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Morningstar | Mesoblast Secures Chinese Partner in Cardiovascular Indication and Strengthens Cash Position

Mesoblast has entered a strategic alliance with Tasly Pharmaceutical Group for development, manufacture, and commercialization in China of cardiovascular candidates MPC-150-IM and MPC-25-IC for chronic heart failure and heart attacks, respectively. Tasly is a major manufacturer of pharmaceuticals based on traditional Chinese medicines targeting cardiovascular-related diseases with Chinese FDA regulatory approval for one traditional medicine, based on a botanical extract, for treatment of angina. Phase 3 studies in this same product and indication are currently under way in the U.S. for potential approval by the U.S. FDA. We think the development of both Mesoblast novel stem cell therapy candidates, essentially biologics, represent effectively a departure from Tasly's core capabilities in pharmaceutical manufacturing based on traditional Chinese medicine.

Nonetheless, we think the deal, comprising upfront payments and milestones, is positive, in terms of adding to cash on hand and providing a commercial partner and pathway to a potentially large market. However, despite attractive deal metrics, we think the value of the commercial opportunity in China remains highly uncertain in the absence of positive efficacy data in U.S. trials and given the novel nature of the products. Our concerns include regulatory risk, pricing, Tasly's manufacturing know-how, and distribution. Under the agreement, Tasly will receive exclusive rights and carry all development costs. In return, Mesoblast will receive a USD 40 million payment consisting of USD 20 million technology access fee and a USD 20 million equity purchase pending deal completion and subject to government approval.

Given the uncertainties around potential production in China, we incorporate only the upfront USD 40 million payment into our model and maintain our AUD 2.90 fair value estimate per share. At current levels, shares in Mesoblast screen as undervalued, albeit with a very high fair value uncertainty rating.

With respect to milestones, Mesoblast will receive USD 25 million on product regulatory approvals in China and double-digit escalating royalties on net product sales. Upon certain thresholds in China, Mesoblast will also be eligible to receive six escalating milestone payments.

We still consider the 600-patient phase 3 with MPC-150-IM for chronic heart failure, or CHF, representing over 55% of our fair value estimate, as the key value driver for the stock. However, with patient recruitment still ongoing, we await data from the complementary Phase 2b trial evaluating the benefits of MPC-150-IM in patients with end stage heart failure. This is also due in first-quarter fiscal 2019. We think a positive result in this study would augur well for the larger CHF study and potential partnering prospects.

Mesoblast is currently burning around USD 22 million in cash per quarter, broadly in line with our expectations. Adding Tasly's USD 20 million to about USD 60 million in available cash on the balance sheet, as at end of March 2018, and with access to an additional USD 40 million from a nondilutive credit facility, coupled with further of USD 50 million provided by NovaQuest Capital, should provide Mesoblast with enough capital to reach major milestones in the near term.