@benelong - my favourite charity at the moment would be anything...

@benelong - my favourite charity at the moment would be anything that can save lives affected by the virus. Draw your own conclusions!

I've finished with HC posting (it takes a lot of time and effort, no reward and potential waste of time if it is moderated), but you've asked for an update and the massive price fall in MSB and the huge potential in possible emergency approval of a product which could reduce the death rate of the Corona virus outbreak are worth mentioning and analysing. So this is a one-off for exceptional circumstances.

NONE OF THESE OBSERVATIONS ARE RECOMMENDATIONS TO BUY OR SELL ANYTHING.
I AM NOT A LICENSED FINANCIAL ADVISOR, NOR DO I WORK FOR ONE.
I AM JUST AN OLD RETIRED GUY WHO HAS BEEN INVESTING FOR DECADES.


Observations on MSB price and recent announcements

1. The price correction down to $1.47 today has gone way beyond any sort of normal correction

2. Analysts have kept 12-month price targets intact

3. The company has a potential product treating ARDS resulting from Covid-19 Corona virus - An ARDS/COPD product would probably extend into an ongoing need to save lives from seasonal 'flu

4. US approval could be days not weeks as governments and regulators need to be seen to be pro-active

5. Big pharma partners could produce all the cells required

6. MSB has no short-term earnings which could be affected by an economic downturn this year

7. Interest rates have fallen which should be beneficial to valuations of long duration equities like MSB

8. Indication from FDA re approval of aGvHD only a couple of weeks away

9. Back pain and Heart Phase 3 trial results now just over 3 months away

A bit more detail:

1. The price move down to today's lows of $1.4725 is way overdone

That doesn't mean the price has to rise, and many other stocks are caught up in the global panic, but MSB has fallen 54% from the recent high of $3.21 and the move down is enough to be a 61.8% Fibonacci retracement of a rise from 40c. The price had moved up from $1.65 in October last year, and so that whole rise and more has been lost - this isn't a simple price retracement of the last move up, it's a capitulation.

Maybe you could justify it by saying it needed to go back and fill the gap between the $1.475 high on 9 Sep 2019 (just before the Grunenthal announcement) - and the price opening the 10th Sep at $1.53. That gap has now filled.

That means the price has retraced the whole of the Grunenthal announcement effect and also the restoration of technology credibility and balance sheet credibility. It ignores imminent approval for aGvHD and ignores potential emergency approval for treating ARDS resulting from the Corona virus.

Sure, the price has had major falls in the past and lost the whole of previous big rises, but other falls have been triggered by loss of partners, poorly interpreted trial results or imminent need for major cash injections. None of those factors are present now and there is potential good news by the end of this month.

I will comment more on potential approvals and MSB valuations by analysts below - but all of these combine with the comments above to show that the price fall is way overdone - IN MY OPINION.

Even if Corona virus becomes dramatically worse (which it probably will), MSB has a potential cure for the deadly lung diseases which it can cause, and so MSB may soon become one of the few companies to benefit from this horrible situation.


2. Analysts have kept 12-month price targets intact - price today below Cantor's low target

Cantor FitzGerald
On 10 March, C/F reiterated their 12-month price target of $US23 per MESO ADR (equates to $A7.13) and their previous note on March 5 said:

"The risk/reward is to the upside, ahead of these potential catalysts, in our view. We think the stock could trade down to $5 (equivalent $A1.55 per MSB share) on negative outcomes and up to $30 (equivalent $A9.30 per MSB share) if things turn out positive."

SO MSB'S PRICE TODAY WAS ALREADY BELOW C/F's DOWNSIDE LEVEL, SET ONLY A WEEK AGO "ON NEGATIVE OUTCOMES" - AND WE HAVEN'T HAD ANY NEGATIVE OUTCOMES.

Here are some of the Cantor FitzGerald comments:
"Mortality in COVID-19 infected patients with the inflammatory lung condition acute respiratory distress syndrome (ARDS) is reported to approach 50%, and is associated with older age, co-morbidities such as diabetes, higher disease severity, and elevated markers of inflammation. Current therapeutic interventions do not appear to be improving in-hospital survival."

"Remestemcel-L has potential for use in the treatment of ARDS, which is the principal cause of death in COVID-19 infection. This is supported by recently published results from an investigator-initiated clinical study conducted in China which reported that allogeneic MSCs cured or significantly improved functional outcomes in all seven treated patients with severe COVID-19 pneumonia."

"Additionally, in posthoc analyses of a 60-patient randomized controlled study in chronic obstructive pulmonary disease (COPD), remestemcel-L infusions were well tolerated, significantly reduced inflammatory biomarkers, and significantly improved pulmonary function in those patients with elevated inflammatory biomarkers."

"Since the same inflammatory biomarkers are also elevated in COVID-19, these data suggest that remestemcel-L could be useful in the treatment of patients with ARDS due to COVID-19. The COPD study results have been submitted for presentation at an international conference, with full results to be submitted for publication shortly."

"We rate Mesoblast Overweight. We believe the company's platform of mesenchymal lineage cell (MLC) therapies has the potential to treat an array of diseases with currently significant unmet needs."


Dawson James
On March 10, D/J said:
"BUY: REMESTEMCEL for COVID-19"
D/J have a $US15 price target (equivalent $A4.65 per MSB share) and they note:

"How Does Clinical Success Change the Projected Valuation?
For example, we assume just a 40% success probability in the CHF indications (even though the trial is pivotal). If Mesoblast announces positive clinical data, it suggests the probability goes up. At 100%, this change alone would drive a substantially higher valuation target."

"Hippocratic Oath – Do No Harm. Regenerative Medicine is in a unique space and often is confused and compared to CAR-T and Gene Therapy. One reoccurring theme that differentiates the Regen. Space is Risk versus Reward. We can view this as safety versus efficacy and the commercial potential for clinical success versus valuation.

"We feel confident that the safety profile of both allogeneic (other people’s) cells and autologous (your own cells) has been very well understood and established."

"We see this as a differentiator in comparison to other cell and gene therapy therapeutics, where we must carefully balance the adverse events versus the efficacy (& its sustainability). We also see distressed valuations often stacked against therapeutics that are addressing blockbuster markets. Mesoblast has established a strong clinical record with a series of Phase 1, Phase 2, and now pivotal trials that have demonstrated the safety profile and which address blockbuster markets such as Heart Failure."


Maxim
Maxim has a $US16 price target ($A5 equivalent MSB shares) in their note of March 10th.
Maxim is positive on the Covid-19 opportunity:

"Conclusion. Much of the focus on the therapeutic side for COVID-19 has been towards antivirals like Gilead (GILD - Hold) with remdesivir (data in April). Though antiviral drugs are important to modify the course of the disease, treatments are also needed to improve functional outcomes in severe patients. Cell therapy represents a safe option which has demonstrated efficacy in inflammatory conditions, and could represent an important option for the most severe COVID-19 patients, and for Mesoblast, this creates a new, potentially high-value opportunity."


Bell Potter
BP have retained their $A5.15 price target


3. Potential treatment for ARDS - what it means for MSB

ARDS is a killer and the Covid-19 virus seems to be killing at 10x the rate of the seasonal 'flu virus, although the number of Covid-19 infections so far is way below the normal 'flu season (but rising quickly). That 10x death rate is just an order of magnitude - it could be 30x, or the death rate could be much lower once we can test large numbers of people, as we may find the overall rate of Covid-19 infection is much higher than first thought.

The numbers and rates/percentages are fluid and depend on several assumptions- even the annual seasonal 'flu numbers and deaths are based on statistical estimates by the CDC in the US. So we don't really know how bad Covid-19 will be at this stage, but the numbers of deaths are high - with 61,000 seasonal 'flu deaths in the US in 2017-18 and possibly as high as 95,000 (ie higher than annual car deaths at 37,000 and gun deaths at 40,000 in the US).

The potential to cure ARDS (and COPD), which is the killer disease developing from Corona Virus is covered in comments from MSB and recent Chinese trials are well known, and the key facts are summarised in analysts' reports above.

This could be a blockbuster product, and could be approved very quickly and I'll discuss why in the sections below.

MSB are at full throttle on this opportunity. They have announced that they are already in talks with 4 governments and with big pharma. Their other projects are still progressing, but there is the chance that treating the ARDS stemming from the combined Covid-19 and seasonal 'flu opportunity is bigger than all of the other opportunities, and may be approved very quickly and therefore for a very low cost.

The heart and back pain trials won't read out until the end of June and then there could easily be 12-18 months of BLA lodgement delays as there was with aGvHD (in fact these two trials were much bigger than aGvHD and there were multiple endpoints - particularly in the heart trial, so the lodgement with the FDA could take much longer).

The opportunity is not just the Covid-19 patients with ARDS (of whom there are currently very few), but all people who die of seasonal 'flu each year (61,000 in the US) and according to the CDC, global death rates from seasonal influenza are likely between 291,000 and 646,000 people each year, depending on the severity of the circulating flu strain.

That is just the number who die of seasonal 'flu - a lot recover after very expensive Intensive Care Unit interventions - the number of hospitalizations in the US in 2017-18 was estimated by CDC at 620,000 to 1,400,000. ICU care with ventilators etc for very sick patients can be up to $US10,000 per day. So if MSB can cure people in 2 days (as with the recent Chinese example) they may cut hospital costs by $US30k to $US50k if they can cut the ICU stay by 3 days or 5 days. They could also save a large percentage of the 61,000 (or up to 95,000) American lives lost in a bad 'flu season plus many of the lives which may eventually be lost to Covid-19.

So, based on the amount MSB's cells could save the health care system, they may be able to justify charging $US30k to $US50k for a treatment. This is a total guess - it may be nothing like this number, but you can see where I got it from - so make your own assumptions!

If there are something like 1m Americans hospitalised for 'flu in a normal year (CDC 620,000 to 1.4m) then maybe the opportunity is $US30 billion in sales per year! This is also a total guess - but I do it to show that the numbers on ARDS caused by Covid-19 or seasonal 'flu could be a blockbuster which is much bigger than the current sales forecasts for heart or back pain.

So, it makes sense to go hard on this opportunity, while still progressing the other product candidates


4. US approval could be days not weeks as governments and regulators need to be seen to be pro-active

This is self-evident, but governments are desperate to look like they are doing something after stuffing up the initial response to Covid-19. So far, all they have done is slow economic growth by imposing travel restrictions and hence they are trying to encourage business with spending and stimulus packages. Central banks are also cutting interest rates - but this is a health problem first and foremost - so trying to encourage businesses to invest misses the point that if people aren't going to buy the products produced then companies won't invest, and deficit spending and low interest rates won't change that.

What is desperately required is a health response - but a vaccine isn't likely until next year, and the infection rate is accelerating. Panic is everywhere. Northern Italy doesn't have enough intensive care beds to treat all the very sick people - and that situation may only be a month or so away in other parts of Europe and the US. We don't know how bad it really is in China and Iran looks stuffed.

Governments who announce a speedy health response that works and reduces deaths will rightly bathe in the glory of saving the lives of their populations. It is a great opportunity to get on the front foot and be seen to be taking a lead in innovative 21st century medicine. Downside is very limited, especially given the results we've seen in trials already.

Something needs to be done right now to treat the worst cases who are at grave risk of dying, and increasing the number of ICU beds would be a great start - you can do that by building new hospitals, buying ventilators, training ICU nurses etc -which would take years and be hugely expensive and still result in large numbers being turned away to die for at least a couple of years, OR- you could dramatically increase the throughput of your current system - using MSB's cells to cure patients in a couple of days and then free up the ICU bed for the next person. That could double or triple the effective productivity of the current system.

THIS NEEDS TO BE DONE NOW IN NORTHERN ITALY and it is maybe a few weeks away from being critical in the US.

Approving MSC's to treat ARDS on an emergency basis would cost MSB very little (or nothing). Follow up confirmatory trials would probably be mandated - but the patients who would immediately start to be treated could make up this trial.

For all of these reasons, it isn't hard to see the pressure on governments and the upside for their electoral prospects if they move quickly and decisively to approve MSB's cells on an "emergency" basis - and I personally think that could happen in days rather than weeks.


5. Big pharma partners could produce all the cells required

The Lonza facility has not yet been expanded, and even then it wouldn't be big enough to produce enough to treat 1m patients per year in the US, let alone potentially 10x that number in the rest of the world (subject to cost of treatment). The announcement said that MSB was in talks with government and pharmaceutical companies - I believe that is is a coded way to tell us that these bodies could both be part of the solution and therefore big pharma may enter into partnership with MSB (and possibly governments) to produce all the cells required. Remember that the MSC's used in the trials so far are the lower tech cells (vs the MPCs).

MSB have strongly stated that they have patent protection for the cells, their manufacturing and their use for COPD and ARDS. The small scale testing in China was not MSB's cells, but would've been cells which are approved for research purposes only. Once these cells are used in a commercial or large scale context, MSB's patents will be triggered. I guess it is possible the Chinese may flout Western patent law and produce MSC's themselves, but the big opportunity for MSB is in the US.

A big pharma partner may result in another big upfront payment and that could trigger my pet subject of a buyback if the balance sheet is left with way too much cash. Too early to speculate on how much this could be, and none of it may happen - but stay tuned, this is just the beginning.

6. MSB has no forecast short-term earnings which could be affected by an economic downturn this year
I can understand why the market in general is being sold. It was 30% overpriced before this all started (based on the Industrial Average P/E ex Financials - on my numbers, in my opinion, not a recommendation) and the fear of the population plus government travel restrictions and prudent management means earnings forecasts are being downgraded in most companies and industries, which makes the market even more overpriced.

BUT Mesoblast doesn't have any earnings forecast in the near term and the Covid-19 situation doesn't increase its costs or losses - so an economic downturn can't affect MSB's earnings in a negative sense. AND even at $3, MSB was trading at a fraction of the price targets of the major analysts ($4.60 to $7.50 targets). MSB was in the opposite position to the overpriced general stock markets which were also suffering profit downgrades. In fact, this crisis may even do a huge amount to actually generate a big new short-term earnings boost for Mesoblast if there is a quick approval of the use of MSB cells for treating ARDS related to the Covid-19 outbreak.

So, to me, the price fall right back down to $1.4725 today was inexplicable - but then again human beings act in a herd, and just as the herd is charging in to grab as much toilet paper as it can, it is doing a lemming dive off the economic cliffs and dumping shares indiscriminately (just have a look at the smashing handed out to some of the gold share funds, with massive falls from their recent highs).


Bottom line

In my opinion, without giving any advice, this really looks like a final capitulation sell-off to me - now that we have filled the gap between $1.475 and $1.55, we are trading below the bottom level that Cantor FitzGerald set a week ago for MSB if news were to be bad.

We have also more than retraced the whole bounce after the Grunenthal deal and the balance sheet reinforcing capital raising (with no more raisings required out to 2022, at current rates of cash burn) and the share price is down over 50% from the high.

Despite the price fall, news has improved over the past week, with the announcement of a MSC product targeted at the most deadly aspect of the Corona virus and discussions with governments and pharma companies regarding a product targeted at the potential of a COPD/ARDS product getting quick approval under Covid-19 pressure.

Covid-19 has no short-term negative impact on MSB earnings and the drop in interest rates actually helps increase valuations of long-term growth companies like MSB by applying a lower discount rate to long-term earnings and cash flows.

Analyst forecasts have held solid or been recently increased and the FDA is scheduled to tell us by the end of this month whether fast track approval is granted to children's acute Graft v Host Disease.

By the end of June we should have readouts on the highly important back pain and Heart trials - but both could be swamped in the near-term by the potential for emergency approval for a product to stop the deaths associated with Covid-19. None of the Covid-19 potential is in analyst forecasts, not is it in the share price.

Maybe the share price will go lower, the whole world is panicking, but personally I see much higher upside than downside for MSB from these levels and I'm changing my sentiment from Hold (where it has been since 2 July 2018 when the price was $1.54) back up to Buy - as the price is now back to the same level, but the company is far more advanced. PLEASE NOTE - THIS IS JUST MY SENTIMENT INDICATOR (WHICH IS REQUIRED BELOW) IT IS NOT A RECOMMENDATION - THIS IS MY FIRST CHANGE IN SENTIMENT SINCE END JUNE 2018.

Good luck to all those who are backing this tremendous company.



APPENDIX - CDC SEASONAL 'FLU NUMBERS AND ESTIMATED DEATHS

Estimated Range of Annual Burden of Flu in the U.S. since 2010
The burden of influenza disease in the United States can vary widely and is determined by a number of factors including the characteristics of circulating viruses, the timing of the season, how well the vaccine is working to protect against illness, and how many people got vaccinated. While the impact of flu varies, it places a substantial burden on the health of people in the United States each year.
CDC estimates that influenza has resulted in between 9 million – 45 million illnesses, between 140,000 – 810,000 hospitalizations and between 12,000 – 61,000 deaths annually since 2010.