MSB 1.99% $1.48 mesoblast limited

Market opportunity aGVHD

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    Hi all

    I wanted to create a thread focused a little more on the market opportunity in front of us, given the FDA phase 3 trial success with both primary end-points met on our pediatric aGVHD trial. With 180 day safety data pending (100 day safety/survival was impressive), there isn't much standing in the way of FDA approval.

    As Mesoblast is currently  cash flow negative (approx US$20m burn each quarter), it has rightfully been a significant drag on the share price and valuation of the company. Funding has been a key issue for as long as I can remember, but it is time to change our focus from funding (funded to at least Sep19, thats at least 15 months) ... as there is a lot of tangible commercial activity to take place in the next few months, ultimately resulting in what could be our first FDA approved product (or two) in calendar year 2019.

    When I say tangible commercial activity, I mean pivotal trial results (180 day safety aGVHD, LVAD phase 2b), which if positive, will lead to BLA filings early 2019 with the FDA and ultimately approved products by end of 2019. I don't know about you, but these pivotal trial results are likely to be the drivers of shareholder wealth in the foreseeable future, and not funding. Funding has had its fair share of air-time, its now time to shift our focus.

    Firstly to fully appreciate the value of the pediatric aGVHD trial to Mesoblast (and ultimately to shareholders), you not only have to look at the market opportunity of pediatric and adult aGVHD... you also need to understand where expenses are heading for Mesoblast.

    Remember before a company becomes profitable/cash-flow positive, it first needs to become cash-flow neutral. So both revenue and expenses need to be analysed to appreciate where we are, and where we are likely to end up.

    Expenses (source: Appendix 4C's)
    Mesoblast current quarterly expense is approx US$20m roughly broken down by:
    R&D: $13m, recruitment & running costs of pediatric aGVHD, CHF and CLBP trials.
    Manufacturing: $1m, mostly for commercial inventory
    Staff costs: $2-3m
    Other costs: $3m
    IP costs: $1m

    Key impacts to expenses in the next 24 months:

    - Decrease in R&D costs for aGVHD trial with pediatric aGVHD trial completed and primary endpoint reached. On-going safety monitoring costs only.
    - Decrease in R&D costs with the CLBP trial completing enrollment at end of Mar18;
    - Decrease in R&D costs with phase 3 CHF stage IV heart failure trial to complete enrollment by end of 2018 calendar year.
    - Increase in manufacturing costs due to inventory required for US/EU/Canada etc launch in 2019;
    - Increase in staff costs for sales force to launch in US (6-12 sales staff);
    - Increase in other costs for marketing/distribution costs for launch in US.
    - Increase in finance costs due to debt facilities.

    While the magnitude of each key impact is not known, these will be items I will be looking out for in future announcements/investor calls to get a sense of the impacts. It is however encouraging that our largest expense item to date, being R&D, is likely to fall.

    Ultimately the size of expenses will dictate how much revenue Mesoblast will need to generate to become cash flow neutral.

    Current revenues (source: Appendix 4C's)

    Current on-going revenues come from Temcell (Japan), which were approx US$0.3-0.4m for a few quarters, before spiking to US$1m+ in the Mar18 quarter (excluding milestone payments). SI has stated a few times recently that the uptake/penetration in Japan is going better than expected, so lets hope revenue continue to grow... every bit counts.

    aGVHD market opportunity

    Each year there are 30,000 bone-marrow transplants, with 20,000 taking place in the US/EU. We already have approval for the EU, US (FDA) should come in 2019.

    20% of bone-marrow transplants are pediatric (20,000 x 0.2 = 4,000) of which 50% contract aGVHD (4,000 x 0.5 = 2,000) and of those 60% contract liver/gastro aGVHD (2,000 x 0.6 = 1,200) which is the most dangerous form that results in death for approx 85% of cases. So that is 1,200 cases of the most dangerous form of pediatric aGVHD each year in US/EU.

    Applying the same assumptions, the adult aGVHD market is for 4,800 in US/EU that contract the most dangerous form of aGVHD.

    Source: 22Feb18 aGVHD phase 3 trial result announcement

    Pediatric annual market opportunity in US/EU at 100% penetration = 1,200 patients x US$300k (Source: Mar18 quarter investor call, Q&A session) = US$360m

    Adult annual market opportunity in US/EU at 100% penetration = 4,800 patients x US$300k (Source: Mar18 quarter investor call, Q&A session) = US$1.44bn

    Of course we can't expect to get full penetration straight away, but it will be possible in the mid/longer term if our treatment becomes the standard of care and possibly becomes a subsidized treatment (hopefully).

    But for now, if we assume expenses stay the same at approx US$20m (with factors existing that will lead to increase and decrease quarterly cash burn) ... Mesoblast need to achieve 25% market penetration in US/EU to break-even/turn a small profit on a quarterly basis.

    That is, 300 pediatric patients a year = US$90m (300 x US$300,000) annually, and US$22.5m quarterly revenue (US$90m x 0.25 = US$22.5m).

    300 patients a year is our first target, or 75 quarterly.

    The Adult market opportunity at 25% penetration is US$360m annually, and US$90m quarterly. IMO label extension partner will be an easy sell once the pediatric product is approved by the FDA. Minimal risk given the very strong and consistent results achieved in across the extended access program (241 pediatric patients) and recent phase 3 trial (55 pediatric patients).

    Hopefully that is enough to kick off some discussion, and before we know it... pediatric aGVHD 180 safety data will be available and Mesoblast will be filing its BLA with fast-track designation... and end of Sep18 we will get the Phase 2b LVAD trial, and if positive we can then start to analyse that market opportunity.

    For reference, here is my cash flow projection as some will be wondering how MSB is funded to at least Sep19:

    Cash flow forecast
    Mar18  = US$59m (US$35m drawndown already, US$31.7m after costs)
    Jun18  (FCST) = US$39m ([email protected] Temcell, -US$20m expenses)
    Sep18  (FCST) = US$68m ([email protected] Temcell, -US$20m expenses, +US$30m drawdown + US$10m share issuance+ US$5.9m TiGenix+ US$3m govt grant)
    Dec18 (FCST) = US$62m ([email protected] Temcell, -US$20m expenses + US$15m drawdown)
    Mar19 (FCST) = US$67m ([email protected] Temcell, -US$20m expenses + US$25m drawdown)
    Jun19 (FCST) = US$57m ([email protected] Temcell, -US$20m expenses + US$10m drawdown)
    Sep19 (FCST) = US$39m ([email protected] Temcell, -US$20m expenses+ US$3m govt grant)
    Dec19 (FCST) = US$19m ([email protected] Temcell, -US$20m expenses)

    Drawdowns take into account US$40m facility with Novaquest and US$75m facility with Hercules.
    Assuming we get a US$3m govt grant (AU govt) which is consistent with prior years.

    Based on the above, we should be funded out to at least Sep19 and possibly out to Dec19 assuming no change in revenues and expenses. However revenues should be much higher by end of 2019, and should easily outstrip expenses growth as it is a high margin product we are selling.
    Last edited by stockrock: 11/07/18
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