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Why the Mesoblast (ASX:MSB) share price is going nuts

The Mesoblast Limited (ASX: MSB) share price is going nuts this morning after announcing a deal with Novartis (SWX: NOVN).

What is the agreement?

Mesoblast has entered into an exclusive worldwide license and collaboration agreement with Novartis for the development, manufacture and commercialisation of remestemcel-L, Mesoblast’s mesenchymal stromal cell product, with an initial focus on the development of the treatment of acute respiratory distress syndrome (ARDS), including that associated with COVID-19.

Mesoblast said that the demonstrated ability of Novartis to rapidly move from clinical to commercial scale with cell-based therapies will play a role in the success of forwarding remestemcel-L, as will the nearly two decades of experience Novartis has in delivering products that address areas of unmet respiratory need.

Dr Silviu Itescu, Mesoblast’s CEO, said: “Our collaboration with Novartis will help ensure that remestemcel-L could become available to the many patients suffering from ARDS, the principal cause of mortality in COVID-19 infection. This agreement is in line with our corporate strategy to collaborate and partner with world-leading major pharma companies in order to maximize market access for our innovative cellular medicines.”

What are some of the key terms?

Novartis will make an initial US$50 million upfront payment including US$25 million in equity.

From the initiation of the phase 3 trial in all-cause ARDS, Novartis will fully fund global clinical development for all-cause ARDS and potentially other respiratory indications.

Mesoblast may receive a total of US$505 million, pending the achievement of pre-commercialisation milestones for ARDS indications.

The company may receive additional payments after commercialisation of up to US$750 million based on achieving certain sales milestones and tiered double-digit royalties on product sales.

Mesoblast will retain full rights and economics for remestemcel-L for graft versus host disease (GVHD), and Novartis has an option to (if exercised) become the commercial distributor outside of Japan.

For most non-respiratory indications, the parties may co-fund development and commercialisation on a 50:50 profit-share basis.

Mesoblast will be responsible for clinical and commercial manufacturing and Novartis will purchase commercial product under agreed pricing terms. Novartis will reimburse Mesoblast up to US$50 million on the achievement of certain milestones.

Mesoblast result

The healthcare business also announced its FY21 first quarter result.

For the three months to 30 September 2020, it saw US$1.3 million of revenue and a net loss of US$24 million.

Summary thoughts

Mesoblast’s share price is up around 13% in response to this news. A partnership with a huge pharmaceutical company is a good sign, it seemingly shows that Novartis believes in the potential of the product.

Mesoblast may be a little bit lower risk now that Novartis is on board and could be headed upwards again. But R&D healthcare companies like Mesoblast with binary outcomes normally isn’t the type of business I like to make. I’d prefer other ASX growth shares like Pushpay Holdings Ltd (ASX: PPH).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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