Tightening focus to extend runway

Mesoblast 21 September 2016 Update

Mesoblast

Tightening focus to extend runway

FY16 results

Pharma & biotech

21 September 2016

Price

A$1.14

Market cap

A$435m

US$0.76/A$

Net cash (US$m) at 30 June 2016

80.9

Shares in issue

381.7m

Free float

66.1%

Code

MSB

Primary exchange

ASX

Secondary exchange

NASDAQ

Share price performance

%

1m

3m

12m

Abs

(24.8)

(4.2)

(66.9)

Rel (local)

(21.7)

(5.3)

(68.2)

52-week high/low

A$3.62

A$1.02

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

Interim results aGVHD Phase III

Q416

Futility analysis MPC-150-IM HF trial

Q117

Interim analysis MPC-06-ID back pain Phase III

Q117

Analysts

Dennis Hulme

+61 (0)2 9258 1161

Lala Gregorek

+44 (0)20 3681 2527

Mesoblast is a research client of Edison Investment Research Limited

Mesoblast cut its cash burn by 15% in FY16 to US$90m, and guided for a further ~25% reduction in FY17, which will give it headroom to fund the Phase III heart failure (HF) trial that Teva relinquished in June. It has ~12 months of cash runway plus a US$90m equity finance facility, which will give a further 12 months’ runway. It expects to report interim analyses of three Phase III programmes by end Q117, including the HF trial. We lower our valuation ahead of these potential catalysts to A$1.5bn from A$1.8bn (A$3.84 per share from A$4.67), due to lower forecast uptake in HF and removal of two low-priority tier two programmes.

Year
end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/15

32.4

(96.2)

(30.0)

0.0

N/A

N/A

06/16

44.2

(87.4)

(0.2)

0.0

N/A

N/A

06/17e

6.8

(81.0)

(21.2)

0.0

N/A

N/A

06/18e

9.0

(82.6)

(21.7)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding exceptionals and share-based payments.

Cutting costs to extend cash runway

Mesoblast cut its cash burn in FY16 (year end 30 June) by 15% to US$89.7m. Further cost-cutting measures are expected to reduce burn by up to US$25m in the current year, although this will be partly offset by expenditure on the Phase III HF trial that was previously funded by Teva. Cash at 30 June was US$80.9m and the company has put in place a US$90m equity funding facility.

We tighten focus on advanced HF & trim peak sales

We have revised our market uptake assumptions for MPC-150-IM with a sharper focus on advanced HF patients who are considered optimum targets for the therapy. This sees us reduce peak sales in this indication by 22% to US$2.2bn.

Positive RA data confirm pipeline depth

In August the company reported encouraging exploratory efficacy data from the randomised Phase II of MPC-300-IV in biologic-refractory rheumatoid arthritis (RA), with ACR50 and ACR70 responses numerically superior to market-leading JAK inhibitors. Efficacy in the predefined subgroup of patients previously treated with one or two biologics was particularly encouraging. However, the lack of benefit compared to placebo in the less clinically important ACR20 endpoint will present some challenges in Phase III trial design, as RA drugs are typically approved based on an increase in the proportion of patients achieving ACR20 (20% improvement).

Valuation: Decreased to A$1.5bn from A$1.8bn

Our valuation falls to A$1.5bn from A$1.8bn (A$3.84 per share from A$4.67), mainly due to lower forecast uptake in HF and removal of the MPC-CBE cord blood expansion programme and MSC-100-IV Crohn’s disease programme from our valuation model. We forecast that an extra US$85m will be needed to fund operations until end FY18. As an illustration, we note that US$85m equity issued at A$1.13/share would see our diluted valuation (A$3.82/share) fall to A$3.27/share.

Cutting costs and tightening focus to extend runway

Mesoblast has an extensive portfolio of products based on its allogeneic, off-the-shelf adult mesenchymal precursor cell (MPC) and mesenchymal stem cell (MSC) technologies, which are summarised in Exhibits 1 and 2. While many of the products have shown promise in exploratory efficacy studies in Phase II, with Teva’s withdrawal as funding partner Mesoblast needs to carefully target expenditure to maximise chances of success, while minimising the risk of shareholder dilution through capital raises.

The release of FY16 accounts shows that Mesoblast is making good progress in reducing ongoing expenditure. Operating and investing cash outflows were reduced by 15% in FY16 to US$89.7m. Guidance is for further cost-cutting measures, including a headcount reduction in July, to reduce burn by up to US$25m in the current year. However, this reduction in expenditure will be partly offset by expenditure on the Phase III HF trial, which was previously funded by Teva. Guidance is for the trial to cost US$13m to the interim analysis in Q1 CY17 – we assume a further US$5m expenditure over the remainder of the financial year. Cash at 30 June was US$80.9m and the company has put in place an equity funding facility that will provide US$90m over three years, so funding is assured until at least mid-FY18.

Mesoblast has four active programmes in Phase III, one that is Phase III ready and two in Phase II. The company works on a two-tier product structure, with the primary goal of supporting late-stage or top-tier products on their path towards commercialisation – either through own-company financing or partnership agreements (Exhibits 1 and 2). The first tier comprises four products with a significant mid-term revenue opportunity: MPC-150-IM in congestive heart failure, MPC-06-ID in low back pain due to degenerative disc disease, MSC-100-IV in acute graft versus host disease (aGvHD) and MPC-300-IV in a number of chronic inflammatory conditions including biologic-refractory RA and diabetic kidney disease. The remaining tier two products are in Phase II or III and will advance into tier one on the basis of data, market opportunity or partnering capability.

Exhibit 1: Tier one pipeline

Product

Indications

Delivery

Status

Next milestones

Cardiovascular

MPC-150-IM

Advanced and end-stage chronic heart failure

Transendocardial injection

600-pt Phase III study ongoing,
600-pt Phase III confirmatory study planned

Phase III interim futility analysis Q117

Class IV heart failure requiring LVAD

Transendocardial injection

120-pt Phase IIb study 2/3 recruited as of August 2016. Fully funded by NIH.

Results expected Q317

Spinal disease

MPC-06-ID

Chronic low back pain due to degenerative disc disease

Intradisc injection.

Phase III ongoing

Phase III interim analysis Q117

Immunologic/inflammatory

MPC-300-IV

Diabetic kidney disease

IV infusion

Phase IIb/III trial design ongoing, early access regulatory pathway sought

Clarity on regulatory pathway on encouraging Phase II results

Biologic-refractory RA

IV infusion

48-pt Phase I/II study top-line results released August 2016

Clarity on Phase III design on encouraging Phase II results

Oncology

MSC-100-IV/Temcell

Steroid-refractory acute graft versus host disease (aGvHD)

IV infusion

Conditional approval (Canada/NZ). Full approval in Japan (Temcell brand name).
Pivotal 60-patient, US open-label trial. Expanded access treatment (US).
US trial in adults with liver/gut aGvHD.

Updated Japan sales Q416; US BLA submission, paediatric filing possible 2017 supported by Phase III futility analysis Q416 or full Phase III results potentially Q217. Enrolment to complete Q117.

Source: Edison Investment Research

Exhibit 2: Tier two pipeline

Product

Indications

Delivery

Status

Next milestones

Cardiovascular

MPC-25-IC

Acute cardiac ischemia

Intracoronary infusion

Recruitment complete in 225-pt Phase II

Results expected Q117 (six-month primary endpoint)

Spinal disease

MPC-25-Osteo

Lumbar spinal fusion

Intervertebral injection

Phase III ready, subject to partnering

Phase III subject to partnership

Immunologic/inflammatory

MSC-100-IV

Moderate-to-severe Crohn’s disease

IV infusion

330-pt Phase III study fully recruited June 2014

2016: update/decision point

Source: Edison Investment Research

Teva’s withdrawal from the cardiovascular programme and Celgene’s decision to let its right of first refusal for selected products lapse, combined with the increased risk that dilutive capital raisings may be required to fund its ongoing development programme, has seen the stock price fall by 60% over the past year, despite reporting good clinical progress over the period.

Encouraging efficacy in Phase II rheumatoid arthritis study

Mesoblast announced encouraging top-line results in August from the final cohort in its Phase II trial of MPC-300-IV in rheumatoid arthritis (RA) patients who are refractory to biologics such as TNF alpha. Patients were randomised to receive a single intravenous (iv) infusion of either 1m or 2m MPCs/kg or placebo. The iv infusions of MPCs were well tolerated with no serious adverse events over the 12-week study period.

The exploratory efficacy analysis showed there were dose-related improvements in clinical symptoms, function and disease activity, with the highest dose (2m MPCs/kg) providing the greatest benefit. Exhibit 3 shows that the most clinically meaningful ACR70 (at least 70% improvement in the number of affected joints and other symptoms) was achieved at 12 weeks by significantly more patients receiving the high dose (2m cells/kg) than the control group (27% vs 0%). More patients in the high-dose group also achieved ACR50 response at 12 weeks (31% vs 19% in controls), but the difference was not significant (Exhibit 4).

Responses to MPC-300-IV were consistently higher in the pre-defined subgroup of patients who had been treated with one to two prior biologics; 36% for high dose vs 0% in controls for ACR70, 55% vs 11% for ACR50 and 55% vs 33% for ACR20. However, with the smaller numbers in this subgroup the effects were not statistically significant.

Exhibit 5 shows that by week 12 there was no difference between the treatment and placebo groups in the number of patients achieving ACR20 responses, with the high placebo response meaning that around 50% of subjects in each group achieved this minimal improvement. This result will present some challenges in choosing the appropriate primary endpoint for a Phase III trial because, while the ACR70 and ACR50 responses are much more clinically meaningful, drugs for the treatment of RA have typically been approved on the basis of a greater proportion of patients achieving the minimal ACR20 (20% improvement) response. We expect that in a larger trial we would see a benefit in ACR20 as well as for the more stringent ACR50 and ACR70 endpoints, but the Phase II results add an extra element of uncertainty.

MPC-300-IV treatment also led to dose-related improvements in physical function as measured by the health assessment questionnaire-disability index (HAQ-DI). Exhibit 6 shows that subjects in the high-dose group had significantly greater improvement in the HAQ-DI score from baseline compared to the placebo group at both four and 12 weeks. At 12 weeks significantly more subjects in the high-dose group had achieved the minimum clinically important improvement in physical function (HAQ-DI reduced by at least 0.22), 90% vs 38%, p=0.003.

Achieving an ACR70 response in 27% of subjects vs 0% on placebo represents impressive efficacy in refractory patients. This result is 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). If benefits of this magnitude are confirmed in subsequent clinical trials, MPC-300-IV could potentially be used as a first-line treatment option for patients who have failed to respond to anti-TNF or another biologic agent.

Exhibit 3: ACR70 response over 12 weeks

Exhibit 4: ACR50 response over 12 weeks

Source: Mesoblast presentation

Source: Mesoblast presentation

Exhibit 3: ACR70 response over 12 weeks

Source: Mesoblast presentation

Exhibit 4: ACR50 response over 12 weeks

Source: Mesoblast presentation

Exhibit 5: ACR20 response over 12 weeks

Exhibit 6: Health assessment questionnaire – disability index (HAQ-DI) – change from baseline

Source: Mesoblast presentation

Source: Mesoblast presentation. Note: Least squares mean change from baseline at four and 12 weeks. Dashed blue line indicates minimum clinically important change (-0.22).

Exhibit 5: ACR20 response over 12 weeks

Source: Mesoblast presentation

Exhibit 6: Health assessment questionnaire – disability index (HAQ-DI) – change from baseline

Source: Mesoblast presentation. Note: Least squares mean change from baseline at four and 12 weeks. Dashed blue line indicates minimum clinically important change (-0.22).

We trim MPC-150-IM sales forecasts to focus on advanced HF

The approval of Entresto (sacubitril/valsartan, Novartis) in the US and Europe in H215 provided another option for treating patients with symptomatic (NYHA class II-IV) HF and a reduced ejection fraction (HFREF), the type of HF that Mesoblast is targeting in its development programme. Entresto is a combination of sacubitril, a neprilysin inhibitor, and valsartan, an angiotensin II receptor blocker. The list price for Entresto in the US is about US$4,500 a year before discounts. Entresto reduced the risk of cardiovascular (CV) death or HF hospitalisation by 20% versus the ACE-inhibitor enalapril in the Paradigm-HF Phase III trial in 8,442 patients (76% had NYHA Class I or II HF). As Exhibit 7 shows, there was a trend towards greater benefit in patients with milder class II HF than in those with more severe Class III symptoms. In Class III patients there was only minimal 7% improvement in the primary endpoint (a composite of CV death or first hospitalisation for worsening HF, HR=0.93), although there was a more meaningful 18% reduction in the risk of death from cardiac causes (HR=0.82). For the small number of Class IV HF patients (n=29) the situation was reversed, with a small 10% reduction in cardiac deaths but a larger 25% reduction in the composite primary endpoint.

Mesoblast’s Phase II trial of MPC-150-IM randomised a total of 60 patients with Class II or III HFREF and normal ventricular rhythm (QRS < 120ms). A post hoc analysis of HF-related major adverse cardiac events (HF-MACE), defined as cardiac death, resuscitated ventricular fibrillation or HF hospitalisation, found that HF-MACE incidence was significantly lower in the high dose group (150m cells) than the controls (0% vs 33%, p=0.025) over three years of follow up. Exhibit 7 compares the efficacy of Entresto seen in the Paradigm-HF pivotal trial and the results of post hoc analysis of HF-MACE and death from cardiac causes in Mesoblast’s phase II trial. HF MACE is similar to the composite endpoint in the Entresto trial, but with the addition of successfully resuscitated ventricular fibrillation and exclusion of deaths due to stroke.

As a post hoc analysis in a small study that was not powered to detect clinical endpoints, it is not clear to what extent these benefits of MPC therapy will be repeated in large pivotal trials. However, we note that the incidence of HF-MACE events and death from cardiovascular causes in the control patients in the MPC trial were similar to those seen in the control arm of the Paradigm-HF trial, which suggests that the difference between the MPC-treated and control patients were not due to an unusually high event rate in the control arm. We note that even when looking at the less dramatic improvements seen when the data for all 45 patients in the 3 MPC dose groups were pooled, the incidence of HF-MACE events was still 40% lower and incidence of cardiac death 78% lower than in the control group.

Exhibit 7: Comparison of event rates in Entresto and MPC trials

HF MACE hazard/ incidence ratio*

HF MACE** incidence in controls (%)

Cardiac death hazard/ incidence ratio

CV/cardiac*** death incidence in controls (%)

number in treatment group

Entresto

total population

0.80

27%

0.80

17%

4187

NYHA Class II#

0.74

25%

0.77

15%

2952

NYHA Class III

0.93

31%

0.82

21%

1005

NYHA Class IV

0.75

41%

0.90

22%

29

MPC-150-IM Phase II (all subjects)

High 150m cells dose

0.00

33%

0.00

20%

15

All 3 doses pooled

0.60

33%

0.22

20%

45

MPC-150-IM Phase II (LVESV > 100ml)

High 150m cells dose

0.00

71%

0.00

43%

11

control

7

Source: Edison Investment Research; Perin et al 2015; FDA Entresto Medical review; Mesoblast NASDAQ IPO prospectus. Note: *Data represents hazard ratio for Entresto study, incidence ratio for treatment vs control groups for MPC-150-IM study; **For the Entresto trial we list the composite endpoint event rate; ***CV death in the Entresto trial includes deaths due to stroke, whereas cardiac death in the MPC Phase II does not; # NYHA class at randomisation - data not shown for the 4.6% of patients who were in Class I at randomisation.

In September 2015 Mesoblast released additional analysis of the Phase II trial of MPC-150-IM which found that the cell therapy had the greatest cardioprotective effect in the subset of patients with more advanced heart failure, defined by substantial baseline left ventricular (LV) contractile abnormality (LV end systolic volume (LVESV) >100ml), as shown in Exhibit 8. The bottom rows of Exhibit 7 shows that the HF-MACE and cardiac death event rates were also much higher in the patients with advanced HF in the control group but no events occurred in the high MPC dose group.

Mesoblast concluded from this analysis that the optimum target population for MPC therapy is likely to be patients with advanced heart failure with a high rate of progression.

Exhibit 8: Greatest cardioprotective effect of high MPC dose seen in advanced heart failure

Source: Mesoblast NASDAQ IPO prospectus

In May the American College of Cardiology Foundation, the American Heart Association (AHA) and the European Society of Cardiology issued updated HF treatment guidelines which strongly recommended that Entresto be used to treat patients with Class III HF due to reduced ejection fraction, as well as those with milder Class II HF symptoms. This is a stronger endorsement that we had expected given the modest benefit of Entresto on the composite primary endpoint in Class III patients in the pivotal study.

We had previously assumed that uptake would be 3% of eligible patients. With the strong guideline endorsement of Entresto we have reduced forecast uptake in the US and Europe to 2.5% and 2.0% of eligible patients respectively, as we expect use of MPC-150-IM to be more tightly focused on patients with advanced heart failure. Entresto is a twice-daily tablet, whereas intracardiac injection of MPC-100-IM is an invasive procedure that is administered in a specialist cardiac catheter lab, so it makes sense that use of MPC therapy would be concentrated in the optimum target patient population.

The Phase III trial of MPC-150-IM is recruiting patients with New York Heart Association (NYHA) Class II or III HF with an ejection fraction ≤40%, with additional criteria including high baseline NT-proBNP level and a history of a heart failure hospitalization in the past 9 months to select for patients with advanced heart failure. In Exhibit 9 we identify patients as eligible for MPC-150-IM therapy (the addressable market) as those who are in Class II-III HF with a reduced ejection fraction (LVEF<40%). As Exhibit 9 shows, this includes 36% of all HF patients, which is equivalent to 2,150,000 patients in the US in 2016. Our revised uptake rate in the US of 2.5% of eligible patients would represent 53,700 patients receiving MPC therapy each year.

Exhibit 9: Proportion of US HF patients eligible for MSB’s stem cell therapy

 

% of HF patients

Number of US HF patients

Notes

US HF patients

 

6,050,000

Based on American Heart Association estimate of 5.7m in 2012, escalated at 1.5% p.a.

LVEF < 40%

48%

Fonarow et al 2011a, citing ADHERE, GWTG-HF, OPTIMIZE-HF, Olmsted County studies

Per cent in NYHA Class II-III

74%

Based on per cent in each NYHA class among patients with LVEF<35% or <40% in: ADVANCENT registryb (80%); Improve HF registryc (63%); INDYCE registryd; baseline data at screening in Entresto Phase IIIe (Paradigm-HF)

Eligible patients (LVEF <40% + Class II-III HF)

36%

2,150,000

Patients treated at 2.5% uptake of eligible patients

0.9%

53,700

Source: Edison Investment Research; a Fonarow et al. Potential impact of optimal implementation of evidence-based heart failure therapies on mortality. Am Heart J 2011;161:1024-1030; b Hanna et al. J Am Coll Cardiol 2006;47:1683-8; c Fonarow et al. Circulation. 2010;122:585-596; d Tabet et al. Archives of Cardiovascular Disease (2010) 103, 354-362; e FDA Entresto Medical review p50.

As Exhibit 9 shows, we consider all patients with Class II or III HF and reduced ejection fraction as eligible for treatment. However, as previously stated, we expect use to be concentrated in patients with more advanced heart failure. While it is not clear what proportion of eligible patients could be considered prime candidates for treatment, in Exhibit 10 we have taken as a proxy those patients with HF with a reduced ejection fraction and Class III symptoms. This category represents 12% of all HF patients, equivalent to 726,000 patients in the US. Our peak utilisation of 53,700 patients per year would represent 6% of these prime candidates for treatment.

We note that if we assume that the average survival of these prime candidates patients is four years and that each patient receives MPC therapy only once, this 6% annual uptake would be equivalent to 24% of prime candidates receiving MPC therapy over the course of their treatment.

Exhibit 10: We take Class III HF as a proxy for prime candidates for MPC therapy

 

% of HF patients

Number of US HF patients

Notes

US HF patients

 

6,050,000

Based on American Heart Association estimate of 5.7m in 2012, escalated at 1.5% p.a.

LVEF < 40%

48%

Fonarow et al 2011, citing ADHERE, GWTG-HF, OPTIMIZE-HF, Olmsted County studies

Per cent with NYHA Class III

25%

Average per cent in NYHA Class III-IV among patients with LVEF<35% or <40% in: ADVANCENT registry (27.5%); Improve HF registry (24.6%)

Prime candidates for MPC-100-IM therapy (LVEF <40% + Class III HF)

12%

726,000

Source: Edison Investment Research; Note: See Exhibit 9 for data sources.

The eventual uptake of MPC-150-IM, if approved, will be strongly influenced by its relative efficacy when compared to Entresto. We will reassess our uptake assumptions when we have more information on the efficacy of MPC-150-IM. This may come when the results of the interim analysis in Q117, or we may have to wait for the top line results of the first pivotal trial, potentially in mid-2018.

We also note that we assume that MPC-150-IM is priced at US$20,000 per treatment in the US (US$15,000 per treatment in Europe). This is intermediate between the US$4,500 annual cost of treatment with Entresto and ~US$35,000 for an implantable defibrillator device (ICD). We think this pricing is reasonable given that multiple clinical trials have shown long-lasting reductions in mortality of 20-50% with the use of these devices in this patient group. If MPC-150-IM therapy is shown to provide a long-lasting benefit, this may justify pricing in line with ICD devices, which represents potential upside to our forecasts.

Cord blood transplantation Phase III suspended and programme fully impaired

Mesoblast has suspended recruitment in the Phase III trial of MPC-CBE for the expansion of haematopoietic stem cells (HSC) within cord blood for HSC transplant recipients. Existing and future cash resources will be primarily directed towards tier one programmes for the foreseeable future and the company was unable to say when recruitment will restart. The company impaired the full carrying amount of the intangible assets relating to the programme (and for a separate MPC-Micro-IO programme for age-related macular degeneration) and recognised a US$61.9m non-cash impairment charge in the FY16 accounts. As a result of the indefinite suspension of patient enrolment on the Phase III trial we have removed MPC-CBE from our valuation model (previously valued at A$46.4m or A$0.12 per share).

Valuation

We reduce our valuation for Mesoblast to A$1.5bn from A$1.8bn (A$3.84 per basic share from A$4.67, or to A$3.82/share diluted for options that would be in the money if shares traded in line with the NPV, from A$4.62). The breakdown of contribution to the rNPV is shown below (Exhibit 11). Note that these product NPVs do not account for R&D costs, which are grouped together as a single line item.

Most notably, our NPV for MPC-150-IM in HF decreases from A$2.79/share to A$2.08/share due to reduced peak uptake among eligible HF patients from 3% to 2.5% and 2.0% in the US and Europe, respectively, deferred launch of MSC-100-IV for aGvHD from FY17 to FY18 with recruitment in the pivotal trial now expected in Q117 vs Q416 previously, and the removal of the MPC-CBE cord blood expansion programme from our model as outlined above (previously valued at A$46.4m or A$0.12 per share).

We have also removed the MSC-100-IV programme in biologic-refractory Crohn’s disease from our valuation model until we have better visibility as to future development plans (previously valued at A$8.2m or A$0.02 per share). The Phase III trial of MSC-100-IV in biologic-refractory Crohn’s disease patients completed recruitment in June 2014, according to the entry on ClinicalTrials.gov (trial NCT00482092). However, with no news to date as to the outcome of the trial, and in light of the fact that an additional pivotal Phase III programme will be required for approval, it is uncertain whether this programme will progress any further.

Note that our model retains similar revenue share assumptions for the HF and acute myocardial infarction programmes to those that we used under the lapsed Teva collaboration, on the assumption that if the development programme is successful it could negotiate similar terms with a new partner given the more advanced stage of development. These assumptions include a revenue share that ranges from the twenties to reach 40% when combined sales for HF and myocardial infarction exceed US$2bn, and COGS that range from 14% down to 10% as sales increase. We assume combined milestone payments for approval for HF in the US and Europe total US$125m, risked to 50% likelihood.

We highlight key upcoming potential catalysts that could allow for share price inflections: interim analysis of MPC-06-ID in low back pain in Q117, futility analysis of MPC-150-IM in HF in Q117, interim results from MSC-100-IV Phase III in paediatric aGvHD in Q416 and full results from the same trial in Q217.

Exhibit 11: Valuation

Product

Therapeutic area

Indication

rNPV
(A$m)

rNPV/share (A$)

Probability of success (%)

Launch (FY)

Peak sales (US$m)

MPC-150-IM

Cardiovascular

Congestive heart failure (CHF)

794.9

2.08

50%

2023

2,177

MPC-25-IC

Cardiovascular

Acute myocardial infarction (AMI)

105.9

0.28

20%

2025

1,057

MPC-06-ID

Spine disease

Intervertebral disc repair

550.4

1.44

50%

2022

1,858

MPC-25-Osteo

Spine disease

Posterior lumbar fusion

44.9

0.12

20%

2025

662

MSC-100-IV

Oncology

Acute graft versus host disease (aGvHD)

101.1

0.27

60%

2018

354

JR-031

Oncology

Acute graft versus host disease (aGvHD)

30.8

0.08

100%

2016

36

MPC-300-IV

Immunologic/
Inflammatory

Diabetic nephropathy

119.4

0.31

20%

2025

2,186

MPC-300-IV

Immunologic/
Inflammatory

Rheumatoid arthritis

98.9

0.26

20%

2023

1,350

R&D expenses

(291.5)

(0.76)

Manufacturing expenses

(108.2)

(0.28)

G&A expenses

(87.0)

(0.23)

 

Net cash 30 June 2016

106.8

0.28

 

Total

 

 

1,466

3.84

Basic

 

 

 

 

 

1,486

3.82

Diluted

 

 

Source: Edison Investment Research

Financials

Mesoblast changed its reporting currency to US dollars ahead of its IPO in the US in 2015.

Mesoblast cut its cash burn in FY16 (year end 30 June) by 15% to US$89.7m. Further cost-cutting measures, including a headcount reduction in July, reductions in laboratory and office space and completion of recruitment in the MPC-25-IC heart attack study, are expected to reduce burn by up to US$25m in the current year. However, this reduction will be partly offset by expenditure on the Phase III HF trial that was previously funded by Teva. Guidance is for the trial to cost US$13m up to the interim analysis in Q1 CY17; we expect the full year cost to be around US$20m. We have increased forecast operating cash outflow by 2% and 1% in FY17 and FY18 respectively, and now forecast operating cash outflow to be US$80.3m in both FY17 and FY18 and US$82.4m in FY19.

The reported pre-tax loss for FY16 was US$90.8m, a 6% reduction on the prior year. The reported loss of US$4.1m was affected by a number of non-cash items, including: recognition of the remaining US$22.5m of deferred revenue under the Teva collaboration; a US$61.9m non-cash impairment charge for the full carrying value of intangible assets relating to MPC-CBE for the expansion of HSC, as well as for the separate MPC-Micro-IO programme for age-related macular degeneration; a US$37.4m benefit from revaluing the contingent consideration payable to Osiris for MSC assets including Temcell; and a US$86.7m tax benefit relating primarily to the recognition of deferred tax assets (US$60m) and reversal of deferred tax liabilities (US$21.8m).

In the absence of additional financing and/or partnerships, we estimate that Mesoblast has sufficient cash to fund operations including key late-stage trials into late FY17, while faster uptake of MSC-100-IV (aGvHD) in Japan could extend this runway. Thereafter, its late-stage pipeline will require funds – ideally through partnerships, although the timing of partnering agreement is uncertain. We estimate that an additional US$85m will be required to fund operations until end FY18, most of which could be supplied by the US$90m discretionary equity facility with Kentgrove Capital.

Management has indicated that it does not intend to take on debt to fund its development programmes; however, for purely illustrative purposes we follow our standard practice and add long-term debt of US$85m in FY18 in our forecasts. We note that a scenario where US$85m was raised through an equity issue at the current share price of A$1.13/share would see our diluted valuation fall from A$3.82/share to A$3.27/share.

Sensitivities

Mesoblast is subject to the risks typically associated with biotech company drug development, including the possibility of unfavourable outcomes in clinical trials, regulatory changes, success of competitors and commercial decisions by partners or potential partners. With Teva’s withdrawal from the cardiovascular programme, funding of Mesoblast’s annual cash burn of ~US$70-80m is a significant source of uncertainty. The company has entered an equity finance facility that will provide up to A$120m (~US$90m) to fund the HF Phase III programme, but with a current market capitalisation of A$530m (~US$400m) that could result in significant dilution of existing shareholders. We expect Mesoblast to seek non-dilutive funding from partnering deals, which could reduce the equity funding requirement. Potential partnering catalysts could include filing a US BLA for paediatric aGvHD in 2017, interim futility analysis for MPC-06-ID degenerative disc disease Phase III in Q117 and the second interim futility analysis in the HF Phase III in Q117.

Exhibit 12: Financial summary

US$'000s

2014

2015

2016

2017e

2018e

2019e

30-June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

25,123

32,403

44,183

6,809

9,048

11,288

Cost of Sales

0

0

0

0

(1,207)

(2,382)

Gross Profit

25,123

32,403

44,183

6,809

7,841

8,906

R&D Expenses

(50,929)

(62,649)

(50,013)

(50,013)

(51,013)

(53,054)

Manufacturing & Commercialisation Expenses

(25,434)

(23,783)

(29,763)

(22,025)

(22,245)

(22,912)

SG&A Expenses

(24,403)

(29,636)

(22,500)

(17,881)

(17,820)

(18,355)

EBITDA

 

 

(83,916)

(97,977)

(86,319)

(80,308)

(80,320)

(82,377)

Operating Profit (before amort and except)

 

 

(83,916)

(99,001)

(88,511)

(82,609)

(82,737)

(84,914)

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Share-based payments

0

0

(3,389)

(2,500)

(2,500)

(2,500)

Operating Profit

(83,916)

(99,001)

(91,900)

(85,109)

(85,237)

(87,414)

Net Interest

8,386

2,757

1,079

1,619

157

93

Profit Before Tax (norm)

 

 

(75,530)

(96,244)

(87,432)

(80,991)

(82,580)

(84,822)

Profit Before Tax (FRS 3)

 

 

(75,530)

(96,244)

(90,821)

(83,491)

(85,080)

(87,322)

Tax

(4)

0

86,694

0

0

0

Profit After Tax (norm)

(75,534)

(96,244)

(738)

(80,991)

(82,580)

(84,822)

Profit After Tax (FRS 3)

(75,534)

(96,244)

(4,127)

(83,491)

(85,080)

(87,322)

Average Number of Shares Outstanding (m)

319.5

320.9

360.8

381.4

381.4

381.4

EPS - normalised fully diluted (c)

 

 

(23.64)

(29.99)

(0.20)

(21.24)

(21.65)

(22.24)

EPS - normalised (c)

 

 

(22.76)

(28.88)

(0.20)

(20.57)

(20.97)

(21.54)

EPS - (IFRS) (c)

 

 

(23.64)

(29.99)

(1.14)

(21.89)

(22.31)

(22.90)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

100.0

100.0

100.0

100.0

86.7

78.9

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except) (%)

N/A

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

655,222

659,306

595,195

594,893

594,477

593,939

Intangible Assets

648,005

650,241

587,823

587,823

587,823

587,823

Tangible Assets

4,411

4,398

3,063

2,761

2,345

1,807

Investments

2,806

4,667

4,309

4,309

4,309

4,309

Current Assets

 

 

191,931

122,460

88,823

13,134

10,971

16,687

Stocks

0

0

0

0

0

0

Debtors

5,744

3,972

4,054

4,054

4,054

4,054

Cash

185,003

110,701

80,937

5,248

3,085

8,801

Other

1,184

7,787

3,832

3,832

3,832

3,832

Current Liabilities

 

 

(40,199)

(48,407)

(29,415)

(29,415)

(29,415)

(29,415)

Creditors

(34,525)

(43,246)

(27,155)

(27,155)

(27,155)

(27,155)

Deferred revenue

(5,674)

(5,161)

(2,260)

(2,260)

(2,260)

(2,260)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(268,395)

(265,372)

(126,442)

(131,442)

(211,442)

(301,442)

Long term borrowings

0

0

0

(5,000)

(85,000)

(175,000)

Deferred revenue

(37,508)

(22,505)

0

0

0

0

Other long term liabilities

(230,887)

(242,867)

(126,442)

(126,442)

(126,442)

(126,442)

Net Assets

 

 

538,559

467,987

528,161

447,170

364,591

279,769

CASH FLOW

Operating Cash Flow

 

 

(86,515)

(104,079)

(89,125)

(80,308)

(80,320)

(82,377)

Net Interest

11,609

3,043

1,129

1,619

157

93

Tax

0

0

0

0

0

0

Capex

(1,712)

(2,204)

(922)

(2,000)

(2,000)

(2,000)

Acquisitions/disposals

0

0

(805)

0

0

0

Financing

2,196

45,852

62,066

0

0

0

Dividends

0

0

0

0

0

0

Other

(36,490)

(2,860)

0

0

0

0

Net Cash Flow

(110,912)

(60,248)

(27,657)

(80,689)

(82,163)

(84,284)

Opening net debt/(cash)

 

 

(292,449)

(185,003)

(110,701)

(80,937)

(248)

81,915

HP finance leases initiated

0

0

0

0

0

0

Other

3,466

(14,054)

(2,107)

0

0

0

Closing net debt/(cash)

 

 

(185,003)

(110,701)

(80,937)

(248)

81,915

166,199

Source: Company accounts, Edison Investment Research. Note: Company has changed its reporting currency to US$.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Mesoblast and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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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

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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

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Mesoblast and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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

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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