Mesoblast Remains on Track, Clinical Trial Readouts Still Ahead

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We maintain our AUD 2.60 fair value estimate for no-moat Mesoblast after the company reported first-quarter 2018 results together with a progress report on several clinical trials. Disappointingly, there was no news of a partnering deal in the near term beyond management's comments that discussions remain ongoing. Liquidity, while weak, has been bolstered recently by the recent inflow of USD 40.4 million raised from an institutional and retail entitlement offer in September 2017. This has increased available cash to USD 62.9 million and represents a cash runway of around nine months based on current cash burn rates. Net loss for the quarter was USD 7 million, compared with USD 19.8 million in the previous corresponding period. This was largely driven by a remeasurement in the fair value of the contingent consideration associated with the Osiris technology asset acquisition and therefore non-cash.
We consider the stock undervalued, based on our risk-adjusted assessment of the company's development pipeline. The current discount to our valuation reflects the market's concerns around partnering and consequently, the prospect of additional capital raisings and associated dilution to existing shareholders. We believe the market is assigning too high a probability of this event transpiring. Also weighing on the stock has been the sell down of 29 million shares owned by beleaguered Teva Pharmaceuticals, given its own company-specific issues. This compares with average volumes of Mesoblast shares traded of around 2 million per day. As such, we see the negative impact of the sell down to Mesoblast shares as temporary. Nonetheless, we remain mindful of the multiple risks associated with development stage biotechnology companies and retain our very high fair value uncertainty rating.​