Short Term and Medium Term Thoughts on MSB Share Price
1. Capital Overhang Gone - Mexican Stand-off Ends - Price rising short term
As was fairly obvious on Tuesday, Capital sold 97.6% of their remaining holding in MSB which had been acting as a cap on the share price since around the time of the placement at $2.
They sold all of the ordinary MSB shares in a single line at $1.711. At the time of lodging the subtantial notice, they only held the balance of their ADRs, which was the equivalent of 650,010 shares - and I would suspect they sold a good chunk of those in the US ADR market in the last two nights.
So, apparently, Capital are gone. There won't be any more selling pressure from their small remaining holding, and in fact, the US ADR price rose last night despite volume being nearly 4x the average of the past 3 months (equivalent of 818,000 shares traded last night and 423,000 shares traded the night before). The past 2 nights has thus seen an excess of 767,000 shares traded above average levels of the past 3 months - ie 100,000 more than Capital's remaining holding.
The 7.2% rise in the share price in the US last night tells us they think the overhang is gone and the Mexican Stand-off is over.
It is likely that most of the Australian buying was done by some of the instos who took up the $US50m placement at $2. So, the instos who bought on Tuesday have done well if they've bought a pro-rata number of shares at $1.711 (getting an average price of under $A1.88). This is a phenomenal deal for the instos to get set in good volume (65m shares including Capital's selling and the placement) at a potential discount of 15% (roughly) compared to where the price peaked after the Grünenthal deal. It's almost unbelievable they could get 12% of the company at such a good discount after such a great deal with Grünenthal.
You've got to ask yourself whether Capital or Teva are the bigger boneheads!
Capital hasn't done well, however, arguably, it could've been worse - selling on a day global markets were plunging - they must have thought $1.71 wasn't that much of a discount to the prevailing price of $1.80-1.85 given the turmoil. Global stock markets remain overpriced and MSB is very thinly traded, so the risk of a market crash may have been the final straw to get them to leave (of course that risk is still there!).
The odds were very high that Capital would sell the rest of their line after the departure of Mark Denning and given that they had already put in a substantial notice for reducing their holding back on 21 October - the market has been waiting for them to sell the final 5.14% holding ever since. I believed they would wait for higher trading volumes or a possible share price bounce if any good news was released in the Quarterly conference call or at the AGM on Nov 26 and 27th, however the local instos didn't blink and obviously stood their ground trying to buy the stock for a discount.
I don't think Capital has covered themselves in glory re their MSB holding - I have noted in the past that at one time they appear to have double counted the ADRs in their holding, and that the last selldown was only greater than 1% because of the placement diluting their percentage holding (so if they thought they had reduced by less than 1%, to avoid lodging a substantial, they were wrong). Then they were left holding 5.14%. If they had sold another 730,000 shares they could've put in a substantial for selling 1% AND would've moved below 5% of MSB all in one go - then they could've slowly dribbled shares out into a rising market - or they could've attempted to sell their whole line at $2 when instos were being cut back in the share placement. I realise Mark Denning's departure was announced after the placement, however, the investigation into his holdings and subsequent negotiation with Denning surely would've been going on at that time (look at how long it took the ARU to get rid of Israel Folau!).
A big positive in all this has been the aggressive way instos have stepped up to buy MSB in the face of falling markets. The 37.5m share ($US50m) placement was done between 1 Oct and 3 Oct (in which time the ASX200 fell 260 points, or 3.9%) and Capital's line of 27m shares ($US31m) was bought on a day the ASX200 fell 2.2%, and fell another 1.6% the following day - during which the MSB price hardly moved (and was in fact up slightly at times).
2. It appears most of the Capital selling has been going to instos rather than flippers or shorters
a. The statistics above tell me the shares didn't go to flippers - if they had, there would've been an incentive to sell the price down after the Capital deal was complete, and the share price would've traded closer to the deal price of $A1.71 - there was over $3m of profits to be had on the day by flipping the stock - so the fact that it only fell 0.5c (and has been as high as $A1.97 today) and that potential flippers didn't sell it down to $1.72 tells me it went to strong hands who are likely to hold long term.
b. It doesn't appear that much of this Capital selling has gone to cover shorts
Of course, you can't rule out that some of the short funds didn't cover their shorts in the recent Capital selldown - however, shorts have been very quiet for several months, and there was hardly any build in the net short position, or gross short trading in front of this selling by Capital. That's very different to the situation back in the second half of last year through to February 2019 when the short position rose by over 19m shares and hit 8.35% of the shares then on issue (of course, in that period the poorly understood NIH trial was also released and the US stock market fell by over 20% high to low by late in December). Capital had been selling in the market and then sold their final tranche of one of their fund's holdings of MSB - 3.5m shares on March 14 at $1.15 and the shorts were already covering heavily into this selling.
This time, the Net Short Position is only 1.68m shares above the 12-month low and is currently only 4.3% of the current shares on issue - back in February 2019, the Net Short had risen by more than 19m shares to 8.35% of the shares then on issue (I suspect because people were assuming Capital was going to sell its whole line at that time). So shorts aren't nearly as active in today's market as at the start of the year.
3. Potential short term share price upside from Capital exiting
Back in March, the share price rose from the price Capital crossed its line at $A1.15 up to $A1.50 three days later, and $A1.63 a month after that - a gain of nearly 50c or more than 40%.
A similar 48c rise from the $A1.71 crossing price now would take the price up to around $A2.20(a rise of only 30% or so) - which was close to the high after the Grunenfeld deal of $A2.23.
It appears that there is still a significant short position out there (about the 70th largest short position on the ASX), which is yet to cover, and which will apparently be competing with strong buying by instos every chance they get to grab a line of stock. However, as the price has risen from the $A1.15 level where Capital sold in Feb/March, the short position has dropped from 41.6m shares to only 23.2m as of last week, and it may have dropped a bit further on Tuesday when Capital sold out.
So, there isn't as much upside from potential short covering, however there looks to be strong support from insto buying - and that is a much healthier situation longer term!
4. What does this mean for ASX200 Index Inclusion in March?
We need a higher price, and quickly! It's starting to look a bridge too far after a very promising start when we hit $A2.23 early on. Unless a big partnering deal is announced very soon, I think we can kiss the March rebalance goodbye and will have to start thinking about June 2020. We have spent most of the first 3 months of the period under the shadow of Capital's selling, and the placement at $2 which took the wind out of the share price.
MSB had an early run up to $A2.23 in mid-Sep and looked well on the way to inclusion in the ASX200 in the March 2020 rebalance.
Unfortunately, since then, the MSB price has fallen and it is now looking a lot more difficult to obtain the required market position (requiring a ranking of stock number 179 or better by March 2020).
The March rebalance will be based on the average market capitalisation over the 6 months to the end of February, announced on the second Friday in March, and implemented on the 3rd Friday of March.
Unfortunately, the amount of time that Capital has been sitting on the share price has made the task of entering the index in March much more difficult. Even though the ASX200 hit a record high on Monday this week, the average level of the ASX200 since the end of August is only up 1%. While MSB is up from $1.435 at the end of August and has an average price in the three months since then of $1.83, that's not nearly enough and we are halfway through the six months period.
As a rough figure (there's still a long way to go) and assuming prices don't change from current levels, I'm working on a required 6 months average market cap of $A1.055bn to get to stock number 179, and allowing for MSB's 15% Index Weight Factor discount, that means we need we may need an average price of $2.30 for the whole 6 months. Given the first 3 months is only $1.83, the second 3 months to the end of February will need to average $2.77.
Of course, if the small stocks from around number 160 to 200 in the ASX200 fall heavily between now and end Feb, MSB would not need to rise as much to get into the index. If MSB stays around the current price, to get into the index it would take a fall in the other stocks of around 40% given that they already have 3 months at the current record highs of the market. A bit of both might happen and MSB could enter the ASX200 with, say, a combination of a 25% rise in MSB and a 25% fall in other stocks etc (as long as there aren't many new entries into the index or some huge rises by a few stocks currently outside the ASX200).
So, I haven't totally given up on ASX200 inclusion in March, but it is looking difficult, and probably not prudent at present to expect it.
5. Medium term expectations for MSB price
MSB's share price has performed positively and more consistently in 2019 than ever before. The huge and unsustainable share price spikes have given way to much more consistent price rises, with less dramatic corrections. That leaves us with a share price of $A1.96 today vs the recent low on Xmas Eve December 2018 of $A1.015. That's a fantastic performance for the year, but is only the start!
The share price has been trying to establish a bottom that will hold since 2016 - and it appears that we passed that bottom just under a year ago.
The reasons that the price is more stable than previously and is now solidly and confidently moving ahead are the validation of the technology and strengthening of the balance sheet following encouraging trial results and the beginnings of large partnership deals, noting especially:
• the proving up of the technology and patents, with licensed product success in Japan and Europe;
•
the proximity of the end of the two big multi-year phase 3 trials in heart failure (by the end of December) and back pain (by the end of March 2020);
•
success of the P3 trial and imminent filing of the BLA for aGvHD with the US FDA;
•
validation of the technology by external partners - deals and cash payments from Grünenthal for back pain in Europe and Latin America, Tasly for heart in China; rapid market acceptance and sales growth in aGvHD sales in Japan;
•
validation of the technology with long term loans from specialist biotech lenders Hercules and NovaQuest;
•
validation of the technology and market demand from key global practitioiners and opinion leaders like Dr Joanne Kurzberg;
• strengthening of the balance sheet so that no new equity raisings will be required (at least for the next two years, and in all probability much longer);
• sales of MSB's own RemestemcelL product are expected to begin in the US near the end of next calendar year after potential FDA approval mid-2020;
• by the end of 2020, MSB will be a well funded US biotech, starting to sell its own product in the US, with global partners and licensees selling in other parts of the world, a well funded balance sheet, and potential for several more major global partnership deals with large upfronts, milestone payments and royalties
These factors have drawn new institutional investors into MSB with 12% of the expanded company being recently bought by (in my opinion) mainly solid long-term holders at around 10c below current prices of $1.96 ($A2 for the placement and $1.71 for Capital's 5% holding).
Shorting has not been a feature of the share price volatility or negativity since February - the short position has halved as the shorts realise their thesis of continued discounted capital raisings is over and shorts have probably added to upward pressure on the share price this year (with more to go!).
6. Quarterly valuation increases now greater than quarterly cash burn
The main factor for me in the new stability of the share price is that the reduction in the cash burn (particularly with staggered upfront and milestone payments coming through) and the proximity to sales and profits starting within a year means that the progressive share price valuation now rises faster than the quarterly cash burn.
Both of these factors are improving for MSB. I will have a look in the next section at the impact of the increase on the cash flow valuation as time passes - ie as we get closer to the cash flows actually occurring, the NPV valuation increases dramatically - remember, analysts like Bell Potter use a swingeing 21% discount rate (and I've seen discount rates as high as 30%, and down to 15%).
The rising quarterly valuation due to the approaching date of first profits from aGvHD in the US (within the next 12 months) and the lower net cash burn means that MSB doesn't actually require new blockbuster announcements to jump the share price up, only to see the cash burn whittle it back down again. The quarterly valuation can now naturally rise as time passes, as happens with growth companies. That's not to say I don't expect more blockbuster announcements, just that the share price can now rise under its own steam.
6a. Cash burn
Even if cash burn stays around $US20m per quarter, the Grünenthal deal means there are another $US30m of payments in the first year of the deal (on top of the $US15m already received) plus another $US105m prior to product launch (to fund trials which are unlikely to cost more than $US40m).
Meanwhile, Temcell royalties in Japan are now running at a rate of $US8m pa, and that is forecast to increase to a maximum of $US13m assuming a 25% royalty rate on sales of around $US50m pa.
So, just counting Temcell and Grünenthal, the next 12 months cash burn of $US80m to Dec 31 2020 should be halved to $US40m.
The year after that,to Dec 2021, could see net cash of $US65-85m from Grünenthal (if they are only required to do a smaller 12-month confirmatory trial in Europe for back pain) plus another $US10m from Temcell, potentially completely offsetting the cash burn. You could also see the first year of RemestemcelL revenues in the US, plus potential partnership payments for a partnering deal in US heart and/or back pain.
There is also another €10m to be received from Takeda in milestone payments for Alofisel (on top of the €10m
already received).
In their forecasts, Bell Potter assumes $US100m in upfront and near-term milestones for back pain in the US. That seems low to me, given that US markets are generally twice as lucrative as Europe and Grunenthal's Europe and Latin American payments over a similar period could be up to $US150m (including a successful confirmatory trial). Of course, the mix of upfront and milestone payments could be much more than this, and MSB may want to stagger the payments so that the P&L isn't too lumpy and the US partner may well want to stagger payments to reduce risk.
Bell Potter spreads these revenue payments and risk adjusts them, but still assumes $US19.8m in 2020 revenues and $US24.2m in 2021 revenues from a US back pain partner. I would be surprised if the Prof couldn't get at least $US150m from a US partnering deal over that time frame, based on Grünenthal comparisons.
There is also $US50m due from Tasly on regulatory approvals of MPC-150-IM and MPC-25-IC ($US25m each), plus 6 milestone payments - so far unspecified, but the original Cephalon deal and Grünenthal both go to over $US1 billion in total long-term milestones, so I don't see any reason that Tasly wouldn't be similar if it achieves long term sales, profits and market penetration in China at similar levels to sales achieved in the US or Europe.
As I said, I think Bell Potter are conservative in their forecasts (but better than most) and they are estimating total revenues to MSB from all partnership payments, licence payments and sales of $US57.5m in the year to June 2020 and $US90.1m in the year to June 2021. That 2021 year estimate more than offsets cash burn.
I think there is upside to these Bell Potter cash numbers, but they illustrate why cash burn is no longer a problem eating away at the share price between announcements.
I reckon MSB is cleverly staggering these upfront and milestone payments - tying them to successful achievements and progress, rather than booking them all in big lumpy amounts. That way, the quarterly cash burn is under control, the annual (if not quarterly) profits can progress steadily and they don't need the cash in the near term anyway. Instos far prefer steady progress and well-controlled cash flows for predictability and confidence in investing and partners can reduce risk and are more likely to sign deals.
6b. Outlook for US aGvHD sales and profits
I will try to put the aGvHD numbers into perspective and show how conservative the various analysts remain. This is important as, on all indications, we are about 12 months away from first sales (and it could be less depending on the data required by the FDA) .
Timing of US paediatric SR-aGvHD
The submission of the BLA to the FDA is supposed to be lodged by the end of December this year (2019). Then the FDA has 60 days to "confirm acceptance and eligibility for priority review", ie determine that all information required has been submitted and declare whether the "fast track" designation applies, meaning that they are likely to approve or not within 8 months of the end of December. MSB has been using the "rolling submission" method, which allows the FDA to review a large amount of the info submitted already, so it may not take the full 2 months to declared the submission lodged. Then we have comparisons with several other drugs recently approved which only took 3 months after lodgement - so, the whole thing could also possibly be done by the end of April 2020. A range off end-April to end-October 2020 is wide, but allows sales to start by the end of 2020, with inventory and sales force being built up already. In the last conference call, The Prof said aGvHD will be "on the market sometime in 2020 if the FDA approves" - I think that MSB is becoming more savvy, or more "corporate" in releasing uncertain timings and numbers - ie if you aren't sure, don't commit to a date, but give an achieveable range. "sometime in 2020" covers the likely range of end-April at best to end November at worst (of course there is an outside chance the FDA will not grant eligibility for priority review - but we'll deal with that if it happens - it's not what they've indicated so far). Bell Potter is saying the launch is likely Q3 2020.
Market Size
The Prof has stated on the conference calls and in the slide decks that the peak sales figure for the US and EU market (which I take to be Germany, France, Spain, Italy and UK) is $US700m for adult and paediatric aGvHD.
He has also said in the latest slide deck that the US "addressable market for SR aGvHD in children and adults is expected to be approximately 8-fold larger than Japan" due to greater patient numbers, incidence and pharmaco-economics (incidence is greater in the US because patient matching is better in the much less diverse Japanese population).
With Japan peak sales forecast around $US50m-60m, that puts US peak sales around $US400m-$US480m, so that leaves EU sales at $US220-300m to add to $US700m. That all looks about right - EU sales come out around half US sales due to the different pharmaco-economics (ie prices much lower in EU due to different health care systems and hospitalisation costs etc). My own view is US sales at the upper end around $US480-500m and EU sales at the lower end around $US250m -giving a total of up to $US750m peak sales. These numbers may take up to 7 years to come through - so we shouldn't be too precious about them - the potential sales of heart and back pain products are much larger.
Within the US, we have previously been told the market for adults is around 3x the market for children - so 25% of $400m to $500m total US market is $US100m to $US125m for the paediatric market (note this looks in the ballpark, but conservative as I have seen estimates of up to $US150m and I've been using $US120m - see below). That leaves the adult market in the US at $US $US300m to $US375m.
Based on a premium price to Japan (say 20-40% premium ie $US195,000 to $US225,000), and based on the average price in Japan for adult and child combined around $US160,000 (the Prof in the conference call), the peak sales to adults and kids in US would be treating
around 1,780 patients ($400m sales at $225,000 average treatment cost) to 2,460 patients ($US480m at $195,000 per average treatment).
That range looks low to me, so it probably means either the price will be lower than I'm assuming or the actual total sales will be higher, say the $US750m mentioned earlier. There are over 30,000 bone marrow transplants in the world each year, and over 20,000 of these in the US and Europe. 20% of these are paediatric (ie 4,000 in US and Europe - let's say 2,000 in each - half of which develop GvHD, so 1000 in each region, and around half of which are Grade C/D). If the US cost per child is around $US200,000 (less than adults because of their lower weight) then the US market would currently be around $US100m (treating 500 kids) and my peak sales figure of $US120m will treat around 600 kids in years to come. To get to figures of up to $US150m, the number of bone marrow transplants would have to rise by 50% from current levels (or maybe doctors would start using the MSB cells on the less severe cases of aGvHD). None of this includes chronic GvHD which can develop from aGvHD, or develop independently after 100 days, which is discussed further below.
The FDA has recently approved several drugs which were much more expensive than this on time frames as short as three months. So, the numbers are again in the ballpark - however, the next section looks briefly at US pharmaco-economics, then after that there are some more figures on the US GvHD incidence in bone marrow transplants.
GvHD Pharmaco-economics
This estimated price of $US200,000 to $US225,000 for average adult and paediatric aGvHD in the US is less than half the average extra cost of treating paediatric aGvHD of $US500,000 with Length Of Stay in ICU 28 days, average extra outpatient visits 30 and average extra prescription fills 7. The US hospitalisation cost is $US10,000 per day and MSB can reduce the hospitalisation required by up to 60 days in the worst cases of aGvHD.
MSB has stated that the Product Attribute Rating from providers/payers is 6 out of 7. They cited the excellent trial results, notably the Day 28 Response (especially Grade C/D); the Day 100 and 180 Survival Rates; No Increase in Infections; the Large Clinical Dataset (over 300); ease of Administering Drugs to Outpatients; the Significant Reduction in ICU Stays. The ratings were from 5 MCO Medical Directors, 5 Transplant Centre Directors, 5 Hospital Pharmacy Directors and 3 AMC based Hem/Oncologists/Key Opinion Leaders.
All of these factors, plus the lack of alternative treatments for steroid refactory disease, plus the extremely high death rate and debilitating disease make it highly likely (in my view) to be approved by the FDA and funded by health insurers to more than halve their overall costs.
US GvHD Incidence in bone marrow transplants
To check the market size figures for reasonableness, see https://equilliumbio.com/pipeline/[/BCOLOR]
"Approximately 50% of HSCT recipients develop GVHD. HSCT recipients are at risk of developing either or both acute GVHD (aGVHD) and chronic GVHD (cGVHD) with approximately 30-70% of HSCT recipients developing aGVHD, 50% of which will progress to cGVHD, and another 30-70% developing cGVHD independent of aGVHD.
GVHD is the leading cause of non-relapse mortality in cancer patients receiving allo-HSCT, and the risk of GVHD limits the number and type of patients receiving HSCT. According to the Center for International Blood & Marrow Transplant Research, there were more than 8,500 allo-HSCT’s performed in the United States in 2016. Approximately 50% of HSCT recipients develop GVHD; we estimate that the incidence of aGVHD in 2018 will be approximately 5,000 patients and the total prevalence of GVHD could be up to 25,000 patients.
GVHD results in very high morbidity and mortality, with five-year survival of approximately 53% in patients who respond to steroid treatment and mortality as high as 95% in patients who do not respond to steroids.
Chronic GvHD
None of the above market size figures include anything for related treatments like chronic GvHD – which is a much bigger market (and which Joanne Kurzberg is initiating an IND Investigational New Drug trial), Crohn’s disease or the other 20 or so “off label” indications which I believe doctors in the US will expand into once aGvHD is approved by the FDA.
As the note above says, total prevalence of Chronic GvHD patients (ie those already living with chronic GvHD in the US) could be up 25,000 patients (and growing each year) vs the 5,000 patients pa with acute GvHD (95% of whom die if they are steroid refactory) and a high percentage of the aGvHD patients who survive go on to develop chronic GvHD.
Chronic GvHD (cGVHD) is the most significant non-relapse cause of morbidity and mortality following allo-HSCT for malignant disease. Although the rates of cGVHD tend to be lower in children (20-50%) than adults (60-70%), the incidence of cGVHD in the pediatric population is substantial and has increased recently in association with the expanded use of peripheral blood stem cells and unrelated donors. As opposed to acute GVHD (aGVHD), which involves the skin, liver and gastrointestinal (GI) tract, cGVHD can involve almost any organ of the body. Importantly, cGVHD leads to significant morbidity, diminished quality of life and decreased overall survival. The rates of cGVHD in the pediatric population depend on several variables and can range from as low as 6% in matched sibling cord blood transplants to as high as 65% in matched unrelated donor (MUD) peripheral blood stem cell (PBSC) transplants.
7. How are analysts currently valuing aGvHD for Mesoblast?
It appears highly likely (to me and others on HC!) that the FDA will approve MSB's paediatric aGvHD product in 2020 and that sales will start soon after. There is no alternative treatment for children, up to 95% of whom will be dead in a year with the MSB cells and alternatives such as steroids have horrific side effects and can't be used over the long term. MSB have successfully completed their P3 FDA trial over a year ago and are still providing the Expanded Access Programme cells, the 15 main transplant centres (which are 50% of the market) are already aware of the success of the trials and the product already has a 6 out of 7 rating. Opinion leaders in the field are highly complimentary - such as Dr Joanne Kurzberg of Duke University, who has told me she will recommend the MSB cells to ALL of her paediatric SR-aGvHD patients and that 99% will take it up.
Once the FDA approves the product, Europe shouldn't be too far behind.
That means, depending on how quickly sales ramp up, we can expect peak sales of $US700m in a few years. Maybe starting with $US50m in the US in calendar 2021 (50% of the potential market for paediatric aGvHD).
The gross margin on the initial sales, using inventory from the current 2D serum based production would be around 60%. This will move up to 75-80% using Xeno-free with recombinant factors (increasing yields 3x-5x) and then up to 90% using the 3D technology (which eliminates a lot of the manual processes) to be built by Lonza. MSB will probably have to do 2D production until they can negotiate with the FDA to move approval to 3D production once it is proved up. The expansion of the Lonza plant will probably depend on the FDA approval (in my view).
7a. Let's look at analyst valuations and the upside if aGvHD achieves MSB's $US700m sales
This is all highly speculative and we don't even have FDA approval yet, nor do we know if another product may come along in the 5- 7 or so years it may take to get to peak sales. So, don't take this as a forecast, it's just a "what-if", and may partially answer the question people pose "what if heart and back pain don't get approval - what's the downside for MSB?"
Firstly, I would note that Bell Potter has a valuation of $A5.10 for MSB, and within that valuation, has peak sales of US paediatric aGvHD of $US117m and an NPV of only $US161m or $A0.28 per share. They have nothing for US adults, and nothing for European aGVHD - adults or kids. They have nothing for chronic GvHD.
I repeat, all they have for peak worldwide sales of GvHD is $US117m, whereas the company talks about $US700m sales just for acute disease. BP's NPV for Temcell is $A0.07 per share, yet that is only royalty payments in a market one-eighth the size of the US.
If MSB are correct on their peak sales, global aGvHD sales will be 6x the Bell Potter figure - and if you multiply BP's 28c valuation by 6 (simplistic, I know, because it doesn't take discount rates into account) you get a valuation of $A1.68 just for aGvHD. I think BP's discount rate is much too high, so the valuation should increase accordingly, but that's an argument for another day.
Next, let's look at a valuation by a less bullish analyst at HC Wainwright. Their price target for MESO is $US8 (they actually get $US8.49, but "round it down" to $US8). That $US8.49 equates to around $A2.50 per MSB share. HC Wainwright say of US aGvHD, that "Mesoblast could obtain a regulatory decision in CY 1H20" (ie by June 30 2020) "...If approved, RemestemcelL could launch in 2020 and we believe this would be the most important upcoming catalyst. We currently project risk-adjusted US RemestemcelL revenues of $US94.5m by FY2030".
That's even lower than Bell Potter! Sales of $US94.5m by 2030 (when the company is guiding for a total of $US700m adults and kids, Europe and US). No wonder some people have such low valuations for MSB, when their forecasts include so little compared to guidance the company is giving. One mitigating factor is that HC Wainwright uses a lower discount rate of 12.2%.
7b. What about looking at aGvHD as the only successful approved product - what could MSB be worth?
So, having some fun, on a reasonable guess basis (my view only), sales of aGvHD could start in the US at around $US50m in calendar 2021 with gross margin of $US30m. That then builds up over say the following 5 years to peak sales in US and EU children and adults (just acute GvHD) of $US700m with gross margins of $US630m (90% margins on Xeno-free 3D production by then). Finally, sales of chronic GvHD and other indications such as Crohn's could add significant growth to these figures - so justifying a growth P/E on net profits of at least 25x in 7 years. Let's say net profits on aGvHD could be $630m less $100m in interest and other costs - giving net profits of $US420m times 25 = $US10.5 billion valuation from aGvHD alone in US and Europe. Let's discount that back to today's values for 7 years at the relatively high discount rate of 15% - that gives $US4 billion today, or $A5.8 billion, and let's assume the number of shares rises to 580m (currently 536m plus options to be exercised). That gives a share price TODAY of $A10, and because we used a discount rate of 15%, even if you paid $A10 today, you could expect an annual return of 15% pa for the next 7 years - all just from aGvHD!
8. So what else is being left out of the valuations?
Most of this note is focussing on aGvHD and the upside to valuations from successful approval and therefor, hopefully the downside protection if nothing else ever gets approved (in answer to questions asked "what is the downside if our other trials fail").
I haven't gone into the very high probability discounts that analysts are using for most of the potential products which haven't yet been approved (Diabetic Necropathy 14.5% probability, Rheumatoid Arthritis 20%, US Revascor LVAD 40%, Heart Failure 60%, and Chronic Lower Back Pain only 44% probable despite the fact that Grunenthal is already signed as a partner and has paid upfronts!).
I have mentioned the extremely high discount rates used in NPV valuations of future cash flows, and because most of the expected cash flows are several years out in the future, these cash flows are VERY heavily discounted in net present value calculations.
So that is why analysts come up with such low valuations compared to expectations on HC, and why the valuations by different analysts vary so much.
However, I would also note that analyst valuations generally don't include anything for:
•
Tasly regulatory approvals which may become due of $US50m, and 6 milestone payments plus 20% royalties from Tasly on heart product sales in China (a huge market);
•
GvHD - nothing for EU, nothing for US adults, nothing for chronic disease;
•
Nothing for Crohn's disease or knee osteoarthritis;
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Nothing for US launch of Alofisel by Takeda, expected in 2022 - with a 10% royalty on global sales of $US250m and an milestone approval payment of €10m;
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Nothing for potential partnerships in back pain in China or Japan
Yet despite all this, the current US analyst consensus recommendation is "Buy" and consensus 12-month price targets are double the current share price! The consensus of $US 12.60 per MESO ADR equates to $A3.70 per MSB share and the high side remains at $US23, which equates to $A6.73. Bell Potter in Australia recently upgraded to $A5.10.
Mesoblast (NASDAQ:MESO) Price Target and Consensus Rating
MarketBeat calculates consensus analyst ratings for stocks using the most recent rating from each Wall Street analyst that has rated a stock within the last twelve months. Each analyst's rating is normalized to a standardized rating score of 1 (sell), 2 (hold), 3 (buy) or 4 (strong buy). Analyst consensus ratings scores are calculated using the mean average of the number of normalized sell, hold, buy and strong buy ratings from Wall Street analysts. Each stock's consensus analyst rating is derived from its calculated consensus ratings score (0-1.5 = Sell, 1.5-2.5 = Hold, 2.5-3.5 = Buy, >3.5 = Strong Buy). MarketBeat's consensus price targets are a mean average of the most recent available price targets set by each analyst that has set a price target for the stock in the last twelve months. MarketBeat's consensus ratings and consensus price targets may differ from those calculated by other firms due to differences in methodology and available data.
5 Wall Street analysts have issued ratings and price targets for Mesoblast in the last 12 months. Their average twelve-month price target is $12.60, suggesting that the stock has a possible upside of 100.96%. The high price target for MESO is $23.00 and the low price target for MESO is $6.00. There are currently 1 hold rating and 4 buy ratings for the stock, resulting in a consensus rating of "Buy."
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