2023-05-04 16:22:41 ET
Summary
- Among lower US-listed biotech stocks on the back of the US banking turmoil, Australia-based regenerative medicine product developer Mesoblast Limited offers upside opportunities to be seized.
- MESO is targeting the growing cardiovascular disease market and unmet steroid-resistant graft-versus-host disease pediatric (younger than 13 years) patients’ market in the United States.
- The portfolio is performing well and contains some positive catalysts, including the next US FDA decision on MESO's treatment for US pediatric patients with steroid-resistant acute graft-versus-host disease [SR-aGVHD].
This analysis supports a Buy rating on Mesoblast Limited ( MESO ).
The Biotech Sector Has Been Hit Hard by the US Regional Banking Crisis but Offers Investment Opportunities
The collapse of three US regional banks did not blow a hole in the first world economy's financial system, but it was enough to fuel skepticism about the possibility of a recovery while fueling risk aversion for US-listed equities.
Relative to the entire market, the US-listed biotech stock sector was highly vulnerable to severe banking turmoil, which began on March 10, when the first collapse occurred involving Silicon Valley Bank.
However, the shock suffered by the SPDR® S&P 500 Trust ETF (SPY), used here as the performance benchmark of the entire US stock market, was much smaller than in the biotech sector, as can be seen in the chart below. For the biotech sectors, the chart includes the trends of the iShares Biotechnology ETF ( IBB ) and the SPDR® S&P Biotech ETF ( XBI ) over the past year.
The biotech's market value has lost its argument against the banking turmoil, falling significantly from peaks in mid-August 2022 or early February 2023. It also means that there is now an interesting opportunity to take advantage of lower stock prices ahead of a possible sharp recovery.
Mesoblast Limited's Treatment Portfolio Has Good Prospects
Investors may want to take advantage of this opportunity by investing in shares in Melbourne, Australia-based regenerative medicine product developer Mesoblast Limited as the holding has some positive catalysts that currently appear to be attractively valued by the market.
Price Development on the NASDAQ Stock Exchange
Shares of Mesoblast Limited are still trading around the long-term trend of the 200-day simple moving average of $3.17, the 100-day simple moving average of $3.27, and the 50-day simple moving average line of $3.25.
MESO has a stock price of around $3.31 as of this writing giving it a market cap of $418.7 million which has been fluctuating between a lower limit of $2.14 per share and a higher limit of $4.35 per share over the past 52 weeks. This interval has a middle point of $3.245.
The chart below shows that MESO's 14-day relative strength indicator stands at 53.17, suggesting that the overbought or oversold levels are not yet approaching, but suggesting that the shares are in a new uptrend mode with significant upside potential down the road.
The Financial Aspect of the Company’s Operations
MESO generates revenue from royalties on sales of Temcell HS Inj, a mesenchymal stem cell product used to treat acute graft-versus-host disease [aGVHD] in Japanese children and adult patients.
The treatment is being marketed in Japan by MESO's licensee, JCR Pharmaceuticals Co., Ltd. ( JCRRF ) and revenue for the most recent quarter of 2022 was $1.9 million, resulting in annualized revenue of $7.6 million.
The company is not yet posting net earnings as revenues are still significantly impacted by operating expenses of $7.7 million for R&D, of $7.9 million for manufacturing, of $6.4 million for management & administration, and $6.2 million for financing costs. These were the toughest operating expenses for the income statement in 2022.
Including the income tax benefit, Mesoblast Limited suffered a loss of $24.5 million in 2022 compared to a loss of $25.9 million in 2021.
The company is burning cash as operations used net cash of $16.5 million for the second quarter of fiscal 2023 (the company states in the presentation ), versus $18.1 million for the second quarter of fiscal 2022 and versus $30.6 million in the second quarter of fiscal 2021.
The Treatment Pipeline Under Development by Mesoblast Limited
In terms of R&D costs, MESO was billed for the following preparations:
MESO was required to resubmit a Biologics License Application [BLA] for Remestemcel-L, a stem cell drug that is seeking approval for the treatment of pediatric patients with Graft-versus-Host-Disease [GvHD] and who do not respond to corticosteroids.
This is because back in October 2020, the U.S. Food and Drug Administration Agency, through a full response letter, recommended Mesoblast to support the efficacy of remestemcel-L in SR-aGVH patients 12 years of age or younger with at least one other study in children or adult patients.
The US FDA made the recommendation despite its Oncology Drugs Advisory Committee issuing a very favorable opinion on Remestemcel-L in pediatric patients with SR-aGVH, with a resolution that had 9 members in favor of the candidate and only one against the product.
The company says the U.S. Food and Drug Administration Agency should make a decision not later than August 2, but the watchdog believes the resubmission is a very comprehensive response to its request to address specific issues.
“Over the last two years we have worked tirelessly to address the issues previously raised by FDA. We look forward to working closely with the Agency over the review period with the aim to make remestemcel-L available as a therapy for children suffering from SR-aGVHD,” said the Chief Executive of Mesoblast, Silviu Itescu.
The drug is a preparation based on mesenchymal stem cells obtained from the bone marrow of healthy young adult donors. To make the drug, the stem cells are separated from the bone marrow and grown in culture, so one donation is enough to make many doses.
Graft versus host disease [GvHD] is a reaction against the patient by donor cells. This adverse event can occur in children to be transplanted for the treatment of thalassemia, but it can also occur in many other transplants.
The side effects can damage the skin, liver and digestive tract. Doctors usually use steroids or other drugs to suppress immune attacks, but these do not always work and the patient dies. Remestemcel-L is based on stem cells and needs to be approved for use in children who unfortunately do not respond to steroids.
On page 11 of its presentation, MESO says there is only one approved treatment for steroid-resistant graft-versus-host disease [SR-aGVHD] in the US, but none for US children 12 years or younger. Also in Japan, MESO is the only one approved for the treatment of SR-aGVHD children and adult patients.
MESO Remestemcel-L has excellent potential and following possible positive feedback from the US regulator on the BLA, the stock price could potentially get a strong boost for higher market valuations.
MESO's resubmission of the BLA was based on new treatment efficacy data and other insights into the clinical aspects of the product being studied in pediatric patients with SR-aGVHD.
The BLA resubmission now includes an analysis comparing the results of the Phase III study of MESO to treatment data from the Mount Sinai Acute GvHD International Consortium [MAGIC] database.
Twenty-five children were treated with MESO Remestemcel-L compared to 27 control group children from MAGIC who received other biologics, including ruxolitinib.
Ruxolitinib is marketed in the US by Incyte Corporation ( INCY ) under the brand name Jakafi as it is a first-in-class JAK1/JAK2 inhibitor treatment approved for a variety of diseases, including SR-aGVH, in adult and pediatric patients aged 12 years or older.
Novartis AG ( NVS ) markets ruxolitinib under the brand name Jakavi abroad.
In the first quarter of 2023, Jakafi saw product sales increase 7% year over year to nearly $580 million, driven by strong patient demand and an increased number of graft-versus-host disease patients. Looking ahead to 2023, Incyte expects Jakafi to generate net sales of $2.55 billion to $2.63 billion.
Jakavi is among Novartis' top 20-selling products, and in the first quarter of 2023, Jakavi reported sales up 13% year-on-year to $414 million, reflecting strong demand from myelofibrosis and polycythemia patients in emerging markets, Europe and Japan.
Additional Efficacy Results of Remestemcel-L for Pediatric Patients with SR-aGVH
A further analysis states that 67% of the high-risk children responded positively to MESO's Remestemcel treatment within 28 days and 64% of them were still alive after 180 days.
Source: MESO's "Operational Highlights and Financial Results for the Quarter Ended December 31, 2022" pdf
While only 10% of the high-risk children from the MAGIC group responded positively to ruxolitinib and other biologics, both in terms of 28 overall responses and survival rate at day 180.
The BLA resubmission also includes the Center for International Blood and Marrow Transplant Research [CIBMTR] study that evaluated MESO's Remestemcel-L in 51 children with SR-aGVHD who participated in MESO's Phase III trial.
The results of the 4-year survival study provided some evidence of the durability of the benefits conferred by treatment with MESO over the first 180 days. MESO's Remestemcel-L achieved a 63% survival rate in the first year, which decreased to 51% in the second year in SR-aGVHD children, 88% of whom had disease progression between grades C and D.
The D grade indicates an advanced stage of the disease, while the C grade means severe liver damage or other life-threatening situations.
Source: MESO's "Operational Highlights and Financial Results for the Quarter Ended December 31, 2022" pdf
While the best available or ruxolitinib-based therapies had lower survival rates of 40% to 49% at year 1 and lower survival rates of 25% to 38% at year 2.
MESO Also Targets Chronic Heart Failure and Chronic Back Pain
MESO is also trying to develop this type of treatment for chronic heart failure and chronic back pain due to degenerative disc disease. In this regard, Rexlemestrocel-L, an experimental human bone marrow-derived allogeneic mesenchymal precursor cell product, is in Phase III clinical trials.
The FDA granted MESO's Rexlemestrocel-L with “Regenerative Medicine Advanced Therapy (RMAT)” designation for the treatment of chronic low back pain [CLBP] associated with disc degeneration .
Among several benefits, the RMAT designation accelerates the development of the treatment, which has the potential to address the unmet medical need for CLBP disease.
Data from the completed randomized controlled Phase III study in 404 patients showed that a single injection of Rexlemestrocel-L in combination with hyaluronic acid [HA] into the lumbar spine resulted in significant pain relief compared to saline control at different times across all subjects, according to Mesoblast Limited through GLOBE NEWSWIRE.
“We are pleased to receive RMAT designation for our cellular therapy to treat CLBP due to disc degeneration” said Silviu Itescu.
He added: “We look forward to working closely with FDA to efficiently generate the additional data needed to support marketing approval of Rexlemestrocel-L for the treatment of this serious and debilitating condition.”
Between June and August 2023, MESO plans to initiate a pivotal Phase III study to further evaluate the safety and efficacy of the treatment and the occurrence of common side effects before submitting a regulatory application to the FDA.
With regard to the “ reduced ejection fraction heart failure ” or HFrEF condition, the authors of this article, published by JAMA on November 24, 2020, defined the condition as follows:
“HFrEF occurs when the left ventricular ejection fraction [LVEF] is 40% or less and is accompanied by progressive left ventricular dilatation and adverse cardiac remodeling. Assessment for heart failure begins with obtaining a medical history and physical examination.”.
Ejection fraction is a test that measures how the patient's heart is working because it can identify the percentage of blood that leaves the heart each time the organ squeezes. The heart squeeze is called a contraction.
Recently published results from the Phase III DREAM-HF study in 537 patients with chronic heart failure [CHF] due to reduced ejection fraction [HFrEF] showed that MESO's Rexlemestrocel-L enhanced cardiac function at 12 months. Improvement was measured by the following outcomes over a median follow-up of 30 months: Left ventricular ejection fraction [LVEF] improved in all patients. There were fewer cardiovascular deaths or myocardial infarctions or strokes among CHF patients. In addition, the most encouraging results have been reported regarding the benefit of treating patients with inflammation.
In addition, Rexlemestrocel-L can reverse inflammatory endothelial dysfunction, as shown by study results ranging from Class II/III (mild to marked impairment of normal activities due to symptoms such as shortness of breath and/or angina pectoris) to end-stage of HFrEF.
Although not obstructive in the sense that the coronary artery is not blocked, endothelial dysfunction is a coronary artery disease characterized by the narrowing of large blood vessels on the surface of the heart. Women are more prone than men to this condition, which causes chronic chest pain.
Therefore, under the RMAT designation, which will accelerate the development of the product, Mesoblast plans to meet with US regulators before the end of this semester to discuss the potential approval path.
The Risk
Mesoblast Limited has 147.32 million shares outstanding, while 130.7 million shares represent the free float, which is the volume of shares that can be freely traded on the NASDAQ stock exchange.
Owning MESO shares involves the risk that one or more projects will fail, which may adversely affect the market value of these shares. The company certainly cannot afford setbacks in developing treatments as the financial resources cannot last more than a few years as the company is now burning money instead of generating money.
The company has $67.6 million in cash and up to $40 million in undrawn lines of credit to advance the pipeline. Aside from difficulties from the subsequent tightening of credit conditions due to the recent regional banking crisis, raising additional financing could become very costly due to higher financing costs because of inflation. The company might issue new equity, but these types of corporate financing transactions result in shareholder dilution, which might not have a positive impact on the stock price.
However, the projects appear to be on the right track, and based on the results of late-stage studies, which look very encouraging, they now have the potential to become therapies for targeted diseases.
The mesenchymal stem cell product, which is targeting children with steroid-resistant acute graft-versus-host disease [SR-aGVHD] in the US, has good prospects as no treatment has been approved to date for 12 years or younger patients.
While Rexlemestrocel-L, an experimental human bone marrow-derived allogeneic mesenchymal progenitor cell product, is targeting the growing cardiovascular disease market.
Cardiovascular disease is the main cause of death among US citizens. Chronic heart failure [CHF] is a disease that tends to get worse over time and is characterized by a very high mortality rate of 50% after 5 years of illness, rising to 75% after the first hospitalization, according to MESO presentation.
Conclusion
Mesoblast Limited is an Australian biotech developer of regenerative medicine products targeting the growing cardiovascular disease market and unmet steroid-resistant graft-versus-host disease pediatric patients’ market in the United States.
The portfolio is performing well and contains some positive catalysts, while the stock does not look expensive given the prospects for the treatments in the pipeline.
For further details see:
Mesoblast Has A Strong Upside Potential