What’s going on with Mesoblast?

Alan Kohler here with today’s CEO and it’s Silviu Itescu, CEO and Founder of Mesoblast, the stem cell business.  Which has had a huge roller coaster – 2011, it was at $9 a share, but now it’s back to $1.35 or so, which is almost back to where it was when it started back in 2004.  It’s been a bit of a rough ride for shareholders, particularly those who have bought in the last few years because it’s been on a pretty steady decline and in fact, clunked down this month from above $2, down to $1.35 after some phase 2 trial results were announced which seemed to be positive.  Clearly the first question of Silviu is what’s going on, why was that apparently positive phase 2 trial result taken so poorly by the market?  Did the market get it wrong?  

But the other reason to talk to him is because there was a report out the other day from a New York broking firm called Cantor Fitzgerald which has a target price for this company of USD$23, so that’s $30 target price by a couple of analysts with this Cantor Fitzgerald firm in New York – and we’re talking about a company that’s share price is currently $1.35.  More than 20 times is their target price!  What they say in the report is that their target price of USD$23 is derived from the combined risk adjusted NPV of the future cash flows from the Meso stem cell platform.  “Our model attributes a range of probability of success from 35% in rheumatoid arthritis to 100% in steroid refractory acute GVHD” – whatever that is – in Japan, which is approved.

It looks like it’s a very interesting thing.  I tell you what, I think we should put the report, so you can read this report, with the interview with Silviu – which is quite a long interview and I think well worth doing.  I mean, the trouble with all these bio-techs is you’ve got to really understand…  Unless it’s to be just a speculation where you put a little money on as a punt, it’s very difficult to understand the science behind these things, particularly with stem cells.  But Silviu Itescu explains as best he can in the interview and there’s plenty material on their website as well.  Anyway, here’s Silviu Itescu, the CEO and Founder of Mesoblast.

Silviu, the other day a couple of weeks ago, you announced or at least there was announced what seemed to be quite positive results from – I think it’s from a trial.  I’m not au fait with a lot of this stuff but it seemed to be in a trial and it was announced.  It seemed to be positive but the share price fell quite a lot.  Can you explain to us what the market saw in that result that was negative?  

The trial was a phase 2 trial that was funded by the National Institute of Health, and the stated objective of the investigators was whether an injection of ourselves into the native heart of patients who have been given an artificial heart, a left ventricular assist device, because they were so end stage, could potentially allow them to strengthen their native heart muscle.  The way to look at improvement in native heart muscle is several ways.  But one of the ways by which the investigators were wanting to see was whether we could increase the proportion of patients who could tolerate the device being switched off for about 20 minutes and then switching it on again. 

Overall, I think that end point was not significantly met in the whole group, but in half the group it was.  Half the group where we significantly improved the proportion of patients who could be weaned were those who were older, had ischemic heart failure and had permanent use of their devices as a destination therapy.  The younger patients who had these devices put in waiting transplants were much healthier, very robust and very healthy and there was a very high level of spontaneous ability to wean those patients off in the first place.  If 70% or 80% of people are able to tolerate the weaning it’s very hard to be better than that.  But in the older population which accounts for 50% of patients and accounts for the vast majority of patients who today are in our phase 3 trial for chronic heart failure, we showed a significant improvement in the ability to tolerate switching off the device. 

Equally as important or perhaps more important was the fact that we were able to significantly reduce total hospitalisations from bleeding in the cut, which was a unique problem in these patients and it’s the number one cause of recurring hospitalisations in these patients and it’s a complication due to recurrent inflammation that’s setup by the artificial heart being in there adjacent to the native heart.  And so the fact that ourselves are such strong potent anti-inflammatory agents, we think has a major impact on the ability to reduce bleeding in the cut and reduce hospitalisations.  In prior meetings with the FDA, for which we have one of these equivalent breakthrough designations called an RMAT for this product.

The FDA has specifically said to us that if we can show that we can reduce bleeding and hospitalisations in these very sick patients, they think that that’s a clinically meaningful outcome that justifies an early potential approval for product commercialisation.  I think from our point of view that’s a very important big deal.  I think the market needs to take a little bit of time to understand and digest those results.  They’re complex.  It’s a very sick group of patients.  I think the two key takeaways for us are that, a) we have a pathway to an early FDA approval for the heart failure product; and b) the readthrough from these results gives confidence that we’re in a good position in our bigger class 3 heart failure program where the very patients who predominate in that population are the ones who had the greatest response in this tribal zone.  We’re reasonably pleased with the outcomes, I think [over-talk] and Mesoblast are in a good position to move this forward.  

Do you think the market’s just completely got it wrong here?  The share price has gone down from above $2 bucks down to $1.30 or something, so is it just completely wrong?  

Well, it’s not for me to discuss share price for the market.  I would say again I think it’s a complex area and I think it requires a well-coordinated and repeated discussion with investors so the investors understand the valuable outcomes we think we’ve achieved and how this reads through to both early approval, likelihood of success and our existing phase 3, and more importantly, the ability to partner with sophisticated pharmaceutical companies that understand the strength of the data.

I wonder, Silviu, whether the message from this to you is that you have a serious credibility problem with the market.  Because you’ve been plugging away at this for so long now, almost 15 years, do you feel like if they’re not going to believe you on this, they’re not actually giving you the benefit of the doubt on something like this, then maybe you’ve got a credibility problem?  

Obviously, as I said to you, credibility comes with results, so you have to put the runs on the board and then credibility comes with that.  A partnership deal in the short term would obviously provide the kind of credibility that the market’s looking for.  That’s probably more important than interpretation of clinical data.  

It’s been a long time since I’ve spoken to you, I think it’s been years, so perhaps we better just catch up…

Well, it’s actually been about two years and I would say, what have we accomplished in the last two years since we last spoke, Alan…

Yes, let’s talk about that.

Let’s highlight that.  First of all, we’ve completed a successful phase 3 program in a disease called graft versus host disease, which is orphan indication, we’ve completed the phase 3, we’ve met with the FDA and the FDA has said, go ahead and file for approval, which we will do early in Q1, and we’re on the path to having our first FDA approved product in the US.  We’ve said we were going to do that, we are doing that and we were successful in phase 3.  That very same product has been partnered for several years in Japan to our commercial partner, JCR pharma. 

They got approved two and a half years ago or so, launched the product in Japan and here we are two and a half years later, there’s substantial revenues, they’ve achieved approximately 50% adoption rates of the addressable market, and we’re very pleased by what we’re seeing in terms of the revenue and the adoption in Japan because it has a very positive read-through to the way we see the US market.  That lead product is what I would say, the valuable asset that underpins the value of Mesoblast in terms of a market that is a multi-hundred million dollar market in the US alone.  I think that’s point number one. 

Point number two is that we’ve regained full ownership of our cardiovascular assets from Teva Pharmaceuticals, who have their own major problems in terms of disastrous acquisition that’s put them in tremendous debt and they needed to ship non-core assets.  We regained our cardiovascular assets and we’ve put in place a program that has now resulted in what looks like an early approval pathway for the heart failure product, for end-stage heart failure patients and a phase 3 trial of 600 patients.  That is 85% or so, fully enrolled, where we performed an interim analysis after the first 275 patients and we were successful. 

And beyond being successful in the interim analysis we’ve had multiple successful data monitoring committee reviews that resulted in recommendations to continue the trial without any change, which is really a tick by the data monitoring community repeatedly.  That cardiovascular program, which is an incredibly valuable one, which is something that we’ve put in place, navigated strategically and we expect that we will partner this program because heart failure is a big unmet medical need.  There are very few phase 3 assets and I think the data to-date provide the underlying value proposition for a strategic partner that has a strong commercial capability in the heart failure space.

The third program in phase 3 is back pain, and after having completed 100-patient phase 2 trial, we’ve now completed a 400-patient phase 3 trial that’s fully enrolled, completed enrolment in Q1 of 2018.  We’re waiting for it to read out of course, so we’re following patients for pain and functional recovery.  These are very sick patients, up to 50% of whom are chronically taking opioids for their severe pain.  As you know, today there is a major epidemic in the west and particularly in the US where opioid prescriptions are being abused and are resulting in a very high rate of accidental overdosing.  In fact, 50% of all opioid prescriptions are for patients with this very condition, chronic, unremitting, low back pain.

We think if we achieve the kind of results that we saw in phase 2 and see them again in phase 3, that we will have a really exciting product for opioid avoidance for those millions of patients, particularly in the US who suffer with severe recalcitrant back pain, not responsive to other modalities.  Again, this is a real commercial opportunity, we are in discussions with a number of major pharma companies who have a real focus and sales and marketing capabilities in the pain space who we would leverage their commercial capabilities.  This is not an area that we will be able to build out on our own. 

Both the cardiac and the back pain products which are in phase 3 will require partnership and we’re very confident that those partnerships are coming and part of the reason that we’re confident is the fact that we’ve delivered positive clinical outcomes including the recent LVAD results and obviously the more advanced graft versus host data.

What exactly does the product do with the back, can you explain simply what it can do?

Sure.  The core mechanism of action of our cells is that they switch off damaging inflammation and then they help the local tissue repair and rebuild itself.  The back pain, the disc degeneration problem fundamentally is inflammatory destruction of the disc, and so unless you switch off the severe inflammation you have no chance of rebuilding the disc tissue.  A single injection of our cells into the disc space in 100 patients in phase 2 demonstrated substantial and durable reduction in pain and improvement in function for as long as two to three years, from a single injection. 

We know from earlier preclinical studies in sheep and the like that what the cells do is they get activated by inflammation.  They release multiple factors that switch off the damaging inflammation and other factors that stimulate the disc cells to lay down more ground matrix proteoglycans that strengthen the actual disc material.  Together that probably explains the significant long-term reduction in pain and improvement in function there.  As many to 40-50% of patients that have a single injection into the disc have minimal to no pain for as long as two years which is quite astounding.

Sure is.  Explain to us about the Tasly Pharmaceutical Group partnership in China.

Yeah, and that’s probably the other very important signal.  We’ve entered into a cardiovascular partnership on heart failure and heart attacks in China with China’s number one cardiovascular commercial company, Tasly, and that transaction was closed in August.  It was both substantial upfront and an equity investment.  We just met with them again last week at their headquarters, they’ve obviously reviewed all of the data including the most recent LVAD results, and I’m very excited to move forward in fact.  They’ve put in place a steering committee between the two companies that will oversee the manufacturing and clinical and regulatory requirements.  They will be going to the Chinese FDA to seek regulatory clearance to begin the final phase of product approval in China. 

They have a very strong footprint across China in a variety of products for cardiovascular disease, including to my knowledge, the only biological proved and used in the setting of heart attacks which is a clock-busting agent in China that they manufacture and sell.  They’re a terrific partner and we see great prospects in working together through China.  Of course, whatever clinical data and trial results they generate, we will have access and leverage of to support our US and European filings.  And I think the partnership with Tasly is a further validation, really, of our cardiovascular assets.  They’re a first-class company, they understand the space, they’ve fully reviewed all of our data to date and I think are great supporters of where we’re at in the cardiovascular space.

Well in fact, they’ve given you $40 million dollars upfront, haven’t they?

That’s right, and they’ll be spending more on clinical and manufacturing development.

When do you think that will turn into a product in China?

It all depends on what level of evidence the Chinese FDA require and how much they can leverage our phase 3 trial data coming out of the US, to the extent that the US trial is fully able to support their submissions.  The real question is what kind of bridging data do they need in China, how large an additional trial needs to be and how quickly they can recruit?  Those are questions that they will be addressing with the Chinese FDA this coming quarter.  The good news is that they have obviously a major footprint across all the big hospitals and the largest of the hospitals in China have very large numbers of patients that it would fulfil the criteria needed for rapid enrolments.  I think enrolment of trials in China will be much faster in the US and hopefully we can get things done in a relatively short amount of time.  

I wonder if you could just take us through your financials for the September quarter?  I’m just having a bit of trouble understanding – you’ve reported revenue of about $11 million dollars but the cash flow was only $1 million dollars.  What’s the difference?  I’m just trying to understand.

Revenues are a combination of royalties and upfronts and revenue from a number of different areas.  When we do transactions, those transactions include upfront, they include milestones, it’s a number of things.  It’s the aggregate of income, inclusive of the Japan royalties for example.  

I understand, I’m just trying to get a sense of your cash position?

Our cash position reported at the end of Q3 was $95 million, and obviously we continue to be predominantly an R&D organisation, spending money on our phase 3 trials.  Once we enter into a partnership, let’s say either on cardio, core or back pain, any partnership of that ilk will come with a substantial upfront and a substantial reduction in our spend because all clinical development would be partnered, and so you’ll see a very different quarterly burn rate and quarterly accounting.  But at the moment, we have to manage our cash very carefully because we’re still in investment mode, R&D mode.  

Yes, you’re burning about $20 million a quarter, right?

Something like that, that’s right.  As, by the way, any serious phase 3 company tends to do, this is not unusual for phase 3 companies and I think our quarterly cash statements will substantially change with a major transaction obviously.

Yes, of course.  You’ve got that $40 million cash from Tasly, right?

Yes, that’s an example of a regional partnership.  A global partnership would be very different of course, it’d be much larger.

You floated the company in 2004, I think.  Have you got on your mind how much money you’ve actually raised since then?

Yes, of course.  We’ve raised and had income from a variety of sources along the way which has allowed us to get to this point. 

What’s the number?

We’ve probably spent about $500m, something like that, to get to this point, of that order of magnitude.  Which, put it into context, traditionally US pharmas spend now the equivalent of up to USD$2 billion dollars per successful phase 3 drug.  I think if we’ve got three potentially successful phase 3 assets, that’s a relatively efficient use of capital.  Where we think we now need to move is we’ve got the ability to launch GVHD product on our own and we’re building a sales and marketing team internally that can do that.  We now have good news on the end-stage heart failure product that has now got a pathway for an accelerated FDA approval.  That also potentially could be put together with a GVHD asset into a relatively small sales force that could be managed internally.  But I think clearly in terms of the larger heart failure market which is a multi-billion dollar market in the US alone and a large back pain market which is similarly multi-billion dollar, for those two large opportunities we must partner those with appropriate pharma companies, leverage their sales and marketing capabilities because the costs of sales and marketing are large.  Those are not things that we will be able to invest in.  We can certainly manage the small orphan like indications, but I would expect that pharma companies will pick up the commercial piece on some of the larger opportunities.  As a company, that’s what you’ve got to build and invest in order to get successful assets into the market place.

I wonder whether a misfortune for you was in some ways that in July 2011 your share price hit $9 dollars and the market obviously was tremendously excited about Mesoblast, but it was a bit early, it was too early…

Again, I can’t speak to the market dynamics, but just before that price we entered into a tremendous partnership with Cephalon.  Cephalon bought 19.9% of the company and was heavily going to be investing in both phase 3 and commercialisation of heart failure.  I think that’s exactly what the market would respond with a new partner in the exact same space, right.  I think simply stated, a commercial partner not just validates but actually takes on the commercial responsibility of launch sales marketing growth etcetera, precisely where I would say the market wants to see the expertise of a partner brought in. 

I think bringing in a partner in that mould not only reduces our burn rate, but more importantly increases the likelihood of successful sales and revenues going forward.  I would say that you’ll see the same sort of response from the market as soon as we bring in an alternative partner either into cardiovascular or the back pain asset.  I think the issue is, now the technology is clearly demonstrating that it has legs, that it works, that it has the ability to meet phase 3 outcomes and potentially get approvals.  What the market wants to see is that we de-risk the commercial phase.  The commercial phase will be de-risked by partners who leverage their sales and marketing and distribution capabilities.

I was just observing, Silviu, that you’re a leading doctor, you’re a transplant surgeon…

I’m not a transplant surgeon, I’m a physician.

You’re a physician, okay.

I’m an immunologist and…

Right, sorry, I thought you were.  Anyway…

Involved in immunology and transplant medicine, sure, but that was many years ago, we’re talking about 15 years ago.  I am an entrepreneur and I run a bio-tech business for the last 10 years or more, that’s really what I do.

Yeah, of course.  I just wondered whether you’re going to continue as CEO – I think you own 15% of the business – whether you continue to act as CEO or you bring in a commercial person to run it for you?

Obviously, when the product has first product on the market it requires very different kind of skillsets.  The sales and marketing and distribution piece of it is a commercial piece and of course, products on the market require quarter on quarter revenues and growth and ability to bring on end-users, etcetera.  Sure, we will be expanding to a commercial organisation.  The strategy and navigation and partnering is where I lead the company and I think the younger people who are going to be running the revenue part of this is the growth engine of Mesoblast in the future.  In the short-term, we are now building a commercial team and in fact, our Head of Commercial will be here at the AGM this Friday.  He’s a young chap named Eric Strati who has come out of Novartis and Bristol-Myers and has been involved in a number of key products that have been launched in the marketplace and he’ll be leading our launch activities in the US, be building a team around him.  Even more importantly, a recent acquisition to the board is Shawn Tomasello.  Shawn, most recently was Chief Commercial Officer at Kite, a company that was sold to Gilead for I think $10 or $11 billion.  Before that she was Chief Commercial Officer at Pharmacyclics, which was sold to AbbVie for about $21 billion.  Prior to that she led a major franchise at Celgene. 

Shawn will help me oversee the commercial team that’s being built and will rollout this initiative and I think what you’re seeing in the transition of Mesoblast from a product development company to a commercial company, I think you’ll hear a lot more about that in the short-term.

Yes.  Well, it’s great talking to you, Silviu, again.  Thank you so much for your time.  

Thanks, Alan, I appreciate it.   

That was Silviu Itescu, the CEO and Founder of Mesoblast.