Unfortunately, even though there are 20 trading days to go until the last Friday in November (including Melbourne Cup day because Sydney will be trading) ASX200 Index inclusion is highly unlikely for MSB in the December quarter rebalance.
I think we currently need an average share price of at least $2.60 and probably closer to $2.70 over a 6-month period based on the assumptions below. Note that this calculation has a lot of moving parts, including what other stocks are doing, how many MSB shares the index committee decide to count in the Investable Weight Factor calculation, and new stocks which may list with larger market caps and thus pushing MSB down the ladder.
Last time I wrote on this, I said that one of the targets of the shorts may be to stop MSB's inclusion in the Dec quarter ASX200 rebalance and that index inclusion is "looking more likely to be delayed until next year after recent price falls". It was an outside chance but numerically possible for December index inclusion in early October when the price was $2.47, but required another $2 or so jump in the share price at that time (ie to$4.47 and hold there) to get the 6-month average up to around $2.60 by end-November. That may have been possible if the price had kept rising in anticipation of the November 11 results and a possible partnering deal, but the average price over the past month has been only $2.00 and that means it would now have to average over $7.40 over the next 20 days to average $2.60 for the whole 6 months to the end of November.
I think we need an average share price of $2.60 over a 6-month period for March quarter inclusion in the ASX200 based on the following calculation:
1. "Buffer" market cap to be included in ASX200 - you have to rank no. 179 or higher - ie around $1.0 bn to $1.05bn, but I allow for the possibility of 2 or 3 new stocks entering the index between now and March, which would push the requirement up to $1.05bn on current market caps. That is, it isn't good enough to scrape in at number 199, the calculation has a buffer zone to ensure the index isn't chopping and changing all the time. Conversely, you have to rank below no. 221 or lower to be chucked out.
2. Number of "Investable Weight Factor" MSB shares is 402.5m (ie I assume Silviu Itescu's shares, directors' shares, Tasly shares and NovaQuest are not included)
3. The other stocks aren't in a static share price position and many of the market caps which look much lower than MSB's right now are actually averaging a higher market cap than MSB since the end of May.
4. Right now, for inclusion in the December quarter index, you probably need a MSB price to average $2.70 (ie a market cap closer to $1.08bn for stock number 179) as several stocks around number 179 in the index had much higher prices earlier in the 6 month average than their current prices - this gives them a bit more buffer in the December quarter, but they will lose that protection in the March quarter rebalance. It also means December quarter inclusion is very unlikely.
Shorts have had a big influence on October share price movements:
The price of MSB hit its high of $2.47 when it re-opened on October 2nd after being closed in Sydney the previous day for Labour Day holiday. Net shorts shot up by 1.2m on October 2nd in a high volume day of 7.2m shares traded on the ASX and this turned the price down heavily over the course of the day and the price plunged below $2 before closing right on $2. The traded volume that day was 3x already elevated volumes around the start of October.
More than 25% of the total net shorting for the month happened on that one day. It was a fairly vicious attack which smashed the share price. I believed it happened for two main reasons:
Firstly because the shares had run up so quickly (from $1.65 to $2.47 over only 2 weeks) so shorters could hit knowing they could provoke some profit taking;
Secondly because there was an outside chance that if the rise continued, MSB may enter the ASX200 in the December rebalance and if the volume in the US market continued to match the strong volume of late September MESO might enter the Nasdaq Biotech index. Both were a stretch and would have caused massive problems for the shorts if they had happened as index funds would have bought in and pushed up the price. In the event, the selling and nearly 4m increase in the net short position hit the share price, making ASX200 index inclusion almost impossible in the December quarter and also making the task more difficult in the March quarter (but possible). Furthermore, any buying for index inclusion then dried up.
Net shorts continued to rise fairly aggressively to 30.1m by the end of October (up 3.9m over the month). However most of the big shorting was finished by Wed 24/10/2018. In the week to 24/10 gross shorts averaged 427,000 per day. In the week to Wed 31/10/2018 gross shorts only averaged 101,000 per day. Coincidentally (?) the share price bottomed on 25/10/2018 at $1.75 when the shorting abated. The net short position, which rose by nearly 4m shares in the month has barely moved since 25 October.
The absence of shorting in the last week of the month allowed the share price to rally from $1.75 to the $2.12 close on Nov 2nd.
What next?
At this stage (very preliminary), I think a share price of $2.60 would have a good chance of ASX200 Index inclusion by the March rebalance which is calculated up to the last Friday in February ie 22 Feb (unless the stocks around number 179 all rise strongly as well).
To get to a 6-month average of $2.60 by 22 Feb, MSB will have to average a bit over $3.00 between now and then. We are starting from $2.12, but a strong rise after the November 11 announcement would certainly make this achievable. A big partnering deal would make it almost certain. It may also be made easier or harder depending on what other stocks are doing.
The shorts will have their work cut out for them - but I suspect they are likely to come back again after any big price rise post Nov 11. They may have managed to keep MSB out of index contention in the December quarter, but they have failed to keep the share price down.
The index inclusion is a bit of a sideshow. It will happen eventually - if not in the March quarter, then almost certainly in the June quarter. The share price is likely to continue to rise as phase 3 trials successfully complete and the company is derisked. The other big derisking factor is the relatively comfortable cash position. Derisking means higher valuations.
Once MSB can show it has a big enough cash balance to drive through the cash burn phase and can demonstrate no requirement for future rights issues (apart from demonstrating big potential growth from raising money to fund Tier 2 trials which I would heartily support at the right time), then it will cease to be a speculative stock and analysts' valuations will rise as they drop their 30-70% probability discounts and as they cut the discount rate used in DCF valuations from 30% to 10-12%. That could raise their valuations to multiples of the current $4.00-$6.00.
MSB is a long term stock with massive upside. These shorting machinations and index considerations do impact the share price in the short term - but it is short term in its impact.
MSB has clearly turned the corner in terms of proof of its cells, manufacturing and trial design. Trials in Tier 1 products are either finished or at a very advanced stage and the FDA has granted fast track status. Previous times the share price has run up these results were years away!
MSB has shown that it has no current need for capital raisings and has plenty of power to negotiate with big pharmas without being in a desperate cash position. There are no more big weak shareholders on the register (Teva is out) and the next likely move is a big partner signing on, not leaving (which has hit the share price in the past). Previous times the share price has run, it was inevitable that more capital would be required in the near term.
Things have progressed amazingly in the past year, yet the share price has hardly reacted. Tasly has the potential to open a vast market in China for zero expenditure - and this isn't in any of the analysts' cash flow estimates. New licences and extensions with JCR and Takeda/Tigenix shows a low risk path forward and these extensions are also not in analysts' forecasts.
So don't worry about the short-term manipulation and shenanigans. You'll miss out on the massive upside if you allow this stuff to spook you. If you sell out you may have to pay tax on the gains and you won't be likely to get back in with the same sized position - and if you are out of the market even for a short time, it's very easy to miss the short sharp gains that MSB tends to make.
MSB Price at posting:
$2.12 Sentiment: Hold Disclosure: Held
(20min delay)