Shorts have not been active since the Capital movements - slow short covering supports share price riseActive trading by shorts has all but disappeared. The average daily gross shorts in the past month have been a scant 156,000 shares - ie 3 basis points (or 0.03%) of MSB's issued capital.
Total net shorts have fallen from 31.04m to 30.17m since April 1st. That's down 870,000 shares in total, or an insignificant 46,000 per day over 19 trading days - ie less than 1 basis point average per day.
These figures include the 559,000 gross shorts on Tues 30 April (in itself not that large either, being 11 basis points) which was after a few very low days' volume, impacted by ANZAC Day and Easter. The average daily share turnover in the past month has been low, at 923,000 for the same reason. This one-day increase in gross shorts doesn't seem to mean anything nor does it seem to indicate a new trend increase in the net short position.
While there can be short-term manipulation of the share price, I'm not convinced about manipulation theories over longer term time frames. I also don't think it's possible that manipulators have followed an accumulation strategy over many years, short selling 30-40 million shares from the $10 high down to the lows of $1. If so, they'd own enough shares by now to be in the Top 5 shareholders just to offset their short position. It just doesn't make sense mathematically - and it doesn't make sense to pay very high interest rates to borrow stock to short if you are somehow buying it in large quantities to more than offset the short - I just don't think this happens.
It's far more likely that most of the big moves in shorts over the past 6 months were related to Capital's apparent forced selldown. Capital probably suffered fund outflows or closure in November/December last year (when US stocks had a fall of more than 20% and the funds industry suffered outflows from equity funs) and so Capital was probably forced to sell part of its big position in MSB, which created big fluctuations in the short positions in early Feb and early March, with several daily moves of 3.5m shares. Between the end of January peak and the end of March, the net short position reduced from 41.646m to 31.247m a drop of 10.4m or 248,000 per day. Since then, the drop in the net shorts has only been 46,000 per day.
SO AT THE MOMENT, NOTHING'S GOING ON - AND THAT"S GOOD FOR STABILITY AND CONTINUED STEADY PRICE RISES!
Far from being manipulation, the only big movement in short positions in the past 6 months (the rise from late October to late January and the fall of almost exactly the same number of shares since the end of January) look related to the Capital redemption. Sure, there may have been a "prescient" shorter (or group of shorters) who sniffed out the fact that Capital needed to sell and took advantage of that, but that has obviously finished now and there don't appear to be any new concerted attacks by shorters since.
Most of the stock lenders are currently showing no stock available for lending, and are advertising an 18.6% pa interest rate to try to tempt some holders to lend stock. So, even if a shorter wanted to add to their position, at present they can't.
Of course, a big holder could make stock available for lending any time they are tempted by the interest rate, but most of the big investors have tended not to do this. The total net short position at present is back down to 6.05% of the issued shares, still very large, but currently slowly falling.
MSB is still one of the most difficult stocks to cover the short if there are positive announcementsEven after the reduction in the net short, MSB is still the 34th most shorted stock in the Australian market, and is 13th in terms of number of days to cover the short at 40.2 days due to the illiquid nature of the stock, where over 50% is held by major holders who have not tended to trade their positions unless forced by circumstances outside their normal control. Some of them are still under escrow, and I wouldn't be surprised if some want to increase their holdings if the blockbuster trials are successful, or if a big partnership deal is announced.
The holdings of Capital and M&G are not meaningful in the context of the size of those firms and Tasly would surely want a bigger stake to cement their position if the combined US/Chinese trials prove successful.
Environment for biotech share pricing is improvingMSB's share price has some similarities with the Nasdaq Biotech Index - both hit a low in December and hit a short-term high in March. MSB managed to avoid the US biotech selloff in April and the US biotechs are now bouncing back. Both are currently tracking around the levels of June last year. Both also had a strong run into the end of September last year, with MSB currently 38% below the early October high of $2.47 and the NBI 11.5% below its high of 3866, so MSB still has a lot of ground to make up to get back to the recent highs.
View attachment 1545619Cash position getting tight by Dec 31, but undrawn debt could give runway out to June 2020 and maybe much longer if a partnering deal is doneThe latest quarterly cash flow showed a small improvement in the cash burn to $US21.2m from the previous 6 months average of $US22.0m. The improvement could continue in the June quarter, with cash outflows expected of $US21.931m before interest revenue and royalties (last quarter they were $US200,000 and $US1.22m) - so the June quarter cash burn may be $US20.5m. The lower cash burn in the March quarter was due to savings in staff costs ($US 0.68m) and lower manufacturing commercialisation ($US 1.15m). Savings in the June quarter are again expected to come from lower staff costs $US 0.25m; but this is offset by a rise in "other expenses" and IP expenses; there is a forecast big drop in R&D to $US10.288m from $US 13.428m, offset by a rise in manufacturing commercialisation from $US 2.268m to $US 4.451m. All up, the June quarter should be another small improvement of $US 0.7m to a burn of $US 20.5m.
Cash at the end of March was $US 70.385m; so at the end of June that is likely to be $US 50m; then $US 29m at the end of September and $US 9m at the end of December. However, up to an additional US$35.0 million of debt funding is available to Mesoblast subject to achievement of certain milestones, under the financing arrangements with Hercules Capital and NovaQuest. Hercules is $US 25m of this "on or before the December quarter of 2019 subject to milsestones and Nova is $US 10m on marketing approval of Remestemcel-L.
So, the end December cash position could conceivably bump up to $US 44m without needing to raise new equity capital and that would last until June 2020. Of course a major partnership deal for heart or chronic lower back pain in the US or EU markets should each be capable of generating upfront payments of $US 100m.
If aGvHD is approved in the US by the FDA, MSB could begin selling pediatric product by early 2020 in a market worth around $US 130m, with gross margins up to 90%. Assuming a 50% market share, that should generate cash of $60m pre tax (and tax should be minimal given previous losses).
The quarterly statement reiterates that "company remains in advanced negotiations with a number of potential commercial partners regarding potential transactions and access to non-dilutive capital. Mesoblast does not make any representation or give any assurance that such a partnering transaction will be concluded."
Mesoblast established an equity facility in 2016 with Kentgrove Capital for up to A$120.0 million/US$90.0 million over the next 3 months to be used at its discretion to provide additional funds as required. I don't believe this facility is any better than having a general rights issue, which allows all shareholders to participate, and that if this agreement were triggered, Kentgrove would probably sell stock to hedge the risk of their position, so it would ultimately have the potential to push the share price down in a similar way to a rights issue.
If the extra debt milestones aren't met, and there is no partnering deal, the cash position will be looking tight by Dec 31. MSB may decide to roll the Kentgrove facility before it expires to have a backup plan, otherwise they'll need to consider an equity issue. There's still 6 months before a decision on Kentgrove vs a rights issue needs to be made, and if the milestones are met and the extra debt is available, that runway extends out to June 2020. Meanwhile, if there's a big partnering deal, the cash position extends for at least another 5 quarters, and probably more as aGvHD sales commence.
I don't believe the board would authorise the comments in the quarterly cash flow report regarding "advanced negotiations with a number of potential commercial partners" unless they thought there was a likelihood of them being successfully concluded. As people have noted, these comments have been made for some time now, however the longer negotiations drag on, the more pressure auditors, lawyers and shareholders will put on the board to justify the statement. They must have justifiable grounds for belief that a deal can happen. It may be that the potential partners are waiting to see FDA approval for aGvHD, or maybe see the unblinded 1 year results from the CLBP trial or possibly the MACE events start to build up in the Heart trial - these things are all close and would give a potential partner a lot more confidence to complete a major deal.
Bottom Line: Most Exciting 6 months in the company's historyLast conference call, SI said the next 6 months would be the most exciting in the company's history. That'll certainly be the case if they gain the first approval for stem cells from the US FDA
Nasdaq Biotechs are improving, and still have upside to their March highs
MSB's cash position still gives time to complete deals and trials
Shorts are slowly reducing the net short position and there have been no major moves in shorts since Capital's fund apparently completed its selling in March
Short covering would probably support another share price rise rise as the market for MSB shares is still very illiquid and it will be difficult for shorts to cover (unless another Capital situation occurs) - remember MSB is still one of the most difficult stocks for shorts to cover in terms of 40.2 "days to cover" at current market volumes.
This has paved the way for a steady recovery in the share price (if you can call a 50-60% rebound "steady") - I actually prefer the word "sustainable" - if MSB can slowly climb and hold gains, it is much better for valuations, risk and discount rates than seeing huge runs up followed by equally large falls.
I'm actually very pleased with the way the company has been performing, both in terms of meeting milestones and also the share price rising from $A1.01 to over $A1.60 from late December to early May. A similar rise in the next 4 months (50 to 60%) from the current level of $A1.54 would take the share price to $A2.30 to $A2.40 by the end of September 2019 (which is where it was at the end of September 2018).
The first module of the Biological Licence Application should be submitted to the FDA in the near term (could be days rather than weeks away) and then the Fed's response and guidance for the second and third module should keep upward tension in the share price over the next few months - assuming it all goes as well as the trials have indicated. That should keep the share price bubbling higher.
A big partnering deal could blow the share price well above these sort of levels, but it's impossible to gauge how much until we see any deal. Meanwhile, there's still plenty of upside just to get back to where it was in Sep 2018, and the environment looks supportive to get there.
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