A big week coming for MSB
The MSB share price is still being constrained by the perceived overhang of Capital’s remaining holding of around 27m shares and ADRs. The Mexican Stand-off continues, with Capital refusing to sell (according to @otherperspective) and with potential buyers who are bidding Capital refusing to pay up on the ASX to get their stock.
The impasse may be broken next week with the release of the Sep Quarter results (which are nearly a week later than in previous years) and the AGM on Wednesday. I don’t know why the Sep Q is later than normal – maybe there are some announcements about to be made which are still being finalised. We all know there’s plenty going on with trials and partnering deals! Maybe The Prof has been busy overseas, or maybe the new Board, management and Chairman want to have more input in the announcements? The slides used in the Sep Q results and conference call are usually very similar to the basis of the AGM presentations with regards to the state of the technology, partnering deals etc – so maybe these are being vetted by the new Chairman.
The release of all the current information, the Sep Q conference call and the AGM may either drive the buyers to pay up for stock in the market, or may give Capital the green light to sell the rest of their holding – as with all of the info released, they will look less silly if they sell and then the price bounces strongly (as I suspect it will). Capital would look like they had considered everything and hadn’t jumped the gun with a knee-jerk reaction just because one of their senior fund managers had left the firm.
More information gives everyone the opportunity to make more informed decisions on buying and selling and the price they are prepared to pay. Everyone is nervous of making a big decision right in front of a ship load of data.
Capital and The Mexican Stand-off - update
As I said, I don’t know why the Sep Q result is a bit late, but it would make sense for Capital to wait until all the info is out of the way before deciding whether they will finally sell or not. The departure of Mark Denning (the fund manager who held all of Capital’s MSB holding) and the sale of MSB shares and ADRs after he left Capital leaves the rest of Capital’s holding in question.
Capital sold 2m shares at an average price of $1.87 and 223,000 ADRs at $US6.43. The market has been suspicious that Capital would sell more (and maybe it has dribbled a few more out since Oct 21st when the price gets back up near $1.87 – though that only happened briefly on Oct 25th – the rest of the time it has been capped at $1.85).
There have been times the market has been suspicious that Capital was selling down near $A1.80 when big lines have traded. I don’t think that is the case, given the pattern of substantial shareholder notices, however buyers would be wary that if they buy a few million shares above $1.80 and then Capital decides to sell the rest below $A1.80, the buyers will feel ripped off, especially if their competitors get stock at a cheaper price by waiting for Capital to sell. So, the buyers are probably trying to get Capital’s line of stock below $A1.80, and Capital are probably holding off to try to match their average price of $A1.87, or at least to make sure it doesn’t look like they are panic selling in front of potentially positive announcements.
The fact that we still haven’t seen a substantial shareholder notice indicating that Capital has fallen below 5% of MSB’s equity means that they still hold at least 26.834 million shares and ADRs (although I suspect they haven't sold any since their last notice of 27.563 million shares and ADRs which included selling up until 21 October). If Capital have decided to exit, it doesn't make any sense to sell piecemeal for bits and pieces and force the share price down in the process - they're better than that!
So that’s the Mexican Stand-off and why I think it may be broken in the next week with the release of all the current information and a potential rise in the share price. That is within the timeframe I originally thought it might take to break this logjam. The very low volumes of the past 2 weeks may also give way to better volumes once Capital is out of the way.
Finally, it is still possible that Capital’s new fund manager may decide the info released next week is so good that he will hold on to the rest of the holding (and even add to it!) – if that is the case, we might hear Capital make some sort of announcement – or even say something on the conference call or at the AGM. Maybe someone should ask them their intentions on the conference call (though you can’t expect a fund manager to honestly telegraph what he’s going to do, unless it suits him)!!
[One final thought – I know a lot of people on these threads think that selling shares is a way of accumulating – while I think it would be crazy for Capital to sell over 2m shares as an accumulation strategy, it is certainly possible that other potential buyers may be abstaining from buying or even firing off some strategic small selling in the hope of making the price look weak and then being able to buy a big chunk of Capital’s remaining 27m shares in MSB at a discount. This accumulation strategy only works where the amounts you sell are much smaller than the potential stock overhang you are trying to buy – and so it is possible it is going on at the moment in such a thinly traded stock as MSB, where the last 10 trading days have seen less than 500,000 shares traded per day.]
1. Sep Quarter result and conference call is due
We haven't yet had a quarterly conference call for the Sep Quarter results. Given that the AGM is next Wednesday, I assume the Sep Q conference call will be held either Monday or Tuesday morning before the market opens.
There will at least have to be a September quarter Form 6-K quarterly profit report for the US listing of MESO.
I know that nothing has yet been announced, but there has been a Sep Q result and conference call every other year before the AGM. Note that in 2016, the Sep Q result was on 15 Nov followed by the AGM on 22 Nov. In 2017 the Sep Q conference call was on Nov 15, only one d
ay before the AGM. In 2018 the Sep Q conference call was on Nov 16, with the AGM on Nov 30. This year, it appears the Sep Q result is going to be nearly a week after previous years - but to come before the AGM it will have to be on Monday or Tuesday - traditionally before the market opens in Australia - probably at 830am Melbourne time.
We have already seen the September quarterly cash flow statement (which was only an operating cash outflow of $US15.9m and was an improvement of $US3.9m or 20% less than the Sep Q last year), and we have the forecast of a $US22m operating cash outflow in the Dec Q, before the known inflows of $US15m from Grünenthal, $US50.5m from the capital raising and $US1.9m TEMCELL receipts. So the net Dec Q cash flow will be strongly positive when these are included.
2. This will be a good opportunity to update the market on:
a. Further debt drawdowns planned from Hercules ($US50m drawn so far and $US25m to go) - this debt is now at 9.95% (7.86% net after US taxes, once MSB is profitable) - much cheaper than equity financing
b. Plans for NovaQuest debt ($US30m drawn so far at 15% and $US10m to go upon receiving marketing approval for RemestemcelL from US FDA - most likely by end of June Q 2020).
c. Plans to renegotiate debt as MSB's approvals come through, product sales start and partnerships progress - which has been raised by Bell Potter and others. Once all the debt is drawn down it will amount to $US115m with an annual net after-tax cost of $US10.635m - or 9.25%. That's high and could potentially be renegotiated or paid off early and then reborrowed from somewhere else - however it is way below the WACC and cost of Equity Capital being used by analysts of 15% to 30%. Equity is hideously expensive at present. If the share price goes back above $A2.20 after Capital's selling and the recent equity raising are absorbed (as I expect) then MSB's market cap would be $US800m - so $US115m of total debt will be less than 15% of the value of the equity at that stage (and that's without counting any more partnering deals). At present, the drawn down debt is only $US80m - which is 10% of the market cap at $A2.20. That seems conservative just 9 months from potential sales of RemestemcelL in the US market.
d. Update on the BLA filing for paediatric SR-aGvHD - which the Prof has previously said will be completed by the end of December
e. Update on Phase 3 CHF trial which is expected to have reached its total number of MACE events by the end of this December quarter - even if the number of MACE have not yet been reached (which would be a very good sign in itself) - MSB should be able to give an indication of time frames of batching and lodging all results for analysis, and a range of outcomes as to how long that analysis may take. They don't have to be exact on this - it's all new medicine and the FDA is feeling their way on it as well - but MSB has some very experienced people that it has employed as staff and board recently who should be able to give us a rough range of achievable guidance and a range of dates (even if it's broad)
f. Update on CLBP trial - which will have been fully enrolled for 2 years in the March quarter of 2020 and so due to finish by the end of March. Results from that trial may be available by the end of June 2020 - giving 3 months for analysis - but there could be preliminary results before that, once the trial has ended - I'd like to know if this timeframe is achievable or if I'm too optimistic
g. Update on Tasly - it has now been 12 months since Tasly spent $US20m on MSB shares at a premium price of $A1.86 (after moves in AUDUSD, they would need $A1.95 now to break even) and paid $US20m in upfront fees. Note that Tasly is committed to paying another $US25m on product approval in China for heart failure indications, plus double digit royalties and 6 escalating milestones on certain product sales thresholds in China - and that Tasly can "leverage each other's clinical trial results for respective regulatory submissions". I'd love to know if the 6 escalating payments may be potentially as big as the Grünenthal $US1 billion total, or the 2011 Cephalon deal of over $US1 billion. Of course, sales would have to be highly successful to justify this level of milestones, and they would take several years - but it would be good to be able to model these potential payments. Even though the Tasly situation has been very quiet, a positive phase 3 US heart trial may become the basis for approval in China and things may start to move quickly after the end of this year when the US phase 3 trial's MACE events reach their target if the results are as good as the phase 2 trial and as good as the older ischaemic patients in the NIH LVAD trial.
h. Update on Lonza facility - when the upgrade will be completed and the increase in capacity
i. Update on Grünenthal - when the EU confirmatory trial may begin and whether it will be a 12-month or 2-year trial. Also an estimate of the cost of the trial - borne by MSB, but reimbursed by the Grünenthal
upfront and milestone payments
3. Short position and recent trading
I haven't commented much lately, because there's very little going on. However, a few people have noted recent rises and falls in the daily net short position of around 1.9m to 2m shares per day since November 12th. That is only 0.36% of MSB's capital and is going in and out on a daily basis. I can't read much into it.
It is possibly a broker facilitating buying by an insto client(s) - i.e. an insto doesn't want to sit in the market buying all day, so the broker shorts 2m shares to him, and the broker then dips back into the market over one or two days hoping to cover the short at lower prices and book a profit as well as the brokerage. Once the broker has covered his short, they can start again. With volumes so light at present - it could take nearly a week for the broker to cover this amount of stock.
In this way an insto could build a holding of a few million shares without the hassle of being in the market all the time - and the insto gets the stock at a fixed price they are happy with. Remember that this all started back on Wed 6th November with a 1.98m share crossing that everyone thought was Capital selling (I said at the time that I doubted it was Capital as we should have seen a substantial notice that they had gone below 5%). It now looks like this may be part of an accumulation plan by an insto, with a broker facilitating the insto's buying either by shorting stock directly to the buyer and then covering, or possibly involving another client on the selling side to put through the crossing. If it is a new buyer, he can buy nearly 27m shares without going substantial - so this could go on for a while, or he might eventually be able to buy a big chunk from Capital when they finally decide if they are sellers or not.
MSB is now the 77th most shorted stock on the ASX, with 4% of the company short (down from a high earlier this year of over 8%), and it is estimated at 47 trading days to cover the short. That ranks it the 12th hardest stock to cover the short - this has dropped recently because of the very light trading in the past 2 weeks, particularly compared with the heavy trading from 3 October to 7 November after the Grunenthal deal and equity raising. We are currently struggling to get over 0.5m shares per day vs many days of 2m to 2.5m shares traded in the previous month.
4. Comments of the value of the Grünenthal deal
I have previously said that the Grunenthal deal can be regarded as the first of a set of emerging partnering deals, which can be regarded as better than the Cephalon deal which pushed the share price to $9.95 back in 2011. There are now twice as many shares on issue, so arguably a deal like Cephalon today would only push the price to $A5.
However, Cephalon was a global deal for all of cardiac and all of the central nervous system (which could arguably include back pain). Grunenthal is only a deal for back pain in Europe and LatAm - yet the total potential milestone payments of $1 billion are nearly as big as the Cephalon deal. Cephalon also took a placement of 20% of MSB's equity (which isn't required now, and would just dilute us all with expensive equity) and paid $US130m upfront - though the current Grunenthal deal is up to $US150m in upfront and milestones prior to product launch (less $US40m or so cost to MSB - my guess - to run a confirmatory trial in Europe).
Also note that Cephalon was 9 years ago, when we were only at phase 2 trial stage at best, and was before huge expenditure in time and money on phase 3 trials. We are now at the end of that phase 3 period on 3 of the most promising product candiates, with great results so far - so the amount we receive should be much more than in 2010.
So, the amount received from Grunenthal is comparable to the Cephalon deal, but it only covers a fraction of the potential products and geography of the original Cephalon deal - that's why it's better - but it's also more strung out - and it requires more sales/licensing of the technology in other indications (eg heart) and geographies (eg the USA) to show just how much better this series of deals could be. The final tally could be 3x better than Cephalon after they license heart in US and EU markets and CLBP in the US. And that's before you licence any of this in Japan, which could mean 4x the value of Cephalon in total! So if Cephalon would be worth $A5 per share, if Grunenthal is repeated, it could be the start of a series of deals which could lift the share price to $A15 or $A20.
The fact that the share price doesn't currently reflect this doesn't mean the Grunenthal deal is a dud. You have to give these things time. Who knows, maybe nothing else will happen and the trials won't match earlier results. If you are a believer in the technology, these comparisons just show you what the potential upside is. Of course, you can come up with much higher valuations than this, depending on your assumptions of how many products succeed and their global sales penetration, but I'm just trying to put the Grunenthal deal in the context of where the share price traded in the past after similar deals.
Was CSL a dud when it fell 25.4% between Sep and Dec last year - did that share price move tell you anything about the company's value or prospects? Of course not - it was just people panic selling, with no focus on long term value. In fact, if you had bought CSL at the Dec 2018 low, you'd now be up 55% less than 12 months later. So don't imagine that the short term share price is any indication of the medium to longer term value of a company.
NB - the CSL rise over the past year is impressive - but not as good as MSB over the same period - which is up 77.5% from the $1.015 low in Dec 2018 to $1.8025 at time of writing.
5. Lull before the storm in the share price
I have showed this graph previously, but it's worth updating. You can now see that the low price volatility period has extended as long as the previous two periods this year (about a month, or slightly less), which led to significant price rises after the lull ended.
Graph Update:
The MSB price has been trapped in a tight range since Capital lodged its substantial shareholding notice on 23 October. You can see that similar periods in 2019 have preceded big rises in the share price (see purple bands on the graph below) – i.e. when MSB has traded in a 10c range for 4-6 weeks that has been the lull before the storm and there have been strong rises after the period of low volatility. The first one in February- March was caused by Capital’s selling being cleared with a crossing at $1.15, and the price subsequently rose to $1.65 (up 43.5%). The second in September was caused by the Grünenthal partnership deal and a rise in the price from $1.455 to $2.23 (a rise of 53.3%):
Bottom line - a big week ahead
The Sep Quarter results, conference call, AGM comments and a resolution of the Capital Mexican Stand-off could all provide triggers to end this share price lull. It's due to end, and the information flow will be there.
Later in the quarter, final submission of the BLA for US paediatric SR-aGvHD or more info regarding the phase 3 heart trial, or another partnering deal out of the blue could see the share price explode upwards. There is also possible inclusion in the ASX200 - but with the share price averaging $A1.84 over the past 2 months, around 30c below my previous price target of around $2.14 average required over 6 months, we will need a price above $A2.30 for the next 3-4 months to enter the ASX200 at the March rebalance - certainly possible, but starting to get more difficult.
Next week could resolve several of these issues, with potential information on MSB's progress and the possible removal of the Capital overhang of selling.
(20min delay)
