MSB Still Looking Great, Some Taking Advantage of Small Lull To...

MSB Still Looking Great, Some Taking Advantage of Small Lull To Top Up

The price correction in MSB since entering the ASX200 Index is relatively minor as price corrections go. After every rise in any stock there's a fall. After a big rise, there's a big fall in proportion to the rise - unless new positive information interrupts the profit taking correction.

That's what has happened with the MSB price since the ASX200 Index inclusion event on Fri 19 June. There has been no official news since then and the price has consolidated. Have a look at the Log graph below - log graphs are useful when there has been a big move because they show percentage moves in a price - the recent downwards correction is still small in % terms compared to the preceding rise. Note that on the graph below, a move up from $2 to $4 has the same vertical rise as a move from $1 to $2 - both are a 100% rise - that's what I mean by saying the log scale graph illustrates percentage moves.

This is the MSB price graph (log scale) over the past 12 months:




No news means the price is just correcting a bit

We have had no news to offset profit taking since June 19. That's because there is no news. That's why I haven't commented recently - there was nothing to add to my last few updates. The long-term value remains the same (exceptional return vs risk trade-off) and nothing has changed.

News is coming, but companies would be stupid to try to manufacture news every day as they would end up like the boy who called wolf and no-one would pay attention to the real news when it comes.

So why do prices move like this in the absence of news? The market is people. People like you and me. People panic and become enthusiastic. Often it is no more than people seeing a trend and jumping on it - buying because something has just gone up, then selling after it falls. No rational reason for doing this, and a classic way to lose money. These people are the reason for the price moves. The market itself is neutral - it doesn't know nor does it care if you are invested in a particular stock - it isn't out to get you. It is up to you whether you choose to buy, sell or hold - the market will carry on regardless. The instos aren't out to get you. Not even the bots are out to get you. The instos and the bots are just more disciplined in what they do, but they make losses just the same. It's how instos and bots react to losses and how disciplined they are that can make the difference between a profit and a loss.

The main problem with individual investors is that they don't know themselves. They take positions which are larger than they can handle when an inevitable fall comes, then they can't handle the pressure and sell for a loss. They then want to blame someone else for their loss - often they blame "the market" or "bots" etc. They don't seem to realise that they ARE the market. Who has ever been in a stock which has not had considerable falls? Nobody. Knowing yourself only comes after years of trading - most of it inefficient - selling out of profitable positions too early, letting losses run, not really understanding long-term valuations, making snap emotional decisions based on flimsy reasons when the underlying decision to hold a position was right all along.

How many people have sold MSB on days that the US futures were down in Australian trading time, thinking that they were getting out in front of a big fall in the US market, only to find the US market rose anyway that night? Then it becomes difficult to buy back in when the MSB price rebounds the next day - or if one of the announcements that you were expecting comes out the next day and the price rockets higher.

Selling a long-term position for a short-term fear is a classic mistake. Good research and reducing pressure on yourself is the best way to avoid this mistake. Sometimes selling is the right thing to do - but do it when you're not pressured and emotional. Do it when a share price is irrationally exuberant and is way above your long-term valuation - even then, you'll probably kick yourself as everyone else will be buying and the price is likely to keep rising. For most of time, real asset markets rise in price as money creation creates inflation in these markets, so selling after a big fall doesn't make sense - especially if your long-term valuation shows you are in a stock with superior prospects.

We have seen traders on these pages selling out and then missing big rises post announcements. That can kill your investment strategy and leaves you as just another trader trying to pick up the crumbs under the table while the investors feast.
Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.


Are Shorters, Traders Or Bots Taking Advantage of Me?

That's a fairly common complaint when people lose money or don't understand the random walk of the market. Most pricing models involve "random walks" and probabilistic assumptions based on a normal curve of error terms. There are some fancy ways of mathematically using probability models describing price behaviour which boil down to "we don't know why prices move like this, but they do" - therefore professional pricing models take a wide range of possible price outcomes into account and the time value of money to determine risk pricing. The longer the time frame, the bigger the range of potential price outcomes, regardless of how the stock may be valued - it's just the "random walk" of imperfect humans trading stocks, with a forecast valuation and an increasing range of possible values as the investment's time frame lengthens.

Do other people know something I don't about MSB at the moment? Quite possibly, but these days companies have continuous disclosure requirements and are sued if they don't make prompt announcements. So whatever they know is unlikely to be market moving, or MSB would've announced it. Major institutions have much stricter operating and compliance rules than in the past. Smaller instos may still be more laissez-faire, but face enormous risks and their whole business could fail if they don't police their staff effectively - this has happened to legit fund management businesses with just one rogue employee.

No-one at an insto wants to go to gaol for insider trading - and it certainly isn't worth losing their well paid job to make a lousy $million or two on an insider trade. It obviously happens, but it is relatively rare compared to trading volumes. Unusual activity is monitored by the regulators and brokers also have obligations to report. Market makers have been known to initiate investigations of clients who seem to be "blessed" and some of those clients have been subsequently gaoled. If you work for an insto and you step over the boundaries, you'd better hope no-one has a problem with you or wants your job, or is sacked or just leaves to go somewhere else and dobs you in to the regulators or your clients after that person leaves your firm. That's why senior people don't take the risk and why they police their juniors as well as they can.

So, is the recent MSB price retracement anything to do with news that is out there? I sincerely doubt it - I think the retracement is normal after a big rise - just look at products like cryptocurrencies - they rush up and down on no news at all - they have no income and no hopes of income in the future - they can be created at will and have no intrinsic underlying fundamental valuation - so why do their prices move on a crazy rollercoaster? People! People buying and selling and acting emotionally and under pressure - both on the upside and the downside.


Big Volumes Continued Through June - Instos Still Buying

The past week's price fall doesn't mean instos aren't buying, it just means they are buying carefully, on the back foot. I have noted this pattern previously - there is quite strong buying in the mornings to get volume, then they step back for a few hours and let the price drop, then there is another burst of buying in the last hour of the day. The following graph has the past 5 trading days in 15 minute intervals - note the strong volumes at the start of the day and the final hour's trade from around 3pm. That is careful institutional back-foot buying - getting volume, letting the price drop to see how cheap you can get the next lot, hopefully let the bots sell it down, then going back hard fro more volume at the end of the day:



Bots
During the day, bots are constantly testing the market's resolve - they sell a few shares and if the price falls, they sell a few more until they sense buying starting to take their selling and then start to move the price higher. Then they reverse and buy their short position back. They do these trades in microseconds. They exaggerate moves up and down during the day, but don't determine the long-term price. If other people are panicking and selling or just taking profits, the bots will exaggerate this move.


Shorts
There has been a big increase in shorting since 22 May with and extra 11m to 13m shares net shorted up to 33m net short position as of the latest figures last Wednesday. The spike low was 19.8m net shorted on 4 June (but that may be an aberration). The total net short as a number of shares is the highest since March 2019 which was in the period when Top 5 investor Capital had been major sellers and shorts had spiked higher due to the perceived Capital overhang. Back then, 33m short was 6.6% of the company as there were just under 500m shares on issue. Now 30m shares are a lower 5.7% of the company with 582.5m shares on issue.

Last year, 33m shares short was 1.5 months of average daily trading of 1.1m shares per day (average daily trading volume in 2019). Now it is only 5 days of average trading volumes of 6.6m per day (average volume since 1st Jan 2020). So, the shorts aren't currently taking nearly as big a risk now as they were in March 2019, but MSB is still one of the most shorted stocks on the Aussie market (ranking 30th as a % of issued shares) and with the low amount of stock available for shorting and the price starting to rise again, it's a reasonable bet to assume the shorts won't be too aggressive down at current prices (and some of them may even buy back with up to $1 of potential profits in a week on the table at the current price).

The shorts can determine the direction of the share price over a short period of time, but eventually they have to cover their position and buy back to realise their profit (or loss) and so I regard the shorts as "frozen buying". They have undoubtedly been smashed since the lows in March. They generally wait for the price to start to top out after an announcement and then try to build up new shorts to try to make back some of the money they lost in the last rise after the announcement - of course a bad announcement allows them to make a big profit.

There was very little stock available for shorting in the past year, however the recent buying by index funds makes more stock available for shorting - that's one of the key ways that index funds can outperform their index, and MSB traditionally offers a much higher lending rate than most stocks because of the large chunks tied up in the hands of non-index players (over 52% of MSB is held by non-traditional, non-index instos, the board, technology partners and funding partners). The current borrowing rate to short is 7% pa on 2m shares available to short, that's way down from the 18% pa rate at the high last year and indicates greater availability of stock to short now the index funds are in there and after two big placements and a couple of selldowns from Capital and Tasly made stock much more available and liquid.

The index funds bought around 16m shares on June 19th in the match and probably made that available to short, and the short interest has recently risen about 11m to 13m shares and there's another 2m available, so that adds up and makes sense, and it would appear that there isn't much more stock available to short - though I don't get too tied up with balancing these numbers as they are notorious (there's another nod to Conor McG).

Instos
So, how do I know instos are taking advantage of the lower prices and buying at present? Firstly, we saw cutbacks of up to 2/3 to 3/4 of the demand for the recent $A138m insto issue of 8% of the company at $A3.20 - so the recent price fall below $A3.20 is a great opportunity for those guys to top up. M&G received a very low allocation and they have been a long-term loyal holder who was prepared to take another 15m shares late last year (at much lower prices). Others I spoke to asked for large holdings in the placement and got none at all.

Secondly, I noted the institutional trading patterns above - classic "back-foot buying" - no panic, just taking advantage of lower prices to build up big positions. Instos don't "tree shake" - especially if it looks like market manipulation. They can build large positions without needing to do that. It is far more likely that the price falls in recent days are some people taking profits from the $1 low in March (eg 6m shares crossed at $A1.06 near the low) or the previous selldowns and capital raising done at $1.70 and $2.00 and others panicking.

I would note that CommSec has consistently been one of the biggest daily brokers and they have been a net buyer in June. CommSec is usually retail. UBS has been the big seller over June and it often acts on behalf of its prime broking clients who are actively shorting, but who may also be buying back shorts. The other big "Net Value" buyers in June were Macquarie and JP Morgan, while CLSA and Goldman Sachs were also healthy buyers - these guys are all mainly institutional buyers. Other decent sized sellers were Pershing and Morgan Stanley (probably short selling clients) and Instinet. Interestingly, Bell Potter was a net seller of 718,000 shares worth a net value of -$2.9m. The table below shows all these brokers in the "Broker Coverage" section. Anyway, the point is that most of the activity was focussed in the big insto brokers.


Thirdly, we know the placement and the final selldown by Capital late last year went to a small number of instos and we know index funds were forced to buy on June 19. We can also see some US instos appearing on the US MESO ADR register, with holdings in MSB/MESO that are absolutely tiny in relation to their funds under management - so it is reasonable to assume some of these players will be ongoing buyers as the price falls.

Fourthly, the volumes in 2020 have just been way too big for retail investors and must be instos. The graph below shows the 6.6m shares per day average volume of trading this year vs the 1.1m shares per day average volume of trading in 2019. The 20 day moving average (red dots) shows how the massive trading at the end of April moved the moving average of the number of shares traded to record highs in May, and the ASX200 Index inclusion in June also gave another boost to the 20-day average, though not quite as strong as the April boost. You will remember the price hits its recent peak at the end of April ($A4.45) and again on the day of the ASX200 inclusion just over a week ago at $A4.27. These spikes in the price correspond with the volume spikes below and you can see volumes are still very strong, indicating insto buying:



Today is another strong volume day, and above the average since January, with 8.85m shares traded between ASX and Chi-X (including late trades). That's pretty amazing volume for June 30 as many instos closed off their books last week to make end of year accounts neater.

Value traded today was another $A28.6m ($A23.5m on ASX), and value was not far off the massive daily trading value averaged over the past 3 months of $A31m per day on the ASX. We can say daily trading values are still near record highs, but have been around $A25m on the ASX in the past 5 trading days since the excitement of the ASX200 on the 19th and 22nd of June.

So, the last 5 days have seen 20% less value traded in MSB on the ASX than the past 3 crazy months - I suspect the selling pressure is abating at these lower prices and the patient instos who are still picking up stock have started to realise that they will have to pay more unless they get lucky with another global market panic. The next graph shows the daily average value of turnover on the ASX every month back five years:



Finally, we have seen constant late crossings over the past 3 months, including today, which is insto related.
So, who can doubt instos are buying - although these days bots etc probably make up at least 50% of daily volumes.


Broker coverage is very light at present - but must be coming

Entry into the ASX200 has not yet made a major splash in terms of either broker coverage or fund buying outside of the "pure" index funds. That's a good thing for the future and means there is a lot of demand yet to come (despite trading volumes so far this year running at a rate of 6x the average of 2019). The instos will slowly buy, the price will rise and the broker coverage will increase - all these things happen more slowly than we finely tuned holders can imagine. Most Australians have never heard of Mesoblast, or if they have heard one of the news reports, they've quickly forgotten - but that will change!

I like to buy a stock which is under researched and which looks cheap with good growth prospects. It is very rare to find all of these features - especially one which has a strong balance sheet and high quality management - this is a unicorn.

By the time the major brokers all discover a stock, the price has generally run far too hard. That tells me we have plenty of share price growth in front of us with MSB.

At present, the only domestic Aussie brokers I have seen do any coverage of MSB are Bell Potter, Blue Ocean, Lodge and Morningstar (and I'm not even sure Lodge and Morningstar are still actively covering it). Aitken Murray has also provided some insto coverage. Occasionally there's a mention in the Coppo report and Alan Kohler has had a long term interest in The Eureka Report - but the broker coverage is really still desultory.

There are a few large insto brokers overseas who cover MSB - but only about 5 or 6 who regularly update their models and provide quality coverage. That's not much for a stock with the potential to have several global blockbuster health products. Furthermore, their models are highly conservative, with massive discounts built in for probability of success, massively dilutive discount rates (well above the cost of capital) and some of the products which have completed phase 3 trials and with partnering deals completed not even in the valuation. Almost none of them (except Bell Potter) have anything in their valuations for Covid19, despite us being 2 months into a phase 3 trial. That's understandable to the extent that MSB doesn't yet have sales in its major markets - but that is likely to change by October when we are likely to see first sales in paediatric Sr-aGvHD in the US (and maybe followed quickly by Covid19-ARDS treatments). There's plenty of long-term upside as the analysts get up to speed and get more confident with their models and valuations.

I have spoken to the analysts at the large Aussie brokers and they tell me they are not covering MSB at this time because it is small, it doesn't yet have revenues or profits and so they don't feel they have any value they can add - many of the healthcare analysts are financial analysts and are not healthcare professionals, so they don't feel they can add value above the analysis done by a few of the PhD healthcare analysts overseas (or the specialists in lending firms like NovaQuest). They also don't have clients who own it, so there isn't much demand for their research at this point. This will obviously change as sales and profits flow - hopefully starting in the next three months.

So entry into the ASX200 for MSB has not yet made a major wave with the stockbroking analysts or the insto funds outside of the "pure" index funds who bought on Fri 19 June (28m shares traded on the day and 16m in the closing match including Chi-X).

In terms of whether brokers are making money off this tiny stock, which is only around 0.1% of the ASX200, there was gross value in June (up until the 28th) of $A1.3bn, of which UBS traded $A307m, CommSec traded $A219m, Credit Suisse traded $A96m, Morgan Stanley traded $72m and Merrill Lynch $A66m. As far as I know, none of these brokers research MSB - yet even if they only charge insto brokerage at 0.1%, a broker turning over $200m per month would earn $200,000 per month or $2.4m per year - and that's before you do any corporate capital raisings - that's gotta be worth the cost of a healthcare analyst on its own!
For those who say Bell Potter are conflicted, note that even if they charged 0.2%, their turnover of $11.275m in June is right down the bottom of the table and would generate only $22,550 in brokerage for the month - worth having but doesn't justify an analyst on its own:




Quasi-Index Funds and Index-Huggers Yet To Buy

My sense is that the quasi-index funds and index-huggers are either still absent, or are just dipping their toes in the water as the price falls. That is still enough to cause record high trading values and volumes to continue - but it has been met with some shorting, some profit taking and some panic selling as the US market had some bad down days in the past week.

I think the shorts will back off at the current low levels, and most of the profit taking selling must have happened by now - 1.6x the total issued capital (over 950m shares) of the company has turned over since mid-April (combined ASX, Chi-X and MESO trading on Nasdaq) with MESO accounting for 350m of the shares turned over, even though only 50m shares (10m ADRs) are listed on Nasdaq - it's hard to imagine there are many people left who intend taking profits but haven't yet done it (there will always be some, but at this stage they should be outweighed by those looking to buy after the price fall). Note that the turnover is even more exceptional when you consider that over 50% is locked up with long-term holders.
There haven't been any substantial shareholder notices lodged to indicate anyone has taken a large stake - so these turnover numbers are really exceptional. It's hard to imagine there's that much churning going on.

So, as the price rises, it will start to put pressure on instos who are index huggers, but who haven't yet bought in. They haven't needed to buy yet, after the inauspicious start since 19 June, but the 2020 financial year is now ruled off for the majority of Aussie funds and the new financial year could see a nasty hole in their performance if they ignore MSB at $A3.25. Just going back to $A4.45 (end April price) would mean they miss a 37% gain on a stock worth 10bp of the ASX200 - that could cost 4bp to their short-term performance, which is wearable, but underperforming index by 10bp in a year can start problems for an indexer. Imagine if the announcements are positive in the next three months and the price goes to $10 - that would hit them hard and so one minor stock could cost over 20bp of performance in just three months- you don't want many of those if you are an index hugger and the risk is so high on MSB that it is easier to buy here and cover the risk of not owning.


Timing of announcements

Heart Failure
Mid year read out of the phase 3 trial - I would allow until August before I think we are past "mid year". I really have no idea of the time frame or whether Covid 19 has slowed down the final patient visits and data cleaning, but MSB has not revised its "mid-year" guidance. Analysts I talk to are of the view that heart will come out before back pain.


Chronic Lower Back Pain (DDD)
Same time frame as Heart, however possibly bleed out into September? After September is definitely not mid-year in my book.

Paediatric Steroid Refractory acute Graft vs Host Disease
The Advisory Committee meeting in August could recommend approval if there is a strong consensus on the day. The FDA would then defer to the experts in the AdCom and approve early. Otherwise, the final date for approval (or not) is September 30. MSB have said that they are ready to go with sales as soon as the FDA approval is received, and doctors I have spoken to will immediately recommend it to their patients (who are children under 12 with up to a 90% chance of dying in the worst grades of the disease and have no other treatment option).


Crohn's Disease
I expect the Crohn's results to be unblinded after aGvHD approval is given. MSB could then seek a label extension from the FDA for Remestemcel-L to treat Crohn's.


COVID19-ARDS
I know many people are expecting a Covid19 announcement in the near term. I have previously said mid-July for an announcement, however that was always a guess and I would prefer to hear officially from MSB that they have dosed the first 90 patients. So I am holding off saying that they have dosed the first 90 yet.

They usually inform us when the first and last doses in a trial occur, and I had expected an announcement that the first 90 had been dosed as the end of the first 30% of patients as specified in the trial design. I think it will come soon (ie by the end of next week), but that is a guess.

I have heard that the numbers of patients entering trials started picking up two weeks ago with the rebound in cases and spikes in states like Texas, Florida, California etc and that the number of patients being added to trials around the start of June was less than MSB holders might have expected (for those who thought all 90 patients in the first 30% group would be dosed by now). Some reasons that we aren't signing up every case are that MSB requires people to have been on ventilators for less than 3 days (all of the successful patients in Mount Sinai EUA of 12 people were likely the shorter term patients) and patients reporting to smaller local hospitals don't always get to the bigger hospitals running the trials inside of 3 days; also some trials in the US are competitive and don't allow people on them if they are using other treatments - so if patients have already started another trial they can't add the MSB trial in some cases; also, last I looked, there were still only 15 hospitals out of the 30 planned for the trial - although I note that they would only mention them when they are contracted which requires sign off by the IRB, so I expect you will see more come online quickly now that we have completed 2 months of the trial.

The announcement of the first 90 patients being signed and dosed could come any day now - I think it's worth announcing - and the rest of the trial should amp up much quicker once all of the hospitals are signed up. These hospitals are under huge pressure with ICUs filling up, the ethics committees and IRB's are conservative and this trial is still one of the quickest 300 person US multi-centre phase 3 trials I have ever seen get going.

For those wondering about the speed of the trial or how predictable the timing of signing up patients is:
Remember that Dr Fauci said in his recent testimony "We need to be careful that we don't, because of our need to get vaccines for those who need it, that we do not definitively prove safety or efficacy before we make decisions about distribution. We've heard a lot about EUA (Emergency Use Authorisation) and EUA is important, but it has to be done in a situation where you fulfil the criteria for the EUA. I'd be very disappointed if we jumped to a conclusion before we knew that a vaccine was truly safe and truly effective because I wouldn't want perpetual ambiguity of not knowing whether or not it is truly safe and that's the reason why we're doing randomised placebo controlled trials [RCT]. Several RCT with power enough could give us that answer. We're going into the first phase 3 efficacy trial in July, it takes at least a month to get to the second dose because it's a prime boost. We'll take another couple of months to accrue or enroll enough people that if there is viral activity in the community and we have our sights all over the world, not only in the US but in Brazil, South Africa. You're going to get an efficacy signal more quickly the more cases there are. Now, if it turns out there aren't a lot of cases it may take longer AND THAT'S THE REASON YOU CAN'T GIVE AN ACCURATE PREDICTION OF WHEN YOU'RE GOING TO GET THOSE DATA."

So, that's the opinion of the top guy - we have to listen, and have patience that MSB's trial is going incredibly fast compared to previous crises and compared to current vaccine developments and needs to meet these expectations of the FDA. We need to have regard to how conservative Dr Fauci and the FDA are, not just believe that because we think MSB's cells are the answer that the FDA will agree without incontrovertible proof.

So, in the absence of any announcements, I'm assuming we haven't yet hit 90 patients, even though we must be getting close. That means we will be at least in early August before the trial is potentially stopped after 30 day results show overwhelming efficacy. That's a couple of weeks longer than I had thought the earliest possible date could be, but taking into account Dr Fauci's testimony and the known problems of recruiting the right patients for best results, I'd prefer to get the right results and satisfy the FDA's requirements.

So what would overwhelming efficacy be? The trial was powered to get a result with 300 people, assuming a 40% death rate and a MSB cells death rate of 20%. So, the number of people required will drop if the control group death rate is higher, or if the MSB death rate is lower. Non-Covid ARDS has a death rate of 40-50%, so it is likely that the control group will have a death rate well above the assumed 40% in powering the trial. The "control" group reported in New York City hospitals in March had a death rate of 88% for moderate.severe Covid-ARDS.

I am hearing that the standard of care is improving - particularly dealing with the blood clots, treatments for DVTs, endothelial treatment, ventilators, adding other treatments such as antivirals, anti-inflamatories etc. The death rate may be able to come down from 80% to 60% or so - but the death rate for MSB patients could also come down - possibly almost all of them will survive (as we are talking about people on ventilators for less than 3 days with improved standard of care). If the first 90 patients have a death rate differential approaching 60% (vs only 20% assumed in powering the trial) then you would clearly be looking at overwhelming efficacy and the trial would be stopped after the first 90 patients. It's a Bayesian probability analysis and I don't have access to the parameters, but from everything I've seen so far, I'd be optimistic for an early end to the trial.

Why is Mesoblast likely to succeed in the Covid19 ARDS trial?

I have talked to many people with great insights into the potential success of MSB's trial. I would note the following points:

1. MSB's whole premise is to block or mitigate the cytokine storm and inflammation in the lungs and other parts of the body. This is aimed at curing some of the most severe problems caused by Covid19.

2. MSB is intravenous, a catheter into the venous system - the cells lodge right into the lungs and gives a directed delivery system.

3. The trial will do careful analysis of the mechanism of action -how do the cells block or mitigate the cytokine storm - looking not just at mortality, but also at all relevant biomarkers, time to extubation, time of ICU stay, hospitalisation time etc. These will be major new steps in understanding of how MSCs work.

4. Anti inflammatories such as IL-6 Inhibitors target single pathways (pro-inflammatory pathway) but are limited to only one pathway. The beauty of MSB is that it targets IL6 and all other pathways at once.

5. There is also evidence that MSB cells can improve antibody response - this will also be a key marker in the trial.

6. MSC cells have already shown great results in trials in China and at Mount Sinai Hospital (MSB's own cells at Mount Sinai). These trials have been very small and not placebo controlled RCTs, but they were quoted by the doctors at Mount Sinai as "encouraging", and as saying they were looking forward to starting the current 300 patient trial.

7. MSB has a strong portfolio of studies showing efficacy at blocking the immune response. These include COPD (data analysed by MSB from a trial run by Osiris) and MSB's own successful trials in the "mother of inflammation" Steroid Refractory Graft vs Host Disease.

8. Side-effects of MSB's cells are very low or zero - and this is very very important in Covid19 - especially in people with comorbidities - it is the reason many other treatments are likely to fail in curing the worst affected patients - eg the side effects of hydroxychloroquine kill the very people threatened by the moderate to severe forms of Covid19 -ARDS due to their comorbidities.

9. The leading group of researchers at Mount Sinai are very experienced in this treatment and are likely to do a very professional job carrying out the trial. Other researchers such as Dr Joanne Kurtzberg's Duke University hospital are also highly experienced in using and dosing MSB's cells.

10. I have previously been told the MSB cells are easily useable and don't require complex processing by the hospitals' labs - the processes can be learned very quickly and performed in a less sophisticated unit if required. The batch consistency of the cells is within 5% and the potency and maturity of the cells means that a dose of only 2m cells per kg is required vs up to 10m cells in other trials. This also makes the MSB cells cheaper than other "research cells" brewed up in a lab, and the commercial manufacturing of MSB's allogeneic cells makes it much cheaper than autologous cells.

11. No other phase 3 MSC trial is powered for acceptance by the US FDA. The NIH is funding Mesoblast's trial and MSB will supply the cells - it is fortunate to have enough treatments ready for the full trial as it was already building up inventory for the anticipated approval of aGvHD in September. Other companies relying on finance from BARDA have had the rug pulled out with the announcement that BARDA will only fund vaccines.

12. Even if an antiviral or vaccine are found to be effective, there are likely to be way more than enough Covid19-ARDS patients for MSB to treat in the US alone. After looking at the Dexamethasone results, I concluded there could still be over 100,000 people requiring treatment in the US after Dexamethasone cures 1 in 8, and that's before you add demand from moderate/severe ARDS patients from causes other than Covid19. Vaccines may be developed - but we have vaccines for the seasonal 'flu and can still see 60,000 to 90,000 deaths in a bad 'flu year in the US (CDC estimate for 2018 'flu).


Bottom Line

While it might not feel like it, the price drop since the entry into the ASX200 just over a week ago is minor in relation to the previous move higher and simply looks like a normal correction during a time of some big falls in the US stockmarket adding to anxiety. This is caused by people, not "the market" and is not an indication of any special knowledge nor manipulation (outside of normal trading patterns in all stocks traded by irrational humans).

There's no news on MSB that anyone has missed, and it is likely to start moving ahead again once the traders, profit takers and short sellers sense that the selling volumes are starting to dry up and as the insto buyers continue to soak up stock.

There's plenty more buying to go, and it could be months or years before they all get set - giving considerable long-term upside momentum to the share price. That's another reason the price fall in the past week makes no difference to the long-term outlook. As I've said many times before, we are all much better off if the price spikes and falls settle down and we move into a long term upward move with lower volatility - unfortunately I don't think this is likely in the near term, and so the rollercoaster is likely to continue.

The last 5 days have seen strong volumes, but 20% less value traded in MSB on the ASX than the past 3 crazy months - I suspect the selling pressure is abating at these lower prices and the patient instos who are still picking up stock have started to realise that they will have to pay more unless they get lucky with another global market panic.

The next 3 months will see definitive results from three phase 3 trials in heart failure, chronic lower back pain and Covid19-ARDS. It should also see FDA approval for paediatric acute Graft vs Host Disease by Sep 30 (and possibly as early as August). The Covid19 ARDS trial could be stopped for overwhelming efficacy in early August (my best guess at the moment) and then have results analysed and presented as a label extension to the aGvHD approval soon after. No other stem cell company is in this position. No other stem sell company has the patents or is as advanced on a US phase 3 NIH funded, adequately powered trial.

Dr Fauci has given a long testimony about how long it takes to design and recruit for a proper Covid19 vaccine trial, which applies equally to MSB's stem cell trial. MSB is still well within the boundaries of Dr Fauci's time frame and MSB appears to be on track and doing well from the brief comments the Prof and Fred Grossman made on the last conference call. The trial is blinded - so we can't know the details and it could jeopardise the trial if people started leaking details (even if they knew them). So we all need some patience even if it is a little longer than the most optimistic guesses. MSB have always said 3-4 months for this trial, which started on May 5th.

The partnering deal on manufacturing is likely to be completed by the time of a successful phase 3 trial result for Covid19-ARDS. There will be intense competition amongst US or global pharma companies to sign a partnership with MSB to treat Covid19-ARDS. As I have noted previously, this sort of major global blockbuster deal with a phase 3 approvable treatment should generate an upfront payment of at least $US100m - and that money would probably then be used by MSB to fund cell production for sale at a 60-80% gross margin. That is the sort of return that defines a growth stock - where expansion is rewarded with returns well in excess of the cost of capital.

None of this Covid19-ARDS opportunity is in the MSB price. We are still trading at a 40% discount to the average US analysts' heavily discounted target price (before anything for Covid19 is included). The stock is poorly covered (or not covered at all) by major tier 1 Australian stockbrokers and funds and yet has just entered the ASX200. There will eventually be buying by funds for months or years to come and analysts in major broking firms will eventually cover MSB (NO TOP TIER AUSTRALIAN BROKING FIRM COVERS MSB YET).

The Covid19-ARDS opportunity is absolutely enormous. It could eventually propel MSB into the top ranks of global health companies or it may not work. But the fact remains there is virtually no sustainable downside risk to the MSB share price from Covid19 (apart from a possible short term drop if the trial were to fail) and the upside risk is potentially multiples of the current analysts' price targets. Even if the Covid19 trial fails, the phase 3 trials in heart failure and back pain are due to read out very soon and they could also propel the share price to between $A10 to $A20 if successful. With downside of maybe $2 to $3 if only GvHD is successful, the reward-risk tradeoff remains exceptional at the current share price of $A3.25.

It really doesn't matter that the price has fallen from $A4.20 to around $A3.20 - that's just a small fluctuation after moving up from $1 in the past three months. Don't complain about it - that's just how people react to price moves - it's nothing to do with MSB or its prospects or its announcements. Either take advantage of it, or if it has you rattled, review the size of the risk position you are taking as it may be too much risk for what you can handle when prices have inevitable corrections. This is not a big correction in the history of MSB.

My view remains that this is the best risk/return tradeoff I have ever seen in a stock which can potentially save the world from the two biggest problems since the Spanish 'Flu and the Great Depression - so I am set long and prepared to do the really difficult thing of not jumping at shadows and avoiding trading out after small moves (either up or down). I have a valuation way above the current share price and will not be selling until I can see a mania develop that drives the price above my valuation. That is a long way north of the current price. Learn to know yourself - you are not fighting the market, nor the shorts nor the bots - ultimately you are fighting your own emotions. I still think we are in the garage with Bill Gates - it's up to each one of us whether we want to stay for the ride or not. I'm also blown away that this Covid19 opportunity has just dropped into our laps right at the time that our cure for severe inflammation (GvHD) is likely to be approved by the US FDA after years of trials and nearly another 2 years of preparing the data for the FDA - no-one else is close - this is one of those lucky moments of serendipity which come rarely and whose importance is usually not recognised at the time.

Hopefully that all puts the current share price and our long-term prospects into perspective!

Happy New Year to all.