Shares of Mesoblast (NASDAQ:MESO) fell as much as 40% today after investors pored over a briefing document for an upcoming advisory committee (AdCom) meeting scheduled to take place on Aug. 13. The meeting will allow independent scientists to weigh in on the marketing application for remestemcel-L in treating pediatric steroid-refractory acute graft-versus-host disease (SR-aGVHD). The U.S. Food and Drug Administration (FDA) will make a decision on the application on Sept. 30.

According to the briefing document, AdCom members are prepared to drill Mesoblast on manufacturing processes for remestemcel-L, which is a mesenchymal stem cell (MSC) therapy. Investors were expecting the FDA to approve the drug candidate at the end of September, a confidence that was bolstered by a successful phase 3 trial and approval in other countries. 

While that approval deadline could remain intact, investors are now considering the possibility that regulators will require Mesoblast to provide more data, thereby delaying market launch beyond 2020. The small-cap stock isn't handling the uncertainty very well, but investors shouldn't necessarily panic just yet.

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What's the big deal?

The pointed questions raised by AdCom members in the briefing document aren't very surprising. On the one hand, MSCs have been heralded for their immunomodulatory effects, meaning they can alter a pro-inflammatory environment into an anti-inflammatory environment to treat disease. That could be valuable in GVHD or COVID-19. On the other hand, the tools needed to accurately characterize MSCs and ensure reproducible results from manufacturing processes aren't very robust in 2020.

Mesoblast has provided data demonstrating that 95% of the MSCs it produces have acceptable physical characteristics, such as specific surface proteins that interact with immune cells. But AdCom members have poked holes in the data provided, arguing the experiments might be insufficient and the results could be viewed as contradictory.

Investors might be tempted to brush aside the concerns since remestemcel-L successfully completed a phase 3 trial in SR-aGVHD, but it's not so simple. Due to the way Mesoblast currently manufactures MSCs, errors can be compounded in larger manufacturing lots and make the product less effective as production is scaled up. In other words, it's easier to manufacture on-spec doses of remestemcel-L for a smaller number of patients (say, for 10 patients) than for larger trials or commercial products (say, for hundreds of patients).

What should investors do now?

Of all of the upcoming catalysts for Mesoblast, the marketing application for SR-aGVHD was probably viewed as the surest. The AdCom briefing document throws a wrench into that assumption. 

That said, there are no approved treatments for pediatric SR-aGVHD, and Mesoblast is working on modernizing its manufacturing processes. The FDA will take the AdCom recommendation into consideration for the Sept. 30 decision, but regulators don't have to follow it (and the AdCom vote could still favor approval). To be blunt, off-spec MSCs are unlikely to trigger safety concerns; they just wouldn't be very effective as a therapeutic. That could provide the FDA an argument to approve the drug candidate with some strings attached, thereby avoiding a delay in market launch while still requiring the company to shore up its manufacturing processes.

For now, investors simply have to wait for the AdCom vote on Aug. 13, but MSC characterization and manufacturing concerns could certainly impact Mesoblast's other goals for remestemcel-L, such as in COVID-19 or heart injuries. 

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