Well, one of the problems that I have with understanding the shareholder value equation around the potential future revenue streams from the various programmes, is that there is scant information available on how much capital MSB - or Teva or JCR, for that matter - is allocating to each product development pipeline.
But I did obtain some clues from the NASDAQ IPO Prospectus that provided some limited detail about the application of the IPO proceeds (pg 55 of the Prospectus).
The bulk of the capital to be raised is for non-CHD (heart) purposes, notably:
- $6m for MSC-100-IV (aGVHD)
- $9m for MSC-06-ID (CLBP)
- $11m for MPC-300-IV (rheumatoid arthritis and diabetic kidney disease)
- 10m for General and Administrative purposes
These items are all quite self-explanatory, but then there is also the following (which I found to be disconcertingly vague... but that obviously partly because some of the technical manufacturing concepts elude me):
$24m for "manufacturing requirements for our Tier 1 and Tier 2 product candidates, through development and implementation of out proprietary manufacturing processes and expansion of our manufacturing capabilities and resources, including, but not limited to, finalising the development and implementation of the 3D bioreactor-based manufacturing of our products, finalising the development of our proprietary FBS-free media, and expansion of the scale of manufacturing to support commercial production of our products at our collaborator Lonza"
So what part of this last category of $24m of expenditure pertains directly to supporting the heart trials is not clear, but the way the paragraph reads to me is that the nature of this expenditure relates to general capacity building and therefore somewhat broader a deployment of capital than for just one application.
And given my understanding that heart trial recruitment expenses were for TEVA's account, anyway, I am not sure how much of a difference to the overall cash outflows for MSB, the completion of heart trial recruitment will make.
Therefore, to answer your question about when I estimate MSB's cash balance will approach going concern technical depletion (refer [*] below): somewhat crudely, as a basecase I simply took the current US$30m per quarter cash burn rate and amortised it off on a quarterly basis from the last published cash balance (Sept 30 Sept 2015) plus the IPO capital raised (given the share price performance since IPO, I have assumed that the over-allotment option will not be exercised by the underwriters).
On that basis the maths to derive the theoretical cash balance is quite simple and the results are as follows:
Theoretical Cash Balance (US$m, rounded to nearest single $m) (Base Case)
[*] Note that for going concern purposes, the cash balance can never go right down to zero, or even close to it. As a rule of thumb, my sense is that any company would need to hold enough cash to be able to service Current Liabilities (excluding Deferred Revenue). In MSB's case, the relevant figures at 30 June 2015 were Total Current Liabilities of A$63m (US$45m at prevailing exchange rate) and Deferred Revenue of A$20m (US$14m). So the minimum cash position the company could hold based on the latest published accounts, would I believe be a large portion of US$30m.
Which means that some time during JQ2016, the company would need to be back in the equity market, seeking further funding.
But, naturally, this all precludes any other capital that might be incoming, for example partnership deals, milestone payments or product royalties and/or revenues. All of which are somewhat indeterminate, both in timing and quantity, as we have seen.
But I think your line of questioning is a very good one.
Because, the key to a successful investment in MSB is, as has been proven, is highly contingent on the issue of funding, something that just about everyone seems hell bent on ignoring.
And I just can't understand why that is... if this was my company, dependent as it is on non-internally generated sources of capital, this factor would not cease to occupy my mind, every time I thought about the business.
To that end, I think investors would be far better served discussing, debating and trying to quantify the potential sources and allocation of capital for MSB.
It amazes me that the discussion is concentrated around such meaningless issues such as which broker has what target price, how "rigged" the market is and how manipulated MSB's share price is, what shorters have, or haven't done, what they might, or might not, do in the future, how colossal the upside is, who the potential marginal buyer and/or seller might be, what the website says, what the company's PR people are saying or what might make the stock bounce this morning/this afternoon/tomorrow/next week/next month.
When instead highly pertinent questions such as yours, i.e., "How much cash is product program X costing and what will happen to the capital balance of the business once those outgoings cease?" go unasked.
For the life of me I can't understand - given how critical it is for the company - why there are not more questions around the determinants of the company's financial position as it progresses along its developmental phase; questions such as:
Why was only US$60m raised on the NASDAQ? Why not US$100m? Or US$200m?
When management says revenues from Japan will "exceed expectations", what does that mean in a practical dollar sense? Whose expectations is that statement based on? Bell Potter's? Macquarie Bank's? Consensus? Unless the reference point of "expectations" is quantified, then "exceeding expectations" is a nothing statement. This is an important figure and, depending on its magnitude ($10m pa or $50mpa?), it could dramatically alter the capital structure of the company.
What is the potential timing and magnitude of other sources of funding?
Of the US$120m that currently goes out the door each year, where is this being spent? What research? What trials? What product streams? And why?
As part owners of a business, shareholders are entitled to ask these sorts of questions.
My sense is that, in the period immediately following the Cephalon transaction, the company actually did a very good job at assuaging the market by proactively managing expectations in this regard.
But in recent years, it appears that they have paid less heed to this issue, both in not letting the company get to the sort of vulnerable funding position that causes consternation in the market, as well as the communication of it.
At the liberty of purporting to speak on behalf of MSB shareholders, here endeth the lament.
MSB Price at posting:
$1.95 Sentiment: None Disclosure: Not Held
(20min delay)