MSB Trading - 2019, page-2188

FDA Guidance Importance - partnering possibilities, timing of trial, possible label extension:

1. This obviously makes a partnering deal more likely with confirmation by the FDA that "reduced major mucosal bleeding events can support product marketing authorisation" (ie FDA approval) "through a BLA with confirmatory data". Potential partners will be encouraged that there is an approvable product here. I'm sure they will begin pouring through the minutes of the FDA meeting.

2. As if increasing the odds of a partner isn't enough, the share price should start to recover the big losses caused by the initial uncertainty of the release of the NIH trial results back in November 2018 when the share price was $2.20.

3. There is no cost to MSB for the confirmatory trial (besides the usual cost of supplying cells). InCHOIR (the NIH) will fund and run the trial. InCHOIR served as the central coordinating and data management arm of the original 159 patient trial.

4. Will it be difficult to enrol patients? The NIH have already run the original phase 3 trial, with positive secondary results for the ischaemic patients, and major improvements in their quality of life as well as stopping many serious GI Bleeding events and hospitalisations - so I don't anticipate any problem with recruiting patients for the trial.

5. How many patients might the confirmatory trial need? It could be as big as the last one (ie 150 - or maybe start with 200 to keep a big enough control group). I don't see this as a stumbling block as the MOU with InCHOIR was announced on 27 March and they already know where the patients with LVADs are and NIH has previously had experience with the doctors involved in the transplants. There are 5,000 LVAD implants a year in the US, so getting 100 or 200 to trial something that will improve their outcomes shouldn't be difficult.

6. How long will it take? Maybe as short as 6 months, given InCHOIR's release on March 26th said: “Gastrointestinal bleeding episodes are a major life-threatening complication of LVAD implants that occur in 20-40% of recipients in the first six months, resulting in recurrent hospitalizations and compromising quality of life. Confirmation of our previous observations that Mesoblast’s cell therapy reduced major bleeding episodes and related hospitalizations would identify a therapeutic approach that could greatly benefit these patients.”

I would guess a 12-month trial would be plenty to show enough benefits if the results in the previous trial are replicated - however I haven't seen the FDA minutes - it could even potentially be the shorter six months mentioned by inCHOIR since the FDA has already granted orphan designation and has already seen the results of the first phase 3 trial. This is a question for the next conference call, which should come in the next few days with the financial results.

7. What are the likely secondary endpoints? @cosair please note Putting aside weaning as an indication of regrowth of heart muscle (which the FDA had indicated wasn't an approvable endpoint in the previous trial due to a number of difficulties, but would be good if it could be proved), secondary endpoints could be quality of life considerations - eg how far can someone with an LVAD implant walk, or exercise capacity etc. These are very important and are more easily verifiable than the way they tried to measure weaning in the NIH trial. We've all seen the video of the patient treated with MSB's cells doing multiple laps of the hospital corridor which blew away his medical team's expectations. Quality of life after an LVAD implantation is usually pretty bad - as well as serious risks of GI Bleeding and other complications requiring re-entry to Intensive Care, people can't walk, exercise etc which opens them up to all sorts of other problems (particularly old people).

8. What about label extension? This is an orphan indication, so is approved by a different part of the FDA than the people looking at the much bigger Chronic Heart Failure trial. I would guess they wouldn't want to cross over the lines of the two trials and try to undermine the process of the big trial. However, you would have to think that the LVAD trial opens up other possibilities in bigger markets, eg bypass surgery, stenting etc - where inflammation is a big problem and MSB's cells may well be better than the current treatments of statins and steroids:

Restenosis after stent implantation is mainly caused by neointimal proliferation through the stent struts. Experimental studies performed in the last decade indicate that inflammatory mechanisms play a key role in the process of neointimal proliferation and restenosis. Coronary stenting is a strong inflammatory stimulus, and the acute local and systemic inflammatory responses to local inflammation produced by coronary stenting are highly individual and predictive of restenosis and event-free survival. The benefit of anti-inflammatory periprocedural therapy, such as with 3-hydroxy-3-methylglutaryl coenzyme A reductase inhibitors (statins) and steroids, and long-term follow-up is dependent on the individual’s inflammatory status. Measurement of acute-phase reactants, such as C-reactive protein plasma concentration, appears to be important for the identification of subjects at high risk and the development of specific treatment tailored to individual patients.


Bottom Line as to why hasn't the share price responded to the FDA announcement

This is yet another steady progression, as promised, by Mesoblast.

We could potentially have a trial producing results in a bit over 6 months. Then the orphan designation could possibly see approval in 12 months (however a 12 month trial could mean 18 months to approval). Then we could see label extension into much bigger markets.

This is likely to be a big positive for companies considering partnering deals as it gives further comfort that the FDA considers MSB's trial results in a positive light.

I have pointed out previously that over-anticipation works against the interests of small shareholders. MSB usually delivers what they promise, even if the time frame is initially too optimistic. For that reason, I'm still prepared to believe that a partnering deal is in "advanced negotiations". I'm planning on holding this stock for the long term (and expect a CSL-like benefit), so months of waiting will be paid off by years of benefits. It's a bit like the payoff from Pascal's Wager!

If the partnering deal were not in "advanced negotiations" the Board and auditors would not allow this to be said - there must be concrete negotiations going on and directors and the company face penalties if the statement is shown not to be true - independent directors wouldn't risk this. If the negotiations had ended, it would have to be disclosed under continuous disclosure. If the company really is in advanced negotiations then arguably they must disclose it under their continuous disclosure requirements, though they don't have to disclose incomplete proposals, trade secrets etc which are confidential:

3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.
3.1A Listing rule 3.1 does not apply to particular information while each of the following requirements is satisfied in relation to the information:
3.1A.1 One or more of the following 5 situations applies:
 It would be a breach of a law to disclose the information;
 The information concerns an incomplete proposal or negotiation;
 The information comprises matters of supposition or is insufficiently definite to warrant disclosure;
 The information is generated for the internal management purposes of the entity; or
 The information is a trade secret; and
3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential; and
3.1A.3 A reasonable person would not expect the information to be disclosed.

Generally, it makes sense to disclose a company making event like a partnering deal if it is in advanced negotiations, even though it could be counterproductive to disclose the actual terms of the deal. It also alerts other potential partners that a deal may be done with someone else and they could miss out! That's the stage we are at (and have been for months).

I think the real reason for the lack of activity in the share price is the lumpy nature of the share register, with a few big holders owning most of the stock and only slowly topping up on share price dips and no real buying by retail holders who have lost confidence due to years of falling prices (which I think ended in December 2018, but the rebound since hasn't been enough to entice tired retail buyers). I have seen this many times before in shares which have had multi-year price falls and near-death experiences and would note that the recoveries start slowly on low volume, and usually because the bad news has simply ended. A multi-year price rise can then begin from a low base, especially if the news flow eventually turns good. MSB has been basing for three years, hit by the pullout of Cephalon/Teva which then triggered equity capital raisings and vulture operations by shorters, then the poor response to the NIH LVAD trial, then finally in late 2018 to early 2019 by the big fall in the US stockmarket at the same time that Capital had to sell for one of its funds.

I would argue that all of these negatives have now turned around - the Cephalon/Teva pullout put doubts on the value of the technology, particularly the big CHF trial - but allowed MSB to regain the technology it had previously sold for free, and that trial will finish by the end of 2019 (if not sooner) after several futility analyses have recommended it proceed; the NIH LVAD trial's results were actually positive, as now confirmed by the FDA; equity capital raisings have finished (unless a partnering deal doesn't eventuate) and the major phase 3 trials are close to concluding; Capital's selling has been absorbed and Vanguard has apparently continued to build a stake. Note that I don't think the US Nasdaq 20%+ fall on its own was responsible for the MSB price fall late in 2018 - it appears to me that someone knew Capital was likely to sell and it was a combination of those two events which saw the short interest shoot higher. MSB and MESO have almost zero correlation with either the US or Australian stock markets - and it is just as likely that MSB will rise during a big fall in the market as that it would fall (in fact MSB was up most of the day yesterday on a day that the ASX200 opened 1.7% lower!) unless a big holder decides to sell at the same time that the market falls. No other big holders have sold, and Capital has not sold in its main fund holding MSB.

I will go into more depth below on why trading volumes are so low at present.


Appendix: MSB trading volume, Shorts and the MSB Price

@ddwn @Hey2 You are right that there is no apparent manipulation at present and shorts are going to find it very difficult to cover in the very low trading volume environment of the past few months. I think the low volume is a direct effect of no major placements or equity raisings and with the market absorbing the selldown from Capital early this year.

The big volume spikes between 2016 and early 2019 correspond to equity raisings, the Cephalon/Teva selldown of 55.786m shares, the 1:12 capital raising, and share placement. The Capital selldown was another major influence early this year (Jan/Feb) and quite possibly in Nov/Dec 2018. The shorts played on all these events and shorted every price rise, knowing there was an equity raising coming or a share selldown.

These events have now stopped, equity capital raisings have been replaced by debt raisings, milestone payments and licence fees since 2018 (apart from a couple of placements to strategic partners like Tasly and NovaQuest) and there appears to have been net institutional buying since January 2019.

Hercules, NovaQuest and Tasly have raised $US130m since March 2018, with the potential of another $US35m on approval of aGvHD and other milestones (equity was $US30m of this). The total would equate to $A237m at today's exchange rate, or 165m shares that aren't available to shorts to cover. The total net short position is high, but is only 27.4m shares - so those raisings if done in equity would have given the shorts ample room to cover. Their last opportunity was the Capital selldown, and that accounts for about 11m of the 14m reduction in the shorts from the high. Without Capital they would've been in real trouble.

Shorts therefore don't have any current events to cover into. A partnering deal would finish them off. If there's no partnering deal, there will probably need to be a capital raising in March to May of next year, depending on the cash burn. Even if the share price spikes in the near term, there isn't a big capital raising or share sell down on the horizon, so how do they cover without causing a further big rise in the share price, which would then become a virtuous circle of good news and rising prices bringing in more long-only investors.

Other evidence that shorters have not been active recently:

1. Loading up the sell (and buy) stacks with big lines (ie 100,000 to 300,000) a few cents out of the money has stopped

2. MSB's price has not been acting out of the ordinary statistically

3. Volumes have thinned out to the lowest since 2015.

Note that there were only 317m shares on issue on 30 Sep 2014 and 337.4m in 2015 just before the November Nasdaq IPO. The Nasdaq IPO raised a gross $US68.3m ($A96m), or net $US58.8m after $US9.5m in costs ($A83m) which listed on November 16, 2015 (you can see the gap in the volume graph from 29 Oct 2015 to 16 Nov 2015). That IPO was a disaster for the share price and saw a nearly 40% price drop and the issuance of 42,675,295 shares (increasing the shares on issue by 12.6%).

We now have 498.66m shares on issue, but the same average 20 day volume of trading as in 2014 and 2015 when there were only 317m shares on issue (of course most of those extra shares have now been locked up in institutional and partner holdings such as Tasly and NovaQuest as well as the Nasdaq MESO ADR holdings). The MESO ADR volumes aren't included below, but they account for about 210,000 shares traded per day. Taking the average Australian 20 day trading, which is now down to 390,000 per day (and will probably go lower again today, with only 105,000 traded up until 3pm), only 0.08% of the total equity capital traded daily on the Aussie market in the past month - that's less than half of the average daily turnover as a percentage of issue shares of a big cap stock like Westpac in the past 20 days. In 2014 and 2015, the same volume of MSB trading was 0.12% traded per day in typical 20-day periods.

So, even though there are more shares on issue now, they are locked up and it is becoming more difficult for shorts to cover!


I have previously noted that new net shorting activity in MSB has been absent since the end of April, with a total reduction in the net short of 2.746m shares in the 4 months to 20 August (a 35,000 per trading day reduction in the net short position - or about 10% of the average daily trading volume being used to reduce the net short position).


Finally, in reponse to a few observations re first line treatment for aGvHD by @dolcevita @cosair

I would note that I asked Dr Joanne Kurtzberg this question and she said they would usually try steroids first and would know within a couple of days if they worked, before moving on to MSB's cells. You are correct that steroids are bad for the immune system, and a host of other problems, including that they just can't be used over long periods, however they would probably be a lot cheaper than MSB's cells.

You also have the question of how the health funds will pay - eg will they want all patients tried on cheaper steroids first before they will reimburse for the MSB cells? I think that is probable.

I would guess that the Prof was talking about the MSB cells being used as first line treatment in Steroid Refractory aGvHD. That was what the trial specifically examined SR-aGvHD.

Dr Kurtzberg said she would recommend MSB's cells to ALL of her SR-aGvHD patients and that 99% would take it up. She and other leading doctors also trying the cells off-label on other indications (eg chronic GvHD) and is initiating a trial which would extend the label if it is approved for aGvHD. She said that MSB's cells were well tolerated, with no side effects and had greater efficacy than competing products like Jakafi - hence MSB would be the first line treatment for Steroid Refractive aGvHD.