MSB Trading - 2020, page-43

MSB – A great year in 2019 and hopefully even better in 2020
MSB was the No. 37 stock for 2019 in the ASX300, with a 79.3% return.
That compares to the ASX200 Accumulation Index which rose by 23.4% for the year and healthcare darling CSL, which rose from $185.15 to $275.76 plus dividends of $2.66, for a total return of 50.4% for the year. Since the low at Christmas 2018, MSB is up 107% - exactly the same % rise as its partner JCR Pharma over the same period!
Shareholders are now flocking in to MSB shares – with phenomenal volume of over 3m shares traded on the ASX today, a normally quiet time of year. Today’s volume was more than traded in total in the first 3 trading days of 2019, and it was a similar story in the US (140,000 ADRs on Thursday night vs 166,000 in the first 3 trading days of 2019). Both high volume trading days were on big price rises (+2.4% in Australia and +6.2% in the US).
The MSB return for the year started from a depressed base (after the 20%+ fall in the S&P500 Index in December 2019 and the miscommunication and poor trial design by the NIH for the “weaning” LVAD trial – there was actually a recommendation in the body of the report that statistics were very positive for reduction in serious GastroIntestinal bleeding and expensive readmissions to hospital for the older, ischaemic group of patients – exactly the patient cohort selected for MSB’s much larger Heart Failure trial.
So, even though the past 12 months has seen a great rebound, the price isn’t quite yet back to where it was prior to the NIH result’s release – yet there has been much progress since then – notably the very positive partnering deal with Grunenthal in Europe and Latin America for Chronic Lower Back Pain. The balance sheet is now flush with cash for at least the next two years of cash burn – and may not ever need another capital raising – with a declining cash burn and increasing royalties from licensees, partnering upfronts and milestone payments and potential sales revenues from aGvHD in the US market by the end of 2020.
On 2 October 2018, the share price was at $A2.47 and it remains a mystery to me why it is still trading below that level. One key reason is that after the Grunenthal deal there was a large degree of indigestion as the market swallowed a $A75m placement at $2 (being 7.5% of the company’s capital and then Capital sold its remaining holding of 5% of the company – effectively dumping 27m shares at $1.711. Soaking up 12.5% of the company was a big ask, especially as there were some big one-day falls in global markets at the same time.

The $A121m of MSB shares that instos absorbed late in 2019 compared to the biggest capital raisings in the sector in 2019 – Avita raised $120m in November and Paradigm raised $78m in mid-April. Total raisings in the biotech sector were a 10-year record of $1.27bn, with a further $12m raised by Cartherics and $10m by Cyclopharm on Dec 20. None of this money was raised by the big three (Cochlear, CSL and Resmed). So it was a big ask for the price to absorb all this selling and still rise, yet that’s what happened.

I don’t anticipate any capital raisings in 2020 by MSB and there are several big announcements due which should keep tension in the share price. These include the results of the phase 3 back pain and heart trials and the possible fast tracking of the Biologics Licence Application with the US FDA for paediatric Steroid Refractory acute Graft v Host Disease (SR-aGvHD) – and sales of this SR-aGvHD product due to start in late 2020. The company remains in advanced negotiations on further partnering deals and deals could be announced any time “out of the blue” like the Grunenthal deal. If another big upfront payment deal is announced, I would expect MSB to consider a share buyback at the same time (my thoughts only – they haven’t made any comments on this).
Instos are buying, and shorts are down from their 8.3% peak to only 4.5% to 6% of the company now (it is swinging between these two levels on a daily basis) – still a relatively high short position, especially in a company with so many potentially positive announcements on the horizon.
There is still a good chance that MSB will enter the ASX200 in the June rebalance (calculated based on the average market capitalisation for the 6 months to the end of May). That would create another big round of insto buying and probably be the final nail in the coffin for the shorts.
I have no real hope that MSB can enter the ASX200 index on the March rebalance – and I estimate the price would need to average $A3.10 between now and the end of Feb to make the March rebalance.
There’s still a long way to go, but an average price of $2.24 for the six months to the end of May should be enough to get MSB into the top 179 stocks and probably into the ASX200 in the June rebalance, including a 15% discount in the Weighting Factor. So far, we are 23 days into the period and averaging $1.955 – that means we need to average $A2.31 for the remainder of the 102 trading days left until the end of May. That’s only 10% above today’s closing price – so quite achievable, although the longer it takes to get there, the higher it has to go to get the average up to $A2.24 for the whole period from end November. One good announcement should do it, and the solid buying in early January is a good indication of stronger support.

Positives for MSB on Friday
Insto buying
There was obviously strong insto buying in Australia on Friday – and the bulk of the volume was traded at a bullish $2.12 (nearly 50% of the volume at that price) – furthermore the range of trades was a positive skew (right skew), with the high $2.17 vs the low of $2.08. Midpoint trades showed much higher volumes than the light trading of New Year’s Eve and were a much higher percentage of trades, indicating insto involvement. The close price of $2.10 (only 4% of the total volume) was well below the VWAP and below the median trade price of $2.12 (nearly 50% of the day’s volume) – I think it show some determination by the shorts to manipulate the closing price down.
So instos have shown they are prepared to buy volume at $2.12 and that was before they saw the results of the competitor’s Incyte trial failure for a GVHD drug, and before they saw the most recent analyst research from Edison, valuing MSB at $A$A7.91 per Aussie MSB share.

Incyte Corporation GVHD trial failure
Nasdaq listed INCY announced that the pivotal Phase 3 GRAVITAS-301 study evaluating itacitinib in combination with corticosteroids in patients with treatment-naïve acute graft-versus-host disease (GVHD) did not meet the primary endpoint of improving overall response rate (ORR) at Day 28 compared to placebo plus corticosteroids (74.0 percent vs. 66.4 percent, p=0.08, respectively). Itacitinib added to corticosteroids improved the overall response rate in patients with treatment-naïve acute GVHD; however, the difference versus placebo plus corticosteroids was not statistically significant. In addition, there was no difference observed in non-relapse mortality (NRM) at Month 6, the study’s key secondary endpoint, between the treatment and placebo arms.

Edison report dated 3 January
Edison said…”We have increased our valuation from A$4.1bn or A$7.56 per share (A$7.20 per diluted share) to A$4.2bn or A$7.91 per share (A$7.53 per diluted share) mainly due to rolling forward our NPV and lower R&D expenses. This was partially offset by lower net cash. A number of key valuation inflection points are coming up for the company in the next 12 months including a potential FDA approval and data from two Phase III trials.”
NB For those who have argued in the past that Edison isn’t independent, the Edison analysis is commissioned analysis, but is independent of MSB. This is a fairly recent trend to analysis being separated from broking firms. Andrew Goodsall’s firm in Australia is doing the same thing – they usually charge instos an annual retainer for access and charge small cap firms a nominal amount to cover costs. This is both a compliance/regulatory response by the broking industry and also a better cost recovery model for small cap research. Stock broking firms make very little these days from brokerage commission and make huge sums from capital raisings. It just isn’t worth the cost of an analyst if your brokerage rate is 0.1% for instos and a stock like MSB only trades 1m shares per day (last year’s average volume) – even at the current share price above $A2, total brokerage would only be $A2,200 per day if it were all instos trading at 0.1% - and a year ago it was half that when the share price was only $1. That’s the main reason there is so little “quality” coverage of MSB in Australia. The recent 27m share crossing would be worth it for Goldmans who had both sides of the deal – but even that would’ve been less than $100,000 of brokerage at 0.1% per side. Coverage is also worth it for firms like Bell Potter and Aitken Murray who won the right to place $A75m of shares to instos recently – they make money from the placement and then get follow up business from the clients who took stock. Commissioned independent analysis firms usually make far more from their insto clients than they make from the amounts companies pay them to write a report. They won’t survive if they favour their corporate clients over their insto clients.

Why Thursday's BLA announcement means we remain in a "fundamental" news uptrend

Well, yet again, the Thursday overnight US price for MESO ADRs ($A2.25 equivalent) was a poor indicator for the Aussie price the next day - Friday ($A2.10).

However, rather than get caught up in arguments about which market leads the MSB share price rise, I believe that MSB remains in its uptrend which has seen the share price more than double since Xmas Eve 2018. That means that the price should rise regardless of whether the shares trade in The US or Australian markets - obviously not rising in a straight line, but it should continue to rise over the next year due to continued news flow regarding medical trials, partnering announcements etc - ie a "fundamental" news uptrend supporting strong technical share price trends.

Why should the price continue to rise? It’s not just my opinion, the average US analyst 12-month price forecast is $US15.25 per MESO ADR according to tipranks.com (with a high of $US23 and a low of $US8) – that’s the equivalent of $A4.38 per MSB share, with a high of $A6.60 and a low of $A2.30. Bell Potter’s Australian analyst’s 12-month target price is $A5.10, and Edison’s is the highest current valuation (that I’ve seen) at $A7.91. As I have previously shown, most (if not all) of these analysts use discount rates which I consider excessive, combined with probability discounts which downwardly distort the valuation methodology. Furthermore, they leave out some of the deals and potential tier one future cash flows – even those which have already been announced. So, valuations should continue to move higher.

As to @joeycav11 comments/questions that I’m being too conservative and possibly scared by the constant negative posts by some on HotCopper – I’ll address that in the second half of this note. Good questions, and raises some important issues, but I’m actually much more worried about falling afoul of ASIC!

Bottom line is, we’re still in a fundamental uptrend of positive announcements and share price rises.

MSB trading in Australia leads the share price higher, but that doesn't mean there can't be strong nights in the US which lead ahead of the general uptrend, particularly if a US short seller decides to aggressively close a position (which is possibly what happened Thursday night). Usually, if the share prices spikes in the US and then it isn’t confirmed by the Aussie market the next day, the price falls back in the US the next night. So, that’s not “leading” by the US market, it’s just getting ahead of itself – probably for reasons of low liquidity in the US.

I also believe Thursday's BLA lodgement announcement was generally misinterpreted by people who saw it as a delayed announcement which added another month to the timeframe.


Looking at some of these issues in more detail:


1a. MESO vs MSB - who leads?

@Armyne has it right. I did a statistical analysis (actually a few of them) showing that MSB leads MESO and that MESO is a very poor lead for the next day's MSB trading. However, that is an analysis of statistics and doesn't mean there aren't nights where MESO goes up and then MSB goes up the next day - it just means you can't depend on it and especially the magnitude of the moves have no correlation.

That analysis makes sense as only 8-9% of Mesoblast is listed on the Nasdaq, and the big overseas instos who own Mesoblast tend to own far more MSB shares than they do MESO shares. So, the home market is Australia, and particularly Melbourne. The home market where the bulk of the volume is traded sets the price.

Having said all that, if there are positive dynamics going on, and the price is in a general uptrend, there's no reason why the price can't rise in Australia, then see a further rise in the US, then rise in Australia again the next day. Does that make any difference though? Does that mean the US price can be seen as leading the next move up in Australia the next day? Not in my humble opinion - imagine if there were no US listing and the price was generally rising - the price would still go up most days in the Aussie market even in the absence of price moves overnight. The US moves therefore aren’t dragging it higher in Australia – it would be rising in Australia anyway. It actually looks more like the Yanks give it a push and then wait to see if the move is confirmed by Australian trading the next day – if not, the US price usually falls backs again.

I believe most of the big US price moves of the past 12 months are related to US buyers who must hold US registered stock (ie MESO ADRs) and who aren't allowed by their investment mandates to hold foreign stock (ie MSB shares) - and that includes US players who have shorted on the NASDAQ market. While there is a small extra expense involved in creating or busting ADRs into ordinary shares or vice versa (Custodian Bank costs about 1% plus cost of currency conversion) it is quite doable (I’ve done it myself!) and the fact that the US players sometimes pay a premium way above this cost tells you that they aren’t allowed to arbitrage through the Aussie market.

It is quite possible that Thursday night's trading spike in the US was related to short covering post the BLA lodgement advice in Australia - which I believe was much more positive than commentators in Australia realised (see below section on the announcement). Thursday night, 138,744 ADRs traded, ie 3.8x average daily volumes and, interestingly, about half of the existing US short position – though I expect there was also buying by long-only investors as well. US short sellers are much more active and aggressive than Australian short sellers, and they can afford to be - the positions aren't nearly as big in total number of shares or as a percentage of their much larger portfolios - so it doesn't hurt as much to cut and run if they see a position no longer has merit.

It is certainly possible that Thursday night’s price rise was exacerbated by aggressive short covering, and therefore doesn't mean that the much larger Aussie market will follow suit with such a large percentage rise (and while the price was up 2.4% in Australia on Friday, it was only $A2.10 – way below the 6.2% price rise in the US market to the equivalent of $A2.25).

At the end of December there were 277,726 ADRs shorted on the NASDAQ market in the US- up 10,000 vs November and at the highest point for 2019. That equates to nearly 1.4m ordinary shares out of around 40m equivalent ordinary shares (or 8m ADRs) listed on Nasdaq - so the US short is around 3.5% of the ADRs listed. Average daily volume of ADRs traded in the past 3 months is only 36,000 (or 180,000 ordinary shares) - that makes 8 trading days' volume to cover the short.

These shorting figures in the US market are nowhere near as critical as in the Aussie market - average daily volume 1.73m shares past 3 months, total short 24m to 32m shares over the past few trading days or 14-18 days' average trading volume to cover the short).


1b. Instos have returned to the market in early January

I was surprised by the strength in the MSB price at the end of December – both price and volume - especially because it was obvious that the sellers were still trying to knock the price down with low volume selling at quiet times of the day. When there was big buying, the sellers stepped back and then when the buying finished, the sellers unleashed flurries of low volume trades knocking the price back down.

This was also evident in the closing match of the day which has been below the VWAP for several days now. Even today, with big volume trading of over 3m shares (almost double the recent daily average, the closing match was $2.10 vs the VWAP of $2.116 – that’s a big difference and is fairly consistent.

I have other proprietary indicators I look at for determining insto buying vs shorts and bots. The instos had dropped off by the end of December, but were back in force today. That’s unusual as most Aussie instos usually take at least the first two weeks of January off. Maybe overseas instos (who don’t have the long summer holiday in January) liked the BLA announcement and decided to buy in the Aussie market today. Maybe the bushfires mean Aussies aren’t holidaying (apart from the fancy-pants fund managers who are off skiing in Aspen and Val d’Isere at present).

Whatever happened on Friday, it was most unusual for this time of year and is indicative of strong natural insto buying. The reported short position continues to jerk up and down in a manner that makes it basically useless as a guide – I guess we have to keep an eye on it, but I’m not gaining any insight from it. It is possible that some of Friday’s buying was short covering, though I don’t have any confidence in saying that – we will probably only find out for sure in a few weeks – unless a new substantial shareholder pops up – then we’ll realise what’s been going on.

Midpoint trades were evident again on Friday – instos often use the midpoint to try to discover lines which are lurking in the shadows. Bots also use the midpoint to discover whether there’s any strength there. On New Year’s Eve, there was virtually nothing traded in the midpoint (see graph below), which is one indicator that instos had ruled off the books for the year and were off for an early holiday:

​

Compare the limited trading at the midpoint on New Year’s Eve (16,194 or 2.7% of volume) to Friday Jan 3^rd (110,834 shares or 3.9% of total volume).

Also note the manipulation – the bulk of the trading on Friday was at $2.12, and the highest trade was 5c above this, while the lowest trade was only 4c below - yet small trades managed to pull the VWAP down to $2.116 and the closing price was only $2.10.

The average trade size on Friday (dividing each block by the number of trades per block) was 1,733 which was 2.2x the average of 781 on NYE. The average block on Friday was 7,418 vs 4,733 on NYE.

So, Friday saw more trades, bigger average trades, a much bigger range of prices, bigger blocks and bigger average trades per block, and very strong demand at $2.12 (with 42% of the day’s trades going through at $2.12). Yet a nudge at the end managed to shave 1c off the closing price by selling a lowly 4% of the day’s volume in the closing match.

I’m not complaining, and it’s actually heartening to see that instos were clearly prepared to buy volume on Friday at $A2.12, which was a price rise of 3.4% vs Thursday’s close.

Friday’s very bullish valuation report from Edison, and a reevaluation of the BLA announcement (and the benefit of adding contemporaneous control data) may well propel another round of insto buying next week.


2a. Why Thursday's BLA announcement was better than many commentators thought

I believe the announcement of filing the BLA for aGvHD with the US FDA in early January was very positive and that realisation will gradually dawn on people.

I believe that the extra data which was able to be added from the Mount Sinai Acute GVHD International Consortium "MAGIC” significantly adds to the probability that the FDA will approve the BLA. That is because there was no control group in the MSB trial because (as Dr Kurzberg who was the lead investigator has said) it would’ve been too difficult (and too cruel) to get people to agree to putting their terminally ill children into a trial with a control group with no treatment at all, knowing that most of them risked death. So MSB conducted the trial with no control group and instead chose to use historical survival and response data as the “control”. This was accepted, but was open to a bit of criticism (particularly from the usual crowd).

So the “MAGIC” data can now act as a contemporaneous control group – the data was matched for inclusion criteria and disease severity (80% Grade C/D) and is over a similar time period to the MSB trial. The MSB trial was in the high 80% grade C/D.

Including and analysing the MAGIC data must have taken some time and caused some delays for filing the BLA, but it neatly handles any accusations that treatment procedures may have improved and that using historical data as a control group could be out of date. The Day 28 Overall Response and Day 100 Survival in this new control group was as expected (ie similar to previous data for those not treated with MSB’s cells) and was significantly worse outcome for the control group (43% Day 28 OR and 57% day 100 Survival) than the stem cell treatment group (70% Day 28 OR and 70% Day 100 Survival).

So, it was worth waiting for the MAGIC data and analysis to put this into the BLA. My understanding is that the remaining module is just routine paperwork to finish the whole submission and should take less than a month. I believe that US analysts probably understand the significance of this and that there was possibly a bit of desperate short covering on Thursday night in the US and possibly also some higher than normal buying demand in a normally quieter trading period.


Conservatism vs Potential vs Upramping or Market Manipulation
@joeycav11
You asked some relevant questions on Xmas Eve at 7:27pm. Sorry I haven’t been around to answer them until now.
You asked if I have “lowered expectations and decreased the company’s huge potential based on posters here that are constantly negative”.
The answer is NO! I don’t value opinions from people who constantly try to find a negative skew to even the most positive announcement. They are probably shorters, and even if they aren’t, they obviously have some sort of agenda or problem.

Some of them may be embarrassed analysts who persisted for too long with a negative view of MSB and now can’t bring themselves to change. Some may be competitors with less effective conventional drugs. They could be big pharma trying to force the share price down to try to buy MSB cheaply, or maybe to try to send it broke and buy the technology from receivers. Some may be holders of “competing” stem cell companies. I actually have the few most egregious commentators on “Ignore” – it is time consuming and frustrating to read their stuff and even more time consuming to refute it.

Try arguing with a “creationist” or a “flat-earther” – you won’t get anywhere; you generally won’t learn anything useful from them and I’ve got better things to do. The only possible use they have is to raise contentious issues which I can then research myself – which have usually convinced me to buy even more MSB! Some of them try to sneakily hide their negativity behind the occasional back-handed compliment – I think most of us can see through that.

I do, however, have consideration to Australian securities law regarding market manipulation, ramping and the attitude of ASIC and the ASX.

As HC says under ”HotCopper Terms of Use” Disclosure and Warnings to people who view postings on HotCopper Point 4. People making postings are individually responsible for the accuracy and authenticity of their postings”;
“Disclosure and Warnings to people making postings on HotCopper Point 1. You are personally responsible for your postings…Therefore you should not include any misleading or deceptive information in your postings …ASIC and people acting on such information may take action against you”;
And under HotCopper “Code of Conduct” Upholding the Code point 3. “If you believe a message has been posted in violation of securities laws, you should also contact ASIC…”

Herbert Smith Freehills wrote on August 30, 2019 that “Listed companies should be aware that “ramping” announcements are on the ASX’s radar and that companies making them risk suspension from the ASX…ASX is maintaining its spotlight on the disclosure of customer contracts…” (See ASX Guidance Note 8).

ASX says “A ramping announcement…is designed to increase the price of an entity’s securities rather than to inform the market. It typically contains exuberant or superlative language and discloses information that has little substance and is not material to the entity”.

I’m not so worried about ASX (as I don’t work for a listed company), but I don’t want ASIC on my back – and once ASX spotlights something, I think you can assume ASIC will also examine it closely.

It is quite possible that complaints already made to ASIC by several HotCopper posters regarding the market manipulation of MSB have resulted in an examination of MSB trading. It is even possible that the raid on Regal funds was related to this – Regal is one of the most active managers in Australia and is known to have had short positions in MSB in the past.

If ASIC is investigating the shorters and trading patterns in MSB, they’ll probably also be looking at upramping. So, I want to be totally scrupulous and avoid any hint of overstating the company’s prospects, and be able to show where I get independent analysis from to back up any claims. That’s why I’ve always been careful not to overstate the price targets and prospects of MSB – it’s nothing to do with the “constantly negative” downrampers.

I also avoid giving personal financial advice and certainly don’t want to overstate the prospects of MSB to potential retail holders without independent backup.

So, yes, I do moderate my price targets to try to reflect expectations which I think can be justified, and then I try to use independent analyst research to back that up. I also list where I think those analysts have shortcomings or are being too high or too low in their forecasts and why.



2b. There’s a big difference between NPV’s today and where the price may be in 5 or 10 years

Note that the reason my price forecasts may look low is that I am talking about values today (NPVs) or 12-month price targets.

For instance, if I were to value the MSB share price at $A100 in 10 years, I wouldn’t say that was my price target, but would use a discount rate (usually of 15%) to bring it back to today’s NPV or Net Present Value of $A24.71. You have to use NPV’s to be able to compare different cash flows of different companies at different times and bring them all back to a common valuation of today’s date. You use different discount rates to allow for the differing risk of the cash flows.

That doesn’t mean you might not see the share price at $A100 in 10 years, just that the NPV of $100 in 10 years in a risky stock is worth only $24.71 versus cash today – it attaches a concept of risk as well as time value of money to the future value. That’s why it’s not correct to double up with another “probability discount” as many analysts do – the risk of product failure should already be encompassed in the discount rate.

Note that Bell Potter use a 21% discount rate AND probability discounts AND leave out a number of potential products YET STILL GET A NPV OF $A5.10 PER SHARE!

As you can see from the graph below, a share price forecast of $A5.10 in one year could be the result of a share price of over $A1,000 in 30 years - if you require a discount rate of 21% pa over a 30 year period. I’M NOT SUGGESTING THE SHARE PRICE WILL BE OVER $1,000 IN 30 YEARS – I’m saying even if it gets to $1,0000 in 30 years, it would be appropriate if you require a 21% risky rate of return to only put in a NPV of $A5.10 today – that’s the combination of very high discount rates and a long timeframe!


Now, think about what happens as the stock is derisked – the discount rate required drops and the NPV today goes up. If you use a discount rate of 15% over that 30 year period, $1,000 in 30 years is an NPV now of $15.10 (up from $5.10 using a 21% discount rate) and is worth a NPV of $99 now at an 8% discount rate (which is the Weighted Average Cost of Capital to big US pharmas). So, $1,000 in 30 years is worth somewhere between $5.10, $15.10 and $99 depending on your required rate of return. It is worth the most to a US pharma with a large diversified portfolio and a low Weighted Average Cost of Capital.

This gives you some rules of thumb to use when you compare my current NPVs at today’s values with what you think MSB may sell for some years into the future – it all depends on your assumptions – you can really come up with any number you like in the future – it is much more rigorous to use NPV’s now.

Let’s use CSL as an example:


In the first 10 years of being listed, CSL went from 43c to $5.21 (share prices adjusted for issues). In the second 10 years, it went to $66.55 and after 25 years (in June 2019) it was $215, six months later it is $277. That is a rate of growth of 28.9% pa over 25.5 years. Please note that I haven’t included dividends in this analysis – so CSL’s performance has been even better than this – although the current dividend yield is only around 0.5%.

If that 28.9% pa rate of return were to continue for another 5 years, CSL would be $1,000 before the end of January 2025. That’s just compounding arithmetic – IT’S NOT A FORECAST!

If you had done an NPV back in 1994, at a discount rate of 21%, and knowing that the share price would be $277 in January 2020, you would’ve calculated an NPV of $2.14 vs the share price back in June 2014 of only 43c. That is, an NPV valuation would’ve been 5x the existing share price and would’ve been a great buying opportunity. The metrics for MSB were similar 12 months ago – with the Bell Potter NPV of $A5 compare to the share price of $A1.00. Hopefully MSB can continue on the same path as CSL in the future!

I hope that shows the difference between present values and future values at high discount rates over long periods of time. Ie would someone saying that when CSL was selling for 43c that it had a long term NPV today (ie in June 1994) of $2.14 was too conservative, when 25.5 years later it was selling for $277? The answer is, the two numbers are the same for someone with a required rate of return/discount rate of 21% – $2.14 today invested in a risky stock with a required rate of return of 21% pa is worth the same as $277 in cold hard cash in 25.5 years’ time. Now, you may argue that the discount rate is too high, or that the company isn’t nearly as risky as that, but they are all personal choices. The risk adjusted NPV is so you can compare different stocks today all with different cash flows, risks and time frames. You can choose your own discount rate and decide how attractive the company is compared to other investments.


2c. MSB Guidance looks much too conservative
Furthermore, I think the numbers that MSB have on their own website are too conservative, and this also has the effect of reducing expectations.

For instance, on their website when MSB talks about Chronic Low Back Pain –they say there are over 3.2m patients and >$US1 billion market opportunity in US alone. Well, even if the cell treatment costs $US15,000 (as I expect), $US1 billion is only 66,666 patients per year. That number of patients hardly solves the opioid crisis. After a year of treatment, it still leaves 3.1m patients without treatment and that number is growing each year as the population ages.

Maybe MSB means there is a > $US1 billion royalty stream in US CLBP, which would be a phenomenal royalty stream, but that’s not how the website reads to me. Let’s face it, if there’s a $US1bn pa royalty stream, the US portion of CLBP would be earning net profits of $US790m which would be $A1.135 billion, and on a P/E of at least 20x would be worth $A22.7bn, or $A42 per share in around 7 years when we may see peak sales – so discount that back to today’s NPV at a fairly onerous 15% gives you $A15.80 NPV today JUST FOR US Chronic Lower Back Pain!

However – I don’t think a >$US1bn royalty stream for CLBP is what MSB means, and I think they really mean the total market in the US is >$US1 billion – of which they would probably earn up to a 20% royalty, so divide the $15.80 by 5 to get $A3.16 valuation per share for US CLBP. However However – that figure of $US1 billion in total sales is way too low given there are 3.2m US sufferers of disease – it isn’t hard to imagine that the real market would be, say, 50% of the 3.2m people and that they may need a top up injection every 3 years – so if they take 3 years to treat 1.5m people, that’s 500,000 pa and long-term demand could be 500,000 pa as they come back every 3 years for a top up – and that’s only half the market in the US and doesn’t allow for more back pain in an ageing population. If there are 500,000 treatments pa, that would mean total sales of $US7.5 billion – then that would translate to a NPV just from US CLBP of $A22 per share.

Nobody has any idea of the real size of the US market, but I must say, as someone who has suffered acute low back pain in the past, I would pay $15,000 in a shot to get a shot that left me pain free for up to 3 years. I honestly can’t imagine living with that in a chronic state and I can understand why people are driven to the desperate measures of taking opioids – even if they don’t work long term. You can’t sleep nights, you get claustrophobic from not being able to move, you can’t even tie up your shoelaces. I wouldn’t care if I couldn’t get health fund reimbursement, I would find a way to afford it – there may be a lot of GoFundMe pages set up for this.

So, at this stage, it appears that the US CLBP market will easily surpass the $1 billion MSB talks about and could easily be as high as $US7.5 billion

Edison’s research has peak sales for CLBP in their valuation at $US3.3 billion pa – which is much more reasonable than MSB’s website – however that includes European sales (and Grünenthal believe there are 7m Europeans who need treatment). If Edison mean this is the royalty stream for MSB and we assume a 20% royalty rate, then $US3.3 billion royalties to MSB would mean total sales of $US16.5bn and would treat 1.1m people per year out of the US and EU market of 10m. That would take 5 years to treat 50% of the market – but at present MSB is only saying the treatment leaves people pain free for 3 years – so again, these amounts aren’t nearly high enough to treat half of the US and EU market. However, if Edison mean a $US3.3 bn peak royalty rate for CLBP, I fail to see how their valuation for this product is only $A1.63 billion. Obviously if it is a royalty figure, costs are minimal and to get to the bottom line in the US you subtract 21% tax to get net earnings from CLBP alone of $US2.6bn, or $A3.75bn – even on a P/E of 20x, that gets you to a valuation of $A75bn (or $A140 per share – let’s put that into today’s prices – discount it back at say 15% for 7 years to get to peak sales and that’s still an NPV of $A52 per share – just from CLBP. So, if you think CLBP will pass its primary endpoints (which all of the data are already indicating with people pain free for 3 years) then MSB is being way too conservative on its website when it talks about >$US1bn market opportunity in the US alone!