2023-11-01 14:22:06 ET
Summary
- MESO has a diversified portfolio targeting inflammatory conditions, majorly led by products Remestemcel-L and Rexlemestrocel-L.
- The recent FDA rejection of Remestemcel-L poses a challenge, but Mesoblast remains optimistic about eventual approval.
- Mesoblast's financial situation is concerning, with a short cash runway and a need for additional funding to support its pipeline and meet FDA requirements.
- MESO's robust product pipeline and strategic partnerships across geographies underline a promising long-term outlook.
- The "hold" rating on MESO reflects a cautious optimism, intertwining immediate financial challenges with the potential long-term gains post-FDA approval of flagship products.
Mesoblast Limited ( MESO ) has curated a diversified medical portfolio to address a spectrum of inflammatory conditions, utilizing its distinctive regenerative medicine technology. A substantial segment of MESO's market valuation is anchored to the progression and authorization of its pivotal products, namely Remestemcel-L and Rexlemestrocel-L. Although the recent FDA disapproval of Remestemcel-L marks a hurdle, the company's broad product spectrum and strategic affiliations across diverse geographies highlight a holistic strategy to surmount regulatory and clinical obstacles. Currently, MESO's trajectory is intricately linked to Remestemcel-L, which will compel MESO to garner additional financing to achieve FDA endorsement. This endeavor might require time and potentially lead to shareholder dilution. Nevertheless, given the FDA's now explicit criteria and MESO's optimistic outlook on adhering to them, the likelihood of eventual approval is high. Given the recent pronounced price depreciation, I discern MESO as a prudent long-term "hold" investment, predicated on Remestemcel-L's prospective FDA approval following phase 3.
Business Overview
Founded in 2004, Mesoblast is a promising biotech company operating in Australia, the United States, Singapore, and Switzerland. With its base in Melbourne, Australia, the company is immersed in regenerative medicine, leveraging a proprietary technology based on specialized mesenchymal lineage cells. In my view, MESO's wide-ranging medical portfolio, which covers cardiovascular, spine orthopedic disorders, oncology, hematology, and immune-mediated and inflammatory diseases, reflects its comprehensive approach to addressing multiple inflammatory conditions with significant unmet medical needs.
A key product within MESO's lineup is Remestemcel-L, undergoing Phase III clinical trials. This product holds promise in tackling systemic inflammatory conditions like steroid-refractory acute graft versus host disease, acute respiratory distress syndrome, and biologic refractory inflammatory bowel disease. Moreover, Remestemcel-L is being tested for its potential in managing chronic heart failure and chronic low back pain caused by degenerative disc disease.
Source: Financial Results and Operational Update for the Year Ended June 30, 2023
Alongside, Rexlemestrocel-L is another medication under development, positioned for the treatment of advanced chronic heart failure and chronic low back pain. The FDA has granted Rexlemestrocel-L the Regenerative Medicine Advanced Therapy (RMAT) designation for treating chronic low back pain. A Phase 3 randomized controlled trial was conducted, involving a single injection of Rexlemestrocel-L as an allogeneic mesenchymal precursor cell ((MPC)) therapy with 404 enrolled participants. Moreover, MESO is strategizing to bring Rexlemestrocel-L to patients in the U.S. with chronic low back pain (CLBP) due to degenerative disc disease refractory.
Additionally, MESO is advancing two other projects: MPC-300-IV and MPC-25-IC. MPC-300IV, now in Phase II trials for Rheumatoid Arthritis, has a 32% chance of progressing to Phase III as per GlobalData. On the other hand, MPC-25-IC, a Phase 2 candidate, targets the treatment or prevention of acute myocardial infarction. It was part of the study assessing allogeneic cellular therapy delivered via intracoronary infusion in acute myocardial infarction patients.
Source: Mesoblast's website
To extend its market reach, MESO has engaged in strategic partnerships with pharmaceutical companies. Among these partnerships, collaborations with Tasly Pharmaceutical Group for heart conditions in China, JCR Pharmaceuticals Co. Ltd. for wound healing in patients with epidermolysis bullosa, and Grünenthal for the development and marketing of cell therapies for chronic low back pain stand out.
Mesoblast's Persistent Pursuit: Remestemcel-L's Regulatory Odyssey
Despite a favorable vote from the Oncologic Drugs Advisory Committee, the FDA denied approval for MESO's drug Remestemcel-L to treat pediatric SR-aGVHD, citing a need for more data as communicated in a Complete Response Letter ((CRL)). After MESO's resubmission in January 2023 that included new long-term data, the FDA's decision released on August 2, 2023, highlighted the need for additional data, suggesting a probable necessity for a new trial. This development shifts MESO's focus to an adult trial, aligning with its commercial strategy, delaying the potential first U.S. approval of such an off-the-shelf cell therapy.
Patients facing steroid-resistant acute graft versus host disease (aGVHD) have a dire prognosis with over 90% mortality rates. The earlier Phase III clinical trial for Remestemcel-L in pediatric patients proved successful, meeting its primary objectives with a 74.1% survival rate at day 100 and 68.5% at day 180. The company plans an additional Phase III study, now including adult patients, particularly those with the highest risk of disease and mortality, to further validate the drug's efficacy.
Following the FDA's denial, a meeting in September provided MESO with clear directives for advancing the approval process. As they are in the final stage of phase three, poised for Regulatory Filing, and considering the typical duration of phase three is 1 to 4 years, the FDA's request for additional clinical trial data hints at a faster review process underway. The positive remarks from the Oncologic Drugs Advisory Committee and the previous results for clinical trials indicate a good standing for the drug, hinting at a likely approval eventually.
Source: Annual Report 2023
Despite this setback, MESO remains committed to fulfilling the FDA's requirements to obtain approval. The disappointment over delays is clear, yet there's a strong resolve to continue the journey towards approval, underlined by the board's continued support. The engagement with the FDA in September has provided clearer guidance on the regulatory path ahead, which is a positive stride. MESO's Fiscal responsibility is demonstrated through planned payroll reductions and executive pay cuts, indicating a prudent approach to managing resources, which is critical for long-term sustainability, especially in the face of regulatory hurdles.
Mesoblast Post-FDA Rejection
Mesoblast's recent financial performance , reflected by a GAAP EPS of $0.11, which exceeded estimates by $0.67, signals a positive fiscal trajectory. However, a 26.5% YoY revenue dip to $7.5 million, missing by $0.89 million, underscores MESO's challenging lack of profitability. I believe this aspect demands cautious optimism from investors. But, on an encouraging note , MESO's stronghold in Japan through TEMCELL is noteworthy. This venture has steadily contributed to revenue, with an annual return of $8.1 million from TEMCELL royalties.
However, MESO's revenue capabilities are closely tied to the progress of its clinical trials, particularly concerning its two primary cellular platforms derived from stromal cells. TEMCELL royalties are negligible and insufficient to justify MESO's $190 million market cap. Instead, its valuation hinges on the advancement of Rexlemestrocel, currently in a Phase 3 trial to address chronic low back pain. Cellular platforms like Rexlemestrocel hold promise as they could significantly bolster MESO's revenue upon successful trial outcomes. However, the regulatory pathway is challenging due to the FDA's rigorous standards for product consistency throughout the clinical and commercial stages, which may impede timely revenue generation. The FDA's request for additional data extends the timeline and escalates the resource requirements, thus delaying approval and revenue accrual. But at the same time, MESO now knows exactly what it needs to satisfy the FDA.
Source: Financial Results and Operational Update for the Year Ended June 30, 2023
Yet, it's imperative to understand MESO's annual cash burn through its cashflows from operations and net CAPEX. As of June 2023, MESO registered a cash burn of $63.6 million ($63.3 million from CFO plus $0.3 million from net CAPEX). Also, over two years, from June 2021 to June 2023, there's been a notable 37% reduction in CFOs, plummeting from $100.7 million to $63.3 million. If we project this rate of decline into the following year, the anticipated cash burn is $51.8 million. Presently, MESO's balance sheet holds cash reserves of $71.3 million. At the current cash burn rate, this suggests a financial runway of 1.38 years, which is concerning in the wake of recent FDA setbacks. Also, an uptick in MESO's revenues in the near term is unlikely, necessitating the company to procure additional funding or amplify its cost-saving measures to extend its cash runway. The former could entail taking on debt or diluting the equity for current shareholders, while the latter might adversely affect MESO's R&D activities.
Valuation Analysis and Challenges
Interestingly, there's a viable pathway for MESO to recover, contingent upon garnering FDA approval. The financial outlook seems somewhat precarious, with a cash runway extending to just 1.28 years. Yet, if financing wasn't a concern, the prospects for FDA approval appear promising, as deduced from their recent feedback. In my opinion, the latest correspondence from the FDA resembles a "soft" rejection, delineating explicit prerequisites MESO needs to satisfy, paving the way for potential approval.
Additionally, MESO's Remestemcel-L potential is accentuated by the high incidence and significant treatment costs associated with steroid-refractory acute graft versus host disease (SR-aGVHD), a prevalent complication post-allogeneic hematopoietic stem cell transplantation (alloHCT). With an annual global tally of over 50,000 alloHCTs and a 30-70% occurrence rate of acute GVHD post-transplant, the market potential for Remestemcel-L is significant. For instance, in the U.S., the treatment expenditure for SR-aGVHD through alloHCT spans a broad spectrum, from approximately $150 thousand to $400 thousand per transplant. This denotes a substantial revenue opportunity for MESO upon securing regulatory approval and initiating the commercialization of Remestemcel-L.
Therefore, MESO is at a crucial point regarding its financing. MESO will likely pursue more financing, mainly through equity, since the current risk-reward analysis makes borrowing less attractive. If MESO fails, repaying loans becomes an impossible task. On the other hand, if successful, the risks are high, while the returns resemble that of debt, making borrowing less appealing. Therefore, opting for equity financing or convertible debt seems to be a more practical choice.
MESO's recent FDA rejection was a blow to its stock price but likely implies it's already priced in. (TradingView)
Overall, MESO's prospects are intrinsically linked to FDA approval. There are no meaningful revenues to do a multiples-based valuation or DCF model. Instead, MESO's value is entirely derived from Remestemcel-L's eventual approval. Without this approval, bankruptcy becomes a tangible threat; on the flip side, approval could usher in notable returns. However, securing such approval necessitates significant investments in either R&D or production infrastructure, likely leading to further equity financing and consequently diluting existing shareholder value. So, for now, a "hold" rating appears reasonable. Although the shares may face short-term volatility, the prospect of new financing over time augments optimism for an eventual FDA nod. This "hold" rating hinges on a long-term conviction regarding MESO's pipeline and is not a short-term view. Still, should MESO secure favorable financing terms, such an announcement could act as a positive catalyst for the shares, at least until a definite FDA approval is announced.
Conclusion
MESO's recent FDA rejection of Remestemcel-L has inevitably cast a shadow on its stock value in the short term. Nevertheless, I infer that MESO is on a constructive path, diligently working to comply with the FDA's recent stipulations to secure approval for Remestemcel-L. This progress, juxtaposed with MESO's robust product pipeline, I believe, sketches a promising outline of a sturdy biotech intellectual property portfolio. Yet, on the financial front, the narrative slightly tilts. The observed decline in revenue, coupled with a shortened cash runway, calls for additional capital infusion. While such a move may initially dilute shareholders, in my view, it's a quintessential step towards clinching FDA approval. Therefore, my "hold" rating on MESO's stock reflects a balanced perspective, intertwining caution arising from immediate financial concerns with long-term optimism anchored in the potential of its flagship products, especially Remestemcel-L, and MESO's unwavering commitment to meet the FDA's set benchmarks. The hurdles on the horizon are palpable, yet the envisioned market for MESO's innovative products, particularly the post-regulatory green light, I think, heralds a hopeful narrative for a positive financial rebound.
For further details see:
Holding The Fort: Mesoblast's Path Towards Overcoming FDA Rejection