Analyst Price Targets Are Actually Much Higher Than You Think!
Many of the websites which tally analysts' price targets don't seem to be updated properly (or maybe they are just delayed).
@taylorstjames notes an average analyst target price for MESO ADRs of $US14.78, which equates to $A4.15 per MSB share. I keep a running total of the most up-to-date analyst forecasts and my analyst average figure is 33% higher at $A5.55 per MSB share.
The analysts which I watch have the following updated price targets:
Bell Potter update last week $A6.00
Cantor FitzGerald update 27 May $US23.00 ($A6.46 per MSB)
Dawson James update 30 July $US15.00 ($A4.21 per MSB)
Edison update 1 July $A7.89 or $A7.53 fully diluted for options
HC Wainwright update 28 May $US21.00 ($A5.90 per MSB)
Ladenberg Thalman update 30 July $US15.25 ($A4.28 per MSB)
Maxim update 28 May $US16.00 ($A4.49 per MSB) AVERAGE $A5.55
On top of the fact that these websites don't seem to be updated properly, most analysts have NOTHING in their forecasts for Covid-19 ARDS (except a small amount from Bell Potter) and most leave out huge chunks of the prospective MSB product candidates. They also apply very low Probability Of Success (POS) to most of the products (25% to 30%) and even aGvHD is at POS of 85% in many models.
Then there is the question of the very high discount rates applied to the future low probability cash flows, further stunting these valuations - some use discount rates of 30% to bring future cash flows back to today's values - which means that a sale of a treatment in 5 years time (when heart and back pain might be hitting peak sales) is to reduce the valuation of the cash flow by 73% in year 5, and if you apply a 30% POS then a cash flow in 5 years is discounted to 8c in the dollar (a 92% discount!!!).
I know that many people don't like NPV's of Discounted Cash Flows, and they prefer to use a P/E ratio. Just be aware that these NPV's DON'T pump up the valuations, they actually smash them down. If a cash flow in 5 years is discounted to 8c in the dollar now (30% POS and 30% discount rate), it shows you the massive upside in holding MSB for 5 years if these cash flows turn to a 100% probability by then. ie IFF the products work and the sales come through as forecast (noting that even the share of market is pretty conservative) a NPV of 8c now would be $1 in 5 years - that's a 12-bagger in 5 years for that particular payment.
I believe that there is so much fat in these forecasts due to heavy discounting that the three analysts at the lower end of the scale will update their price targets once MESO moves above $US15 to $US16. There will be plenty of excuses for re-evaluating probabilities and discount rates when the AdComm reports on 13 Aug and if the Covid-19 ARDS trial is stopped early in Sep. The share price is telling you that it considers more upgrades are likely. The upgrades started several months ago, and are continuing - see the graph of upgrades from Nasdaq.com below.
The price last night was $US14.37 and the high was $US14.64 (with late trading after hours at $US14.61). So a price over $US15 is only a rise of 2.7% from the late trade close. Volumes in the US are still high, with 466,000 ADRs trading last night (over 2.3m MSB shares).
Upgrades Over Past 4 Months - Still Understate Current Forecasts
The following is from nasdaq.com, which is one of the best websites for updating analysts' price targets, but still seems to lag behind the actual figures. In fact, the average they quote still seems way too low, given that we know Edison and Cantor FitzGerald are both included, and their forecasts have been above $US21 for a long time, yet nasdaq.com still says the highest forecast is $US21. They get their numbers from tipranks - and there does seem to be a problem with the source of the data for most of these websites.
The only analyst included below which isn't on my list is Chardan Capital as I can't independently verify their numbers. Also, I include Bell Potter from Australia.
So, even though the numbers are too low, you can see that the trend of price targets has risen strongly over the past 4 months, from below $US5 to $US17.42. No wonder the price is rising!
Here's MarketWatch's average of 7 forecasts at $US17.04 (ie $A4.79 per MSB share at AUDUSD 0.712).
Again, the number is too low, given that we know the 7 main MSB/MESO analysts and their up-to-date forecasts, but it helps to put it all in perspective.
A move in the AUDUSD by 1c gives a range of $A4.72 to $A4.85 for MSB shares:
So Where Is The Price Heading?
Higher!
1. Analysts continue to upgrade
Upgrades should continue as analysts become more confident in the probabilities of success and as the share price rises - ie their 12-month forecasts don't look so outrageous any more, and they will have more confidence in lifting them.
2. Shorts continue to burn
I have commented several times on the net short position - it is currently 6.12% of the issued capital - which is less than 0.1% from its recent high, and the 35.732m shares net shorted in Australia is a record high in terms of $ value of MSB shorted ($A146.5m) plus another 7.084m shares equivalent shorted on Nasdaq through ADRs worth $A29m. That's a massive $A176m of shorts in MSB. And they are burning!
There were 23.4m shares net short on March 23rd at the low of $A1.02 and around another 1m shares short on the Nasdaq. Even if those shorts were covered and transferred to someone else, those positions are sitting on a loss of $A125m vs an original position valued at $25m (exposure adjusted value) - that's a 5-bagger loss for the shorts in just 4 1/2 months - and it's on money they didn't have - they would've had to keep topping up their security with the prime broker. Of course, since the low another 12m shorts have been added to the net short position, so there's a world of pain going on for these guys.
The current interest rate to borrow MSB in order to short is down to 5% - that's the lowest I've seen and it probably reflects all the ASX200 Index funds who are trying to lend stock in order to make extra returns. It is down from a high of around 18% when MSB was incredibly tightly held and almost no stock was available to short. There are currently 10m shares listed as available to borrow (probably more behind that). The net short position is highly undependable and shows huge volatility on a daily basis, but has probably moved up from around 25m to 35m over the past three months. That more recent move only adds another $4m to $5m to the losses as the price over that period has risen from $3.60 to today's $4.10.
The shorts upped their position to try to make back some of their losses, but it has backfired. The net short is at record highs in $ terms and the total number of shares shorted is the highest since the spike between Dec 2018 and March 2019 when Capital made the first big part of their exit. People had a reason to short back then as they knew Capital would weigh on the price. They've got nothing now, only the knowledge of the Aug 13th AdCom and the early Sep Covid-19 ARDS read-outs. They must be sweating wombats!
3. Other Blockbusters could increase Valuations to $A10-20 without Covid-19
Recent updates suggest slight delays to other blockbuster readouts - but weren't changed to 4th Quarter, just indicated a bit behind the AdCom and the early Sep Covid-19 readout.
Heart Failure and Chronic Lower Back Pain appear to still be likely to read out in the 3rd quarter (just because they weren't updated to 4th quarter). In years to come, I don't think anyone will quibble that an estimate of "mid-year" was too far out if results are read out in September - particularly in the middle of the world's worst health crisis since the 1918 Spanish 'Flu and the US hospital system in chaos.
Those two blockbusters could easily increase analysts' valuations to the $A10 to $A20 range with lowered POS discounts and the high possibility of a US partner for back pain and US and EU partners for Heart Failure. These partnership deals could each generate a $US100m up-front payment, even though Covid-19 ARDS is centre stage at present.
4. Covid-19 ARDS looks spectacular to me - both likelihood of success and manufacturing potential
Covid-19 ARDS and ARDS from other sources are a spectacular opportunity if they come off, and are in now way priced into MSB share price (well maybe 1% of the potential).
I have spoken to doctors and trial experts. When we run through the numbers of what is required under the MSB Covid-19 ARDS Bayesian Analysis, sceptical doctors tell me it just might work! Just to be clear, I believe a 40% assumed mortality rate in the control group and 20% in the Rem-L group means the FDA expects to be able to approve if the numbers are better than this on 300 in the trial - ie a difference between the 2 groups of 150 each of 20% or 30,000 people (60,000 die in control group and 30,000 die in the MSB group).
I think it is quite possible that we will get close to this figure in the first 90,000 if the control group continue to die at rates of 60% or more (27,000 dead) and the MSB group has a very low number of deaths. I am allowing for improved Standard of Care since the initial mortality figures in NY hospitals were reported at well over 80% - that improved SoC should improve the outcomes in both groups, and could mean that the mortality in the stem cell group is close to zero (vs 12% in the original EAP). The researchers would then have to look at the probability of reaching a difference between the two groups of 30,000 by the end of the trial, given that they may already have a difference of 27,000 from the first 90,000 patients. I'd say that would be a pretty good chance, though I'm not party to the stats which have been set. So, if that's the case, they would stop the trial in early Sep, and try to give everyone the cells, rather than consigning the control group to a high death rate.
Of course, many of the controls won't survive even if given the cells late due to all the damage done to other organs (heart and lungs in particular) - and those that do survive will have a lower quality of life. The doctor in Sydney who was only 50 and a top-level cyclist now can no longer drive nor cycle - a massive loss of lifestyle for a fit and relatively young man at the forefront of the crisis who was just doing his job. I wish our cells could be made available to everyone with moderate to severe ARDS as quickly as possible.
To this end, I have been doing more work on the availability of cells from MSB's prospective upgrades to manufacturing, and I included a number of speculative calculations in my last note - this is a major change - analysts don't yet have these upgrades to yields, number of cells possible to manufacture and big drop in manufacturing costs.
I think it is quite possible that MSB will be able to produce 25,000 treatments by the end of the March quarter 2021 and rising to 100,000 treatments pa by Dec 2021. Then they can survey the requirements and decide if more manufacturing is required, but I think it will be as they begin to expand into non-Covid ARDS. Eventually, if this all works, I can see MSB providing a steady state 200,000 treatments per year for non-Covid and Covid-19 ARDS combined. At a price of $US70k per treatment, that could generate royalties in three years of $US4.2 billion pa and net profits (after US tax) of $A4.66 billion - put that on a P/E of 30 and that's a $A140 billion company - or $A224 per share in 3 years - you should then discount that back to today's value at whatever rate you think appropriate to give a valuation today - let's say 15%, giving a value now of around $A150 - just for ARDS.
Bottom line - Share Price Is Heading Higher
I have many times pointed out the tremendous reward/risk ratio in MSB. The upside from Covid-19 is phenomenal (hundreds of dollars share price potential IFF everything goes right) and I still think the share price is underpinned at $A2 to $A3 on the downside just from paediatric aGvHD.
As I have also pointed out previously, expansion of Ryoncil into Europe, adult aGvHD, chronic GvHD, and other related Rem-L products (Crohn's, EB, and all the other inflammatory indications) - could make Ryoncil worth $A10-20 per share in 4 or 5 years.
Ryoncil could be approved very soon after the Aug 13 AdComm (the FDA doesn't have to wait until the Sep 30 deadline). So that's only 9 days away.
Covid-19 also uses Rem-L technology, plus all the improvements patented in the past 10 years. The first 90 patients have a very good chance of showing overwhelming efficacy by early Sep and the trial could well be stopped then and approval granted soon after under the US "Operation Warp Speed".
Add Heart Failure and Chronic Lower Back Pain which should read out by end-Sep and you've got powerful reasons for the shorts (who are already burning) to be forced into a bit of risk management and the need to close their record high $ value position in MSB.
This is really the fun part of investing! I hope everyone's enjoying this part of the ride - it doesn't get much better than this!!
I'll finish with a song, as it seems to have become de rigueur in these posts. Zoot Money and the Big Roll Band seem to sum up the fun of starting with nothing, then building up to become a Big Time Operator! You can blast this out on your 6-speaker Scarab sound system as you cruise up to @mgavoca island, sipping a Crownie with @ddwn at his beach-side bungalow.
(20min delay)
