Australia | Sep 29 2011
– Mesoblast has announced a new heart attack trial
– Manufacturing alliance also announced
– Both announcements are positives according to Bell Potter
– Significant upside potential in Mesoblast at current levels
– Bell Potter retains a Buy rating
By Chris Shaw
Back in August Bell Potter wrote glowingly of the prospects of stem cell technology group Mesoblast ((MSB)), suggesting the Mesenchymal Precursor Cell (MPC) technology being developed had significant potential (see: Mesoblast's Upside Significant, FNArena, 25/8/11).
Since then there has only been good news from Mesoblast, as Bell Potter notes a new trial to test whether MPCs can repair heart muscle damage post a heart attack was announced earlier this month. The 225 patient Phase II trial will test whether using MPCs soon after an attack can lower the subsequent incidence of heart failure. Pre-clinical data appear encouraging.
Assuming the trial is successful, the potential market is very large notes Bell Potter, as in the US alone there are around 700,000 heart attacks annually and a similar number of heart failures. Estimates suggest around one-third of heart attack patients move onto heart failure, so the test will see if MPCs may be able to reduce this number.
As well, Mesoblast has this week announced a global manufacturing alliance with Lonza, a Swiss contract manufacturer of biological products. The deal will see Lonza become the supplier of stem cells to Mesoblast, with the company also eventually setting up a purpose-built stem cell manufacturing facility Mesoblast will have the option to buy.
In Bell Potter's view, the deal should give the market greater confidence Mesoblast will successfully scale up to a commercial level of stem cell manufacturing. The fact Mesoblast will have control of this manufacturing process is a potential source of massive upside notes Bell Potter, as it is conservatively valued as being equal to a 20-30% royalty on the licensee's average selling price.
The agreement with Lonza follows on from the partnering deal Mesoblast struck late last year with US pharmaceutical company Cephalon. The Cephalon deal saw that company take a 19.99% stake in Mesoblast, as well as partnering in the development of heart failure, heart attack and bone marrow transplant applications of MPC technology. Cephalon will also provide funding for programs related to Alzheimer's and Parkinson's disease.
Not only was the Cephalon deal the first instance of an established pharma company committing resources to stem cell development, it also de-risked Mesoblast by providing funding for development programs. Cephalon has since been acquired by Teva but this is a positive in the view of Bell Potter as Teva has a history of generating growth through branded innovator drugs.
In total Mesoblast is currently either conducting or moving towards Phase II and III trials in eight different applications, most of them related to cardiovascular and orthopaedic issues. Results to date have generally been positive and Bell Potter expects other potential applications for MPCs will emerge.
One advantage for Mesoblast is the path to market for MPCs is fast, as the FDA in the US requires only one Phase II and one pivotal trial before approving a stem cell therapy. This suggests it may be only a relatively short time before Mesoblast begins to yield commercial revenues.
As further successful trial data emerge Bell Potter sees scope for Mesoblast to be a candidate for merger and acquisition activity, as Big Pharma is likely to be attracted to the long-dated patent protection Mesoblast enjoys. Any acquisition would also give the buyer first mover advantage, as Mesoblast is ahead of the pack in terms of trials of its MPC technology.
All of this implies value for Mesoblast shares, as Bell Potter's analysis has generated a base case valuation for the stock of $11.14 and a more optimistic valuation of $21.59. Price target has been set around the middle of this range at $16.00 and a Buy rating retained. In Bell Potter's view, Mesoblast is undervalued on the potential heart application for MPCs alone.
Shares in Mesoblast have traded inside a range of $2.29 to $9.95 over the past year.
None of the eight brokers making up the FNArena database offer coverage of Mesoblast despite a market capitalisation for the company of a little more than $2 billion.
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