2) MSB is still burning cash - albeit at a reduced rate - so it remains volatile and speculative and easy to manipulate
3) over-exposed short position which they are trying to control by selling whenever buying dries up in absence of news flow
4) index inclusion looking more likely to be delayed until next year after recent price falls (affecting ASX200 index) and lower volume of trading in US (affecting Nasdaq Biotech index)
Size of short position still rising
Now that the Tasly shares have been included in the net short % calculation, it appears that the net short has dropped on the latest numbers for Tuesday October 16th to 5.79% (28.804m shares/497.366m) - but that is the same sized position as the previous Friday October 12th when the net short was 5.97% (28.809 shares were shorted but the total was 482.640m).
That has probably increased a bit on Thursday and Friday last week with a combined gross short of 740,000 on those two days.
These are the highest net short positions in the past three years in terms of number of shares shorted, and only around 8% below the biggest $ value of shorts in April/May 2017 when the share price spiked over $3.
The shorts are stuck with an excessively large position in front of potentially market moving announcements on Nov 11 and they have very little hope of covering this quickly without pushing the share price dramatically higher. So it looks like a game of chicken - they are firing off even more selling in short but effective bursts whenever the buying dries up in the absence of news flow. They may be able to scare nervous holders into selling and thus cover some of the short ahead of the heart conference - it's a risky strategy, but is working at present.
Manipulations around ASX200 index inclusion
I think that the shorts have a very strong interest in keeping the price down between now and the next ASX200 Index change in mid-December. On my calculations there are 5 or 6 stocks which were vying to enter the index and a group of around 5 with a high chance of leaving the index in the December rebalance - depending on what happens to their share prices between now and then.
MSB was my second most likely stock to enter - particularly when the price was above $2.10 and looked like going higher into the Nov 11 announcement. However, that is now in doubt, and unless the Nov 11th announcement provokes a very strong rise, and we may have to wait until March next year for the 6-month average price and market capitalisation to be high enough for index inclusion.
The relative liquidity of MSB has been strong enough for it to enter the ASX200 index - partially as a result of a lot of activity by the shorts - so they are kind of cruelling their position if they trade too much. That's one of the reasons they just try to snipe off small amounts of stock when they are pushing the price down - though obviously the main reason is that they don't want to significantly increase their exposure at present as it is close to a record high in terms of number of shares shorted.
It's important to note that it's not a bad thing to be patient waiting for index inclusion - we don't want to just scrape in to the bottom of the ASX200 and then drop out the following quarter.
The ASX200 market capitalisation criterion for stock inclusion is based upon the daily average market capitalisation of a security over the last six months. The stock price history (last six months), latest available shares on issue and the Investable Weight Factor (IWF) are the relevant variables for the calculation. The IWF is a variable that is primarily used to determine the available float of a security for ASX listed securities.
Shares of Directors, major business partners, private equity investors etc are not included - so I assume SI's holding, other directors, Tasly and Novaquest are discounted out of the ASX200 index calculations.
Of course, a really big price rise between now and December could increase the 6-month market cap enough to get MSB in the index (also depending on what happens to other stocks), but the current price performance is making it difficult. This round looks like going to the shorts, but we'll be back in March 2019.
Considerations around Nasdaq Biotech Index inclusion
The market cap is fine - just has to be over $US200m, which MSB easily makes. However, it needs to trade an average of 100,000 ADRs per day to get in the index and, while that was looking possible after several strong volume days post 19 Sep (and hitting as much as 400,000 at the start of October), it has dropped right back again to under 50,000 per day for the past 2 weeks and is still running at only 84,000 per day average for the past 3 months.
The easiest way to get volume higher on the NASDAQ would be to change the ADR ratio from 5:1 to 4:1. Then exactly the same $ value of daily trades would be 104,000 ADRs per day (rather than 83,800 at a 5:1 ratio)!
The other way to increase the NASDAQ volumes would be for US investors to become aware of the technology and push the $US price higher, which may entice some Aussie holders to deliver their stock to the US ADR bank (JP Morgan) to take advantage of the ensuing higher price in the US market. That was part of the original incentive to list on NASDAQ - it was just a bit too early in MSB's lifecycle. That may all change after the heart conference on Nov 11th and there could be a rush of US liquidity - however it will probably be too late to get the liquidity up enough for the Dec 2018 index evaluation (although it was looking possible at the start of this month).
The Index Securities are evaluated annually in December. The eligibility criteria is applied using market data through the end of October and is updated for total shares outstanding submitted in a publicly filed SEC document via EDGAR through the end of November to determine security market capitalisation. Securities meeting the criteria are included in the Index. Generally, the list of additions and deletions is publicly announced via a press release in the early part of December. Security additions and deletions are made effective after the close of trading on the third Friday in December.
The issue of shares to Tasly won't affect liquidity, as they are under voluntary escrow for the next year and won't be traded on any market and will be discounted out of the ASX200 calculation as they are a partner-firm of MSB.
Bottom line
Shorts are facing a desperate situation if MSB or MESO enter Australian or US share indices. This was looking quite possible at the start of October. Inclusion in the indices would generate a lot of buying by institutions and index funds, push the price higher and kill the shorts. The shorts may have done enough selling to push down the price and keep MSB out of the ASX200 until March 2019, but I think it is a very strong chance of going in then. The volume rule will probably keep MSB out of the NASDAQ Biotech index in 2019 though that could improve as the US trials gain publicity and Mesoblast becomes better known.
Despite these shenanigans by the shorts, the share price can still go dramatically higher even if MSB isn't in the index - especially if the Nov 11 heart conference proves up the technology and makes a partnering deal more likely. Even after accounting for all of this, inclusion in the ASX200 may only be delayed by three months, and that is likely to be accompanied by further price rises!
MSB Price at posting:
$1.90 Sentiment: Hold Disclosure: Held
(20min delay)