Mesoblast — COVID-19 ARDS Phase III readout later this year

COVID-19 has ravaged the globe, with more than 10.5 million people having been afflicted by the disease (mostly in just the last six months) and around 510,000 deaths, including almost 130,000 deaths in the US alone (out of 2.7 million cases). While 81% of patients have mild disease, which sometimes may be no more serious that a common cold, 14% have a severe form and 5% become critically ill with organ failure.1 Patients with COVID-19 who progress to ARDS are at an especially high risk of death. COVID-19 patients with ARDS have mortality rates that range between 26% and 62% for patients admitted into critical care at any point, and between 65.7% and 94% in patients who received mechanical ventilation.2 Even without an underlying COVID-19 infection, ARDS has 40% mortality3 with approximately 120,000 patients admitted to US hospitals every year.4

In April, Mesoblast reported data from a compassionate use trial in 12 patients with moderate/severe ARDS due to COVID-19 who were treated with two intravenous infusions of remestemcel-L. Nine of the 12 (75%) came off ventilator support and were discharged from hospital, which compares positively with the 9% who were extubated at other New York hospitals.5 The rationale for remestemcel-L efficacy is that through its anti-inflammatory effects it reduces the cytokine storm that causes ARDS.

Additional support for the use of remestemcel-L in respiratory disease comes from a post-hoc analysis of a trial of remestemcel-L in chronic obstructive pulmonary disease (COPD), data for which was presented at the 2020 International Society for Cell and Gene Therapy (ISCT) annual meeting in late May. The Phase II study was a randomized controlled trial of 60 COPD patients dosed with four monthly doses of remestemcel-L. There were statistically significant improvements in forced expiratory volume, forced vital capacity and six-minute walk test distance (all p<0.01). The effect was greatest in patients with the highest level of inflammation as measured by C-reactive protein (CRP). Patients with CRP of greater than 4mg/L were able to walk 55m further than placebo patients in the six-minute walk test (p=0.004). COPD is a different disease than COVID-19 and a different dosing regimen was applied but these data (and the basis that the greatest degree of response was seen in those with the highest CRP levels) may provide a signal that remestemcel-L may show some efficacy in treating COVID-19 patients with ARDS.

Following the compassionate use trial results, Mesoblast initiated a 300-patient randomized, controlled US Phase III trial of remestemcel-L (Ryoncil for the aGvHD indication) in COVID-19 patients with moderate/severe ARDS who are on ventilator support. The primary endpoint is all-cause mortality up to 30 days post randomization. The first patient was dosed in early May and recruitment is expected to complete in three to four months. However, there are three interim analyses (after 30%, 45% and 60% enrolment) where the trial can be stopped early for efficacy or futility. Based on this, we expect a readout some time in H220, closer to the end of the year if the trial is not halted at an interim analysis.

With regard to the market opportunity in COVID-19-related ARDS, if we assume a similar-sized second wave and 5% of patients being eligible for remestemcel-L therapy, the total addressable market in the US could be around 90,000 COVID-19 related ARDS patients with an additional 74,000 in the EU and UK. However, it is unclear how many case numbers will develop in future as subsequent waves may decrease or increase in size (similar to the 1918 influenza pandemic). Additionally, it is not known how the product will be priced, but we currently assume a US launch price for Ryoncil (which is the same product) in aGvHD of US$285,000 per course. Ryoncil’s dosing regimen is infusions twice a week for four weeks, while remestemcel-L in ARDS dosing is just two infusions. Based on this, pricing for ARDS could be one quarter of the Ryoncil pricing, or US$71,250. These pricing and patient assumptions indicate that the addressable market could be worth US$6.4bn in the US and US$5.3bn in the EU and UK in ARDS related to COVID-19. However, it is important to note that actual pricing may be higher or lower than our estimate and the company has provided no indication of what the pricing may be. It is always possible that the product will have a different brand than Ryoncil so its pricing may have little to nothing to do with Ryoncil pricing and will instead be based on the pharmacoeconomic benefit seen in this specific market (which can be considerable given the years or decades that could be added to someone’s life if the drug proves efficacious in those who might otherwise succumb to the disease). That said, we are not yet including remestemcel-L in COVID-19 related ARDS in our model as the market is still developing, with patient numbers in future years and the competitive landscape largely unknown (including from vaccines that may have a major impact on the market, if successfully developed).

Additionally, Mesoblast has indicated that it expects to pursue other segments of the ARDS market, especially those related to viral or bacterial infection. Data suggest that 44.9%6 of ARDS patients have pneumonia, so this could be a meaningful market with over 50,000 patients (out of approximately 120,000 in total) in the US. Using the above pricing, this could be a US$3.6bn market in the US and one that does not necessarily depend on the progression of a specific pathogen. Outside the US, studies indicate that the non-COVID-19 ARDS incidence rates in the EU countries are lower and vary across regions. US incidence rates are approximately 36 cases per 100,000 population, while EU incidence rates range from 3.0 in Germany7 to 7.2 in Spain.8

Outside of COVID-19 and ARDS, Mesoblast is awaiting an FDA decision on the biologic license application (BLA) for Ryoncil for steroid-refractory aGvHD. The BLA was accepted for priority review and the PDUFA date is 30 September 2020. If approved, the company expects to launch the product in Q4 of CY20. For Revascor, a readout on the DREAM HF-1 Phase III trial in 566 advanced HF patients is expected in mid-CY20. The primary endpoint is a reduction in recurrent heart failure-related major adverse cardiac events such as heart failure-related hospitalization and cardiac death. The MPC-06-ID Phase III trial is also on track to provide data by the middle of this year. It enrolled 404 patients with chronic lower back pain due to degenerative disc disease and had a composite primary endpoint that included measures of pain and disability/function at 12 and 24 months.

We have adjusted our valuation from A$4.2bn or A$7.89 per share (A$7.51 per diluted share) to A$4.6bn or A$7.89 per share (A$7.53 per diluted share). The total valuation increased mainly due to rolling forward our NPV and higher net cash following a US$90m offering in May, which was partially offset by increased expected manufacturing expenses. On a per-share basis the increase in total valuation was offset by a higher number of shares outstanding.

Mesoblast reported revenues of US$12.2m for Q320 (the period ending 31 March 2020), US$2.1m of which was related to royalties on Temcell sales in Japan (up 99% year-on-year), and US$10.0m milestone revenue recognized in relation to its partnership with Tasly in China. For the first nine months of FY20, total revenues were US$31.5m (up 113% compared to the same period in the prior financial year), due to US$15m in upfront and milestone payments that were part of the Grϋnenthal licensing agreement for MPC-06-ID, and the US$10m milestone with Tasly. The operating cash burn rate was US$36.8m for the first nine months of FY20. We have increased our FY21 estimate for revenues by US$2.4m, mainly as we have been impressed with the momentum of the Temcell royalties. We have also increased our FY20 estimates for manufacturing and commercialization expenses by US$10m and our SG&A estimate by US$3.1m due to higher run rates than we had modelled.

For the period ending 31 March 2020, Mesoblast reported cash and equivalents of US$60.1m, with US$87.0m in debt. Subsequent to the quarter, the company raised US$90m (A$138m) in gross proceeds in an equity offering at A$3.20 per share for 43m shares; net proceeds were US$85.1m. We calculate pro forma net cash at A$88.5m (calculated as cash at the end of the quarter plus the net proceeds of the offering, less the debt). We had previously forecast US$50m in financing requirements for FY21, but have now removed that as this raise satisfies that requirement. Based on current forecasts, we do not believe Mesoblast needs to raise additional capital.