The investment case FOR Mesoblast, page-12

Thanks@yelrom for the invitation to contribute to the business case for MSB.

There is nothing new under the sun (Ecclesiastes 1:9, NIVersion).

For a coupleof reasons, I don’t actually see this as a testable hypothesis. But what if, in our world-weary cynicism or wearing our rose-coloured glasses, we just don’t see what’s already ‘under the sun’? Well, for one thing, we won’t be able to tell if anything’s really new & we’ll never learn. So, I agree with the need for a review from scratch.

To avoid doubling-up, Iwant to focus on a group that usually doesn’t get a lot of detailed or reasonedreview – management. So, is the MSB Board/ Executive a force for the greater goodof MSB?I’m hopingthe few comments below are novel, relevant & that they stimulate some usefulHC reflection. I feel they have a common theme. Any errors are, of course, mine, and I encourage constructive criticism. Sorry if I’ve repeated someone’s earlier thought (OK, ya got me Ecclesiastes).

Keep your Friends Close...

“.. if you know your enemies and know yourself, you will not be imperilled in a hundred battles;..” (Sun Tzu, c. 6th century BC )

Judgingby the range of forum comments I’ve read since April 2020 , the median answer’ssomewhere between ‘No, they are the enemy & they should cast themselves enmasse into hell’ and ‘Yes, they can be trusted, and a declaration ofsainthood is in order’.

Ina number of cases people say they’ve crystallised a loss or realised a gainbecause of something the Board/ Exec did or didn’t do. Other than day traders, noone is claiming that they’ve realised all their expectations of the stock as yet.

I’dlike to suggest that a refresher on relationship basics can help avoid somemisunderstandings:

- the MSB Board’s duty is to act in the interests of MSB shareholdersgenerally, i.e. as a whole & not in the specific interest of any oneor more shareholders.

- the MSB Board is not the shareholders, and the corollary is alsotrue. The Board must manage MSB, and shareholders, individually or otherwise,can’t. So, neither should try to do the other’s job - they’re just not allowed to do so.

- Board and Exec members are accountable to MSB, and the MSB shareholdersin terms of their MSB contracts, statutory & fiduciary duties. MSB Shareholders aren’t accountable to anyone, except ASX and NASDAQ on the cross-listing.

- current policies of MSB Board/ Exec regarding what the lawyerscall ‘conflicts’ (of duty and duty, & duty and personal interest) as wellas specific policies on share trading may be found on MSB’s website here:

o https://www.mesoblast.com/images/pdf/Share_trading_policy.pdf

o https://mesoblast.com/images/pdf/CODE_OF_CONDUCT2016.pdf

So,just because the Board is not corresponding regularly with shareholders, or is notresponding to one or more individual shareholders (outside formal meetings)doesn’t necessarily mean they aren’t doing their job. Their job is something quite different.

But,you might say, are the current MSB Board/ Exec members really any ‘good’for MSB?

Leavingaside moral perspective, MSB Exec members and MSB Board have stated during 2020and 2021 that MSB is exploring ‘strategic initiatives’ with global pharmaentities. Given the corporation hasn’t reached break-even yet, HC membersusually get really excited about this stuff – more than anything else, exceptof course the eternally-hated ‘sharts’ (thanks for the imagery @ddwn).

Thetop 10 global pharma companies in 2020 in revenue terms were: Roche, Pfizer,Johnson& Johnson, Merck Novartis, AbbVie, Takeda, Bristol-Myers, Sanofi &Amgen. If a corporation were to have a royalties & milestones deal(s) as its core asset(s) to support future growth and shareholder returns, it would be quite reasonable to want to have it with one of these fine upstanding corporations, eh?

MSBBoard has six (6) non-executive members, three (3) of whom – including the ViceChairman – have held extremely senior positions with Roche, Pfizer, and Johnson& Johnson[ii]. So, 50% of the non-exec Board.

Also,the Executive, apart from the CEO, now has under contract the services of four(4) Execs (out of the eleven (11) currently contracted) who have held equally seniorexecutive positions with Novartis, Johnson & Johnson, Bristol-Myers (in thecase of the CMO) and Takeda (in the case of the COO)[iii]. So, ~25% of the Executive.

AmongMSB’s competitors in the global stem cell research & development industry,this extent of working familiarity with the personnel, objectives, policies andmethods of doing business of ‘Top 10’ global pharma is unparalleled to the bestof my knowledge. I’m happy to be corrected.

So,without considering the experience of SI as founding Exec Director/ CEO, and withouteven looking at data room attendances, due diligence requests, current SEC filingsor any of MSB’s historic transactional dealings with these entities, and therelationships generated from those dealings, MSB could reasonably be seen aswell equipped now in 2021 to engage at a senior executive level with the top 10global pharma companies – certainly, Novartis AG and Takeda Pharmaceutical, atthe very least.

Itwould also be reasonable for the Board to expect the Executive Director/ CEO toframe MSB’s 2021 performance expectations of senior executives in terms oftheir ability to make and advance those engagements, i.e. if ‘strategic initiatives’ were to remain a priority. In doing so, the Execs would be obliged to comply with the MSB Code of Conduct and share trading policies etc, & keep MSB’s (not Novartis’ or Takeda’s or anyone else’s) general shareholders’ interests paramount, and ignore their own personal interests, at all times.

Ifany member of the Exec (or Board) were not to do that, they may well findthemselves joined in litigation of the kind presently threatened in the US. This is a real risk, not necessarily covered by MSB’s Directors and Officers’ insurances, especially where statutory penalties are involved.

So,personally, I see the MSB Board/ Exec as ready and able to do ‘good’ forMSB in 2021, and meaningfully incentivised at all times to ‘Do good work’(as the inimitable Gus Grissom once said to the Atlas rocket guys at Convair).

Tosee if the MSB Exec & Board are doing that atm, we’ll have to take a look underthe hood/ bonnet at results of their activities. I’ll put my thoughts on that in a separate post for convenience.

https://www.proclinical.com/blogs/2020-8/the-top-10-pharmaceutical-companies-in-the-world-2020

[ii] https://www.mesoblast.com/company/board-of-directors

[iii] https://www.mesoblast.com/company/management-team