MSB trading, page-2210

To get an idea of what's priced in and the contribution of the Nov 11 NIH heart trial:

1. Let's look at HC Wainwright's June 2018 valuation sensitivity table for ADR's:


HCW based their P/E valuation on the this table. They choose a 2028 PE of 10 (third line down), then a discount rate of 30% (2nd last column) - giving a present value price target of $US 17.10 per ADR.

My view would be to use a 20-30x P/E and a discount rate of 10-15%, giving a price of $US 116.54 to $US 272.66. That equates to a current present value of $A 31.90 to $A 76.50 per Aussie share.

That shows how much upside we have, and it includes big probability discounts of 30% for aGvHD, 50% for heart, 50% for lower back pain and there is nothing in the 2028 valuation for tier 2 indications or for China!


2. How much is the NIH LVAD heart trial in the total valuation?

In the table below, CHF LVAD Class IV is valued at $US1.22 or 6.8% of the total Sum-of-the-Parts valuation of $US18.

So while the NIH Phase 2B LVAD trial is important and gives us a lead on the much bigger phase 3 heart trial (44%of the valuation), it is not a significant part of the valuation model. We already have leads on the phase 3 trial and they are positive (futility analysis etc).

The NIH LVAD trial is also potentially very important for driving a partnering deal. If the results are good it will add to any impetus for a deal. That would be a big plus for cash flows, with a big upfront payment likely.






3. Probability discounts

We note that "for conservatism" HCW use a probability factor of only 70% for aGvHD and 50% for CHF class II-III and CHF-Class IV with LVAD and 50% for CLBP-DDD. aGvHD is higher as it is already approved in Japan - SO WE CAN ASSUME THEY WILL LIFT THEIR PROBABILITY OF SUCCESS AND HENCE THEIR VALUATION AS OTHER PRODUCTS GET APPROVAL.

The contribution to the valuation for heart products will therefore double if the probability goes to 100%.


4. Acute GvHD has passed its phase 3 FDA trial and it can justify the current value of MSB on its own

Why stress over the NIH trial when aGvHD looks so good!
HWC estimates a steady revenue opportunity of $US100m pa from kids aGvHD in the US from 2024, and $US75m pa in the EU market, both assuming 85% market penetration and then using a 70% probability factor. ie if you use 100% probability and 85% market penetration we get sales of $US250m pa for kids.

The cost is estimated at $US250,000 dropping to 235,000 in 2024 and $US212,000 in 2026. In 2024 there are 728 steroid refractory paediatric grade II-IV aGvHD cases estimated in the US out of a total Allogenic Stem Cell Transplant market of 17,319 cases. Adults SR sGvHD grade II-IV are numbered at 1,738 in 2024.

The European market is larger in number of cases, however they assume a lower price in Europe.

If you get a 90% gross margin manufacturing and distributing yourself, as SI has implied, that's $US225m post 2024 gross profit from kids (using 100% probability).

HWC's estimates for adults aGvHD are much bigger, and reach steady state in 2025 - around $US235m pa in the US market and $US280m pa in EU on 70% probability and 85% market share. Adults combined revenue for US and EU using 100% probability would be $US735m. If MSB keep it all for themselves and don't appoint partners, that would be a gross profit post 2024 of $US662m for 85% market share of adults across US and EU.

So, the potential longer-term gross profit from aGvHD is $US887m pa, or $A 1.24 billion pa.

In the shorter-term, HCW have estimated $US53m of revenue in 2021 based on a 25% market penetration in that year ($US30m in US and $US23m in EU) on a 70% probability basis (ie $US75m on a 100% probability basis). That is the first significant year of sales. My hope is that sales will start in the second half of 2019, and that we could see quicker market penetration in the US than in Japan, so that 2020 could also be a decent year for aGvHD cash flows. If so, we could actually see $US75m in cash flow in 2020 and closer to 50% market penetration in 2021 and thus double the cash flow to $US150m in 2021 on paediatric aGvHD alone.

5. $US strength is a positive for $A investors

Remember that the major analysts covering MSB are in the US and do their target price, profit and cash flow forecasts in $US. So, Aussie investors are cushioned from the fall in the $A. MSB has a lot of its staff and head office costs in the weak $A and its future revenues in the strong $US - that's a great equation for us.

So, since the high in January around 81c, the current level of AUDUSD of 71.3c equates to a 14% rise in the Aussie share price valuation for a given level of $US cash flows and profits.

Even though MSB is originally Australian technology, the future cash flows will be dominated by $US (unless Tasly is wildly successful!).

An impact of that can be seen in the number of shares issued to Tasly of 14,464,259 which was set when the $A was around 74.3c, so we were only getting $A26.9m and the price Tasly was paying was $1.86 per share. We received $US20m which is currently worth $A28.05m - so the shares were effectively issued at $A1.94 using today's currency rate.

Any further weakness in the $A will continue to increase the valuation of each of the MSB product candidates as well as the total value in $A of the company, even if the $US valuation stays static.


Bottom Line

There is almost insane upside in this share price. None of the figures above include anything for China or the second tier product candidates.

November 11 is important, but only in continuing to build the credibility of MSB and its cells, manufacturing and the probability of future success and partnering deals.

The LVAD trial and estimated future profits only form 6.8% of the total Sum-of-the-parts valuation.

GvHD represents a huge opportunity, has passed its phase 3 FDA endpoints, is on fast track, is relatively easy for MSB to commercialise themselves and easily justifies the current share price and more.

Remember, look at HCW's table at the top to see valuation sensitivities - then convert to $A and divide by 5 shares per ADR and they are still huge numbers!!!