69)

(13.28)

(10.29)

(15.83)

EPS - normalized (c)

 

 

 

(15.69)

(13.28)

(10.29)

(15.83)

EPS - (IFRS) (c)

 

 

 

(18.16)

(14.74)

(8.94)

(17.05)

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

 

 

 

589,593

597,054

596,835

597,259

Intangible Assets

583,126

581,601

581,217

583,310

Tangible Assets

826

10,271

10,332

8,663

Investments

5,641

5,182

5,286

5,286

Current Assets

 

 

 

62,522

136,548

73,879

45,576

Stocks

0

0

0

0

Debtors

4,060

1,574

2,446

2,446

Cash

50,426

129,328

66,265

37,962

Other

8,036

5,646

5,168

5,168

Current Liabilities

 

 

 

(44,331)

(90,143)

(87,697)

(77,372)

Creditors

(13,060)

(28,491)

(30,586)

(30,586)

Deferred revenue

(17,264)

(29,197)

(22,218)

(22,218)

Short term borrowings

(14,007)

(32,455)

(34,893)

(24,568)

Long Term Liabilities

 

 

 

(126,732)

(94,133)

(54,839)

(130,271)

Long term borrowings

(67,279)

(57,023)

(24,568)

(100,000)

Deferred revenue

0

0

0

0

Other long term liabilities

(59,453)

(37,110)

(30,271)

(30,271)

Net Assets

 

 

 

481,052

549,326

528,178

435,192

CASH FLOW

Operating Cash Flow

 

 

 

(54,572)

(43,911)

(21,817)

(88,473)

Net Interest

(3,217)

(12,454)

(11,390)

(6,951)

Tax

0

0

0

0

Capex

(279)

(2,096)

(424)

(424)

Acquisitions/disposals

0

0

0

0

Financing

30,258

144,946

0

0

Dividends

0

0

0

0

Other

21,203

0

0

0

Net Cash Flow

(6,608)

86,485

(33,631)

(95,848)

Opening net debt/(cash)

 

 

 

21,634

30,860

(39,850)

(6,804)

Loan movements

0

0

0

0

Other

(2,619)

(15,775)

585

2,438

Closing net debt/(cash)

 

 

 

30,860

(39,850)

(6,804)

86,606

Source: Company reports, Edison Investment Research

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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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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.

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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

1185 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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