MSB Trading - 2020, page-17834

The difference between buying at $3.50 and $10 is a very big deal if the price goes to $300

@Dimasq10
I'd like to address the fallacy that one can afford to miss the first few dollars of performance to make sure that the technology works and that "getting caught on the sidelines" doesn't matter if the share price is on the way to $300.

Madamswer used to peddle this theory and it is mistaken, while it may be "safer", there is a monster cost in doing this.

I agree with your statement that "Each read out will either reduce the investment risk, or increase it. Let's assume the former, and this is the next CSL. Do you think it wasn't possible to buy CSL shares all they way from $3.50 up to $300? What if you missed the boat at $3.50 and got in at $10? Maybe a little annoying, but big deal in the long run."

While it may look like a profit of $296.50 per share (buying at $3.50) vs a profit of $290 (buying at $10) and therefore not much difference, here's why it IS a big deal:

If you spend $100,000 at $3.50 per share, you get 28,571 shares and at $300, they are worth $8.57m.
If you wait for more "certainty" and spend $100,000 at $10 per share, you get 10,000 shares and they are only worth $3m at the final price of $300.

So, on your $100,000 investment, buying at $10 rather than $3.50 costs you $5.57m. THAT'S PRETTY SIGNIFICANT!

We have already seen the first leg of this in just 3 months between March and June. Just to illustrate the point, a lucky person could have bought MSB at $1.02 in March vs the current price of $3.37 vs someone buying eventually at $10 if some of the trials have good results.

The eventual difference if the price eventually goes to $300 on a $100,000 investment is:
Buyer at $1.02: Profit $29.4m
Buyer at $3.37: Profit $8.9m
Buyer at $10.00: Profit $3.0m

Now, people may look at this and say it's the bleeding obvious, but having read many people saying that small differences in the price now don't matter if the price ultimately has a big rise, I would say that it isn't obvious to many people.

I'm not saying the share price will go to $300 - I'm just trying to illustrate the mathematics of the situation.


Is Ecoool2 paid by the company for positive comments, or numbers of thumbs up?

Absolutely not! I'm not offended by the suggestion (as you don't know who I am), but I started commenting to try to offset some of the spin and downramping of the more egregious posters who always took a negative view of even the most positive developments in the company. I simply thought it was unfair to a promising company, and even risked permanently damaging the company by making it difficult to raise much needed equity (at the time) or even attracting an underpriced takeover before it was able to reach its potential.

As I did this, I devoted a lot more of my research time to the company, trying to see if their arguments held water. The more I looked, the more I liked, even though I had been following the stock for over 10 years. When I analyse a company, I like to ask the hard questions, and if they can be addressed satisfactorily I end up with more confidence.

I went exhaustively through all of the analysts' reports over the past 2 years, and met several of the analysts, trying to make sure I wasn't missing anything. I was actually stunned at how overly conservative the analysts' reports were - particularly the very heavy probability discounts (up to 70-75% of the biggest blockbuster potential products profits were discounted out) and also the very high discount rates used in Net Present Values of Discounted Cash Flows. Furthermore, many of the main products (including Covid19-ARDS) are not valued at all (some analysts don't even include European back pain valuation despite the fact that MSB has signed up Grunenthal as a partner for this product candidate).

YET DESPITE ALL THIS DISCOUNTING, THE AVERAGE ANALYST HAS A PRICE TARGET OF OVER $A5.00.

Although I'm just another anonymous poster and could be anyone, some people may be comforted by the reasons I choose to post and the fact that I'm not a paid company stooge - others may choose not to believe this and run off with conspiracy theories. I think it would be quite a dangerous thing for any company to pay someone to spruik to retail investors - if they were exposed doing such a thing without disclosure, I'm sure it would be more than just an embarrassment. Furthermore - if I were being paid by the post or by numbers of likes, I would've posted a lot more than 177 posts - there are people who do 10's of 1000's of posts out there!


Finally, I'm not exhorting people to throw away caution, but I do point out huge upside

Again, in answer to those who accuse me of upramping, I stress that I have never told anybody to buy this stock (except maybe Mrs Ecoool) and that I have never said to put all your money in any one stock, no matter how good it is. However, I have tried to demonstrate the potential upside and downside and the sensitivities if things should go well, or badly, and the very positive return/risk skew of MSB and why, for me, it is The Big One.

I was actually moderated once for daring to suggest that people not put all their eggs in one basket, and that most people would find the volatility easier to handle if MSB was part of a well balanced portfolio.
Since I'm not allowed to say this, let me emphasize that it isn't investment advice, and is only my opinion. I would've thought it was fairly non-controversial, but I've certainly never expressed the view that anyone should throw caution to the winds and put huge amounts into any one stock. Please do your own risk assessments.

My view has always been that MSB has considerably more upside risk than downside risk and that it meets all my criteria to be "the big one". That doesn't mean I think people should risk everything on a speculative stock - merely that I think the tremendous potential upside is not appreciated by the market, nor is it priced in.

Sure, the trials could fail, although they have made it right through to the end of phase 3 in heart failure and back pain, and the paediatric SR-aGvHD trial easily met the FDA's primary endpoint in the phase 3 trial way back in September 2018 and is now potentially within 3 months of FDA approval. So, with the accumulated results of multiple phase 1 and phase 2 trials and with Data Management Committees recommending the trials continue (ie not be stopped for futility), the odds look good for the trials to succeed.

However, that potential success of the trials is certainly not priced in when you consider the massive probability discounts the analysts are still using. I consider the probability of success to be significantly higher than 25-30% (based on the % of phase 3 trials which complete and are approved by the FDA). So, I think it quite likely that the analysts will continue to lift their valuations as trial results are released.

Again this is just to demonstrate the potential sensitivity of the analysts' models. I am not trying to say that MSB is worth $5, $10, $20 or $300 - I am trying to demonstrate where the potential is so you can make your own minds up as results come out. If a product is valued at $1 billion on a 25% probability rating, then its valuation should eventually rise to $4 billion as the doubts dissipate (remember that there is also a large risk factor built into the 15% to 30% discount rate used for calculating the NPV).

As I've said many times, until MSB is generating ongoing operating revenues and cash flows which outweigh the cash burn, MSB is a speculative stock. You could go further and say a stock is speculative until it generates profits and dividends. People have different definitions, and my preference in a growth stock which is building a new market is simply to be cash positive, with a sustainable balance sheet, to no longer be regarded as speculative.

MSB is close to operational cashflows (on top of royalty receipts and upfront and milestone licensing payments) and it may only be 3 months away from starting to generate enough cash on an annualised basis from aGvHD sales in the US for me to change my view from speculative to investment grade.

The debt load of the company is currently a conservative $US80m, which is only 5.8% of the $A2 billion ($US1.38 billion) share market capitalisation of Mesoblast. That also means Debt/(Debt plus Equity) is even lower at 5.5% and I regard the balance sheet as undergeared when there are such potentially high return investments which could potentially be made. Especially given that potential Return on Equity is multiples of the Weighted Average Cost of Capital.

Once products are approved by the US FDA (if it happens), I would expect MSB to benefit considerably from a risk rating point of view, and I would expect the company to be able to negotiate more debt, and at lower rates, to fund growth.

Cash on hand at the end of March was $US150m ($A235m including the receipts from the placement). That is a very high level of cash compared to the quarterly cash burn of around $US20m per quarter, particularly considering that over the next 12 months the company may receive up to an additional $US32.5 million in milestone payments under the strategic partnership with Grünenthal and a further $US35.0 million in debt under the agreements with Hercules Capital, Inc. (“Hercules” and NovaQuest Capital Management, L.L.C. (“NovaQuest”. So far, $US50m has been drawn down from the Hercules loan (with another $US25m potential drawdown) and $US30m from NovaQuest (another $US10m potential).

Another big partnership deal could bring in another $US100m plus in upfront payments. There are multiple potential shots on goal for such a deal in Heart Failure in US or Europe or Back Pain in the US or Covid19-ARDS globally. Another $US100m in upfronts would be great to invest in more cell manufacturing capacity to potentially save lives and increase quality of life for those with the most devastating disease resulting from Covid19.

Cash burn will increase in the next two quarters as Mesoblast uses the recent capital raising to increase product of cells for the Covid19 trial and to maintain the stockpile of cells for the aGvHD launch in the US at the end of September. There will also be cash spent on expanding the Lonza manufacturing plant - but this is investing growth capital in inventory with a gross margin of 60% to eventually 80% which is an excellent use of cash in my view. Sales of this inventory over the next 12 months should obviously return significantly more than the cash burn. Cash receipts from licensing will also be down by around $US2m per quarter over the next 2 quarters as the Temcell manufacturing plant in Japan is reconfigured to significantly increase its output. So those receipts should jump again in 2021 due to exceptionally high demand and higher manufacturing at that time.

I have mentioned all of these positives and negatives in previous posts. I try to balance the potential risks and rewards into a realistic range of outcomes. I have several times pointed out that if everything except aGvHD fails, we have a company potentially valued at around $A2.00 to $A3.00, but that the upside price could rise to $A10.00 to $A20.00 if back pain and heart failure trials succeed (and there is wild potential upside of $A100 or $A200 if everything were to go right with the Covid19-ARDS trial). Again, that is just to give people an idea of the enormous potential of Covid19 - the trial could be a complete failure (although MSB's previous results suggest it is working well) or other competitors could challenge MSB's patents, governments could commandeer the cells for a minimal margin, a meteorite could fall from the sky and wipe out all mammal life on the planet, President Trump could declare war on China, Covid19 could have a second wave so big that the stockmarket has a huge collapse. MSB mentions plenty of other risks in their “Risk Factors” included elsewhere in their Quarterly Reports on Form 6-K.

On top of all this, I've spoken to leading doctors in the US who have run the trials for MSB and they are very positive about the results already reported and are waiting impatiently for FDA approvals so they can save lives and avoid horrific side effects of less effective treatments. They tell me MSB cells have no side effects, are well tolerated and are easy for their technical staff to process and use. The recent changes to MSB's board and top management have strengthened the company's already strong scientific and marketing credentials and it is an impressive group of people led by a visionary and highly competent CEO. The backing of professional specialist biotech lenders like Hercules and NovaQuest gives added credibility and the partnering deals in China with Tasly and in Europe/ Latam with Grunenthal show us that leaders in their markets are prepared to commit to Mesoblast. I have walked around the stalls of companies demonstrating at the annual meetings of the ISCT - they all know Mesoblast and most can also name Silviu Itescu as one of the industry's leaders. I have met Lonza and they have told me that MSB's patented manufacturing technologies are years ahead of the market. This all gives me great confidence.

So, I'm not just an upramping cheerleader, I'm not paid by the company, I'm just trying to answer some of the criticism of the shorters and show you the potential upside and downside and the sensitivity of the analysts' forecasts. These numbers are remarkable - and I've said before that I've never seen anything with a return/risk trade-off as good as MSB. That doesn't mean all the trials will work and it doesn't mean people should put all their eggs in one basket (not advice, just opinion) - it is just to show you that this is an exceptional opportunity if it works!