Numbers for Covid-19 much bigger than analysts think Bell Potter...

Numbers for Covid-19 much bigger than analysts think

Bell Potter is the only analyst which I have seen revise its price target for Covid-19 ARDS
So, this treatment is not in the analysts' price forecasts and BP's numbers are way below reasonable figures.


1. BP total addressable market numbers look way too low

Firstly, BP thinks confirmed cases as a % of the population will not rise above 0.5% - that's 1.6m to 1.7m people. That's hardly the 60% that experts were talking about in the early phase of the disease. It hardly justifies the trillions of dollars of economic destruction and would be a massive waste of money for most people trying to develop a vaccine. It's only 3% to 18% of the number of people affected by seasonal 'flu. Yet according to the US CDC, Covid-19 is spreading far more efficiently than influenza. So, in my view, once economies are re-opened it is likely that this spread will recur and reach more people than seasonal 'flu.

The virus that causes COVID-19 is spreading very easily and sustainably between people. CDC says "Information from the ongoing COVID-19 pandemic suggest that this virus is spreading more efficiently than influenza, but not as efficiently as measles, which is highly contagious."

Compare BP's Covid-19 estimates to seasonal 'flu. CDC uses mathematical modeling in combination with data from traditional flu surveillance systems to estimate the numbers of flu illnesses in the United States. CDC estimates that flu has resulted in between 9.3 million and 49 million illnesses each year in the United States since 2010. More information on these estimates is available on CDC’s Disease Burden of Influenza page.

During the 2018-2019 flu season, CDC began reporting cumulative, in-season estimates of the disease burden of influenza, including estimates of the total number of flu illnesses in the United States. More information regarding these Preliminary In-Season Burden Estimates is available.


In a letter to the New England Journal of Medicine from 4 doctors at Columbia University Irving Medical Center, New York it was disclosed that 215 pregnant women were screened on admission to hospital and that 33 were positive for Covid-19. That's over 15% of the population. Four women (1.9%) had fever or other symptoms of Covid-19 on admission, and all 4 women tested positive for SARS-CoV-2. 29 of those 33 were asymptomatic. So, it looks likely that once this virus gets going in high-density populations in cold weather, the percentage of the population carrying the virus will be way above 0.5%. Letter below:

Between March 22 and April 4, 2020, a total of 215 pregnant women delivered infants at the New York–Presbyterian Allen Hospital and Columbia University Irving Medical Center . All the women were screened on admission for symptoms of Covid-19. Four women (1.9%) had fever or other symptoms of Covid-19 on admission, and all 4 women tested positive for SARS-CoV-2 (Figure 1). Of the 211 women without symptoms, all were afebrile on admission. Nasopharyngeal swabs were obtained from 210 of the 211 women (99.5%) who did not have symptoms of Covid-19; of these women, 29 (13.7%) were positive for SARS-CoV-2.

So, this gives you a better idea of the proportion of the population already affected. It is probable that it is already close to 2% who are symptomatic in the hot spot regions and as the economy is re-opened, and a bigger baseload of the population has been exposed, that a second-wave will increase those numbers across the nation. The asymptomatic population is a much more worrying 13.7%. Maybe pregnant women are more at risk, but I would've thought they'd take better care of their health than most. Maybe there's some other factor in this pregnant woman study, but I bet if you tested the whole US population, the exposure to Covid19 would already be much higher than 0.5%.

Interestingly, the upper end of the CDC's numbers for seasonal 'flu is 49m, which is 14.7% of the US population - very close to the proportion of women carrying Covid19 at CU Irving Med Centre.

Based on the CDC's seasonal 'flu numbers and the fact that Covid-19 is more efficient and contagious, I would expect the population affected by Covid-19 to be at least 5x to 30x bigger than BP's estimates.


2. You can double the price per dose in the BP analysis

Based on the $US300,000 likely price tag for US paediatric aGvHD, MSB would need to charge $US75,000 for Covid19. The aGvHD dose is 4 weeks at twice a week and the Covid19 dose is one week of two doses. So, aGvHD uses 4x the number of cells and should be 4x the price. Both doses are 2m cells per kg.

I don't know what they are planning to do with the fact that most of the Covid19 doses will be adult (and a higher proportion than average of these people will have comorbidities such as obesity) - so on average I think Covid19 patients would weigh double the very sick cancer-surviving kids on aGvHD. If that is the case, you would imagine a Covid19 patient would actually use half the number of cells of an aGvHD kid, so selling Covid19 for $US37,500 as BP suggests would whiteant sales of aGvHD and not be nearly as profitable. You'd have to ask why MSB would bother selling Covid19 so cheaply when their manufacturing is constrained and there are much higher margin products out there than selling the Covid19 treatment for $US37.500 - in fact I'd advise them to drop the trial now if that's what they're thinking. I just think BP's analyst is being overly conservative on her forecasts.

Furthermore, I have previously guesstimated the cost to MSB of producing the cells (in the current 2D bovine-serum manufacturing method) at $US30,000 per treatment of Covid19 - if they sell for a gross margin of $US35,000 there's no net profit in it and it doesn't make sense. Maybe my guesstimate is too high, and certainly in the future costs will drop as they move to 3D bioreacteurs and serum free (maybe $US 15,000 cost at that point).

Finally, on price, competitors using non-commercial cells without MSB's years of patented manufacturing technology are using up to 5x the number of cells as MSB (ie 10m per treatment vs 2m). If that is the case, these "competing" treatments, which are probably in breach of MSB's patents are totally non-commercial. They may have to charge more than 2.5x the MSB price just to break even.


Bottom line - analysts numbers have huge upside if Covid19-ARDS is approved

Both total market numbers and price should be multiples higher than the BP analyst report.
Note that there are already vaccines for the seasonal 'flu, but that up to 49m people in the US get it each year anyway.

MSB can easily make a fortune selling 100,000 ARDS treatments each year in the US and the numbers are mind-boggling in term of potential profits.

Companies like Moderna have gone from $US11.54 to $US87 in the past year, with a market cap now of $US26.3bn. The market cap rise of Moderna since the March low has been $US25bn - which is similar to the rise in Gilead (although Gilead is a much bigger company and the whole market has been up strongly since the March lows).

MSB's total market cap is still only $US1.4bn. Any of these big guys could snap MSB up and you wouldn't notice the cost - but they could potentially increase their market cap by $US25bn if the Covid19 ARDS treatment works out. That only requires a net profit of $US833m on a P/E of 30x - or a pretax profit of $US1.05bn. If they get 100,000 patients pa at $US75,000 and a gross margin of 60%, that gives a gross margin of $US4.5bn - I'll leave people to speculate on market shares and selling and admin costs etc - but with MSB's patent portfolio and the huge cost to the US medical system of leaving these people on ventilators, it looks like an obvious takeover candidate to me if we can't get the share price significantly higher.

Finally, @Sven62 asked about the level of index buying. As I've said before, I expect MSB to enter the ASX200 in the June rebalance, and the Nasdaq Biotechnology Index in December. Currently, I would estimate more than 50% of the Aussie market is index or quasi index. A friend of mine on the board of one of the big super funds told me yesterday that he would estimate 70% of institutional investors in Aussie shares are quasi-indexers. If Aussie instos are 42% of the market and 70% of them will buy MSB because they are quasi indexers, then that is nearly 30% of the market. Add another 15% from US investors - most of which is indexing these days (and concentrated in BlackRock, State Street Global and Vanguard) and you are at 45% of the market is indexing. That means 45% of MSB's shareholders should be indexers or quasi-indexers after mid June when the rebalance occurs. It is nowhere near these levels at present - sure Vanguard and BlackRock are on the register, but not in big enough size, and the others are nowhere to be seen. I believe a lot of the recent buying has been from these funds, or speculators who will sell to them after the rebalance occurs - and then they'll be stuck on the register as long as MSB stays in the ASX200. Remember, to fall out of the index, you have to rank below stock 220 - so that isn't likely, even if Covid 19 fails. I believe MSB will have an index weight around 0.12% (after discounting 15% for the IWF) and the volatility of this stock means indexers will have to hold it. They can't substitute it with another similar stock as nothing else has similar performance characteristics (and nothing else has the potential upside - if they try to substitute it with another biotech, they could end up with nasty underperformance when they are trying to replicate the index.

So, that explains the strong buying which is currently supporting the price, and is likely to continue past the index inclusion date in mid-June. After that we should see results for the Heart Failure and Back Pain trials by early July and the possibility of an early read out of Covid19-ARDS with the possibility of the trial ending for overwhelming efficacy by mid-July. I still think it will take a month or so to sign up the first 90 patients and then a month to track their 30-day survival - so that means potentially stopping the trial after the 5th of July. Nothing happens early with MSB - and it may be more conservative to assume the full trial will run, and that means early September before we see results. Then by the end of September we should see FDA approval for paediatric SR-aGvHD - the first allogeneic stem cell product to get US approval.

There's plenty going on - this is a massive story stock, and it already has US analysts valuing it at over $A5 per share before these trials finish or FDA approvals are granted. Once the trials can be shown to succeed, the analysts have plenty of fat in their valuations to increase price targets (with probability discounts as high as 70-75%) and I think I have shown above how conservative the BP analyst's Covid 19 forecasts are.

The share price is still working the gap and people who missed selling the first time it breach $A4.00 are still around. But I think all the index buying and potential upgrades to profit forecasts and price targets on successful trial completion means MSB will keep moving ahead strongly over the next two months.

None of this is advice, and trials may not complete successfully - and MSB is a very volatile stock - however as I have shown in the past, the upside reward is still potentially much more than the downside risk if these trials complete successfully.