Mesoblast’s GvHD Therapy Could Be Pivotal

This story features MESOBLAST LIMITED. For more info SHARE ANALYSIS: MSB

-Significant therapeutic data
-US$250m in sales pa touted
-Other brokers more measured
 

By Eva Brocklehurst

Mesoblast ((MSB)) will launch a stem cell therapy for acute graft-versus-host disease (GvHD) in 2016. Baillieu Holst believes clinical success in the upcoming trials, and subsequent US Food & Drug Administration approval, have potential to usher in a boom in regenerative medicine as US investors realise the early scientific promise of stem cells is translating into clinical and commercial reality. This development has now transcended the ethical issues associated with embryonic stem cells.

The GvHD therapy is significant as acute cases kill. The condition involves immune cells generated by a bone marrow transplant attacking the recipient's own tissues and organs. It is commonly associated with bone marrow transplants, as a patient's marrow is destroyed by chemotherapy or radiation therapy in an effort to treat leukaemia and lymphoma. The marrow is then replaced by previously harvested stem cells from a donor and the genetic mismatch causes GvHD.

Mesoblast acquired the business for mesenchymal stem cells from US biotech, Osiris Therapeutics, in late 2013 and this therapy – MSC-100-IV – is a development from that acquisition. The therapy has been promising in phase II data for adults with GvHD that are at high risk of death because of liver or gut complications. The company is now preparing for a 60-patient open-label phase III paediatric trial. A product launch is expected in 2017.

Baillieu Holst believes the positive data so far have opened up a large market opportunity and the path to market is straight forward. The FDA only requires one phase II and one pivotal trial before approving a stem cell therapy, so Mesoblast may only need to wait a relatively short time before its technology yields commercial revenue. Mesoblast's partner, JCR Pharmaceuticals, filed for Japanese approval for MSC-100-IV in October and the broker expects approval to be granted next year in Japan. The US FDA has requested two phase III studies, one is covered by the paediatric trial and the other is a confirmatory adult study in patients with liver and gut complications. Mesoblast expects to have the paediatric data in 2016 and will launch product in Canada and New Zealand on the back of this, as conditional marketing approval has already been granted.

Mesoblast expects the therapy could enjoy peak year sales of US$250m per annum and Baillieu Holst regards this figure as easily reached. It will put the key project in the orphan drug area, as so far no product has come close to generating the kind of survival benefit shown by MSC-100-IV. Baillieu Holst values the stock with a target of $9.50.

The question often asked of the broker is why the stock has been in a downtrend for three years, with its all-time closing high of $9.99 recorded back in 2011. Baillieu Holst believes this is a reflection of market scepticism in the US regarding the commercial prospects of regenerative medicine ahead of any meaningful phase III data. The broker compares the scepticism to that in the mid 1990s with development of a drug that became Rituxan. Monoclonal antibody developers were similarly treated with contempt by the market until this drug was approved in 199. Given this assumption, and that Mesoblast is yet to falter clinically, the broker believes the stock is undervalued.

The company is the world's number one stem cell business. Late in 2010 a partnering deal with Cephalon, a US pharma company, transformed Mesoblast. Cephalon was subsequently acquired by Teva, and that company's continued involvement is a positive, in the broker's opinion. Mesoblast has now moved to a phase III trial in heart failure on the back of strong phase II data. The trial, which will be conducted by Teva, is eagerly awaited. Substantial news flow is expected from Mesoblast next year, featuring progress in various phase III trials, phase II results and potential for further partnering deals.

Baillieu Holst's Buy rating contrasts with Macquarie's Underperform. Macquarie recently commented on the data subsets which were re-released from the trial examining the use of Mesoblast's stem cells in intervertebral disc repair. On one measure of pain relief the trial reached statistical significance but was negative on the anatomical improvement measure. Macquarie's target is $3.50. FNArena's database also has two Hold ratings for the stock – Credit Suisse and Deutsche Bank. The former already incorporates earnings from the Japanese launch in its estimates while Deutsche Bank suspects, given key trial results are not due until FY16, that Mesoblast may need to raise funds before then. The consensus target on the database is $4.55, suggesting 7.3% upside to the last share price.
 

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