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Morningstar | Mesoblast On Track With Remestemcel, With Imminent Cardiovascular Readout Boding Well for Partnering

We raise our fair value estimate for no-moat Mesoblast by 3% to AUD 3.00 from AUD 2.90, following a full-year result broadly in line with our expectations and after adjusting for the recent weakness in the Australian dollar/U.S. dollar exchange rate, which now stands at 0.73. Management’s clinical update highlighted progress made across multiple fronts. Still, there was little in the briefing that would alter our medium-term view of the company. With the third round of phase 3 data for acute graft versus host disease, or aGvHD, product MSC-100-IV (Remestemcel-L) imminent, and with U.S. Food and Drug Administration meetings already planned for second-quarter 2019, we still see this as the most likely near-term commercial opportunity, with a launch expected in second-half 2019. We also think the presentation of this data from one of two cardiovascular programs targeting advanced and end-stage heart failure in second-quarter 2019 bodes well for potential partnering. At current levels, and allowing for our very high uncertainty rating, we see shares in Mesoblast as undervalued.

We still view MSC-100-IV, or Remestemcel-L, as the next most likely product candidate to be advanced, given the approval of Remestemcel-L, branded Temcell, in Japan in 2015 by licensee partner JCR Pharmaceuticals, and we apply a 90% probability of success to the program. This product now represents around 33% of our fair value estimate, given management’s intention to not partner in the United States and thus be the sole recipient of U.S. sales in the product. We expect a readout of Day 180 safety data from the ongoing phase 3 paediatric patients with steroid-refractory aGvHD of MSC-100-IV in first-quarter fiscal 2019. We remain positive, given data rendered to date, with the top-line 100-day results from the 55-children cohort demonstrating an overall survival rate of 75%, and significantly higher than 30% observed in patients who typically fail to respond to initial steroid therapy.

As such, the Day 180 data, if equally positive, along with existing (Day 28 and Day 100) phase 3 data, should support accelerated approval in this indication, given its fast-track designation status with the FDA paving the way for a potential U.S. launch in 2019. Our modelling of MSC-100-IV generates sales of around USD 240 million by 2023 for the product based on the addressable market in the U.S., representing around 34% of potential group revenue, based on our forecast should all current clinical programs reach commercialisation.

We still consider the 600-patient phase 3 with MPC-150-IM for chronic heart failure, now representing over 40% of our fair value estimate based on a 25% probability of success, to be the key value driver for the stock. This trial should complete recruitment in first-half 2019. As such, we await data from the complementary 120-patient phase 2b trial evaluating the benefits of the same compound, MPC-150-IM, in patients with end-stage heart failure requiring mechanical circulatory support, being conducted by the United States National Institute of Health. This trial is evaluating MPC-150-IM and is expected to present results in second-quarter 2019 at a major cardiovascular conference. We think a positive result in this study would augur well for the larger chronic heart failure study and potential partnering opportunities. We assume MPC-150-IM generates sales of around USD 1,370 million by 2023 based on the addressable market in the U.S. and Europe, with any partnering arrangement resulting in a 40% share of top-line sales.

Mesoblast is currently burning around USD 23 million in cash per quarter, but this is broadly in line with our expectations. The firm recently signed a strategic partnership with Tasly Pharmaceutical Group, which will add around USD 40 million in cash to about USD 39 million received in July 2018 from NovaQuest Capital and reported cash on the balance sheet as at the end of June 2018 of USD 37.8 million. On a combined pro forma basis, this equates to around USD 116.8 million in cash. This, coupled with a further of USD 50 million provided by NovaQuest Capital and Hercules Capital, should provide Mesoblast with enough capital to reach major milestones in the near term.