Solid Consolidation around $3 before next big move up - more big gains by end June
Notes on Shorts, Analyst Upgrades, Index Inclusion
@mtom it really doesn't matter if one person is shorting or what his target price is - even if he is the squeakiest wheel at present!
What matters at present in the short-term (ie next 2 weeks to 6 weeks) is:
1. the solid and continuing fall in the total Net Short Position (the big picture trend, as you would be badly served believing the daily gyrations in these self-reported short figures);
2. four months of strong net insto buying and still going today
3. profit taking by retail investors in reaction to the big price rise (appears to be slowing with lower volumes and effluxion of time at these higher price levels)
4. ASX200 index inclusion
possible (but not yet likely) in March rebalance; ASX200 almost certain in the June rebalance if MSB can maintain the current price
5. reactions to analyst price target changes
6. Quarterly earnings for December due on 26 Feb
1. Shorts continuing to cover:
To the extent you can believe the reported Net Short Position (ie just observe longer-term trends and possible big moves in the short-term), the net short is still coming down. It is now (Feb 4th) 23.45m shares (4.37% of MSB's issued shares), down from 32.19m (6.0%) at end December 2019.
The following graph shows the net short position as a percentage of MSB's issued capital:
So Jan- early Feb buying back by shorts has been around 8.74m shares over 23 trading days, or nearly 400,000 shares per day. And that's more important than one guy on HC trying to push the price down.
In fact, the short thesis was totally destroyed by the Grunenthal deal and subsequent equity placement as the shorts had been running on the twin concerns of lack of proof that the technology works (MSB would be the first to gain US FDA approval for allogenic stem cells) and the concern that the cash burn would allow shorts to cover in heavily discounted capital raisings (the placement, partnership payments, existing cash and potential debt draw downs all mean cash burn is not likely to cause another capital raising in 2020 or 2021).
So, who is still short? Well, I'd say people who haven't yet woken up and smelled the coffee and find it hard to admit they were wrong (but they're gradually doing this as the price rise burns them) and a few schnipplers who are trying to carve out a few cents as the price retraces after a big rise. Neither group is anything to worry about and they will end up supporting the share price when they buy back.
Let's say the shorts move down (like late 2017) to around 2% of the issued shares - that's another 12.7m to buy, and that's enough to keep upward pressure on the share price for at least another month.
2. Net insto buying
We have seen instos buy the placement in early October of 37.5m shares in one go (when global markets were falling heavily).
They instos stepped up again in early December to buy Capital's final 27m shares, again during a time of big international stock market falls, though that was new instos buying from a former supporter who had discarded their key fund manager - so not a "net" purchase, but certainly shows strong buying from new instos.
Last week two big lines went through the market of over 13m shares in total - again insto buying and selling looks apparent. My guess remains that it was Tasly who sold as they were finally in profit on their share placement and that their return was over 35% in $US terms, while China had admitted that Corona virus was a "grave crisis" - reason enough to lock in some profits on a small holding while still retaining their pharma development relationship with MSB. It appeared to be a very aggressive insto buyer who took the 12m share line of stock, as they were buying right into the uncertainty of the Corona virus pandemic and falling stock markets.
So instos are still prepared to stump up cash to buy big volumes of shares at around $3 even with global markets in turmoil over the latest Corona pandemic. Even though volumes have been lower in February, than in January, today was another strong day (over 2.7m shares traded) and current volumes are still in excess of 1.5m per day vs 0.5m a year ago and the $ value being traded in the past week is still 7x to 14x the $ value being traded a year ago (2 weeks after Feb 11, 2019) when the share price was $1.17.
3. Profit taking by retail investors
As noted above, there have been a couple of insto sellers over the past 4 months, however those instos have crossed their stock in one or two lines to other insto buyers and most of the activity in January was retail selling (as I showed in a couple of long posts analysing the market action back in January).
I'm still pretty amazed that after the share price tripled in 13 months, the profit taking was not more severe, and I wouldn't have been surprised to see a Fib pullback to $2.70 or even a gap filling move back to $2.50. Such falls wouldn't have mattered if they had happened, as MSB would've remained in its primary uptrend. Sometimes prices digest big price moves like we've just seen with a sideways move as new buyers soak up all the profit taking by the sellers - ie it's not a correction in price, but "a correction in time". If we take 61.8% of the 7 week price rise from early December up to the peak in January, that gives us a 4-5 week flat price "congestion" period - ie end of Feb/early March before the next big move higher. That would coincide with the next quarterly profit announcement and possible ASX200 Index inclusion calculations for the March quarter.
4. ASX200 Index inclusion
MSB is currently in the ASX300, but the potential impact of going into the ASX200 is much greater as this is the benchmark for most fund managers.
It is still an outside chance that MSB could make it in the March rebalance - but is not my most likely scenario. If it can hold around the current price, it is my first cab off the rank to enter the index in June.
At present, I have 4 or 5 stocks in danger of being deleted from the Index in March as they drop below number 220 in market cap. I have 3 stocks likely to enter the Index as they are currently averaging market cap rankings of number 179 or higher, and another 2 including MSB in the stocks just below number 180.
My current view is that the Index Committee probably won't include stocks that are below number 180, to keep the turnover of the number of stocks in the index down (that's what they did in December). So, they are currently likely to only delete 3 stocks and add 3 new stocks. The Index Committee has discretion over this, so it is possible they will delete 5 and add 5 new stocks - in which case MSB has a chance of going into the Index in March if things go in its favour from now until the end of February.
Final date for calculations is the end of February. If other close stocks (in market cap terms) shoot up in price in the next 13 trading days, or the MSB price goes down, then it definitely won't happen. It is close at present, but (on my numbers) needs to go up to over $3.70 to get inside the top 179 stocks to really guarantee March inclusion. It could happen if it stays around the current price, but is by no means certain, and depends on other stock price moves and the attitude of the Index Committee. There are those who think it can happen - but that might be wishful thinking. If it does happen, the share price will shoot up as it is not priced in at present.
I think it is more likely that we will have solid buying between end Feb and end May on the basis that MSB will enter the ASX200 in the June rebalance. June inclusion is highly likely at the current share price and it is probably a better outcome for longer term buying and propelling the price higher.
5. Analyst revisions jump to big positive in January
As I have pointed out several times, analysts 12-month price targets are based on very conservative assumptions, and they are subject to upgrades as MSB's "certainty" improves and the share price rises. Thus, it is likely to be a long time before the share price catches up to the analysts' recommendations.
Last week, HC Wainwright increased their 12-month target price from $US8 to $US14 per MESO share ($A4.18). That follows recent upgrades from Bell Potter and Edison who are at $A5.15 and $A7.91 (before diluting for options).
Shorts can pick on individual analysts and their track records all they like - the upgrade trend remains for the 5 US analysts who have reviewed their research since October when the Grünenthal deal and placement took place. Those 5 analysts now have a consensus 12-month price target of $US15.40 ($A4.60) - and this is likely to keep rising in my humble opinion.
The 4 analysts covering MSB in the Nasdaq survey has a slightly lower average of $US15.25, but they include Chardan Capital, who haven't updated their numbers since August, ie before the company changing Grünenthal announcement and the placement (and Chardan have a very low target of only $US6, which is likely to be increased when they update their numbers). Nevertheless, you can see the big increase in the share price targets in the past month, and the other 3 analysts (Cantor, Edison and Wainwright) have an average price target of $US21.16, or $A6.30 per MSB share).
(see: www.nasdaq.com/market-activity/stocks/meso/analyst-research).
I personally like to look at the analysts who keep their numbers updated and who have forecasts more recent than last October, but here's the graph that US investors see when they search the Nasdaq site - no wonder they've been buying!
HC Wainwright points out in last week's note:
"In our view, the potential approval and launch of Ryoncil in the US in CY3Q20 is the most important upcoming catalyst for the company." I'm personally leaving it until the December Quarter, but they are right, it is possible in Q3, but I'd note again that MSB generally deliver on the date they imply and not before (and that's the end of December).
They also note that MSB's Ryoncil is likely to be approved as it has a... "70% overall response rate and a 75% survival rate after 100 days"..vs..." Merck’s (MRK; not rated) Jakafi, which became the first drug specifically approved for this indication back in May 2019, only achieved 41-44% response rates in patients with grade 3 and 4 aGVHD and is only indicated for patients over 12 years old. Therefore, in our view Ryoncil is likely to be approved within six months and has the potential to become the standard-of-care in this indication due to its superior safety, efficacy, and suitability for all patients over six months old."
So, HC Wainwright's share price target upgrade is driven by..." the following changes to our financial projections for Ryoncil: (1) increased the probability of success to 90% from 48% to reflect the successful completion of the Phase 3 study and the submission of the BLA"..." we now expect the company to generate risk-adjusted revenues of $1.1B in 2030, up from our previous estimate of $850M. As a result, we are increasing our 12-month price target to $14.00 per diluted share, up from $8.00."
Imagine what will happen to their price targets if/when they upgrade their probabilities for the "blockbuster indications" of Heart Failure and Back Pain???
6. Quarterly earnings and conference call are due around 26 Feb
There's plenty of interesting news and updates possible.
I expect to hear updates on the expected timeframes for FDA and trials mentioned above.
I also expect an update on the timing of the Tasly trial for heart in China and the Grünenthal confirmatory trial in Europe for Back Pain.
We could also be updated on Joanne Kurzberg's IND for chronic GVHD
We will have a better idea whether ASX200 Index inclusion is likely
Medium term prospects over the rest of 2020
1. Company announcements on FDA lodgement process (max 60 days from end Jan for FDA to accept BLA) - so by end of March. Then up to 6 months for FDA "fast track" approval (as long as the FDA doesn't restart the clock ticking and require new info). So, it is possible to see approval by the end of September and sales starting in the December quarter. Some analysts have sales starting in the September Quarter - however, I prefer to be more conservative and expect sales to start by 31 Dec 2020.
2. Advanced Stage Heart Failure trial readout by June 30 2020 (see MSB's January presentation):
"target of last patient/last visit at the end of January 2020
"Data read-out for this Phase 3 trial expected by mid-2020"
"Results will be considered pivotal to support regulatory approvals"
" Plans for commercial launch in conjunction with appropriate pharma partners in the US / EU / Japan, and in China through the Tasly partnership"
Note that last point in the the January presentation, saying that Revascor for advanced stage heart failure had "Plans for commercial launch in conjunction with appropriate pharma partners in the US / EU / Japan, and in China through the Tasly partnership"
Having plans for commercial launch??? That gives a hint that MSB are already talking to appropriate pharma partners in the big regions of the US and EU (and in the smaller but still significant Japanese market) where they are yet to sign partnering deals for Heart Failure, and which could be even bigger than the Grunenfeld deal for EU chronic back pain.
3. Chronic Low Back Pain - see MSB's January presentation. I expect something by June 30 ("H1 CY20") "Last patient last visit" - note that all patients were enrolled by March 2018, but the need to visit all patients after the 2 year mark and the need to analyse results means this may not be done and reported until the end of June. MSB said " with readout planned (mid-2020)". While it MAY be quicker, MSB usually delivers right at the end of their indicated timeframe. Then "Results from the Phase 3 trials will be considered pivotal to support regulatory approval in the US, as well as Europe through the Grünenthal partnership". AND " Obtain clearance in 2020 from European regulatory authorities to begin European Phase 3 trial" - so the Grunenthal confirmatory trial may not start until 31 December 2020 if we take the last possible date.
4. Partnering agreements - " In advanced discussions on potential blockbuster products"
Deals could happen at any time, and someone may jump the gun (like Grünenthal) before results are out at the end of June for the blockbuster phase 3 trials. However, MSB is likely to get the most value from its trials by waiting until results are reported and analysis completed - that takes a huge degree of the risk out for the pharma partners and allows them to pay much more for the certainty. Of course, bad results would make a partnering deal much more difficult. If the results replicate the phase 2 trials we are on a winner, and the various futility endpoints and Data Monitoring Committees have all recommended continuing the trials, so I'd be happy for the Prof to continue to string out negotiations until the end of June when we should have a lot more certainty on the potential global blockbusters in Heart Failure and Back Pain.
Bottom Line
The insto buying is relentless and is giving the share price major support. This has been joined by solid short covering and that trend also continues. The fact that one particular shareholder makes a lot of noise about being short is totally immaterial (and I'm sure he'd agree with this). I can understand why some schnipplers thought they could make a few cents shorting after the share price trebled in the past 13 months, but I still think the big money is to be made on the long side.
It is difficult and dangerous going against the big trend, but some people may get lucky and lock in a small profit.
The big trend continues to be supported by a slew of potentially positive factors between now and the end of June:
Short-term potential upside (now to March):
1. the solid and continuing fall in the total Net Short Position
2. four months of strong net insto buying and still going today
3. ASX200 index inclusion
almost certain in the June rebalance and still possible in March
5. continuing upgrades to analyst price target (latest last week from HC Wainwright up from $8 to $14)
6. Quarterly earnings for December due on 26 Feb, with conference call
Medium-term potential upside (up til end June):
7. BLA acceptance by FDA and indication of "fast-track" review
8. Advanced Stage Heart Failure trial readout by June 30 2020
9.
Chronic Low Back Pain
readout planned mid-2020
10.
Partnering agreements - "
In advanced discussions on potential blockbuster product
s"
- it is probable that better partnering deals will be achieved after positive phase 3 readouts mid-2020
11. Revascor "
Plans for commercial launch in conjunction with appropriate pharma partners in the US / EU / Japan, and in China through the Tasly partnership" - that one took me by surprise!
Balance Sheet and Cash Burn Under Control = Pressure for a buyback if partners come
MSB is under absolutely no pressure this year for a capital raising. In fact, I would still push for an aggressive share buyback if a big partnering deal with big upfront payments were to be done. At this stage, debt is a minor part around 5% of the market value of debt + equity, yet it is much cheaper than equity capital. Cash burn is under control and a $US100m upfront payment by a partner is the minimum I would expect in the US Heart Failure and CLBP product candidates. That would be inefficient just sitting on the balance sheet earning almost no interest and could fund a buyback of over 51m shares at current prices which is close to 10% of the current issued capital. If they wait too long to do the buyback, the share price would be at $5 and would buy back less than 30m shares.
A buyback of 30-50m shares on top of a major partnering deal would obviously cause more analyst upgrades and the combination of all three would be a major boost to the share pirce.
Most of the factors listed above have a high probability of occurring by June 30 THIS YEAR!
It's no wonder instos are taking advantage of any global instability in share prices to load up as much MSB as they can get at these prices which are still a huge discount to international analysts' 12-month price targets. While it's natural for people to look for a share price correction after a big rise, I think they're missing the big picture in a 6-month period that is pregnant with potential. The risk/reward outlook (in my opinion) and the potential short-term upside vs downside strongly favours staying long my MSB position.
But I'm just one guy - and just as you should ignore the one guy who's shorting and shouting about it, maybe you should also ignore me! However, I wouldn't ignore the trend of the big end of town, and they're obviously still buying (and covering shorts!!). The "trend is your friend", and "cut your losses and let your profits run" seem appropriate old pieces of market advice in this situation (both for the longs and the shorters).
We are unlikely to get any news on trial results (good or bad) until the end of June, and in that information vacuum it would seem that the line of least resistance for the share price is up. Imagine if they announced a partnering deal and a buyback while all this is happening!
Ps please don't worry about the whole hearts thing, it's a nice thought and I appreciate your thanks, but I really don't want to become a general commentator on HC and I don't need the pressure! I'm happy to make a few comments here and there when I think there's some demand for it, or when I feel there's a misunderstanding, but I'm never going to be someone who makes thousands of comments. Cheers and GLTAH
(20min delay)
