Why 1 broker thinks the Mesoblast (ASX:MSB) share price can run higher 

Bell Potter still sees value in the Mesoblast Ltd (ASX: MSB) share price with a speculative buy rating and target price of $5.10. Here's why.

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Well, 2020 was yet another rollercoaster ride for the Mesoblast Limited (ASX: MSB) share price, as good and bad news pushed and pulled on the company's shares. 

A major disappointment for Mesoblast came in December on its remestemcel-L product trial. This is used for ventilator dependent patients with moderate to severe acute respiratory distress syndrome (ARDS) due to COVID-19 infection. 

The Mesoblast share price spiralled 45% lower when the trial was reported to be unlikely to meet the 30-day mortality reduction endpoint at the planned 300 patient enrolment. 

Despite the trial shortcomings, Bell Potter maintained a speculative buy recommendation on Mesoblast shares on 23 December 2020. The broker updated its Mesoblast share price target to reflect the trial, lowering the price target from $7.40 to $5.10. This is more than twice today's price of $2.46, down 5.38% at the time of writing. 

COVID-19 ARDS trial 

Bell Potter believes that remestemcel-L is unlikely to be approved for COVID-19 ARDS treatment on the basis of this trial. The broker thinks that at best, they may get a path forward to identify the correct patient population and clinically meaningful endpoint for a confirmatory trial. 

While Mesoblast has stated that it remains committed to developing remestemcel-L for both COVID-19 ARDS and non-COVID-ARDS, Bell Potter thinks otherwise.

Its report said: "It may be best now for the company and its partner Novartis to focus their efforts on non-COVID-ARDS if they do get any clinically meaningful signals from this trial, as they are likely to have more control over the trial".

Combined with the evolving treatment landscape for COVID-19 with new vaccines, antibodies and other experimental treatments, the broker decided to remove COVID-19 ARDS from its modelling for remestemcel-L. 

Chronic Heart Failure (CHF) trials 

On Monday, Mesoblast announced that it had treated 537 patients with chronic heart failure with its rexlemestrocel-L product. The trial found that one single does provides a substantial and durable reduction in heart attacks, strokes and cardiac death in patients with CHF. Results show that the incident of heart attacks and strokes were reduced by 60 per cent over a follow-up period of 30 months. Based on the observed reduction in morality and morbidity in this trial, Mesoblast intends to meet with the FDA to discuss a potential approval pathway. 

The results coincide with Bell Potter's view that its CHF therapy may not reduce the number of heart failure related hospitalisations but significantly reduces the risk of a patient dying from cardiac causes. The broker observes that Mesoblast's therapy seems to work best when treated at an earlier stage in Class II patients vs. the more severe Class III patients. 

The report believes that path forward is "focusing on Class II CHF patients, with reduction in morality as a primary endpoint". However, it is likely that Mesoblast will be required to do a confirmatory Phase 3 trial focused on class II patients with mortality as a primary endpoint. 

Revised Mesoblast share price target with next catalyst 

Bell Potter's revised model led to a large decrease in NPAT forecasts for FY21 and FY23 and a large increase in net loss forecast for FY22. This was driven by lower revenue due to the removal of COVID-19 ARDS. 

The broker sees the next catalyst for the Mesoblast share price is its results from Phase 3 trial for chronic discogenic lower back pain (CLBP). These results were expected in December 2020.

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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