Mesoblast Crashed on Poor DSMB Report Leaving CytoDyn as Sole Survivor in COVID-19 Therapeutics

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  • Mesoblast trial stopped
  • Poor clinical trial design
  • Sector rotation back in to therapeutics
  • Science triumphs over big pharma

Only Mesoblast (NASDAQ:MESO) and CytoDyn Inc. (OTCMKS: CYDY) had mortality as a primary endpoint in severe to critical COVID-19.  CytoDyn stands as the sole survivor and will greatly benefit from the expected dip in MESO stock price because CYDY has the only therapeutic that completed a phase 3 with their primary endpoint intact and did so without increasing the trial size. Their FDA approval in COVID-19 is expected early next year and they are very close to an EUA from the Philippines, the United Kingdom, and the United States.  

Trial Stoppage

Mesoblast reported after the bell that the randomized controlled trial of remestemcel-L in ventilator-dependent patients with moderate to severe acute respiratory distress syndrome (ARDS) due to COVID-19 was analyzed by the DSMB.  The DSMB performed a third and final interim analysis per protocol on the trials first 180 patients which represents 60% of the 300 patients to be enrolled. The DSMB reported

“there were no safety concerns and noted that the trial is not likely to meet the 30-day mortality reduction endpoint at the planned 300 patient enrolment. The DSMB recommended that the trial complete with the currently enrolled 223 patients, and that all be followed-up as planned.”

This means that Mesoblast will be stopping the trial at 223 patients and will evaluate the secondary endpoint for the number of participants alive and off mechanical ventilator support at day 60.  It will also gather the data for the other secondary endpoints such as days in intensive care, duration of hospitalization, circulating cytokines and inflammatory markers.  The DSMB doesn’t believe that remestemcel-L will achieve its primary endpoint of a 43% reduction in mortality at day 30.  

Failure Linked to Poor Trial Design

This trial failure is a big disappointment for Mesoblast shareholders who were encouraged by the initial anecdotal compassionate use trials from 12 patients.  There was an 83% survival rate in ventilator dependent COVID-19 patients with moderate to severe ARDS which contrasted to a 9% survival at a nearby hospital. The median time to come off the ventilator was 10 days for 75% (9/12) of the patients.  The study was done in April when they were doing everything in their power to flatten the curve because the death rate was so high.  There were no approved therapeutics being used during this period.    

This whole clinical trial was simply an experiment based on an idea that anti-inflammatories could calm the cytokine storm and that the mechanism of action was “similar” to Graft versus Host Disease (GvHD).  They never went into detail talking about which inflammatory markers were affected and their impact on the inflammatory cycle.  They point out the role of the M2 macrophage in the cytokine storm that’s it.  Their scientific publications supporting their approach were 10 – 15 years old.  In addition it’s clear they expected the FDA was desperate for therapies, and would grant them an Emergency Use Authorization (EUA) with a small data set. Throwing stem cells at a problem and hoping it’s going to stick was not a good use of shareholder funds.     

Corporate Presentation

Mesoblast’s overall conceptual approach to treatment is just flawed.  Think of the virus as a digger and the stem cell as fillers on the bronchial highways.  Their concept is to heal faster than the virus can damage the tissue.  This concept was tested in World War 1 in the Battle of the Somme where they tried to overwhelm the enemy with such a large force that they ran out of bullets resulting in a gain of territory.  The poor trial design is likely a product of not thoroughly thinking through the theory of how stem cells work.  Stem cells repair tissue and part of the healing process and yes they lower inflammation but it’s through the healing process.  

A 30 day reduction in mortality is the most difficult endpoint to go after but if its reached approval is almost surely to follow.  They should have gone after a more select group of patients and picked much easier endpoints.  Their achilles heel in the trial design was making the assumption that the standard of care (SOC) wouldn’t improve over time.  In their press release they said:

“During the course of the trial, as the pandemic has evolved, numerous changes in the treatment regimens for COVID-19 patients occurred, including both prior to and while on mechanical ventilation that may have an effect on the mortality endpoint in the trial.”

To get a statistically significant reduction in mortality unfortunately requires a lot of deaths in the placebo arm.  As more therapeutics and treatment protocols became optimized the mortality rate in COVID started dropping and this made it much harder to achieve statistical significance on mortality.     

Salvage Mode

The main question on investors’ minds is now what? Ahead of the conference call here are some potential paths forward.  They could scrap the trial or have a do over using a better clinical trial design but that is going to take time and money.  There is a big push to find a drug that treats “long haulers” disease and pulmonary fibrosis.  This is probably the only face saving option for a blundered clinical trial.  The press release said:

“Mesoblast and Novartis will both analyse these results to identify meaningful clinical outcomes that may guide decisions on the development program for remestemcel-L in non-COVID ARDS.”

Since Novartis closed a licence and collaboration agreement with Mesoblast on November 20, 2020 there’s a chance that Novartis could bow out.  This is something that should be explored in the upcoming conference call.  In the interim the stock is pretty much dead for about a month as the patients finish the trial.  

Resetting Valuations

Before the runup in COVID-19, MESO was trading between $5 – $6/share.  It could easily see a reset to that level.  That would equate to about a $1.0 billion loss in market cap.  The Complete Response Letter that came on October 2, 2020 and shook the stock quickly recovered on COVID-19 trial optimism. The FDA recommended one more randomized controlled study in adults/children to provide additional evidence of effectiveness. This means that the company will need to raise money and that will put further pressure on the stock.  Without an aggressive plan on COVID-19 today the stock price could very well reset into the $3.00 to $5.00 area because steroid-refractory acute Graft versus Host Disease (SR-aGvHD) is not a large market.  The company estimates the total available market is 30,000 patients worldwide and a reaction happens 50% of the patients.

There should also be a corresponding reset higher in the price of CytoDyn since they are the beneficiary of being the first to market and have outlasted all their competition.  They even have 3 shots on goal in this upcoming trial readout.  Their primary endpoint is 28 day mortality, their revised secondary endpoint is 42 day survival, and change in clinical status on a 7 point ordinal scale.  Meeting just one of these endpoints is a layup for approval but it’s likely that they will meet all of them. As the only drug with a mortality benefit, they are almost guaranteed to be the new SOC.  This will dramatically impact Gilead Sciences (NASDAQ: GILD) and their sales of remdesivir. CytoDyn might also get a label expansion in moderate COVID-19 and long haulers.  They have a clinical trial for long haulers that could be started imminently.  All these factors combined equate to a doubling of market cap and a doubling of price.  This news could drive the stock to $10.00 in the short run.     

Sector Rotation Out of Vaccines and Into Therapeutics  

The airwaves are flooded with vaccine news as the government tries to educate people through the media and convince people to take the vaccine.  Vaccines have merit but the question of safety still lingers.  Recent headlines of anaphylaxis after a routine shot give investors pause.  Those lingering questions are cooling off the price appreciation by 10 – 20% of the vaccine stocks like Pfizer (NYSE: PFE), BioNTech (NASDAQ: BNTX), and Moderna (NASDAQ: MRNA).  Investors are realizing that vaccines don’t stop the spread of the disease so therapeutics are still a must.  

A vaccinated person can still spread the disease, but it is not known to what extent and that unknown is driving money back into therapeutics.  Other than masks there is no way to lower the contagion, but there are some promising oral treatments incubating by some private companies. Molunupiravir is an oral antiviral that suppresses viral transmission within 24 hours. An animal study showed the proof of concept, but it is currently in phase 2 human trials sponsored by Ridgeback Pharmaceuticals. In a pilot study an oral galectin inhibitor called Prolectin-M showed an elimination of the virus in as little as 3 days while stopping the contagion.  An interesting concept developed out of this study is post infection immunization. The IgG levels in treated patients was high, affording them long term immunity.  

Big money is chasing other promising therapeutics as well.  Ampio Pharmaceuticals (NASDAQ: AMPE) is a repurposed arthritis drug that is a powerful anti-inflammatory biologic. The safety profile is impeccable and allows them to do multiple trials in COVID-19 using intravenous and a nebulizer for direct administration into the lungs. They are conducting multiple phase 2 studies and are looking at other collaborations to build out their platform technology.  Humanigen (NASDAQ: HGEN) seems to be catching a bid as investors see a major readout for their Phase 3 trial  in Q1 2021.  Revive Therapeutics (OTCMKTS: RVVTF) has a psychedelic drug that could be used as a treatment for COVID-19. They are in phase 3 and got some attention with a recent article in Forbes.            

Superior Science Winning the Day

The disease pathogenesis of COVID-19 is well known now.  There is a viral phase, an inflammatory phase, a hyperinflammatory phase, and then long haulers.  The FDA basically kicked Regneron (NASDAQ: REGN) and Eli Lilly (NYSE: LLY) out of the severe to critical clinical trials because neutralizing antibodies need to be given early and are unlikely to make any impact in late stage disease.  In the end, science won out because their drugs were approved in the mild to moderate category.  There has been a very tepid response by clinicians to these drugs because they aren’t easy to administer in a time of pandemic. MESO also fits in this category because they had no business being in the hyperinflammatory stage of the disease when their class of drug is more appropriate for the fibrotic and long hauler stage of the disease.  

The cytokine storm is not made up of just the IL-6 cytokine, so if it gets blocked it might not do much.  Roche Holdings (OTCMKTS: RBBHY) and Sanofi (NYSE: SNY) had a clinical trial funded by OWS only to find out that their IL-6 inhibitor Actemra failed.  There was a paucity of science supporting their theory which is why it ultimately failed. The cytokine storm is made from a number of inflammatory cytokines.  CYDY found out that Rantes (CCL5) was upregulated in the hyperinflammatory state of COVID-19 when patients are in severe to critical conditions.  CytoDyn’s drug leronlimab, blocks the signalling of the macrophage to the site of infection and stops turning the macrophages that are there into the bad guys called inflammatory macrophages. This quiets the whole inflammatory cycle down and returns homeostasis to all patients in 3 days.  

Investment Summary

The prognosis for MESO is not very good.  They have an inferior drug being used at the wrong stage of disease pathogenesis.  They bombed the trial design and gambled to get a big indication and lost.  Investors only hope is a quick COVID-19 trial but that is throwing good money after bad.  If CYDY gets approval they have a GvHD indication and the new standard of care for COVID-19.  This makes MESO irrelevant.  CYDY has a much brighter future because it is a platform technology with strong indications in COVID-19, longhaulers, cancer, NASH, stoke, and HIV.  The best way for MESO shareholders to make their money back is to buy the best stock – CYDY.

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