Previous MSB low price volatility and low volume has set up big runs with good news
The current low volume of trading, price volatility and shorting in MSB may be the lull before the storm. It has acted in a similar way in 2005, 2010, 2016 and 2018. Each time, the price move up was explosive, with the best the move that started in Sep 2010 and ultimately ran from under $2 to $10.
The volume at the start of all these runs was low for 3 to 5 months (the 2010 volumes didn't pick up significantly until the December of 2010 when the Cephalon deal was announced), the share price was flat over those 3-5 months and the monthly volatility was much lower than normal. This set the scene for the stock's biggest share price rises, with the first stage of the runup usually exhaustion of selling rather than obvious good news, followed by the explosive second stage if good news was released.
Average monthly price volatility is 30% (measured as monthly high price divided by monthly low price). When this moves below 20% and prices are fairly stable (ie the price at the end of 3-5 months is similar to the start of the period) and volumes traded are also low for 3 months or more, we have previously seen the end of selling and some of the strongest price rises in MSB (see red circle on graph below showing past 5 months all below 20% high/low price range), while the current price is similar to where it was at the end of March and volumes are the lowest since 2015. Note the similarity with 2010 before the Cephalon inspired price rise (NB I have capped the maximum on the graph below to 100%):
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The obvious comparison, as we await news of a potential partnering deal, is with the Cephalon deal announced in Dec 2010.
The price had hardly moved between Feb and Sep 2010 and two of the months had high/low spreads of less than 10% in a long run with all but one month less than 20%. Selling had clearly finished and the stock was poised for any good news to move it higher. By 3 Dec 2010, the share price had risen to $3.30 from $1.75 at the start of September. The shares were suspended and reopened another 32% higher at $4.35, before moving to a high of $5.35 two days later, then ultimately hitting the famous high of $9.94 at the peak in October 2011.
Here's the long term monthly graph of MSB - note the low range of prices (height of candlestick) and low volumes for 3 to 5 months before each of the big price rises (marked with a red line under the candlesticks). We have just gone through 5 months of similar low volume and low price volatility:
Looking a bit closer at the period from listing until just before the Cephalon deal shows similar 5 month periods of low price volatility and low volume (marked with purple lines in the following graph). Also note the rise from 70c to $2.20 in 2009 to early 2010 - a three-bagger followed by 7 months of consolidation in the range $1.70 to $2.20. That consolidation happened with relatively strong volumes as stale bulls exited and changed position with new, savvy investors who bought in just before the run to $3.50 and then the big Cephalon deal which took the price to nearly $10.
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So, what should we do in the next few months if a new big partnering deal appears (which remains in "advanced negotiations" as the Prof reiterated in the conference call last week)? And also note that they have moved the "advanced negotiations" statement onto the front page of the release on August 30!
Recapping the Cephalon deal and why this one will be different
A partnering deal now would be different to the big Cephalon deal in 2010 as MSB are in the processing of completing phase 3 trials and don't require a major equity injection. They also don't require Cephalon's original commitment to $1.7 billion in funding regulatory milestones and trials.
Having said that, I would imagine MSB would be trying to negotiate a similar up front payment of over $US100 million. That is more than enough to shore up the balance sheet until sales in the US for paediatric SR-aGvhD start to contribute. A deal of more than $US100 m would remove balance sheet risk and thus lift analysts' valuations through lower discount rates.
The Cephalon deal was for worldwide rights, and it is probable that MSB will want to spread the partnership risk this time and segment at least between US, Europe and China rights as well as segment rights by product candidate. That stops the risk of having one big partner who subsequently pulls out.
That means they will probably do more than one big partnering deal - and once one global region and product candidate is signed up, others will feel pressure to follow or miss out.
Under the original deal, Cephalon agreed to pay MSB an upfront of $US130 million (worth $A132 million back then, but worth $A194 million now). Plus, Cephalon agreed to take a 19.99% stake in MSB at a 31% premium for $US220 million ($A 223 million). Plus, Cephalon agreed to pay total regulatory milestone payments which could reach up to $US 1.7 billion.
The partnership was agreed to focus on treatments for specific degenerative cardiovascular and central nervous system disorders along with products for use as part of hematopoietic stem cell transplantation in cancer patients. The deal included Mesoblast’s existing clinical-stage product for the treatment of congestive heart failure and spanned other disorders including acute myocardial infarction, and Alzheimer and Parkinson diseases.
Under terms of the deal with Cephalon, Mesoblast was to be responsible for carrying out and funding specific Phase IIa trials of partnered products. It would also retain worldwide manufacturing and supply rights. Cephalon would take over development for Phase IIb and III trials and retain worldwide commercialization rights to resulting therapies in cardiovascular and Central Nervous System disorders. MSB was to keep other technologies to develop itself.
So, we should look at any future partnering deals through the lens of how much MSB gave away in 2010 and how much money and support MSB received for the technology they were partnering. A $US100 million deal now just for US heart products would obviously be a much better outcome than $US130 million for the whole world back in 2010.
We also have to consider how MSB's valuation has changed in recent years
There are more shares on issue now, the phase 3 trials are nearly complete, trial results have been good enough for the FDA to grant orphan designation, global leading doctors have backed the technology, international firms are licensing the technology, the balance sheet doesn't need anything like as much support as in 2010 and MSB has moved to a position of being able to sell aGvHD product on its own account rather than depending on pharma companies.
Prior to the Cephalon partnering deal in 2010, MSB had 253.8m shares on issue (post the merger with Angioblast which added 90.8m shares; and post the 2010 placement of 22m shares at $1.70). Cephalon already owned 12.25%(31.1m shares) of the company via its Angioblast holding and a further 24.7m shares were issued to Cephalon (at $A4.35) in Feb 2011 as past of the partnering deal, taking its total holding to 55.8m shares or 19.99% of the expanded company's 279m shares on issue.
So, the combined Mesoblast/Angioblast had effectively half the current number of shares on issue before the placement to Cephalon in which was completed in Feb 2011. The Cephalon deal also meant that MSB had $260m cash on its balance sheet and was in a commanding position as annual cash burn was only $9m.
So, you can see there are many considerations to take into account when comparing the next partnering deal to the Cephalon deal. Foremost amongst these is the much more mature nature of the company and its technology - MSB simply doesn't need huge amounts of balance sheet cash going forward as the phase 3 trials draw to a close and as revenues start to flow (including royalties, milestones, and aGvHD sales). Also, as shareholders, we don't want to share the profits over more shares on issue unless they are issued for a big premium.
There is also a further $US35m in debt which is available to draw down and a letter from M&G that they would take a placement of another $US15m to further support MSB. We have no idea yet how much MSB will gain from a partner, nor how much of its global footprint and which products may be licensed - so how can we compare the coming partnering deal to the 2010 Cephalon deal?
I think it makes much more sense to review the various analysts' cashflow valuations and to look at upside and downside cases. After all, once the partnering deal is locked away, the main considerations will be how long until they start selling our CHF or CLBP product in the US or Europe, and how much MSB will receive in upfronts, milestones and royalty payments.
In reviewing the analyst valuations, I am yet again stunned by what ISN'T in the valuations. For instance, Bell Potter values MSB at $4.13, yet, like most analysts, doesn't include anything for:
1. Tasly, where
MSB also stands to receive US$25 million on each achievement of product regulatory approvals in China for both MPC-150-IM and MPC-25-IC, double-digit escalating royalties on net product sales and six additional undisclosed escalating milestone payments. They " intend to model royalties and approval and sales milestones once we get greater clarity on the timelines and regulatory path forward for China".
2.
Only model MSC-100-IV for Steroid refractory acute GvHD in children for the US and risk adjust our revenues at 85%. FDA approval will allow us to remove the risk adjustment and will be an upside to our forecast. We do not model EU opportunity. We also do not include any value for MSC-100-IV for the expanded indication into high risk adults (those with gut and liver involvement). It is MSB’s intention to pursue a trial in this high risk adult GvHD population in the future to expand the label for MSC-100-IV and the recent approval of Jakafi may help MSB by providing a precedence. We also do not include any value at this stage for potential off-label usage in adults following the approval of the product for children. Once MSB initiates clinical trials in the high risk adult population, it would be a source of considerable upside to our valuation, given the adult opportunity is expected to be 3x times that of the paediatric opportunity.
3. MSB has recently expanded its relationship with partner JCR pharmaceuticals in Japan for Temcell to include now a second indication for wound healing in patients with Epidermolysis Bullosa (EB) and a third indication for hypoxic ischemic encephalopathy in neonates (HIE). EB is an orphan disease for which JCR has already obtained an orphan drug designation for Temcell in Japan. JCR intends to pursue label expansion for Temcell by obtaining approval for EB for which it has already made the regulatory submission (Temcell is already approved and marketed for GvHD in Japan). HIE is early stage with a trial started for it in July’19. MSB is eligible to receive undisclosed royalties on sales of Temcell for EB and HIE in Japan. They could also potentially use all data generated in Japan to pursue the EB or HIE indication for MSC-100-IV in other markets including US. At this stage we include no value from EB or HIE for Temcell in Japan or in other markets and hence this opportunity represents a source of upside to our valuation in future.
4. Under MSB’s December 2017 patent license agreement with Tigenix (now a wholly owned subsidiary of Takeda), apart from the initial €10m that we modelled, MSB also stands to receive an additional €10.0m when Takeda reaches certain product regulatory milestones and single digit royalties on net sales of Alofisel. Alofisel was approved in Europe in March 2018 for the treatment of complex perianal fistulas in adult patients with nonactive/mildly active luminal Crohn’s disease, when fistulas have shown an inadequate response to at least one conventional or biologic therapy. We understand Takeda is currently involved with the NICE and other regulatory authorities on pricing and reimbursement for the product and in the meanwhile in the last few months of CY18, has been allowing access to the product under an EAP (expanded access program). A US launch is expected for the product subject to trial results in 2021. As per EvaluatePharma in 2024, worldwide consensus sales for Alofisel are forecast to reach US$521 million. At this stage we do not model the regulatory milestones (€10.0m) or royalties from Alofisel, which represents a potential upside to our valuation.
The situation is similar for most other analysts, and the Wall St consensus of 5 analysts is an equivalent price target of $A4.00 per MSB ordinary share (though there is a huge variation between them). There is generally nothing in their valuations for many of the improvements delivered over the past 12 months. I believe this is mainly because their valuations are so far above the current share price that they don't feel any need to increase them further until the share price starts rising. Add to that some of the swingeing discount rates being applied and big probability discounts (which I have mentioned before) and, like Bell Potter says, these offer "potential upside to our valuation" (that's an understatement!!!)
Bottom line
MSB is poised for explosive upside - especially if there is any good news on the partnering front. The low volatility of the past 5 months, combined with low trading volumes and flat price for several months indicate selling exhaustion, just like happened before the big rise in 2010 - fuelled by the Cephalon partnering deal. Other big share price rises have also been preceded by similar low volatility of share price and low trading volumes over several months.
To judge how much the price could rise if there is a big deal, with upfront payments over $US100m, we should review the metrics of the Cephalon deal and compare them to the size of the company now (equity bas$e has doubled since then) and also consider which products are covered by the deal and which geographical regions. It is possible there will be more than one major partnering deal announced in coming months.
Each upfront payment of $US100 million is worth 30c per MSB ordinary share. However, the much bigger upside is in the valuation credibility. Cantor Fitzgerald values the NPV of the royalty streams Earnings Before Tax of Heart Failure market in the US alone at $US 858m to MSB; Europe is another $US258m. Chronic Lower Back Pain in the US is valued at $US667m and in Europe at $US387m. That's just a 25% royalty stream - big pharma partners would keep the other 75% of revenues(or 3x what MSB would receive) in products with potential gross margins of 90% - of course there are other costs involved for the big pharmas (including tax) - but that gives you an idea of the possible returns for the partners - and over $US2 billion of NPV to MSB (or $US1.7 billion after tax or $A2.5 billion) equating to $A5.00 per MSB share net of tax - and using a fairly tough discount rate of 15%.
Rheumatoid arthritis in the US and Europe could add another $A1 billion or $A2 per share to the MSB valuation.
MSB could do partnering deals in any of these products in any of the big global markets. I haven't included GvHD as they aren't likely to partner this indication.
So, the numbers are potentially huge, but it's wild speculation until a deal is done, and we can look at the implications then. As an inital guide to the value of MSB, consider the consensus of analyst price targets which is around $A4.00 per MSB share, and also consider that many potential products, label extensions and off label uses have not yet been included in models, and that the models are heavily discounted in many cases, leaving a lot of room for analysts to revise their valuations higher should the share price start to rise.
5 Wall Street analysts have issued ratings and price targets for Mesoblast in the last 12 months. Their average twelve-month price target for MESO ADRs is $13.40 ($A4.00 per MSB share), suggesting that the stock has a possible upside of 172.36%. The high price target for MESO is $23.00 ($A6.80 per MSB share) and the low price target for MESO is $6.00 ($A1.80 per MSB share). There are currently 1 hold rating and 4 buy ratings for the stock, resulting in a consensus rating of "Buy."
I believe the reasoning above shows why there is more upside than downside in the MSB share price and may help put any potential partnering deal in context, especially if the share price starts to move up rapidly. The stock should still be regarded as "speculative" while it is burning cash and until the FDA starts approving product candidates. A large partnering deal would go a long way to removing the "speculative" label as it would remove the balance sheet and dilution risk. An FDA approval would remove the technology risk. Then we just have execution risk.
The lull in the share price in the past 5 months is a perfect prelude to a big announcement - if there is a partnering deal it could be the perfect storm.
(20min delay)