I see Morningstar has lowered their fair value to $1.50
Funding Challenges and Later Product Launches Mean a Lower FVE for Mesoblast
Investment rating
Mesoblast is a binary outcome investment case and hinges on their decades of stem cell therapy research and development, or R&D, ultimately getting FDA approval. With phase three clinical trials ongoing for most of their Tier 1 product candidates and launch timelines consistently moving out, the window remains open for competitor therapies to reach the market first. Paired with funding challenges that have seen the company suspend much of the R&D on their tier two portfolio, and no clear commercialisation strategy, Mesoblast is a risky place to invest despite the shares screening as fairly valued.
Event
Impact Recommendation impact (last updated: 14/06/2019)--
Event analysis
Funding Challenges and Later Product Launches Mean a Lower FVE for Mesoblast
We are lowering our fair value estimate for no-moat Mesoblast to AUD 1.50 from AUD 2.35, based on a re-evaluation of product launch timelines and pricing. Mesoblast doesn't have a marketed product yet and estimated launch timelines have shifted to between three and five years on average, compared with dates originally indicated by management. We now anticipate the firm's first owned product, to treat acute Graft Versus Host Disease, or aGVHD, in children will be launched in fiscal 2021 versus our prior forecast of a fiscal 2020 launch. Our FVE of AUD 1.50 includes only the Tier 1 potential products, which are in the late stages of clinical trials and limited to the U.S. and Europe.
Mesoblast's cash flow is constrained and requires about USD 100 million annually to fund operations. To date it has sourced equity and debt funding, supplemented by selling rights to develop and commercialise certain drugs in specific countries. We anticipate further equity capital will be raised because the balance sheet won't be able to accommodate only debt funding, until Mesoblast reaches a stage where its able to generate positive free cash flow, which we forecast to occur in fiscal 2025. Shares on issue could be diluted 50% to 70% from current levels based on our assumption and debt levels above USD 200 million would be unlikely given the risk profile of the firm. By March 2019, the firm had USD 70 million of debt and access to a further USD 35 million facility. Equity holders are further at risk because existing debt agreements have preferential rights to cash flows linked to specific drugs. We don't believe the firm will pay a dividend.As a biotech firm without approved products, the valuation has extreme uncertainty. Approval success rates, drug pricing, production costs, and the success of commercialisation and ultimate share of the treatable market achieved are highly variable. Our valuation range has a bull case scenario of AUD 5.50 and a bear case of AUD 0.50.
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