Analyst Forecasts Show 50% Price Upside - I think that's way too...

Analyst Forecasts Show 50% Price Upside - I think that's way too low

Here's the current nasdaq.com consensus analyst price target for MESO ADRs. It is the best of all the websites (but not perfect) because it weeds out old forecasts from brokers no longer updating their models. It should only include forecasts from the past 3 months:



Other websites' data aren't as clean as nasdaq.com.

Here's my analysis of current analysts' forecasts. Mine is better because nasdaq.com includes an old Chardan Capital forecast (ignoring this, the 5 remaining analysts in nasdaq.com average just over $US20 per share). My figure is $US19.55 for 7 analysts.

My table:



You can make your own assumptions, but most of the other websites use combinations of old data or a limited number of analysts.

So, that leave 50% upside from today's price of $A3.76 to the average PT of $A5.63.


Why I think the analysts are significantly underestimating the upside
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You'd think 50% upside to the average analyst's price target would be enough. But wait, there's more!

I have gone into several of the problems of the analysts' forecasts in the past and in the interests of brevity, I won't labour them today. The main problems are massive probability discounts of 70-75% on potential blockbusters in Heart and Back Pain. These product candidates have already completed Phase 3 trials and are due to read out "mid year" (might take til August - see APPENDIX). If these probability discounts go to zero, you can broadly multiply the valuations by 3x to 4x.

The second main problem has been huge discount rates used in the Net Present Value (NPV) calculations. I note that Bell Potter reduced from over 20% discount rate to 19% in their latest upgrade, but I still think that's way too high, especially if you are already using big probability discounts. These huge discount rates smashed the valuations of the blockbuster products, because peak sales were not being forecast for several more years ie in the mid-2020's.

NOW, here's the biggest problem. Almost nobody includes anything in their forecasts for Covid-19 ARDS. Why not? Well the potential numbers are so ridiculously big.

Remember that analysts have said the $A price of MSB is justified around $3 just from the valuation of GVHD. At present, analysts are expecting a market of 400 paediatric aGVHD patients in the US - at $US300,000 per treatment, that gives $US120m of sales when fully penetrated (maybe in 2 to 3 years). MSB is saying the total market potential in US and Europe is $US700m (I think that's quite conservative, but it is what's in the numbers). That potential would include adults and take several years to attain in US and EU, and would probably involve partners in several EU jurisdictions because that market is more fragmented than the US.

So, MSB was building up to maybe 200 children treated in the calendar year 2021 (50% of the market), growing to 400 per year in subsequent years, then growing to 3x that in US adults or eventually 1200 treatments and probably similar numbers in Europe in future years. That buildup would've needed a confirmatory trial in adults and in EU - so let's say in 4 or 5 years they had built up sales of Remestemcel-L to over 3,000 patients.

As Bell Potter pointed out in their recent note, around $US8.2m has been spent on building inventory in the past 2 quarters. I presume that is valued at cost, and if cost is $US120,000 per treatment (based on a $US300,000 estimated sales price and a 60% gross margin), then they could have made 68 treatments in the Dec and March quarters, and let's say another 68 in the June and Sep quarters (complete guess but just continuing the trend) , taking them to an inventory of 136 treatments by the time of approval in September. That would give ample inventory if you assume sales to 200 kids in the first year. These numbers could be way out - but it shows you we are only talking a few hundred patients at most.

Now, along comes Covid19. IF it shows overwhelming efficacy and is approved as a label extension to aGVHD, they could start selling it in the fourth quarter of this year. They will need thousands of treatments, maybe hundreds of thousands, but each treatment will probably use half the number of cells of an aGvHD paediatric treatment (only 1 week of 2 doses rather than 4 weeks for aGvHD, but the adults being dosed are probably around double the body weight of the sick kids with aGvHD).

Do you see where I'm going with this??? Hundreds of thousands of treatments potentially required vs only 200 planned for in the next year!!!

Not only would Covid-19 ARDS completely blow the expected number of treatments out of the water, but it would be starting ASAP. Thus, the swingeing discount rate of 15% or 20% applied to the other blockbusters for the next 5 years wouldn't apply - as sales could start, in a small way, THIS YEAR. Furthermore, the probability discount should drop to zero as soon as the priority approval is given (probably by end-September and maybe even earlier if it is a label extension of GVHD).

And this is just the start. I believe other projects such as Crohn's are slightly on the back burner because there simply won't be the number of Remestemcel-L cells available if Covid-19 comes off. Also, it would probably be easier to get a label extension for Crohn's once remestemcel-L is approved for aGvHD. All other EAP's etc would also need to go on the backburner to make sure we have enough cells for the paediatric aGvHD launch and potential rapid extension into Covid-19 ARDS.

However, this raises the obvious question/observation that none of this can happen without substantial manufacturing partnership deals with either big pharma or governments. MSB's recent capital raising will be highly profitable working capital to open and enhance manufacturing suites, but it won't build the capacity to service Covid19 ARDS.

The Prof said in the past conference call that they are still working on partnering deals - and to potentially save people from the worst impacts of Covid-19 these partnerships are essential. So I think they'll be done quickly. Once a deal is signed, it will take at least 6 months to get new manufacturing suites up and going, maybe longer, so some small sales may start in October, but it won't be until the March quarter of 2021 that we see how quickly this can rev up. As I've said before, governments are not my favoured method of funding, because it would probably be on a cost plus 10% or 20% basis - that gets a lot of cells produced, but screws your margin. So, I expect a big pharma manufacturing and distribution partnership deal.

Once a partnering deal is signed, you'd better realise the significance of it. It might not happen, the trial may fail (though all indications previously have been phenomenally good) - but if it does happen, get out of the way, this baby will BLOW! And it should happen soon - though the big pharmas will probably want to see the results of the trial before committing.

I always try to be conservative with timing for Mesoblast. Remember that in the 2014 Ebola outbreak, close to 30 000 individuals developed Ebola viral disease (EVD), and numerous therapies were tested against this virus, including chloroquine, hydroxychloroquine, favipiravir, brincidofovir, monoclonal antibodies, antisense RNA, and convalescent plasma, among many others. With such a large number of therapeutic interventions given to affected patients, the goal was to determine which was efficacious against Ebola. Ultimately, none proved to be efficacious or safe. Why were new therapies not discovered? One reason is because virtually all studies were single-group interventions without concurrent controls, which led to no definitive conclusion related to efficacy or safety. Despite much resistance and controversy regarding asking patients with EVD to participate in a randomized clinical trial (RCT), the National Institutes of Health (NIH) conducted the first and only RCT during that outbreak. It took several months to design the trial, but it was implemented and successfully launched during the outbreak; however, it was too late for the RCT to be completed.This tragedy of not discovering new therapies during an outbreak cannot be repeated.

That shows you how quickly the current trial has been in terms of design and recruitment of patients. It should really still be in the design phase based on past trials. This is a big RCT, capable of answering all the questions that previous trials couldn't answer. It is being done properly and could support a monster blockbuster for Mesoblast. It's potential completely dwarfs anything else MSB has, and it's timing is potentially years ahead of even the other phase 3 products - it has slipped almost undetected under the radar - the analysts have not attempted to add it to their price targets of MSB (well Bell Potter added marginally to their valuation, but nothing like the full potential).

So, this should be done properly and not rushed. The upside is too important to blow it - both for MSB and for mankind. Even if they do end the trial early, they won't have enough cells to even start to meet the potential demand for months - and they'll need big partners (probably in Europe as well as the US as well as upgrading the Lonza Singapore facility). Sure there are some cells for inventory for aGvHD, but they won't go close to meeting the Covid-19 ARDS demand - the rarity and lack of any other treatment for SR-aGvHD means it will probably be more profitable to keep the cells for that product anyway, and who wants to take cells from kids who are guaranteed to die a horrible death.

Remember that the valuations of MSB add up to $A15 to $A20 if the probability discounts are removed from Heart and Back Pain. Covid-19 would be multiples of these values if it comes off. The upside from Covid-19 is NOW - we'll either know if it is going to be approved or not within the next 3 months (we are already 1 month into the 3-4 months trial). And the need to sign a deal with a big pharma or government comes soon after that.


Bottom Line and Short term targets

The Prof noted in the last conference call that the Covid-19 trial recruitment was tracking to plan. Given that they have always indicated 3-4 months for this trial and that they started dosing around May 6th, I'm still not expecting anything before mid-July. The number of hospitals was only moving up to half of the total by the first month of dosing - so if they planned to get 300 in 3-4 months, then it would accelerate as the number of hospitals doubles, and I would think if you were planning 300 in 3 months, you wouldn't get 100 in the first month (probably more like 40-50 if you have half the final number of hospitals). This may raise the wrath of some, and may seem way too slow given the need, but as I have said before, MSB never underestimates timelines - it always aims for the most likely. So I suspect they may be starting to accelerate the rate now, and may get to the first 90 in another 2 or 3 weeks. Then add 30 days and the first cohort of 90 patients may be showing "overwhelming efficacy by the second or third week of July. And that's the earliest - if the results are just good, but not overwhelming, it may take the full 300 patients and the full 3-4 months. I know everyone's saying results could be out soon - and that would be great and may even be possible, but I've learned over the years to follow MSB's guide on dates.

I reiterate, this has to be done properly and is already much faster than previous efforts in Ebola etc. MSB is way in front of any stem cell competition, and holds all the patents even if someone were to get a phase 3 trial completed before them - but would one of the naysayers please tell me where a bigger, better designed, fully funded phase 3 stem cell trial is likely to come from? There isn't one. The only stem cell company with better or longer term data than MSB was Osiris, who spent $US500-600m and 10 years of development and MSB bought their technology, data and manufacturing 7 years ago for only $US50m and have since improved on them - what a buy! No-one else has anything like this background of trials, safety, efficacy, experience, science, patents and successful completion of an FDA P3 trial in allogeneic stem cells. No one else has the cells on hand to be able to treat 300 patients. Most of the "competing" stem cell trials are too small, underfunded, too early phase, too long to complete and in breach of MSB's patents. MSB's patents in new compositions run out through 2040 in all major markets. Other patents run to the late 2020's through mid-2030's. There is plenty of runway for MSB to be selling profitably under patent protection for another 20 years or more.

It looks to me like Athersys are completely blocked. Pluristem have challenged a bunch of the patents in the European courts and lost (as have Tigenix/Takeda). JCR Pharma is a partner with Temcell and so they are contractually bound up and would lose their licence if they tried to challenge MSB. I still believe that CYP ends up with MSC stem cells, no matter how they get there via different manufacturing and would be in breach of MSB's patents on end uses and composition of matter. CYP has only ever completed Phase 1 trials. People worry about some of the very small trials using no-commercial grade "research" stem cells brewed up in labs - these are using dosages 5x the dose MSB is using and are presumably therefore much more epxensive to provide - and if they ever tried to use them commercially MSB would protect their patents at that point. MSB don't want to stop people researching, but they will protect their commercial interests when necessary, and they've won every time.

So, I fail to see a trial which is likely to provide a stem cell solution to Covid-19 ARDS which has a stronger position than MSB, and furthermore, I can't see how a new trial could possibly be designed, funded and completed before MSB is finshed. The small phase 1 EAP's that keep getting reported with good results are great in that they validate MSC's - but they aren't in the same league as MSB's trials and they are years behind.

Meanwhile the readouts for Heart and Back Pain Phase 3 trials are due around "mid-year" although this is sufficiently vague that I wouldn't be surprised if it extends into August.

Also the Advisory Committee for aGvHD is due in August - that should involve industry experts (eg Joanne Kurzburg), health insurance funds, parents of kids to get treatments, etc. MSB will have to present papers justifying its proposed treatment and if it goes well (ie basically a unanimous recommendation), the AdCom could recommend immediate approval and the FDA would probably give it. That would then set the scene to present the P3 trial results for Covid-19 ARDS to get a quick label extension. No other stem cell company is in position to do this.

This Friday we should see the announcement that MSB is going to enter the ASX200 Index - and that will happen after the close of business on Friday 19th June - that should see enormous volume buying by index funds at the final match price on the 19th. There will probably also be crossing going through after the match by smart funds who buy before the Index inclusion and then sell on to the Index funds at the closing match price. I think the buying on the last day of May is just a taste of what may happen on June 19. I don't think most of the ASX200 funds are yet in Mesoblast and I don't see how they can get set without pushing the price significantly higher.

There are other potential extensions to the Remestemcel-L approval - eg Crohn's (where the study has finished recruiting but hasn't been unblinded yet) and complications related to Covid-19 where the COPD and Covid-19 trials may show improvements in lung fibrosis, vascular complications etc. The Crohn's data could feasibly be unblinded and used as part of the Remestemcel-L dataset and MSB could potentially do label extension into Crohn's after the aGvHD approval.

We know that MSB's cells reduce endothelial activation caused by inflammation (that is the basis of their effects on GI bleeding in LVAD patients and on heart failure more specifically). There was a great post recently with the article "Coronavirus May Be a Blood Vessel Disease, Which Explains Everything" - it's good work. We should see more on this in the future. The potential products from MSB's "platform technology" are not even mentioned in analysts' valuations - this is all upside.

For those who think MSB has run too hard, have a look at Z1P, a stock I highlighted was being hit as hard as MSB in the selloff back in March as small cap managers suffered redemptions and were forced to liquidate small cap shares. Z1P has since rallied from $A1.05 to $A6.53 - nearly double the performance of MSB over the same timeframe - it has rallied from being oversold and being a potential beneficiary of Covid-19. Exactly the same applies to MSB, yet it has only rallied from $A1.01 to $A3.76. I believe the potential upside for MSB is much higher. For goodness sake, a low-tech iron ore miner like FMG can rally from $A3.50 to $A15 in the past 18 months - surely a high-tech stock like MSB can do better than that when it is potentially solving the most pressing aspects of the biggest global health and economic crises in 100 years!!!

I expect a big pharma manufacturing partnering deal to happen very soon after "overwhelmingly positive results" in Covid-19 ARDS trial (if it happens). That partnering deal would probably involve a big upfront payment well over $US100m and the pharma would probably also want equity in MSB. That money would all help fund growth expansion and highly profitable working capital generating returns of up to 80% gross margins and turning over perhaps 3x pa. That would be highly profitable in the first year.

This is an amazing opportunity for MSB. I just don't think the market has any idea how big it could be and how close it could be. The numbers are mind boggling. I don't propose writing any more on this as I have previously outlined some of these thoughts in more detail in earlier posts. I can't spell it out any more clearly and I don't want to keep repeating myself. The info is all there if you do the research. You can then make your own decision on whether to invest or not. For me, there is very limited downside and potentially enormous upside - whether it happens in June, August or September is totally immaterial. I then think there could be years of strong gains a la CSL. Trading for pennies completely misses the point of this stock. Short term noise should be ignored - there's plenty of it and I haven't yet seen one decent argument to refute what I've said in this note. It wears me out trying to jump at every little shadow that appears and if you get too caught up in it, it you are likely to miss the big picture. As I've said before, this is a stock that has the potential to be The Big One, and you only get a handful of chances like this in your lifetime of investing.

This is certainly not investment advice, and it's ultimately up to you to choose whether you go for the ride of your life or take the easy profits and jump off early. Many people sell early because they have no idea of the potential upside of a stock, and they justify it saying "you never go broke taking a profit" or "always leave something for the next guy". Frankly that's a cop out, based on doing zero research. This sort of investing is usually only for a small group of hardened professionals, so there's no need to be ashamed of jumping off early, it's human nature - but at least this note (and previous notes I have written) may help you think about the potential upside if everything goes right - so you can't say no-one pointed it out.

What more can I say?
Happy investing,
Ecoool2



APPENDIX - DATES FOR HEART AND BACK PAIN

While June 30 is a proxy for "mid year", I think MSB uses this wording as an indication only - if they really thought June 30, they would say June 30, but instead they say "mid-year". So, given the Covid crisis and everyone's attention diverted elsewhere, I'd give them a couple of months leeway - ie "mid-year" could still be July or August. We know they have been following up patients and recording results. This data all has to be "cleaned" and analysed - these meetings and analysis may well be slowed down like everything else has been (quite rightly) during the Covid crisis. The Prof held this completion date expectation in the last update, but I will be patient and won't be at all critical if we don't see these results til August. If you try to jump the gun with dates there is constant griping about how disappointing management is and the share price goes through wild volatility. It's far better to take a more measured approach. In my experience, this company has always delivered, but is unlikely to deliver early. So take it easy! "Mid-year" means exactly that, and it isn't a date.