Mesoblast (MESO) received some unexpected bad news on September 30 when the FDA issued a Complete Response Letter to the company that denied the immediate approval for their allogeneic mesenchymal stem cell (MSC) product called Remestemcel-L for Pediatric Steroid Refractory Graft vs. Host Disease (SR-aGvHD). What made the decision unexpected, at least by market participants, was that only a month and a half earlier, the Oncologic Drugs Advisory Committee of the FDA voted 9-1 to recommend the approval of Remestemcel-L. The roller coaster ride actually began two days prior to that meeting when a briefing document was released by the FDA that was decidedly negative. However, the 9-1 vote recommending approval by the advisory panel seemed to eliminate those concerns.

The following chart illustrates the incredible volatility experienced by MESO shares from this chain of events from mid August to the beginning of October, all related to the FDA approval process of Remestemcel-L for Pediatric Steroid Refractory Graft vs. Host Disease:

There were several issues discussed in the FDA briefing documents. This excerpt from the "Topics of Discussion" section lays it all out (relevant words embolden by author). The "Applicant", of course, is Mesoblast.

The purpose of the morning session of this Advisory Committee meeting is to discuss the product attributes of remestemcel-L and their relation to product quality and effectiveness. The Applicant has defined critical quality attributes (CQAs) for remestemcel-L that are proposed to be related to the potency and activity of the product (see Section 5.1 Critical Quality Attributes in the Applicant's briefing document). FDA's position is that the product attributes the Applicant has identified as related to potency and activity, however, do not have a demonstrated relationship to the clinical performance of specific DP [drug product] lots, and that the product's proposed immunomodulatory mechanism of action has not been demonstrated in vivo in study subjects receiving remestemcel-L. Without a demonstrated relationship with clinical effectiveness and/or in vivo potency/activity, controlling these CQAs may not be sufficient to ensure the manufacturing process consistently produces remestemcel-L lots of acceptable quality. We ask the committee to consider the product attributes identified by the Applicant as CQAs and discuss whether they are adequate to ensure that the manufacturing process will continue to produce lots of consistent quality. Additionally, given the limitations of the current CQAs, we ask that the committee discuss other product characteristics not previously identified as CQAs for remestemcel-L that might provide more meaningful measures of product quality and potency and therefore provide better assurance of product quality from lot-to-lot.

Mesoblast did not release an actual copy of the Complete Response Letter but did state in a press release that the FDA had recommended that Mesoblast "conduct at least one additional randomized, controlled study in adults and/or children to provide further evidence of the effectiveness of remestemcel-L for SR-aGVHD".

The proposed mechanism of action for this indication as well as most other indications being pursued by adult stem cell companies is the modulation of an overactive immune system that can cause damage to a patient. I won't be delving into this as I have already done so in many previous stem cell related articles. This article will focus the important issue of stem cell manufacturing scalability of the Mesoblast platform and a cutting edge alternative that does it much better.

During April and May 2020, when we were well into the first wave of the coronavirus pandemic, a number of stem cell companies made headlines when they initiated both compassionate use programs and randomized, placebo-controlled clinical trials designed to administer their stem cell therapies to COVID-19 patients suffering from Acute Respiratory Distress Syndrome (ARDS). On May 7, I covered five of these companies in an article called, "5 Stem Cell Companies Racing Towards COVID-19 ARDS Therapy." Mesoblast and Cynata Therapeutics were two of the five companies along with Athersys (ATHX), Pluristem (PSTI), and Capricor (CAPR). While Mesoblast has seemingly executed better than most stem cell companies over the past year, my major concern about the company has always been the limited scalability of its MSC product that I always felt put their platform at a disadvantage, especially in large indications like ARDS. The limited scalability issue is why Mesoblast was not considered for my very well read article, The Stem Cell Triple Play: 3 Companies With Great Value Drivers. This is an excerpt from that article that focused on Athersys, Cynata, and Avita Therapeutics (OTC:RCEL):

To be considered as part of my Stem Cell Triple Play, any allogeneic therapy company must have a highly scalable manufacturing platform, and the two allogeneic companies in my Triple Play have met this test. Scalability does not apply to an autologous stem cell therapy, which, by definition, involves obtaining cells directly from the patient being treated.

To gain FDA approval, Mesoblast has much work to. The basic question that needs to be asked, can the scalability limitations of their MSC cells and manufacturing process be overcome from a regulatory standpoint? How can Mesoblast demonstrate that Patient A is getting the same MSC stem cell therapy as Patient Z when their manufacturing process will require many different bone marrow donors as a result of the inherent natural limitation of MSCs, that lose viability after a limited number of population doublings? The FDA expressed its concern on this issue directly in this excerpt from one for the briefing documents:

As stated above, FDA's position is that the analytical methods used for product characterization of remestemcel-L do not have a demonstrated relationship with clinical outcomes. We ask the committee to consider the product attributes identified by the Applicant as CQAs and discuss whether they are adequate to ensure that the manufacturing process will produce lots of consistent quality. Additionally, given the limitations of the current CQAs, and the state of knowledge in the field of MSC, we ask that the committee discuss other product characteristics not previously identified as CQAs for remestemcel-L that might provide more meaningful measures of product quality and potency.

In the Mesoblast briefing document, Mesoblast revealed that it only obtains about 500 doses per bone marrow donation:

Source: Mesoblast FDA Briefing Document

This inherently limited scalability in MSC manufacturing is a problem that a tiny, Australian-based company, called Cynata Therapeutics (OTC:CYYNF) has an answer to.

First things first regarding shares of Cynata Therapeutics. Cynata shares trade on the Australian Stock Exchange under the symbol CYP. When trading through Fidelity in the U.S. as an example, the ticker symbol CYP:AU is used to trade directly on the Australian Stock Exchange. The CYYNF ticker symbol trades on the U.S. OTC market and has too little liquidity to consider at this time.

Cynata Therapeutics has a market capitalization of about $81,000,000. Mesoblast, on the other hand, even after its recent decline related to the FDA decision on SR-aGvHD, still has a market cap of about $1,430,000,000, about 18 times that of Cynata. Mesoblast has a deep and more mature clinical pipeline and is developing more than one cell type as shown below:

Source: Mesoblast

Cynata's pipeline is less robust and at an earlier stage but it is based solely upon its highly scalable, cutting edge Cymerus Platform:

Source: Cynata Therapeutic

So, a question that needs to be considered is what is more important to a long-term investor, a deep pipeline with a cell therapy product that has inherent limitations on scalability or a next generation MSC platform, still in the early stages of development?

Cymerus was developed at one of the leading stem cell research institutions in the world, the University of Wisconsin-Madison and is exclusively licensed to Cynata. Cynata is one of 7 stem cell related companies that have licensed technologies developed under the Wisconsin Alumni Research Foundation program.

This excerpt from the Frequently Asked Questions section of company's website discusses the origins of the company:

Cynata Incorporated (a California registered company) was formed in October 2011 by two of the inventors of the Cymerus technology (Professor Igor Slukvin and Dr Maksym (Maxim) Vodyanik), in collaboration with Australian technology entrepreneur, Dr Ian Dixon.

Ian had been searching for an answer to a problem he had identified- namely how MSCs could be consistently manufactured in ultra-large-scale. When he became aware of the relevance of the discoveries at the University of Wisconsin - Madison (UWM), he contacted Professor Slukvin. It became clear that they had a common interest in commercialising the technology, so they decided to establish Cynata, with the specific objective of developing therapeutic products using the Cymerus technology.

In November 2013, Cynata Incorporated was acquired by an ASX-listed company called EcoQuest Limited. EcoQuest subsequently changed its name to Cynata Therapeutics Limited. The company is now headquartered in Melbourne, Australia, but the majority of its operations continue to be undertaken in the USA. The Cynata founders - Professor Slukvin, Dr Vodyanik and Dr Dixon - all still hold shares in the Company and Professor Slukvin remains closely involved with the company's product development activities.

The Cymerus platform would not exist without the 2007 breakthrough discovery of induced pluripotent stem cells (iPSCs). iPSCs have become a widely used alternative to embryonic stem cells (ESCs). ESCs have always been extremely controversial because their creation involves the destruction of a human embryo.

The starting material in the Cymerus process are healthy adult human cells that are reprogrammed into iPSCs. Like ESCs, iPSCs are able to be differentiated into any other cell type in the body. However, in the Cymerus process, iPSCs are NOT directly differentiated into MSCs but into interim precursor cells called mesenchymoangioblasts (MCAs). Like ESCs, these cells have the capacity to be cultured indefinitely without losing viability. MCAs were first identified by Professor Slukvin and are a class of early clonal mesoendodermal precursor cells, meaning that they are the common precursor for both MSCs and endothelial cells. The Cymerus process involves expanding MCAs as needed (there is no issue with cell degradation) and differentiating unlimited MCAs into an unlimited supply of identical MSCs. Cynata claims it can manufacture all of the MSCs that it will ever need from a single Master Cell Bank of iPSCs - derived from a single donor, in just one blood donation.

Source: Cynata Therapeutics

Like any other stem cell or drug platform, the road to approval is long. However, earlier this year, Cynata released 2-year data on its Phase I Steroid Resistant Acute GvHD that demonstrated safety and promising signs of efficacy:


Overall survival after two years was 60% (9/15 patients), which compares favourably to previously published outcomes in this patient population No treatment-related serious adverse events or safety concerns were identified Cynata working with licensee FUJIFILM towards the planned Phase 2 GvHD clinical trial

The Phase 1 clinical trial enrolled 15 patients with steroid-resistant acute GvHD. The primary evaluation at Day 100 revealed highly promising safety and efficacy results, as announced on 18 December 2018. By Day 100, the Complete Response and Overall Response rates were 53% and 87% respectively, and overall survival was at least 87%.

Participants who completed the Primary Evaluation Period then continued to a follow-up period for up to two years after the initial dose, which has now been completed.

The overall survival rate after two years was 60% (9/15 patients), which compares favourably with previously published outcomes. An overall survival rate of just 17% after two years has been reported in patients with steroid-resistant acute GvHD who received standard of care treatment. 1 Furthermore, a recently published review article summarised numerous studies with bone marrow and adipose tissue derived MSCs in patients with steroid-resistant acute GvHD. Six of the studies reviewed reported two year survival in MSC-treated patients, which ranged from 16.6% to 40%. 2 Similarly, in another recently published Phase 3 trial of an investigational drug (ruxolitinib) in patients with steroid-resistant acute GvHD, overall survival after 12 months was 38%, while there were insufficient surviving patients remaining on study to calculate the survival rate at later timepoints. 3 The results of Cynata's trial illustrate the significant potential of CYP-001 as a new treatment option for GvHD.

Source: Cynata Press Release 7/30/20.

Mesoblast is certainly aware of Cynata's superior Cymerus MSC production platform that would have addressed many of the issues the FDA found with Remestemcel-L. Achieving only about 500 doses per bone marrow donor is not the kind of manufacturing scale most investors have in mind when they think about an off the shelf allogeneic stem cell therapy. The FDA concerns about the Mesoblast manufacturing process is a reality check to Mesoblast, especially after the FDA advisory committee voted 9-1 recommending approval. Mesoblast will face the same issue with the rest of its Remestemcel-L pipeline. Some may logically ask, shouldn't Mesoblast partner or buyout Cynata Therapeutics? The answer is not that obvious.

Given the disparity in market caps, it would not take much for Mesoblast to acquire Cynata at a significant premium and obtain the rights to Cymerus. However, although both companies manufacture MSCs, Mesoblast can't just ask the FDA with regard to its recent Complete Response Letter from the FDA "Well, what if we manufacture our commercial Remestemcel-L using the Cymerus manufacturing platform so that we can eliminate batch to batch variations?" doesn't work that way.

A Cymerus MSC is not the same as a Remestemcel-L MSC. They are distinct biologic products with their own genetic code and unique set of biomarkers. Mesoblast would need to start all over again, beginning with the pre-clinical and clinical data that Cynata has accumulated during its existence. How would Mesoblast explain this to investors?

The bottom line here is that Cynata Therapeutics has a patented MSC technology that is unique among the publicly-traded stem cell companies. In comparison to Mesoblast, its shares are dirt cheap and should be a prime acquisition target or partnering candidate for larger biotech companies. Cynata has already partnered with FujiFilm in Japan for GvHD and I would expect further partnering opportunities. However, it is unknown whether Mesoblast and Cynata have had any discussions. Immunology is a hot field right now in biotechnology and immunomodulation is the primary mechanism of action of MSCs. This goal of partnering was highlighted in the companies June 2020 Annual Report:

Our Cymerus platform technology has multiple potential clinical applications, and it is our view that the most effective way to generate shareholder value across these applications is to access the capital, expertise and resources of large pharmaceutical and biotech companies. As such, we continue to advance our vigorous partner outreach program and progress discussions with potential partners toward transactions that are sound and drive meaningful shareholder value. In parallel, Cynata continues to progress its broad preclinical and clinical pipeline, providing further data to drive potential strategic partnerships.

Cynata has A$13,650,000 in cash on hand as at June 30, 2020, after raising raise about $A8,300,000 in April 2020 to support clinical development. It has been successful in funding clinical trials with non-dilutive funding, such as a 440 patient Phase 3 clinical trial of CYP-004 for osteoarthritis that is being funded by a grant from the Australian Government. Cynata has a very modest cash burn and a small payroll with a limited number of employees as compared to other companies in the stem cell market. Based on the fiscal year ended June 2020, and excluding the up front revenues from the FujiFilm GvHD agreement, cash burn from operations for the last 12 months totaled about A$7,600,000 or $1,900,000 per quarter. This is equal to about 7 quarters of cash at the current burn rate.

I view Cynata as a very interesting company with a potentially valuable proprietary technology that must be proven with Phase III clinical trials. However, potential investors should understand that it is an early-stage company without a stable revenue stream at this phase of its development. Although its cash burn is small, it will likely need additional financial resources to get to the point of internally funding its operating costs before it can begin to reach success in late-stage clinical trials. These cash needs could be met with up front cash and funding from partnerships or licensing agreements in many potential inflammatory diseases across multiple geographies. Without these outside non-dilutive funding sources, the less desirable alternative will be capital raises and shareholder dilution. Dilution is always a risk when investing in biotech microcaps. As I mentioned in the article, the CYYNF ticker symbol has virtually no liquidity and should be avoided. Furthermore, a direct investment in Australian shares must be executed in Australian dollars and U.S. investors bear the risk/reward of currency movements against the U.S. dollar.

If you like this article, consider signing up for my Premium Service - Stem Cell News and Analysis for a first heads up on ideas like this and direct access.

Disclosure: I am/we are long CYYNF, ATHX, RCEL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As I mentioned in my article I do not own CYYNF but do own CYP shares directly on the Australian Stock Exchange.

These are the personal views of Wall Street Titan Research and should not be relied upon for your investment decisions. All investors should always do their own due diligence.

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Mesoblast Needs A Solution To MSC Scalability Issues - Cynata Therapeutics Has An Answer - Seeking Alpha

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