My weekend musings, Part 2 (Part 1 posted 27 June, Post #: 45487542):
MSB Valueand Clinical Trials
In any given year, 54% of clinical phase 3 trials typicallyfail for a range of reasons, with average costs for developing a drug estimatedat more than US$2.1bn. The trials and approval process can take years, often 10years or more, with less than 12% reaching approved status with the FDA. (Ref:Hwang et al.). MSB has raised overAU$1B in fresh equity since listing in 2004 and has a market cap of under AU$2B.But with MSB products already approved for two different indications in Japanand Europe, one about to be approved in USA, two further indications withcompleted Phase 3 trials, and the big one for ARDS currently in an acceleratedPhase 3 trial, it is abundantly clear to me that MSB has value way beyond thecurrent share price. If we were to value MSB just on the average cost ofgetting this number of indications past Phase 3, that would be at least US$10B,so new investors are getting MSB shares at a huge discount to this cost. Thisis without even looking at the likely revenues and profits likely to begenerated by MSB if/when all of their Phase 3 and beyond products are on themarket (already well covered by Wombat777, eCoool2 and others).
I do not propose to usethese costs as a valuation on which to make an investment decision. However,the above does show that MSB has been very successful in developing so manyproducts for so many indications for so little expenditure, compared toaverage.
MSB Value from a Market Perpective
Without trying to takeaway from MSB’s potential, I have learnt over the years to always try todownplay my enthusiasm when valuing a company, particularly ones like MSB whichhave what seems to be world beating products but which have not yet fullycracked the markets they are targeting. On most occasions, market penetrationand profits have grown slower than what was expected by most investors. Therecan be many different reasons for this: pricing and delays in gettingreimbursements, inadequate marketing resulting in a lack of awareness of newproducts (inertia) by medical professionals and patients, delays in extendingapprovals to other countries, manufacturing limitations, some of the marketlost to competitors etc.
Normally I would discountoptimistic assessments of sales and profits by 90% for the first couple ofyears. But in this case, MSB has the likelihood of extensive world-wide publicityand free marketing as a result of the Covid-19. It also has the funding to rapidlyaccelerate production. Market penetration is still likely to be gradual. IMO,governments and communities would take a very dim view of any excessiveprofiteering during this pandemic, so margins may be less than otherwise forthe first couple of years.
So, when I look atWombat777’s possible revenues, margins and share prices, my gut instinct tellsme to discount them by about 80% in the short term. Don’t get me wrong, MSB mayvery well succeed in achieving Wombat’s figures, but IMO, it will take moretime to do that.
What does this mean for myexpectation for the share price potential over 2-3 years? I have seen others’ quitereasonable looking predictions of profit just on Covid-19 treatment of US$2Band a share price of AU$155 based on a P/E of 30 which also seems reasonable. Thenthere is further upside of around AU$70 per share for other indications andother markets such as Europe and China. If I use my 80% discount, I get US$400MUS net profit, and a share price of AU$31 on the method used by Wombat, which Ihave no reason to change.
This is about 8 times therecent average share price. I would take that over a 2-3 year timeframe anyday, and this explains why MSB is currently the equal biggest share holding inmy SMSF. There is also the possibility that MSB does achieve the kind ofprofits indicated by others, giving much more upside again.
Comments on my Weekend Musings Part 1 postedyesterday:
It appears from the lackof feedback that most MSB followers on Hot Copper either did not see it, or donot want to hear much about potential competitors, even those from Australia.
I am quite new at postingon MSB, so I apologise if I have gone off on a tangent or went into too muchdetail. I found it interesting but perhaps others did not.
If you did not see yesterday’spost and would like to, the link is Post #: 45487542
(20min delay)