Maybe I'm picking up the wrong vibes but the reaction to this...

Maybe I'm picking up the wrong vibes but the reaction to this deal seems muted! A cashed-up pharma like Celgene, taking a 4.5% stake in MSB is highly significant to me for a number of reasons, not the least of which is that the $A58.5m cash injection gives MSB enough cash, (at their current burn rate of around $8m per month) to remove the necessity for any cash raising at least until the end of 2016.

Yes, the response to this deal does appear to be somewhat muted. And appropriately so, I think.

For the overarching feature of this deal is that it allows MSB to kick the can down the road for a further 6 months. Clearly, it certainly isn’t the much-vaunted, show-stopping deal that some might have been hoping for.

You talk of “the necessity for any cash raising to be removed at least until 2016” - based on a burn rate of A$8m per month. However, by my reckoning, it’s more like “this time next year” that the cash runs out.

Let’s look at the numbers:

In the preceding 2 quarters (Sept 2014 and Dec 2014), MSB’s cash consumption (excluding proceeds from options exercised) was A$32m and A$27m, respectively. That implies monthly cash burn of around A$9.8m per month.

But given that the bulk of MSB’s cost base is denominated in US dollar terms, it is important to make adjustments for the recent sharp deterioration in the A$ vs the US$.

In the six months ending December 2014, the A$:US$ exchange rate averaged closer above 0.90, which means that in US dollar terms, the cash burn over that period was around US$8.9m per month.

Based on your A$8.0m per month cash burn assumption, at the current exchange rate of 0.76, it means that in US$ terms, this is around US$6.0m per month. Yet the current cash consumption is running almost 50% higher than that.

What makes you think that there will be a 33% reduction in cash burn going forward?

Also, don’t forget - and this is something people conveniently choose to overlook – is that the company will invariably always need to retain enough residual capital on hand to service current liabilities (other than deferred revenue), which in MSB’s case is around A$30m (A$26.1m for current trade payables and $3.8m for employee benefits). So the cash balance can never be assumed to be able to go to zero when calculating how much cash runway there is at any given time.

[There is also $5m in deferred acquisition consideration that needs to be paid over the next 12 months, but for the sake of conservativeness, I’ll ignore this from the minimum capital retention amount for audit sign-off purposes because it will probably be settled via the issue of additional MSB scrip at MSB’s election, pursuant to the Osiris acquisition agreement.]

Based on this, as well as assuming historical rate of cash burn continues and that the exchange rate remains unchanged at its current level, the company has enough cash until around this time next year.

(I’ll omit the rudimentary mathematics in the interests of brevity, but I am more than happy to post my exact workings for those interested.)

So what MSB has been able to achieve via this deal is to kick the can down the road for 6 months.

Which means that 6 months from today, I expect the market will again start to be concerned about the same funding adequacy as it has been for the past few months. Unless Celgene – or anyone else - signs a big cheque over to MSB to get on board.



It also validates the Osiris deal, effectively giving MSB their investment back, with interest, whilst retaining the commercial rights to GvHD in Japan and its' patents whilst picking up another biotech blueblood as a shareholder.

To say that this deal “gives MSB their investment back, with interest” is a totally flawed observation. You make it sound like it is simply free cash coming in the door.

However, you are forgetting that there is a cost to this cash that MSB shareholders need to bear, and that is the issuance of additional equity that needs to be serviced to perpetuity.

Celgene aren’t gifting MSB with near-$60m. They are getting something in return which they are at liberty to on-sell to recoup their capital, if they so wish.

The most significant question, I think, but one that no one is asking, is, “what are the escrow arrangements on the stock that has been issued to Celgene?”

I am assuming the stock being issued as part of this deal is un-escrowed (otherwise the contrary would have been noted, I suspect, as it is in most instances), in which case Celgene are at liberty to sell their stock whenever they wish, presumably.

And I note that Macbank has picked it up – being at less than 5% shareholding, Celgene could sell on-market without any attention.

Which means that the actual cost to Celgene for accessing MSB’s data room(s) could actually be very little, depending on what MSB’s share price does over the next 6 months.

Heck, Celgene could possibly even end up actually getting paid to see the data, if the MSB share price happens to stay above the $3.82 price they have paid for their stock.

And it would not be lost on any even-remotely smart Celgene executives that the very act of in entering this arrangement would be self-fulfilling in supporting the MSB share price in the short term and thereby limiting the cost of the option they have acquired.

But I think to get overly excited by saying “Oooh, big pharma are paying us a fistful of dollars,” is fanciful. Subject to whatever the escrow arrangements are, the cost to Celgene for looking under MSB’s hood is negligible, if not zero.

So, while this deal is an OK one for MSB as it buys MSB some time, it is a good deal for Celgene, effectively being for them a free – or potentially, negative cost - option.

The way this development should be viewed, in my view is that MSB has given another company a free (or a negative cost), six-month, collared call option. (I read Macbank called it a near free option… I go a step further and say the option might even be a negative cost, as well as being collared).

But one thing it isn’t is MSB simply “getting their investment back, plus interest”


Also, I can’t see how it validates the Osiris deal at all, as you suggest. All this deal does is give Celgene an exclusive right to study MSB’s data related to GVHD (and also to bits of MSB’s portfolio that MSB itself had de-prioritised, namely disease fields in oncology, bowel inflammation and organic transplant rejection).

Celgene is effectively saying is, “Sure, for the cost of buying some shares in your company, you give us six-months to look under the car’s hood.”

It isn’t saying, “Yes, we have decided in the affirmative that we want to be a part of this. How much do you want us to pay you for that privilege?” which is what “”validating the Osiris deal” suggests.

It might get to that stage, but this is not yet it.


Celgene effectively gets 6 months to conduct further due diligence on some of MSB's disease fields (ie GvHD (ex Japan), Crohns disease, some oncology and inflammatory bowel diseases.) At the end of the 6 month period, should Celgene decide to licence any of the MSB pipeline products, I'm sure they will need to negotiate an upfront payment with royalties and milestones attaching, with MSB.

Yes, I am sure they will need to negotiate royalties and milestones in order to participate.

But this is no different to those sorts of potential partnership discussions that happen on an ongoing and routine basis, presumably.


One can't rule out the possibility of Celgene taking a bigger stake, or even acquiring MSB in its' entirety at some point in the future.

And what about the Teva stake in that case? What happens to that?

All that has really happened is that someone has been given a six-month collared call option on one aspect of MSB’s business; and somehow you’re now talking takeovers?


The deal also further strengthens MSB's bargaining position in the Orthopaedic partnering discussions now underway, through the elimination of the perceived need for a capital raising.

The need for a capital raising has been deferred, but far from eliminated.

Mark my words, unless Celgene agrees to up-front payments to MSB to buy into the programmes they are going to be evaluating, in 6 months’ time there will be renewed talk of when the company will need to raise equity.


All in, a small deal for MSB and Celgene, which is hungry for growth options, something Australia's superannuation system seems wired to avoid.

Yes, I agree. It is a small deal for both parties, and certainly not the sort of mega-deal that I was hoping for which will get them through to self-sustaining commercialisation.


[I stand duly by for the usual cacophony of, “why do you even post on MSB when you don’t own the stock? You are obviously a shorter.”, or “why are you trying to scare mum and dad investors?”, or the catch-all, “I wonder if you are an agent acting for Macbank?”]