MSB Trading 2022, The TurnAround, page-1003

@reginaldp Love your work!
I agree with your view that "if we get the tick of approval for aGvHD - CHF will partner globally ( price dependant on FDA pathway , dates forthcoming)", but I don't think that "the CHF up fronts of say $100 million, are used to go it alone in the USA on CLBP" simply because there are much more effective ways of MSB investing their capital to give shareholders a very high ROE than by investing in a very expensive US-wide distribution network for a high volume blockbuster product and I think it would take too long to get chronic lower back pain from DDD to a wide market if MSB were to do it themselves. I believe that Grunenthal wanted US distribution as well as EU and LatAm, but that MSB thought they could get a US partner with a US market presence similar to the Grunenthal market penetration in those other jurisdictions. Of course, this leaves the option open for MSB to go it alone in the US, I just think they can use their capital better to drive much higher returns for shareholders. See my reasoning below:

1. We heard from the back pain doctors on the conference call a few months ago about high demand from them and their patients who are desperate to get on the next trial and get some relief - so as you say recruitment in the US should be quick. I don't know that SurgCenter adds much to that demand - remember they are all individual surgeons who make their living out of doing operations, though it is possible that they will change their model and find that they actually make more out of the Rex-L injections as they can churn more people through than the much longer time it takes to do the surgery - or that they will just be able to add a much larger group of less diseased patients and do both. The people who own the Mesoblast shares are the principals of SurgCenter - mainly Dr Gregory George, the founder. Surgcenter had 86 ambulatory surgery centres a year ago and Tenet plans to add another 50 over 5 years, but I see the demand for MSB's CLBP product as much bigger than that.

2. Mesoblast is talking on its website about "Over four million patients in the United States alone suffer from CLBP, which is caused by damage to the disc as a result of aging, genetics, and injuries", and in the recent CEO slide deck "Over 7m patients are estimated to suffer from CLBP due to degenerative disc disease (DDD) in each of the U.S. and E.U.5".
So to address this market, they'll need many more doctors than SurgCenter currently has - even if they had 100 centres, they'd need to treat 40,000 to 70,000 people per year in each centre. That's up to 200 people a day in each centre - I guess you could do that with MSB stem cell injections if you had up to 20 doctors in each centre churning people through - but you couldn't do that many back operations in each centre "Come through please", jab, "Next!".

3.a. The potential $100m upfront for heart will probably be used for manufacturing cells and for potential extra trial funding which may be required. You wouldn't get anything like the sales network of a major pharma for $US100m, and there's no need for MSB to own a large blockbuster distribution network. Even if you only put 2 facilities in each US state, costing $1m each - there's the $100m gone, and they'd have to treat those insane numbers of patients I mentioned earlier - i.e. the centres would likely cost well over $1m each to treat that many patients.

3.b. The Gross Margin on the cells is around 60%, rising to 80% once the manufacturing upgrades are made for 3-D bioreactors etc. The ROE on making cells is much higher again, assuming you can recycle the equity 2-3x per year as you make new batches of cells - the ROE is likely to be many multiples of the ROE on investing in your own distribution. Investing the $100m in cell manufacturing and recycling that equity 2 or 3x per year gives a much better return to shareholders than building out distribution.

4. It is different economics for aGvHD because 15 centres make up half of the market and the kids' market is around 400 patients per year - and the cost per treatment is $300k (or higher) vs $15k (or higher) for back pain. I note that the latest slide deck implies they could get as high as $75k for back pain if they can show improvement in function and inhibition of the progression of structural damage, and that previous trials are encouraging for this - but at the moment the market is assuming a much lower sales value.

5. The lack of a rapid rapid claim for the European trial may simply be because most of the focus at present is the 80% of patients who will make up the US trial and we have already had trials in the US and strong demand from doctors to continue. There is obviously still a bit of negotiating around funding the trial and I agree with your comment that "partnership discussions for other indications are ( potentially) waiting on the outcome of the aGvHD BLA".
I think that acceptance of the BLA by the FDA will be a hugely positive sign and will spur more partnering deals - hopefully submission by the end of this month, and acceptance by the end of January, then approval by end of June.

6. ROE for MSB and sheholders appears just as good for a high royalty partnering deal (say 25%+ royalties) as for a jv with a large pharma - and much lower risk to MSB. Royalty pharma type deals for single products also look very attractive as a way of preserving cash which could then be invested in high ROE cell manufacturing. Trying to build a large scale distribution network with only one product is not as efficient and means a much longer time to peak market penetration, and in my view would cost well above $100m to get the market reach. aGvHD for kids is very different as stated above.

The recent indications from MSB are that they will be targeting bigger populations of patients and are making comparisons with more expensive drugs than previously thought - i.e. they may have bigger potential revenue targets in sight than previously thought. However, we need an FDA approval first, and then we can speculate what it may mean for long term profits. At present the US analysts have price targets of double the current share price even before incorporating the newer information.

Some of the shorts / naysayers are crowing that the revenues are not yet what people had thought possible had there been an approval by the FDA a couple of years ago. Well, of course they're not, those predictions were dependent on FDA approvals which haven't yet come through. It doesn't mean they won't come through in the future though (once the first FDA approval is landed it will be off to the races), and to me the revenue and profit opportunities look even better than people previously thought possible for heart, back pain and aGvHD.

Now that we are consolidating above $1, with the BLA due to be submitted after a long period of generating new data to meet the FDA's needs, the future looks bright. I'm planning on sitting back and enjoying the ride!