Morningstar Valuation

Valuation: $1.90

Last updated:
15/06/16
Mesoblast Regains Rights to Cardiovascular Portfolio; Funding Risk Escalates Significantly

Investment rating

Mesoblast is developing adult stem cell therapies based on its proprietary mesenchymal precursor cells, or MPCs, extracted from bone marrow. The therapy is noncontroversial, unlike some other stem cell therapies, while clinical trial progress implies a high probability of success. Large underserved potential markets include heart failure patients, bone marrow regeneration in cancer patients, and several orthopaedic indications. Notwithstanding the potential launch of JR-031 in Japan in 2015 and potentially MSC-100-IV in 2017, product sales using the proprietary MPC platform are unlikely before 2019. In the absence of partnering deals during the next 18 months, the company will most likely return to the capital markets, raising the risk of dilution to existing shareholders.
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Recommendation impact (last updated: 15/06/2016)

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Event analysis

Mesoblast Regains Rights to Cardiovascular Portfolio; Funding Risk Escalates Significantly
We are reducing our fair value estimate for no-moat Mesoblast to AUD 1.90 per share from AUD 6.00 per share and maintain our very high fair value uncertainty rating, following the disappointing news that Teva Pharmaceuticals has decided to withdraw from its agreement to fund the company's lead advanced chronic heart failure, or CHF, and acute myocardial infarction, or AMI, programs, through to commercialisation. The strategic alliance with Teva Pharmaceuticals had been a central component of our investment thesis, given that funding under the agreement was used to advance the most commercially attractive cardiovascular indications and represented AUD 4 per share, or 67%, of our previous sum-of-the-parts valuation of the stock at AUD 6.00 per share. Although regaining the rights to the program does allow Mesoblast to sign another partner on more favourable terms, given its more advanced stage of development, we see interim funding requirements as adding significantly to the company's already-high funding risk.

Mesoblast announced an equity finance facility to fund the lead CHF program, which we estimate will require USD 50 million-USD 70 million to complete. However, actual financing mechanism details remain scant at this point. Given the funding uncertainty we are conservatively reducing our probability of success for the two cardiovascular indications, formerly partnered with Teva, in CHF and AMI to 5% and 5%, respectively (formerly 60% and 25%). As previously stated, we use a weighted average cost of capital of 13.5% and forecast an operating cash deficit for the next three years, requiring an estimated 277 million of fresh equity to be raised, which could weigh on the stock. Our revised valuation reduces the underlying issue price per share of the forecast capital raised to USD 1 from USD 1.50, based on current levels, and excludes additional funding consideration required to fund the CHF and AMI programs, pending further details.