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To Like Or Not Like Mesoblast?
FNArena News - December 14 2012

- Brokers split on Mesoblast
- Teva holds the cards
- Wide price target range


By Andrew Nelson

When you look at a broker report on Mesoblast ((MSB)) you’re most likely greeted with news not about the company, but rather speculation about its admittedly key partner, Teva. Brokers tend to even couch their opinions and recommendations with Teva justifications like: we’re negative on Mesoblast because Teva....., or we’re positive on Mesoblast because Teva.....

Mesoblast is a developer of biological products for regenerative medicine, with its core product being proprietary stem cell based adult mesenchymal precursor cells. The products from these cells can be used to target cardiovascular conditions, diabetes, inflammatory conditions of lungs and joints, eye diseases, bone marrow cancers, bone fractures, cartilage degeneration and musculoskeletal conditions. This is a pretty big market.

And just so we’re all on the same page here, Teva is a global generic pharmaceuticals company and is also one of the top 15 pharmaceutical companies in the world.Teva specializes in the development, production and marketing of a wide range of both generic and branded pharmaceutical products.

To get Mesoblast’s products from the laboratory to the market is an expensive process and Mesoblast has thus partnered up with Teva to commercialize their adult stem cell products. Treatments are to target degenerative conditions of the cardiovascular and central nervous systems, but will also look at developing products for augmenting bone marrow transplantation in cancer patients.

The problem brokers are having is not really about Mesoblast’s technology, as almost every broker out there agrees this is likely to be great stuff. The real issue debated by analysts is the support (or lack of) that’s being offered by Teva. Mesoblast just won’t be able to make money until Teva spends a whole lot in testing and then marketing these products. Thus, attention from Teva is crucial in trying to figure out when and how much money Mesoblast is likely to make.

Analysts at Macquarie reckon Teva isn’t all that interested in Mesoblast’s products and fear they could even fall off the plate as Teva looks to rationalise costs in the currently tough global macro environment. Analysts from Deutsche Bank see the exact opposite, with both Credit Suisse and BA-Merrill Lynch sitting somewhere in between.

Earlier this week, Teva held an R&D briefing and according to Macquarie, when asked if it was going ahead with a 1,700 patient trial with MSB, Teva offered no new commentary, simply repeating what it said a few weeks back. Phase III trials will occur, but with an early efficacy analysis. Thus, while the broker was happy to hear Teva confirm that a trial will take place, its interprets this “early efficacy analysis”  qualifier as meaning Teva does not yet have the confidence to proceed directly to a full phase III trial, and instead wants some reassurance first.

These creeping doubts saw the broker cut its valuation and lower its price target to $4.20 from $5.40 and maintain its Underperform call yesterday. This is the glass half empty scenario.

On the other hand, analysts at Deutsche remain at Buy, making no change to their $8.00 price target. The broker notes that Teva confirmed it will discontinue at least five phase II/III programs, but Mesoblast is notably not one of them. 

To the broker, this means congestive heart failure and bone marrow transplant programs remain on Teva’s agenda. In fact, the broker points out that Teva specifically said it intends to proceed with the phase III trial of Mesoblast’s Revascor for congestive heart failure, which as far as it is concerned, confirms Teva’s commitment to the project. Thus, Deutsche continues to see significant upside on offer to its price target and sees no reason to shift from its Buy rating on the stock, with additional news flow on the testing likely to provide catalysts for the share price. That’s the glass is half full argument.