MSB Trading - 2019, page-2522

Overview
This is for @col69 and a few others who requested a comment on the

Grünenthal partnering deal ​

- hopefully you will enjoy it over your Sunday morning coffee!

I haven't commented to date on the

Grünenthal​

partnership because I couldn't see how I could add value to what I see as ultimately a part of a much better series of deals than the Cephalon deal which lifted the share price to $A9.94 in 2011 (market cap $A2.79 billion, $US2.92 billion at the AUDUSD that day).​

As @trixter correctly pointed out, I don't like posting just for the sake of it, and I thought the benefits of the deal were self-evident, that most fair-minded people on HC could see that, and the market was getting on with adjusting the price. I like to keep my number of posts down and the commentary relevant so I can go back through them later to pull out key information.

I thought making a comment on this was a bit like trying to teach grandma how to suck eggs, and I honestly didn't know what to say that wouldn't sound lame - it would be a bit like making a post after the Gettysburg Address or The Sermon On The Mount and saying "Gee, that was good".

If that sounds a bit of an over reach, I would add that I have previously described MSB to friends and family as the best opportunity I have ever seen in markets. I have been looking at investments since the Poseidon boom back in 1969 (disclosure: we held 3 shares through a shareclub) and I invested/speculated in the oil and gas booms of the 70's (Central and Southern Pacific, Canada Northwest, York Resources to name a few), the 1979-1980 gold and silver boom when the Hunt brothers cornered the market, the mid 80's tech bubble (remember Ralph Sarich and all the Perth car engine companies), the entreprenuers boom (Bond, Murdoch, Holmes a Court, Elliott, Skase et al), then bought the big 4 banks in 1994 and again in 1996 after their near death experience and had a tremendous ride through "irrational exuberance" and the tech and telco bubble of 1999-2000, followed by the China boom in resource stocks. All of these had spectacular rises, and many had equally spectacular falls, but even the floats of Macquarie Bank and CSL (both of which I participated in), and QBE in 1983 (which I owned options in) didn't look as good at the time as MSB does now.

My point here is that, to me, MSB looks like it has more upside than any of those stocks and sectors did at the time they started running. Most (if not all) analysts started out not believing any of those boom stocks would go anywhere near as far as they did, and to be fair, good management identified new trends and jumped on them, dramatically inceasing the value of those companies. I believe MSB, with its platform technology in stem cells and multiple product candidates in global blockbuster markets actually looks like it can go all the way, and that analyst valuations of around $A5 leave more out than they include in. To be fair here, most of the analysts' price targets are only for 12 months - so they can always upgrade later and correctly claim to be right - but I believe there is plenty of upside (and I have outlined why in previous notes). Later on I include some comparisons as to why $A20 or more per share is achievable if things go right and MSB's management is astute and successful.

So, if I have researched so many other stocks, why have I mainly posted on Mesoblast (as someone noted during the week)?
Firstly, I'm getting too old for this stuff. I had posted on other platforms previously and copped abuse and wasted my time answering innumerable time-consuming questions - once you answer one, they keep coming (particularly from shorts who are just trying to annoy you and trying to pick petty holes in your analysis) so I gave up posting years ago. I also got sick of being moderated (a bit like @otherperspective recently) when I was putting in a lot of effort to help people, but the shorters (or the crazies) would goad me into a sharpish reply. So now I just state the facts and how I interpret them and generally don't answer questions or get into repartee.

Secondly, I decided most stocks were very well researched and I wouldn't be adding much value, so just adding more is a bit mad if you're not being paid to do it, so I only post if I believe I can add value to something which is hard to understand or where I see very high unrecognised potential. A few months ago (on Jan 29) I posted on FMG when the dam wall came down and the FMG price was still only $5.03 - I thought it was a great opportunity and predicted a rise in the iron ore price to back over $US90 and a contraction in FMG's discount, to which JCoure replied "what is your source for this “dam collapse”? Could it be fake news?" - FMG is now $9.05 and paid $1.14 in dividends since then (plus franking credits of 49c) - so more than doubled in 7.5 months. Once the market caught up on the dam wall, I thought "nothing much more I can add" and I didn't comment again.

Thirdly, as I said earlier, I've never anticipated so much upside from a stock as Mesoblast. That doesn't mean it'll replicate CSL or any of the stocks I mentioned earlier - just that I didn't realise how good they would become at the time of their initial rise. Maybe I'm just stupid. I try to be conservative on MSB and talk about $5 share price (which I think is justified on the current news), but in reality I can see a pathway to $20 and ultimately much more if they manage themselves well.

Fourthly, I don't believe MSB is well modelled by the analysts. I've been through all their models and found them to be way too conservative, to such an extent as to be wrong. Both myself and @otherperspective have pointed out some of the models' failings - however, as well as probability discounts which are too high given the success of trials and discount rates of up to 30% which needlessly butcher the net present value of future years' earnings, I have found analysts leaving out most of the deals of the past 12 months; some still using royalties for US aGvHD even though the company will be selling the product themselves; valuing the shares on a multiple of sales (when most of the future sales of the blockbuster products will be by way of royalties - so obviously reported sales will be much lower than for some of their competitors, hence multiples of sales gives a valuation which is too low); one of them is using the equivalent of 700m shares on issue (which is way too high given 500m at present, no need for more share issues apart from possible exercise of up to 34m options, of which only 9.4m are currently vested and in the money, plus a possible issue to Osiris for the remaining $US20m milestone payment - which could be covered by issuance to M&G of $US15m of equity - so I can't see why share issuance will be more than 45m - and over 3m of the options need the share price to be above $A4 before they will be exercised) - the same analyst uses a long term 25% Cost Of Goods Sold while the Prof has indicated on a conference call that the new generation 3D bioreactors and serum-free production could have a COGS of 10% (note the margin for aGvHD would be less due to single low digit royalties on aGvHD and Crohn's, escalating as sales grow up to a maximum of 10% - so probably less than 5% royalties to Osiris in the first few years of US commercialisation on top of the COGS for this product) - so adjusting for an overly conservative share issuance and COGS (both seemingly innocuous), on this change alone his 12-month price target could increase by 54%, taking it to more that $A7. Here's a classic phrase from one report..."Given the potential to be an opioid-sparing therapy, our timeline may be conservative"...they are telling us they have potential to upgrade and given themselves an out for when they do it, all the while sheltering under the cloak of "conservatism". I prefer analysts to put in their best guess, rather than "underpromising and overdelivering".

I could go on and on about the analyst valuations, but suffice it to say I believe they will continue to upgrade these targets as the technology is approved and partnership deals are done. It can be difficult to make major changes to forecasts and keep your credibility. I admire Tanu Jain at Bell Potter for doing it this week in raising the target from just over $A4 to just over $A5. Bite the bullet and get it out of the way quickly. Sensible reaction. Plenty to go!!

Fifthly, I don't believe any of the recent developments are "in the share price" - particularly the latest Grünenthal partnership, but also the share price is still below where it was a year ago when it got to $A2.47 just before the poorly understood NIH Heart LVAD GI Bleeding trial results - that trial has now been vindicated by the FDA granting orphan designation and an MOU was signed in March to run a confirmatory trial funded by the International Center for Health Outcomes and Innovation Research (InCHOIR) at the Icahn School of Medicine at Mount Sinai. Plus, since then, the first module of the BLA for aGvHD has been submitted to the FDA; JCR Pharmaceuticals has filed to extend marketing approval of TEMCELL for use in patients with Epidermolysis Bullosa, and the JCR partnership has been expanded to treatment of newborns who lack sufficient blood supply and oxygen to the brain, or neonatal hypoxic ischemic encephalopathy (HIE); plus Joanne Kurtzberg has filed for a US investigator-initiated IND for chronic GvHD; plus the Tasly transaction was completed and analysts have nothing in their models for the Chinese market. So none of these improvements are yet in the share price (see graph below).

How do I know that

Grünenthal ​

isn't in the price? Well the price is still below October 2018 before all the above events happened. And look at what happened to the share price under the Cephalon deal back in 2010 - firstly the share price was going up anyway (Mesoblast - Angioblast merger etc - first red arrow July 2010 price $1.70 up to $3.25 by early December), then the shares were suspended at $3.25 and reopened at $4.35 on 8 December 2010 (red circle), then they ran to $9.85 by 11 May 2011 (second red arrow).

By share price accounts, that was the most exciting 6 months in the history of the company - SI has been telling us we are now in the most exciting 6 months - so giving him a few months leeway (as usual) - we ain't seen nuthin' yet!

New analysts are now likely to start covering the stock, new funds will see

Grünenthal​

as confirmation of the technology and they will start to invest and big index funds will probably start to anticipate inclusion in the ASX200 by March next year (outside chance December this year) - see section below on index inclusion.

My view is that

Grünenthal​

is a much better deal than Cephalon - similar money for much less share of MSB's products and geography
$US150m upfront (is better than the $US130m upfront for Cephalon) and

Grünenthal​

is a sale of only CLBP in Europe and Latam, whereas Cephalon was a sale of worldwide rights to all cardiac and Central Nervous System (it was never defined if CLBP was part of CNS, though CNS was generally accepted to mean Alzheimers etc). Admittedly,

Grünenthal​

is only $US1 billion in future milestones (but that now equates to $A1.45 billion) whereas Cephalon was $US 1.7 billion in future milestones (which at the time was $A1.72 billion) so only 16% more in prevailing $A terms. Some have questioned MSB's commitment to funding the

Grünenthal​

confirmatory trial - I estimate it will be less than the $US30-40m US trial cost - so the net upfront payment amount to MSB after funding the

Grünenthal​

trial is around $US110 million (so again Cephalon is only 18% more for the net upfront payment).

So, is it in the price? You be the judge!

However, there are several questions people have thrown up in the past few days and maybe I can help.​

To recap...​

Grünenthal Deal Is A Company Maker

1. This deal secures MSB's balance sheet and means no equity raisings are required. $US50m in cash on the balance sheet at June 30 plus $US35m in further debt drawdowns plus potential of a $US15m equity issue to M&G plus $US45m to be received from

Grünenthal​

in the first year (as part of the $US150m to be received up to product launch less c. $40m trial costs) means that MSB has proforma $US145m in cash from June 30 2019 (possibly minus $US20m payment to Osiris if they decide to use cash, but it can be paid in shares). $US145m would last into early June quarter 2021 at a burn rate of $US20m per quarter - but by the second half of 2020 MSB could be starting to earn revenue from aGvHD in the US market, so the rate of cash burn will decrease at that point, and there is a further net receipt of around $US65m for milestones on pre-product launch European CLBP which could kick in by late 2021, extending the cash runway into 2022 before counting any other partnering deals in other geographies or products - ie there is plenty of cash coming to cover the burn til 2022 and probably further as paediatric aGvHD in the US is likely to be generating $US60m in 2022 and be on the way to $US120m when fully accepted in the market.

2. Shorts have no hope of a discounted share issue and will add to the share price rise as they are forced to cover. See more on shorts below...​

3. This deal means MSB is no longer "speculative" - the technology, manufacturing and batch consistency work, primary endpoint achieved in aGvHD trial, orphan designation granted by FDA for GI Bleeding in LVADs, othe rpositive trial results and CHF and CLBP trials due in the March and June quarters of 2020 and, as shown above, the company has enough cash - technology risk gone, balance sheet and liquidity risk gone. There's just execution risk now, and management and board have been recently strengthened and a partnership established with a company that is no. 1 or no. 2 in its field.

4. This justifies big upgrades to analysts' already high valuations through reducing risk

5. The totality can be seen as a better deal than Cephalon as it plays out through multiple partners over time. MSB is now under much less pressure to conclude other major deals in the short term and can negotiate from a position of strength - the total eventually received under 4 deals could be more than 2x the Cephalon deal

6. Cephalon increased the market cap of MSB to $US2.69 billion ( or $A2.73 billion), or $A5.50 on the current number of issued shares. Of course

$US2.69 billion​

at today's exchange rate would be $A3.9 billion - or $A7.85 per MSB share). The original Cephalon deal was $130m upfront ($A132m at the prevailing exchange rates of the time) this deal is $150m upfront less $30-40m for trials = $110m ($A160m at current exchange rate). The likelihood is that more deals will flow after this one breaks the ice.

Cephalon also included an equity placement to take Cephalon's holding up to 19.99% of MSB. That was needed at the time to bolster the balance sheet and cash levels to complete other trials. It isn't needed now and would be dilutionary, so better not to issue big chunks of equity at this time.

THIS DEAL IS FOR MORE UPFRONT MONEY ($A) FOR 1 INDICATION IN 1 MAJOR MARKET. Upfronts for all products and geographies could be $US600m at this rate.

The total $US1 billion in milestones compares with $US1.7 billion in Cephalon deal - but Cephalon was all cardiac and central nervous system products worldwide. Under the current set of conditions, further deals in US for heart and back pain and Europe for heart should put total milestones well over the $1.7 billion of the Cephalon deal - in fact similar deals could take the total to $US4 billion (not including Tasly's 6 milestones, which could also eventually be over $1 billion).

Take the final potential total for 4 partnering deals of $US600m upfront and $US4 billion milestones and compare that to the Cephalon $US130m upfront plus $US1.7 billion in milestones, means this deal could be part of a final result 2.5x the Cephalon deal.

Comparing that to the Cephalon deal's impact on market cap ($A2.73 billion) would take the share price up to $A6.83 billion, or $A13.65! Assuming that these guys think in $US, not $A, the Cephalon deal was $US2.69 billion - so selling now at the Grünenthal rate to 4 different firms in US and EU for heart and back pain would total $US6.7 billion or $A9.8 billion, or $A19.65 per MSB share - and that's before you start to count the double digit royalties or Tasly in China!!

That's not a forecast, just trying to put this deal into context vs the Cephalon deal in a longer term perspective of what happens if there are similar deals done for heart in EU and US and back pain in US.

THIS IS A GREAT DEAL IF REPEATED IN THE USA AND HEART IS DONE ON THE SAME BASIS.

7. MSB has a credible "story" again - something that the whole market and the media can get behind - a cure for the opioid crisis, given credibility by Europe's no. 2 (and LatAm's no. 1) pain management company - ever since Cephalon/Teva pulled out, credibility has been down - that reverses now!

8. While the paediatric SR-aGvHD results were very positive, leading doctors (Joanne Kurtzberg and Fred Grossman) have added credibility and FDA had given orphan drug designation - these were for relatively small indications - the jury was still out on the mega markets of Heart, Back Pain, Rheumatoid Arthritis and maybe Diabetes. Having Europe's number 2 pain management company as a partner gives credibility in a major indication - that's a game changer - that's an investment thesis - that's a story!

9. More deals will follow in coming months - but now that MSB has secured the balance sheet and cash position, there's a big benefit from waiting for the results of the Heart Failure and Back Pain trials before signing big partners in the US market.

10. Potential for Heart in the US, Heart in Europe and Back Pain in US should all be as big or bigger than the current deal - i.e. total for 4 products:

$600 million in​

milestones between signing and prior to product launch and $4 billion plus in long term milestones - just in US and Europe, before Japan and China are included, and before RA, diabetes and tier 2 products are included.

11. So, when all product candidates are partnered, there's more than double the potential milestones of the Cephalon deal and the risk will be spread between different partners and geographic regions, rather than all in one partner

12. Don't forget Tasly had undisclosed 6 milestone payments - given Cephalon, and this deal, who's to say they don't eventually amount to another $1 billion?

ASX200 Index​

I estimate MSB will enter the ASX200 if the price can trade at $2.35 for the next 6 months, which is quite possible, or an outside chance of entry to the 200 Index in December if it can average around $3.22 from 1 September through end-November (possible, but currently unlikely).​

The ASX200 is very important as industry funds continue to mop up $ billions from active equity managers and the brown-cardigan brigade moves more equity management to in-house index funds.​

To see the impact of entering the Index, have a look at WSA - which was the next most likely stock to leave the ASX200 Index at the September rebalance. It unexpectedly just managed to stay in, so the announcement saw a big kick up in the share price at the start of September:​

​

Of the stocks which enter the ASX200 at the September rebalance, they have generally been rising for at least the 6 months prior to entry, with CKF up from $6 to $9.25; GOR 60c to $1.40; JIN $7 to $24; PNV 60c to $2.10 and SLR 50c to $1.50 and back to 95c.

JIN shows the typical pattern - and note the $5 jump in the price from $22 to $27 after the inclusion was announced in early September:



Index inclusion for MSB would be discounted by at least 15% for the Prof's holding (that's the current discount in the ASX300) and it could even be more depending on how they view the Tasly and NovaQuest holdings when the Index committee do the review in March next year. ADRs are not discounted. The Index committee can also, at their discretion, halve the number of shares used in the calculation if they deem the liquidity of the stock is too low - so the recent volume has been a good failsafe to stop this happening. Currently, a market cap of about $1 billion would be required to get inside the cut-off requirement of ranking at stock number 179 or better - and remember they will only count 85% of MSB's shares - so that requires an average price over 6 months of $2.35 to enter the ASX200 in March 2020. However, these numbers will change as share prices of competing stocks change

(last 6 months a price of $2.19 would probably have been enough to get MSB in the ASX200)​

. For MSB to enter the index at the December rebalance would probably require a price average of around $3.22 - possible, but unlikely.

If MSB starts looking like a possibility for ASX200 Index inclusion by March next year, some funds will start buying a month or so ahead, while others will have to wait for the official announcement. In a thinly traded stock, this should provide plenty of upside.

Comparison with original Cephalon deal

Under the original deal, Cephalon agreed to pay MSB an upfront of $US130 million (worth $A132 million back then). Plus, Cephalon agreed to take a 19.99% stake in MSB at a 31% premium for $US220 million ($A 223 million). Plus, Cephalon agreed to pay total regulatory milestone payments which could reach up to $US 1.7 billion.

The partnership was agreed to focus on treatments for specific degenerative cardiovascular and central nervous system disorders along with products for use as part of hematopoietic stem cell transplantation in cancer patients. The deal included Mesoblast’s existing clinical-stage product for the treatment of congestive heart failure and spanned other disorders including acute myocardial infarction, and Alzheimer and Parkinson diseases.

Under terms of the deal with Cephalon, Mesoblast was to be responsible for carrying out and funding specific Phase IIa trials of partnered products. It would also retain worldwide manufacturing and supply rights. Cephalon would take over development for Phase IIb and III trials and retain worldwide commercialization rights to resulting therapies in cardiovascular and Central Nervous System disorders. MSB was to keep other technologies to develop itself.

​

Shorting

There is still no borrow available for shorts, so that implies that shorts have not bought back and surrendered their short position. Of course, some shorts could have bought back in the market, but "paid to hold" the short position because they fear that they wouldn't be able to get the short back as borrow later - this is expensive, but if you plan on reshorting within a week or so, it only costs 1/52 of the annual 18% borrow cost extra (ie 0.35%) but if you pay to hold for a month, it's starting to get to be a more expensive 1.5% for the month. ​

​

There is also the possibility that long funds who had previously lent stock to shorters are now recalling the lent stock so the long fund can take advantage of the price spike and sell. That would force the shorts to quickly cover by buying against the long funds selling which is at their leisure. This would generate a large amount of volume in the market, and potentially make the stock available for shorting again if the new buyer allows stock lending. The important things to note are the big volume it creates and that the time pressure is on the shorts to cover quickly - thus forcing the price higher in the near term. Medium term, the price may come under pressure as the long fund then starts to sell and particularly if the new buyer allows his/her stock to be lent for shorting again. ​

​

There was a 1.3m spike in Gross Shorts on Wednesday, however that could be shorts buying back stock in the morning and then reshorting in the afternoon, which would not change the Net Short position. We'll see next Tuesday if the Net Short has changed much from the announcement of the latest partnering deal. If the Net Short doesn't change much next week, then the fireworks haven't even started yet! ​

​

I'd be surprised if the shorts didn't take advantage of the big volume of trading last week to cover some positions, but the small movement in Gross shorts implies no significant new shorting and the lack of stock to borrow implies not much Net short covering. It may be more a case of long funds recalling their lent stock and then selling into the price spike.​

​

I had checked last Tuesday and there was no MSB available for shorting. Yet 1.3m gross shorts were reported on Wednesday. You have until 9am the next morning to report shorts, so my guess is that one or more shorters covered on Tuesday morning, that then released the borrow on that stock and then later in the day the same shorter (or someone else) used that borrow to re-short. If that is the case, we should see no net change in the Net Short Position on a T+4 basis when it is reported next week.

In fact, we may even see a decrease in the net short position next week even though there were a Gross 1.3m shorts traded on Tuesday - ie it is possible more shorts covered after Tuesday - if that is the case, we would expect to see more shorts available for borrow - I'm not seeing that yet, but it could happen any day as the information re the Grünenthal deal and the share price rise puts pressure on some shorts to cover and brings out new hopefuls wanting to short into a "price spike".

Is this a "price spike" worth shorting? Historically MSB has rewarded shorters who sell into these big rallies (while also punishing those who were short before it started). If this rally is steady and sustained over several weeks or months, it will kill the incentive of people to short it - that's what happens with "story" stocks - if there's a great story and an expectation of more deals, contract wins ,upward profit revisions etc, then shorts stay away in droves.

At present, shorting MSB is for mugs, as the "story" is likely to continue with FDA BLA filing for aGvHD completion very soon; more "advanced negotiations" with partners in other products and geographies in the next few months; some action from Tasly and negotiations with Chinese FDA due any time; readouts from CHF and CLBP trials H1 2020, approval of aGvHD by June 2020 (IMHO), label extensions for Remestemcel-L coming from the work of Dr Joanne Kurtzberg; details on the LVAD InCHOIR trial starting in 3-6 months (IMHO) and European CLBP trial which should start in 6-9 months (IMHO) - then readouts on these latter trials in 12-24 months (possibly sooner for some of Joanne Kurtzberg's label extensions) and Rheumatoid Arthritis developments. That all means that positive developments from "the story" will keep popping up regularly over at least the next two years - and MSB has plenty of cash to fund itself through that period. It's a killing ground for shorts in such a thinly traded and volatile stock.

Shorting activity has almost closed down since the high of 41.6m net short on February 1, with sharp falls down to 34.1m on March 15. That all coincided or came not long after Capital selling down from one fund (though keeping all the stock in its larger fund). Either some of Capital's stock had been lent (which would be unusual) or someone else knew that the Capital fund would be selling, or they were punting a general fall in Australian small caps and that person/fund then shorted MSB (though I don't know where they sourced the borrow). The net short then fell steadily to 30.7m by April 3rd and has not done much since - currently hovering around 27.3m.

Options: 9.4m vested and in the money at $2.12
​

Note that there will be options converted (which generally sit around 5% of issued equity, at June 30 2019, 27.7m options were outstanding (average price $A2.06), of which 15.6m had vested (average price $A2.35) but only 7.3m were "in the money" as of Friday's closing price of $2.12 - at present the weighted average contractual life of options is 4.5 years. New option issues generally have an expiry of 7 years. In July 2019 another 6.425m options were issued at $A1.87 (one third vested immediately, one third in 12 months and one third in 24 months). So that takes the total vested and in the money to 9.4m.


Osiris payment $US20m milestone to pay on US or EU product approval

All contingent milestones are payable in cash or Mesoblast stock, at Mesoblast's discretion. Osiris may also receive earnout on sales of acquired products, ranging from low single-digit to a 10% cap on annual sales in excess of US$750 million.

The 2018 Annual Report disclosed "the maximum amount of future milestone payments we may be required to make to Osiris is $40.0 million" (now $US20 million). "Any ordinary shares or ADSs we issue as consideration for a milestone payment will be subject to a contractual one year holding period, which may be waived in our discretion. In the event that the price of our ordinary shares or ADSs decreases between the issue date and the expiration of any applicable holding period, we will be required to make an additional payment to Osiris equal to the reduction in the share price multiplied by the amount of issued shares under that milestone payment. This additional payment can be made either wholly in cash or 50% in cash and 50% in our ordinary shares, in our discretion."


Bottom Line

I don't believe the Grünenthal deal is even close to being priced into the MSB share price. It was a surprise to the market, which was hoping for a partnering deal on heart in the US after trial results are released next year - that is still quite likely - but this deal on CLBP in Europe and Latam came like a bolt from the blue.

I believe this deal on its own is almost as good as the Cephalon deal in 2010 which caused the price to run to $10. I also believe it is the first part of a series of partnerships in different geographies and products which will ultimately add up to more than 2.5x the Cephalon deal. Ultimately, if all these deals come off, it's not hard to see $US6 billion in upfronts and milestones for US, Europe and China partners (or $A17.50 per share) plus double digit royalties plus MSB's own sales of products like aGvHD - so a $A20 share price is possible if these targets are met. Then there's further upside from developing Rheumatoid Arthritis and possibly Diabetes and other tier 2 products.

I believe that most brokers with 12-month price targets around $5 are still heavily discounting the prospects of MSB and will upgrade as the share price rises and as FDA approvals are granted and other partnering deals are concluded.

MSB has been derisked, has cash runway out to 2022 or better, has proved up its manufacturing and technology, has improved its experienced staff and board and now has a "story" (a cure for the opioid crisis) and has had its credibility dramatically restored with backing of Europe's number 2 pain company (based on sales of major centrally acting anesthetics), with a field force of 1600 and 300,000 stakeholder visits in 2018 to physicians, pharmacists and health administrators. It has critical experience in European manufacturing and regulation.

This will apply maximal pressure to the large short position in MSB and drive the share price higher over another 2-3 months it would take to significantly reduce the short position. The share price rise has only just started and could have a long way to go. Bell Potter adjusted their 12-month price target to over $A5 and I expect other analysts to follow suit. This could result in ASX200 inclusion by March 2020 if the share price can average around $2.35 over that period (possibly even as early as Dec 2019 if the share price quickly moves over $3.20). Index inclusion in the ASX200 would cause another spike higher in the share price. The last 6 stocks to enter the ASX200 in the September rebalance have gained between 35% and 250% for an average rise of 135% during 2019.

A rise of 135% for MSB in the next 6 months from today's price of $2.12 would take it to $4.98... That's the power of index inclusion!

The old adage is to let your profits run and stop your losses. After people have complained for so long about the 8 year fall in the MSB price from $10 to $1, why would you sell it on a bounce to a lousy $2 when so much has changed for the better and the current run is less than a week old???

I hope this note has some use in clarifying some issues and puts things into perspective. Successful investing is about identifying long term value and buying when the price is below that value. The short term fluctuations are just noise and those who listen to the noise lose money. It is much easier to make money through long-term investment discipline rather than jumping around short-term trading (where at least 80% lose money).

My long-term view on MSB's potential hasn't changed, although the timing and size of this particular deal was sooner and more money than I expected for the partnering deal they have done, so that increases the NPV. I am staying long despite the short term excitement and the traders' enticements to sell because the price is still well below my long-term valuation and MSB remains the stock with the most potential I have ever imagined - I just can't see anything in the present market which comes close to starting with nothing and becoming a company with a global reach, platform technology and possible market leading positions in several potential blockbuster drugs. Even as major global partners line up, the share price has barely dragged itself from a 10 year low at the start of this year. It has some similarities with Andrew Forest creating FMG, a $28 billion company, out of nothing, or as I said earlier, it bears some comparison with CSL, a $105 billion company, with several blockbuster products in the global healthcare market. So, a $20 price for MSB would be a market cap of a much more modest $A10 billion - doesn't sound so remarkable in comparison to those other winners!

There will be plenty of news flow over the coming months to keep gradual upward pressure on the share price, and while this is a volatile stock, it is instructive to look at the performance of CSL over the years. It had a 77% fall from $17 to $3.87 in 2002/03 and then had a 7 month 32% fall from $38 to $26 in 2011; of course if you held on through those falls you were rewarded with the current price of $230. Arguably MSB has now survived an even worse top to bottom fall of 90% from $10 to $1 and is now moving ahead - look to the long term value and try to ride out the short term hiccups. Once MSB has reliable revenue and operating cash flows (and maybe even dividends - or buybacks if more efficient), the share price should be less volatile and the risks of any future big plunges will dissipate.

Those who kept their heads during the dark days when all those about them were losing theirs are now being rewarded - and the best thing is we have invested in the future of "the clever country" and we have allocated capital to an area that is already saving lives and will be improving quality of lives of millions for years to come. That's something to be proud of!