Ann: Change in substantial holding, page-215

Heya Reg,

Sorry - I'm in Europe at the moment so I've been MIA and missed your tag in the "mesoblast-has-been-featured-in-the-latest-thematic-insights-report-download-now" thread. Currently on the train so excuse the rambling answer.

When doing valuations, I like to triangulate with 3 different methods.

1. Bottom-up: How many total potential annual sales * estimated average sales price / COGS * %failure chance * time to attainment adjustment / total shares on issue * industry and market average earnings multiplier (can do PE ratio, PB ratio, etc.).
2. Top-down: How big is the current market (pretty useless in medicine I find because the whole point is that you're commercializing a step change that has a new patent timeline, so the product is likely to drastically grow any market it enters)
3. Side-ways: Look at other acquisitions in the area and their respective values. These acquisitions should take into consideration everything highlighted in (1), so it's the quick and dirty way to get a fairly representative valuation for a company. There have been like ~4 major deals in the stem cell sector, with nothing major recently. You can then look at T-Cell therapy acquisitions and partnership

In my previous posts, I have talked about both (1) and (3). The only factors that are changing right now are the '%failure chance' and 'time to attainment reduction'. I think the recent FDA announcements regarding Ryoncil have greatly shifted the %failure chance to next to none - based on 2nd resubmission success chances, the strength of the BLA, and the feedback we have received. The time to attainment reduction is also greatly reduced as we could have commercial product by August (2-month review, resubmission June 30th). Market capture should happen quickly as we have the EAP in place that has seen extensive use and a good relationship with the body that performs 80% of all US transplants.

You provided a good example of (1) with your AUD $20.72 figure. Attaining a figure using this method is relatively subjective, but can have some pretty strong justification based on historical statistics for market capture, ASP, etc.

Your analysis details the potential impact on the share price of 1250 sales. It excludes a '%failure chance reduction' or 'time to attainment adjustment', so it is a forecast of hypothetical specific earnings directly impacting the share price rather than a valuation of the company. There are also other pipeline items and applications that would add to this value.

I always go with the lowest possible figure to give the 'pessimistic' scenario so I would have used the lower range of US$424,000 per therapy. As you provided in that statement, this leaves a huge upside as it could be valued in the millions per therapy. That said, at the US$750,000 per therapy estimate that you used in your calculation, the margin is going to be higher than 40%. There's no way it is costing MSB US$450k to produce each dose of the therapy. While I don't know the costs associated with the clean room, donor payment, rate of production, commercial reagents, scaling efficiency etc. I really really doubt it would cost over US$10-20k per therapy max when everything is considered. Remember how Silviu didn't want to provide the product as part of the EAP at cost because he didn't want to disclose the cost to produce? Existing allogeneic cell therapies are estimated to have a COGS of US$5k (Harrison RP, et al. (2019). Chimeric antigen receptor-T cell therapy manufacturing: modelling the effect of offshore production on aggregate cost of goods. Cytotherapy. Feb;21(2):224-233. doi: 10.1016/j.jcyt.2019.01.003).

Similarly, regarding market capture, when something becomes standard of care in a high-mortality disease - you could expect the therapeutic to take up almost all insured patients in the US. As the Blood & Marrow Transplant Clinical Trials Network conducts 80% of all US transplants, I would suspect 90% of SR-aGVHD at this body would receive the therapy by the end of patent exclusivity provided no new therapies come along. Herceptin, for example. If a woman is HER2 positive, she is almost guaranteed to receive Herceptin or a biosimilar that targets the HER2 receptor. By 2014, Herceptin was used in 84-88% of patients (Ellegård S, Engvall K, Asowed M, Hallbeck AL, Elander N, Stål O. Long-term follow-up of early stage HER2-positive breast cancer patients treated with trastuzumab: A population-based real world multicenter cohort study. Front Oncol. 2022 Aug 2;12:861324. doi: 10.3389/fonc.2022.861324. PMID: 35982977; PMCID: PMC9379250.).

Almost more importantly, the recent announcements regarding Revascor for Heart Failure and HLHS, they have DRASTICALLY improved the %failure chance reduction or time to attainment adjustment for that application. This is a substantial market and hasn't been priced in yet nearly enough. There's a reason why Novo Nordisk has heart failure as one of their areas of interest for development.

Without going too deep into it because I've kinda done it previously, I think that MSB's acquisition value over the next year is ~US$10-30b (ASX:MSB AU$13.2 - 39.6 per share) pending the confirmation of reimbursement and reimbursement value in the states. Once the therapy is approved and we get a favourable reimbursement, I suspect the value would be on the upper end of that range. While it seems like a drastic range, the difference between 10 and 30 is three times, I don't really care about where in between that value that I sell as the real multiplier has already been made. If we get CHF, HLHS, paed and adult GvHD, label extension Crohn's and ARDS + market penetration - it starts getting pretty nutty.

If you look as far out as 20 years there's no reason that MSB couldn't repeat the CSL story (~US90b market cap) - MSB have a platform big enough to develop treatments for a plethora of disease areas (anything inflammatory/autoimmune + disorders such as HLHS) and treat a lot of patients at a substantial reimbursement.

I take the view that the fair valuation of MSB is so much higher than it is now that it's "so big it doesn't really matter". I am almost certain MSB will be acquired or at least take part in some major partnering deals and so I plan my exit for that milestone instead of a specific share price. If I was big pharma I would want the platform, not a product, but I'm not sure that's as much to MSB's interest - that's a preference question. I doubt an acquisition would come at current share price ranges though as that would set records for acquisition premiums.

Cheers,
Gang gang