Theres always a way forward: Crunchtime for Mesoblast as legal threats loom – Sydney Morning Herald

You dont just suddenly throw up your hands and say there is no way forward. There is always a way forward, he told The Sydney Morning Herald and The Age.

Last October, investors filed a class action lawsuit in the United States District Courts New York Southern District against Mesoblast, Itescu and the companys chief financial officer, Josh Munter.

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They alleged the company had made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the companys business, operations, and prospects, which led to US investors suffering significant losses and damages.

The concerns centre on the argument Mesoblast should have been more transparent about the possibility that the US regulator would demand more detail before Ryoncil could be approved.

Lawsuits may emerge in Australia, too: director of corporate litigator Phi Finney McDonald, Tim Finney, said his firm is likely to proceed with a case on behalf of investors to recover losses for what we allege were Mesoblasts aggressive and misleading statements to the market regarding the likelihood that it would be able to commercialise its drug.

New York Southern District Court documents show Mesoblasts legal counsel lodged applications on June 14 to defend the company against the US suit, and are expected to apply to dismiss the case.

Mesoblast has told investors it will vigorously defend the legal action, with Itescu maintaining that the company has been extremely transparent about the firms interactions with the regulator.

This is not a short-term space, he said. Its not a short-term investment for rapid returns.

While the delayed drug approval has caused conflict, everyone seems to agree on one thing: Mesoblasts experience with the US regulator last year was indeed highly unusual.

After 16 years, more than $800 million in capital raised since 2011 and cumulative losses of $US548 million, Mesoblast was close to US commercialisation. An independent committee that advises the regulator voted 9 to 1 in favour of approving Ryoncil for use in children with acute graft-versus-host disease, an immune response that can occur after bone marrow transplants.

The Food and Drug Administration does not have to take expert advice for treatment approvals, but it usually does. Which made it such a surprise when Mesoblasts application was not passed in October and the company was forced to tell investors the regulator had asked for more information before it would give approval for the treatment.

The FDA did something that is very unusual, which is go against a panel that recommended approval. That is something that just about never happens, said Max Jacobs, an analyst at US firm Edison Group.

No short-term investment for rapid returns: Mesoblast founder and CEO Silviu Itescu.Credit:Josh Robenstone

Investors were floored. On the day the news came out, the stock price plunged more than 35 per cent, which prompted the legal action by shareholders stung by the slump.

The FDA had two concerns. It wanted to see another randomised trial where one group got the drug and the other received a placebo or standard care - Mesoblasts phase 3 trial was single-arm only, with all children receiving the drug. The company was asked to conduct at least one additional trial in adults or children. The regulator also wanted more proof that the company could make the product consistently and at scale.

In response, Mesoblast scheduled an appeals meeting with the FDA and argued for accelerated approval. When asked why the company didnt set up an additional trial immediately, Itescu said the business had a moral obligation to get the treatment green-lit for seriously ill children for which there were no other options.

We have an ethical and moral obligation to bring this product to children, he said.

While investors were digesting the regulatory roadblock, Mesoblast revealed a big corporate win.

In November, the firm said it had secured a deal with Swiss pharma giant Novartis, which included $50 million in upfront cash and investment to jointly commercialise the same product Ryoncil is based on to treat COVID-19 patients in severe respiratory distress. Mesoblast said there were potential milestone payments of $US750 million in the long term on offer.

But seven months on from the announced coup, which boosted Mesoblasts shares by 30 per cent in the weeks after it was revealed, the agreement has yet to be formalised.

Mesoblast had been undertaking a phase 3 study of its COVID treatment, but stopped enrolling patients when it looked like it was going to miss its primary goal. The company has since said it is combing through the data with Novartis as there were signs the product does have an effect on under 65-year-olds on ventilators.

Asked whether Novartis had any scope to alter the terms of the agreement, Itescu vehemently denies it will end up falling through or being altered.

Weve got a contractual arrangement that Novartis had signed, he said.

The delay has put focus once again on Mesoblasts balance sheet, however.

The company generates revenue from milestone payments for its research and for licensing of Ryoncil into Japan, where stem cell treatments are more widely used. But its financial results routinely warn investors that the business has been historically unprofitable and needs to keep raising capital to keep going.

In February, Mesoblasts half-year reports and accounts spooked some when an auditors note from PwC noted that further cash inflows will be required to meet forecast expenditure and to comply with minimum unrestricted cash balance requirements as required under its loan agreements over the next twelve months and that there was a material uncertainty about the company continuing as a going concern if funds were not raised.

Mesoblast entered a trading halt and a few days later confirmed it had found a surprise new investor, US orthopedic medical centre operator SurgCenter Development, which injected $US110 million into the company.

According to Mesoblasts most recent quarterly report, the company now has $US158 million cash on hand and enough money to fund the next 12 months of operations.

Itescu insists that the business is in a better cash position than it has been previously in the same quarter in 2020, for example, it had just $US60 million cash.

You dont just suddenly throw up your hands and say there is no way forward. There is always a way forward.

Even so, the company has net debt of $US56 million, with loan repayments coming due this year. Analysts have forecast it will have to find additional capital if other partnerships or product launches dont come to fruition.

Itescu insists this is not the end of the road, even if products take more than 12 months from here to come to market: I dont see the runway [cash] as being any sort of a short-term issue.

Mesoblast has become a cult favourite stock over the decades and punters end up in fiery debates in share forums and social media about the biotechs prospects.

It is one of the most shorted stocks on the local bourse, at 6.7 per cent, and the company regularly pops up in the Reddit forums WallStreetBets and ASXBets as investors discuss its underlying fundamentals.

They literally have treatments that will save more peoples lives, but nothing is happening with the price. I guess nothing will until the FDA approves something, one investor suggested on Reddit earlier this month.

The company has larger backers in for the long haul, too. Itescus long time friend, billionaire Alex Waislitz, holds a 4.7 per cent stake through his Thorney Investments group, according to Bloomberg data.

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Waislitz declined to be interviewed for this story, but said he remained supportive of the business.

Many analysts are also taking an optimistic view despite the long road of troubles ahead: consensus estimates have both the ASX-listed shares and US authorised depositary interests rated as buys, even though some of these are labelled speculative.

Back in March, Edison analyst Max Jacobs predicted the business would have to come up with another $US75 million by 2023 to keep funding its operations. Despite this, he says the data flowing through from other research programs, including a cardiovascular disease treatment, is actually quite good.

On the question of whether the firm could see its first product approved this year, however, Itescu says he cant say for sure.

Its better for me to be appropriately prudent, he says.

I think its too early for me to say. The next step is let us have a meeting with the FDA review team.

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Theres always a way forward: Crunchtime for Mesoblast as legal threats loom - Sydney Morning Herald