MSB Powering Ahead With ASX200 Index Inclusion and big volume...

MSB Powering Ahead With ASX200 Index Inclusion and big volume buying

What's happening with MSB's ASX200 Index Inclusion?

The announcement has been made, and MSB will enter the ASX200 at the opening on Monday, June 22. That means "pure" Index Funds will need to buy at the closing match price on Friday, June 19 or they risk performing differently to the Index.

My estimate is that it will be 11bp to 12bp of the ASX200 Index, depending on how the price moves between now and Friday close of business. That puts it around stock number 123.

Even more importantly, to be removed from the ASX200, a stock needs to fall below number 221 (based on a 6-month average price) - so there is plenty of fat for MSB. I currently estimate MSB would have to average below $1.30 for 6 months to be in any danger of slipping out of the ASX200 Index. That figure is also dependent on other stocks' performances - so if there is a big fall in the price of other stocks, you can adjust that $1.30 figure lower. Anyway, it's so far away as to not be a concern.

For those wondering why the price didn't rise on Friday, the pure ASX200 index funds can't buy yet - they will be buying next Friday afternoon so that they will hold an index weight position at the closing price, ready for the index inclusion Monday morning.

Some quasi-index, "enhanced" index funds or index huggers will already be buying, and that could explain some of the big volumes traded in MSB recently. Some other smarties who punt index inclusions may also be buying, and they may deliver stock to the index funds in some big crossings in next Friday's closing match.

So, why did the MSB price fall on Friday? Friday also coincided with a near 7% fall in the US stockmarket on Thursday night, so many MSB holders who had been waiting for the ASX200 announcement and probably putting off selling decided to take their profits in case the market continued to fall. Some people would have commitments and put off selling longer than they should have, hoping to catch a rise if the index inclusion announcement were a positive. Once the announcement was made, they had to sell. This is an example of "buy the rumour, sell the news". I think it's a one-day wonder and the price will rise through the next week up til the actual date of index inclusion. Other fast money has entered the stock lately and is much more skittish and prone to selling because they are not sitting on much of a profit and are only here to get rich quick - if that doesn't look like happening immediately, they sell - that's why they're called fast money!

This is all part of the churn and gap filling which has been going on since the end of April's big spike higher. Once the overhang of this fast money is gone, the price will move ahead strongly again - there's just too much potentially good news between now and the end of September in terms of 2 potential blockbuster phase 3 trial results, potential approval of aGvHD treatment by the FDA and label extension into Covid19, potential partnering deals as well as the ASX200 index inclusion.

The volume on Friday was big, but not out of the ordinary compared with the last two months. Last Friday's big volume of 8.6m shares or 10.5m shares (including Chi-X) was a total of $38.2m at a VWAP of $A3.643. The value traded on the ASX was a lower 8.585m shares at a VWAP of $A3.647 for a traded value of $A31.3m. That was a big day, but I think next Friday could be much bigger.

To compare how big Friday's traded value was, I've graphed the average daily value of trading on a monthly basis going back to 2015 and you can see that the whole of April and May averaged around $A31m of trading per day, so Friday's ASX trading was just in line with that:



You can also see how the $ value traded per day in the past 6 months has dwarfed anything we've ever seen before in MSB (the graph in the next section confirms that, even going back to the $9.95 highs of 2011).


This makes MSB important to brokers as well as index funds and small cap funds

This graph of daily average traded $ value also demonstrates how much more important MSB has recently become for brokers trading the stock. Over a year ago, I had argued that the very low daily trading value of MSB made it almost irrelevant to brokers because they couldn't earn enough brokerage from it, and would have to depend on fees from capital raisings to justify the cost of an analyst's time to cover the stock.

I have been receiving phone calls and Zoom meeting requests from the odd analyst wanting to update themselves on MSB and also from mates who are dealers at brokers and contacts at small funds which haven't looked at it in the past. While I'm retired now, I still have contacts in the industry. Most were still uncertain whether MSB would enter the ASX200 Index right up til Friday morning, so I doubt the full impact is yet in the share price.

In the past 6 months, the trading values have taken off, and particularly in the past 2 months, with an 8% increase in the issued capital, more stock being traded and a much higher share price. In June and July last year, the daily average traded value was only $1m per day and August was a dismal $0.55m per day. So recent months have been much more profitable for the main brokers covering the stock, and if that isn't enough to get the analysts sharpening up their pencils, there's the prospect of ASX200 inclusion and higher brokerage to be earned.

MSB is in a sweet spot at the moment - its market cap (discounted for the IWF of 85%) will rank around stock number 123 at current prices, and could be higher if there is a price rise later in the week as funds buy for index inclusion. That means it will have a high weighting for small cap funds which benchmark to the "ex-ASX100". Often small cap funds are allowed to hold a stock for a period after entering the ASX100 index, and have a time frame of a few months to allow them to benefit from the price rise before being forced to sell according to their mandate rules. At present the stocks from number 100 to 200 will be about 8.56% of the ASX200 Index, so MSB would be around 1.3% of those stocks - which could be quite significant to a small cap fund manager if MSB doubles - it would cost them 130bp of performance, which could be a nasty hit to those small cap funds which don't stray far from the index.

So, MSB will be quite important for a number of small cap funds, as well as the ASX200 index huggers. Once it enters the ASX100 (price averaging above $A5.25) the small cap managers will start to sell, and some of the mega funds will take more notice and buy, but that's a nice problem to have!

You might think that MSB's much lower price makes it much less important now than in 2011 (when it hit a high of $A9.95), but remember that the issued shares in September 2011 was 280m (vs 580m now). So the market cap now is $A2.09 billion vs $A2.79 billion at the high in 2011, To get back up to the market cap high of $A2.79 billion would require a 33% price rise to $A4.80, which is still well below the consensus brokers' price target of $A5.63 (see my previous note). So, the market cap is within striking distance of the high - as it should be, given that MSB has completed 9 years of expensive and exhaustive trials, has signed up new partners, has raised large amounts of capital to fund itself, bought the stem cell business of Osiris and has regained its technology which it had previously licensed out to Cephalon (later taken over by Teva).

As well as being within striking distance of the all-time market cap high, the following graph shows how trading volumes in the past 6 months have dwarfed anything at the time of the Cephalon partnering deal back in 2010-2011. Some recent months have had 6-8 times the volume traded back in 2011, so MSB is trading much higher values now, even if the price back then was 2.5x to 2.7x the recent price (see bottom panel of graph below for volumes, and note the current month is only half way through):




Why is the ASX200 so important?

Most of the Index funds benchmark to the ASX200 for a few reasons. The main one is that the Share Price Index (SPI) futures are based on the ASX200. So, if index funds need to hedge, they can do it easily and efficiently against the futures on the index they are benchmarked to. Furthermore, if the premium or discount on the futures contract gets out of whack with the underlying share prices, the index funds can make a profit by arbitraging - ie buying the SPI futures if they are selling at a discount and selling the same dollar value of their share portfolios against this, or vice versa if the SPI is at a premium to its theoretical price (taking into account trading costs, dividends etc).

Another reason to benchmark to the ASX200 is that it is cheaper - there is less turnover when there are inflows or outflows or rebalancing and less admin in terms of dividends, company AGM's and voting, etc. Index funds charge very low fees (wholesale funds may charge only 1 or 2 basis points) so keeping costs down is vital in what is a high volume, almost industrial process. The stocks from number 200 to 300 have very low index weight and the performance difference is negligible, so there are far more Index Funds benchmarked to the ASX200 that ASX300.

Another reason for funds using the ASX200 is that some funds benchmark their main funds to the ASX200 and run a separate small cap fund benchmarked to the "ex-ASX200", although many small cap managers are allowed to hold a stock until it enters the ASX100.

A far smaller subset of funds benchmark to the ASX300 - which is where MSB will reside until Monday 22 June. At present, MSB is owned by a small number of local and international funds as a "small cap" stock, or for those benchmarked to the ASX300 and a couple of index funds (mainly from the US) have also turned up on the share register.

While I can't be sure of where the massive churning of stock in the past 6 months has ended up until we see the next major shareholders list in October, I suspect Tasly sold out (14.5m shares) and a number of new instos entered via the recent 43m share placement at $A3.20. We know Capital has also left the register (final selling was around 30.75m shares since last year's Annual Report) and there was the earlier placement in October of 37.5m shares at $A2.00. That is 126m shares which has come out in big chunks since October, and is over 20% of the expanded capital. Some has been traded in the market, but most of it was placed to instos or crossed in big lines to instos.

The retail holding in MSB has been around 18% of the register for some time, I suspect we will see this increase a bit, since they usually own about 28% of Aussie companies and we have seen a big increase in new HC posters who claim to be new MSB holders. We also saw a big increase in google searches for Mesoblast in the past 6 weeks, up to new record levels which dwarfed the previous highs - so they are both indications of more retail interest. With upgrades from analysts, and more analysts starting to follow the company (the last conference call had a much bigger response than in the dark days of the past few years) we should see more positive reports and upgrades emerging as the share price rises (I've detailed the potential upgrades from analysts several times in past notes).

If we also take out some of the other big block holdings and non-Aussie holdings which add up to over 52% of the company (Silviu Itescu and Directors, M&G, Thorney, Anthony Pratt, NovaQuest, Norges Bank, Vanguard, MSB's own treasury stock holding, Kentgrove and a couple of other independent holders as well as the ADRs) we are left with Australian institutions and unidentified overseas instos (outside of the ADRs, M&G, Vanguard and Norges) holding around 30% of MSB. The latest Orient Capital estimate has Aust instos owning 42% of the market - so domestic instos are strongly underweight MSB.

So, there is a lot of buying likely when MSB enters the ASX200 from Aussie index funds and quasi-index funds, and also buying from some of the big "active" funds who nevertheless hug the benchmark. I believe the funds which are effectively index and index huggers are currently be up to 70% of insto funds in Australia as more and more money is funneled into the big industry funds and away from the active managers - so that means you would expect up to 30% of each company's share register to be owned by Aussie instos who are indexers or index huggers - and we are nowhere near that level of ownership at present.

Is MSB a "must own" for indexers and index huggers?

I think it is.
1. "pure" index funds who fully replicate the index will be forced to buy.
2. it is a dangerous stock to ignore due to its volatility and the proximity of trial results, partnering deals etc which could quite plausibly cause a big jump in the share price.
3. MSB can be bought by index funds and lent out to shorters for high interest rates - as much as 18% pa in the past year (though lower at present). This is very attractive to index funds who charge very low fees and need to keep costs down and generate whatever income they can.
4. it is not going into the index at its recent high price, in fact it is currently nearly 20% below the late-April spike high of $A4.45. Index funds would be aware it could easily do the same thing again after it enters the index and hitting their immediate performance by 2bp, which is a big hit from a very small stock in a short period, and it could become an 11bp hit by the end of September, and even more if the Covid19 ARDS trial shows "overwhelming efficacy".
5. Remember, index funds are starting to get in trouble if they underperform the index by more than 10bp. A doubling in the MSB price would take it to $A7.20 (which is below Edison's price target of $A7.51 fully diluted for options exercis). That would cost index funds 11bp on its own, and could easily happen by the end of September - and could be much more if the Covid-19 ARDS trial is a big success.



Corona virus cases not going away, MSB trial on track - I think first news mid-July

People have been asking me recently whether MSB will have enough cases of moderate to severe ARDS from Covid19 to fill the trial, or whether it will peter out like previous pandemics earlier this millennium. Unfortunately, I don't think there will be a lack of cases (see the appendix on Florida's second wave below).

MSB has said it is on track with its recruitment, which I take to mean around 90 enrolled in the first 6 weeks (at the earliest) and possible end to the trial for overwhelming efficacy around mid-July. If the first 90 are not showing overwhelming efficacy, the trial will continue to run, and I'm guessing around 50 may have been enrolled in the first month, 100 may be enrolled in the second month and 150 in the third month - that is very fast enrollment. I think assuming any faster than that is pushing enthusiasm too hard and could cause disappointment when then is no need for it. The trial is proceeding at an almost unimaginable pace (compared to previous pandemics), and it pays to be careful with recruitment as it is far more important to get the right results than to finish early.


A final thought on manufacturing and availability of cells for trials

Several HC posters have dwelt on the unfairness to people who receive the placebo treatment in the Covid19 ARDS trial. Unfortunately, that's what is required in a random controlled trial and MSB simply doesn't have all the cells which would be required to treat everyone in an Expanded Access Programme. Remember that cells in an EAP are provided free - MSB would quickly go broke if it tried to treat up to 100,000 people each year for free and there would be no takers for the Covid19 trial if you knew you could get into an EAP. If there are no takers for the trial, it will not be approved.

There would also be no cells available for the 200-400 dying kids with aGvHD.

If MSB supplies a few thousand people in an EAP, even if they are all cured, that's still not a proper random controlled trial, so the treatment would still not be approved (apart from for emergency use) and it will be much harder to get partners to fund manufacturing in the US and EU (and maybe even Australia).

That's a bad outcome for everyone - and far worse than maybe 40 people dying in the placebo group (88% of 45 people). Remember that the placebo group receive standard of care - so they'll be getting Remdesivir, hydroxychloroquine, etc and the best care these major hospitals can give. Without a proper RCT with a control group, it is unlikely the FDA would ever approve Mesoblast's cells, and no-one would receive the cells anyway. So I really can't see why people are concerned - the MSB trial is the quickest and most efficient way of stopping huge numbers of deaths and without a proper trial, it won't just be the control group in this trial dying, it'll be up to 88% of every future person with ARDS (and other vascular related conditions) from Covid-19.

For people calling out for more EAP cells to be made available - it's not going to happen. MSB are going to struggle to have all the cells available for the Covid19 trial if it goes to the full 300 people as well as all the cells for aGvHD. Just look at the Japanese situation - they've recently had to stop production to do a major production upgrade because they've been swamped with far more demand than expected for Temcell. Their year-on-year growth has been approaching 100% and I don't believe they fully anticipated how strong demand would be. Note that this might reduce licence receipts for 6 months by $US2m per quarter - that's neither here nor there given that MSB just raised $A138m from the placement - and it's ultimately a big positive as it means higher long-term royalties from Japan and indicates how strong the demand could be for Ryoncil when it is launched in the US (depending on whether FDA approves it).

I also see high demand in prospect for Mesoblast's Remestemcel-L/ Ryoncil when it is (hopefully) approved by the end of September (but possibly earlier after the Advisory Committee meeting in August) - I think there will be immediate demand for off-label diseases - especially adult aGvHD and chronic GvHD as starters. If I had Crohn's disease I think I'd be pushing my doctor to get me an off-label shot of Remestemcel-L and I have spoken to doctors who tell me doctors are raring to go with up to 30 off-label uses as soon as the FDA approval is announced. So, MSB can't afford to provide free cells to an EAP and don't have the cells available anyway as they MUST have enough cells for the Covid-19 ARDS trials and for a successful launch of Ryoncil by the end of September.


Bottom Line

Everything's still moving forward as expected for MSB. The ASX200 Index inclusion is a big positive which should support the share price over the next week at least as funds buy in - expect big volume next Friday afternoon. Don't worry about the share price fall last Friday, there was strong buying, and it was met with a bit of panicky selling by people worried about the US market fall on Thursday night.

I think people are short sighted if they are selling because the US market has a fall, as that fall was heavily influenced by the second wave of Corona virus. A second wave should not hurt the MSB share price, however a lot of hot money which has recently entered the stock may exit.

Small cap funds and index huggers can buy now and will soak up selling from hot money. This churning process is likely to end in another strong move higher if the phase 3 trials continue the strong success of the earlier phase 2 trials in Heart and Back Pain.

Global analysts value the shares at $A5.63 - without including Covid-19. I believe these valuations are very conservative (as I have pointed out several times before) and I believe upgrades to these forecasts will continue. There are now more analysts studying MSB, and more funds becoming involved. Daily traded values are the highest ever, and averaged $A30m per day in April and May versus $0.5m to $1m per day in the low months of 2019. So, it's worth brokers efforts to get involved in the higher day to day trading volumes.

An FDA approval for aGvHD will give the technology a huge credibility boost and with a very strong balance sheet and high cash levels post placement, the short thesis has been blown out of the water. Shorts are likely to stay away from the stock in the next week, as they are likely to be swamped with buying demand. A smart short would've already covered.

None of this is investment advice, but hopefully it clears up some questions people have been asking about what's going on at the moment. You can decide for yourself whether that means it is a good investment or not.

I'm staying long for another powerful move upwards.


APPENDIX - Florida Second Wave

Just like other parts of the US, and elsewhere, a second wave is already hitting after economies are reopening. I hadn't expected a big second wave in the US until the next northern winter, starting in Nov/Dec of 2020. It appears that a premature reopening of the economy (from a pandemic point of view - I'm not making a political or economic comment here) is bringing in a second wave much faster than I had expected.

Florida has always been an are of concern due to its older population. The Miami Herald reports (Sunday night Sydney time):

"As bars, gyms, vacation rentals and movie theaters reopened at partial capacity last week in all but three South Florida counties, the number and rate of new COVID-19 cases were rising statewide — a troubling indicator that the disease could be spreading more quickly.

The 64 counties that moved into the second phase of reopening on June 5 saw a near 42 percent increase in new cases the week before that could not be explained by increased testing alone, according to a Miami Herald analysis of the Florida health department’s case data. Testing had increased by only 8 percent over the same period.

Florida’s coronavirus numbers have continued their surge, including Thursday’s statewide tally of new positives — 1,698, which was the highest single-day total of confirmed cases yet. That number, in turn, was exceeded on Friday, when the state announced another 1,902 confirmed cases.

“We are seeing the very leading indicators of a resurgence in the number of cases, and now is the time to take action,” said Eric Toner, a pandemic preparedness expert with the Johns Hopkins Center for Health Security, who reviewed the Herald analysis.

The Herald used three-day rolling averages of new cases and the percentage of positive tests out of total tests to calculate trends over seven- and 14-day periods. Guidelines from the Centers for Disease Control and Prevention suggest that communities should not move into phase two without seeing a “downward trajectory” in either new cases or rate of positive tests for at least two weeks after entering phase one.

Signs of increased transmission of the virus are also apparent in statewide trends of new cases recorded during the last weeks of May and early June. Over the two-week period prior to June 5, the percentage of people testing positive for COVID-19 increased by about 1.6 percentage points statewide. (Positivity trends later flattened as testing increased in June.)

There's a lot more to the story, but you get the drift. The virus isn't dying out quickly in the US and there will unfortunately be more than enough patients for the MSB trial.