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Research: Healthcare
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.
Written by
Maxim Jacobs
Mesoblast |
Moving closer to key catalysts |
Financial update |
Pharma & biotech |
3 January 2020 |
Share price performance
Business description
Next events
Analysts
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* |
EPS* |
DPS |
P/E |
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$7.53 per diluted share) mainly due to rolling forward our NPV and lower R&D expenses. This was partially offset by lower net cash. A number of key valuation inflection points are coming up for the company in the next 12 months including a potential FDA approval and data from two Phase III trials.
Exhibit 1: Valuation of Mesoblast
Product |
Indication |
Probability of success (%) |
Launch (FY) |
Peak sales |
rNPV |
Active projects |
|||||
MSC-100-IV |
Acute graft versus host disease (GvHD) |
Range 50–80% |
2020 |
574 |
1,200.6 |
Revascor (MPC-150-IM) |
Congestive heart failure (CHF) (includes use with LVAD) |
50% |
2023 |
3,208 |
1,926.1 |
MPC-06-ID |
Intervertebral disc repair |
50% |
2022 |
3,302 |
1,634.0 |
MPC-300-IV |
Diabetic nephropathy |
5.0% |
On hold |
2,186 |
49.1 |
On-hold projects |
|||||
MPC-300-IV |
Rheumatoid arthritis |
5.0% |
On hold |
1,350 |
27.9 |
MPC-25-IC |
Acute myocardial infarction (AMI) |
5.0% |
On hold |
1057 |
43.5 |
MPC-25-Osteo |
Lumber fusion |
5.0% |
On hold |
662 |
18.4 |
Total value |
4,899.7 |
||||
R&D expenses |
(307.6) |
||||
Manufacturing expenses |
(68.1) |
||||
G&A expenses |
(126.8) |
||||
Net cash (at 30 September 2019 + October offering) |
2.2 |
||||
Non-dilutive funding interest and repayments |
(153.9) |
||||
Total (A$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
|
|
Research: Financials
Appreciate Group (APP, formerly Park Group) performed well during H120 and is on track to meet the company’s (and our) expectations for the year. Of greater significance, given the seasonality of the business, were the H1 operational developments and progress with the strategic business plan aimed at enhancing long-term growth by accelerating digitalisation, improving efficiency, broadening customer appeal and deepening market penetration. Management expects the benefits to show clearly from FY21. Meanwhile, the shares offer an attractive yield, with DPS well covered by earnings and supported by a debt-free balance sheet.
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