Upside from Covid-19 ARDS story is enormous Guys, you really...

Upside from Covid-19 ARDS story is enormous

Guys, you really don't need me to tell you this, in fact I feel a bit like Zsa Zsa **or's fifth husband on their wedding night [*], but this is a spectacular opportunity in terms of upside vs downside risk.

[*] I know what to do, I just don't know how to make it interesting...

The FDA has just cleared use of Mesoblast's remestemcel-L for use by patients with a dismal prognosis for Covid-19 related ARDS under both expanded access compassionate use and in a planned randomized controlled trial.

This is a disease which has brought the world economy to its knees. The greatest global public health disaster in a century. And MSB potentially has THE key role to play in saving lives once the disease progresses to the critical phase.

Note Well: Mesoblast's MSC stem cells (Remestemcel-L) are NOT a cure for Covid-19, they are a potential cure for the deadly lung disease ARDS which arises from Covid-19 and is the major killer in this disease.

Even if something like a combination using hydroxychloroquine were to be found to be useful in treating Covid-19, it isn't going to cure the related lung disease ARDS. Furthermore, the side effects of hydroxycholoroquine are related to kidneys and heart - exactly the comorbidities which are killers for the worst cases of ARDS - in other words, you won't be able to use hydroxychloroquine on these comorbidity patients and they are still likely to get the virus and be liable to nasty cases of ARDS. Also, we have vaccines for the seasonal flu, but still have up to 95,000 Americans dying from complications related to seasonal flu each year (most of which are lung disease related).

Remestemcel-L has already been passed for safety - this would be a pivotal trial, not a pilot trial. It is likely MSB would move straight to phase 2B, and then quickly complete a proper, scientific, double blinded, randomised, controlled phase 3 trial. That is a major advantage for the world's leading stem cell company and it's what differentiates MSB from the other phase 1 trials which are starting.

MSB announced on March 10 that they were working on this with governments, regulatory agencies and pharma companies in the US, UK, Australia and China. Trial design will be optimised based on results already achieved by others in small studies and by MSB's own work on other similar diseases such as COPD. There should be no difficulty recruiting patients as nearly 5,000 people globally are dying every day and global deaths have surpassed 70,000. Deaths in the US will soon hit 10,000 and are yet to peak. The time to act is now. I believe a trial could be underway this month.

There are 338,000 cases of Covid-19 in the US and 18,000 have recovered, and 10,000 have died. That leaves 310,000 active cases and up to 6% of them could need hospitalisation - around 20,000 people who would be in the running for the trial - that's a very large potential pool to design a trial around, and they could be recruited quickly. Meanwhile, the worst cases with no other hope would be able to source cells from a compassionate use expanded access programme.


The share price response in Australia today was pathetic

The market cap rose by a lousy $US150m. If this ARDS product is successful, it could generate annual royalties to MSB of up to $US6 billion (20% of $US30 billion in sales). That supposes it will also be used to treat ARDS in up to 1m annual seasonal flu patients (up to 95,000 Americans die in a bad year for seasonal flu according the CDC and multiples of that number need to be hospitalised).

The share price ended at $A1.815 and that is a total market cap of only $US585m. Institutions stumped up for a placement at $A2 late last year BEFORE this announcement on ARDS, BEFORE the FDA announced priority review for aGvHD treatment to save the lives of kids and BEFORE the review of LVAD implant heart trial data was presented showing efficacy and weaning benefits in older ischaemic patients which is a great indicator for the upcoming announcement of results (by end June) of the phase 3 heart failure trial.

There is no fundamental valuation reason for the Covid-19 crisis to negatively affect the profits or share price of MSB. MSB has no sales revenue at this point, so sales can't fall. It has very low debt levels. It has cash to last well into next year and is under no pressure to raise capital. Yet the share price fell in the around 65 percent in two months due to collapsing global stock markets.

The reason for the price fall was short-term supply and demand of shares, with fund managers suffering redemptions, Tasly (based in China) selling out its 13m shares at the start of the Corona virus debacle, and recently forced sales by long-short funds who have seen their leverage curtailed by prime brokers not prepared for their clients to run such big books while the world markets are in turmoil.

Shorts have not been such a large force driving down the price - in the past month the total net short position in Australia fell from 4.3% of MSB's share capital to 3.15% and then rose back to 4.3%. The extremes of those moves are 1.2% of the capital or 6m shares in total - hardly the size of move to create problems when the company has averaged over 6m shares traded PER DAY since Feb 28th.

There are currently around 10m MSB shares available to borrow for shorting at a 10% borrow rate. Maybe there was a jump in new net shorts selling today's 35% price rise - we'll find out in 4 days. There could also be some more equity fund redemptions as superannuation clients access their potential $20,000 allowable withdrawal from super to meet expenses after losing their jobs during the Corona crisis.


MSB will now be pinging the radar of US and international investors

Two positive indications from the US FDA in a week is far more than any biotech company would dare hope for. US investors will regard this highly.

Even without the ARDS excitement, MSB's market cap is ludicrously low (just over $US585m) for a company with 2 blockbuster phase 3 trials in heart failure and chronic low back pain due to read out at the end of June. US analysts have recently justified a $A2.00 company valuation for MSB (vs current share price of $A1.81) just based on the smaller acute Graft vs Host Disease product which is now on priority review with the US FDA that valuation ignores all the potential blockbuster products.

A new category of shareholders is now likely to move in (particularly from the US) and the share price is likely to start to reflect the valuations of the major analysts following the stock.These valuations current;y average over $A5.20 per MSB share. It has been a long wait, and I congratulate The Prof for bringing the company to this point, particularly through the long and expensive years of medical trials. I also congratulate the shareholders who have funded this journey and who can be proud to be part of a solution to the lethal acute Graft vs Host Disease in children, and possibly will save tens of thousands of lives at risk from Covid-19 ARDS.

Here's the Google Trends graph showing interest in the search term Mesoblast in the US geographic region is at its highest since 2004. It is currently sitting on 100% - ie relative to all Google searches for the term Mesoblast since 2004, we're currently seeing the highest interest. The blue dots indicate the recent period is partial and subject to revision:



Reasons MSB share price is jumping

1. MSB is now a "story stock" with a catalyst due to Covid-19 - as well as being 65% below average analyst price targets

2. Today the FDA has cleared use of remestemcel-L in patients with COVID-19 ARDS, where the prognosis is very dismal, under both expanded access compassionate use and in a planned randomized controlled trial.

3. I have previously noted that ARDS could potentially generate US sales of up to $US30 billion and royalties to MSB of up to $US6 billion IF trials are successful AND MSB's future potential licensees gain 100% US market share. Put that on a P/E of 30 and (assume US tax rate at 21%) and you see a crazy potential market cap of $US142bn - a ridiculous number and I don't expect the price to go anywhere near this number in the foreseeable future - but it shows the potential upside is not even close to the current share price

4. Analyst price targets have all been maintained or increased recently, averaging $A5.22 according to wsj.com. despite the stock market collapse. These targets do NOT include anything for Covid-19

5. The economic melt-down has no negative impacts on sales for MSB as it has not yet started sales.

6. MSB managed to get the US Food & Drug Administration to issue a priority review for Ryoncil on April 1st in the middle of a national health emergency

7. The FDA has advised that they are planning to hold an Advisory Committee Meeting to discuss the Ryoncil application - ADCOM often allows a priority review to end 2 to 3 months early instead of taking the whole 6 months, ie possible by July

8. ASX200 Index Inclusion - the March rebalance was delayed and MSB would not have made it anyway. I currently have MSB in as a possible entrant to the Index in the next rebalance in June, based on today's price, but with the incredible volatility we are seeing, anything can happen.

9. I expect more short term announcements re Covid-19. On March 10th, MSB announced: " that it plans to evaluate its allogeneic mesenchymal stem cell (MSC) product candidate remestemcel-L in patients with acute respiratory distress syndrome (ARDS) caused by coronavirus (COVID-19) in the United States, Australia, China and Europe. The Company is in active discussions with various government and regulatory authorities, medical institutions and pharmaceutical companies to implement these activities. "

10. Channel 7 News 3 weeks ago announced that Prof Bob Graham of Victor Chang Research Institute would start a trial of stem cells "within a month" during an interview with Pr Graham. So, there should be an announcement from that quarter in the next week or so.

10. The latest stats on survival rates of ARDS patients related to Covid-19 appear worse than the 50% previously quoted - which is the survival rate for ARDS coming from seasonal 'flu, and Covid related ARDS deaths could be as high as 80% of people - even those who make it into ICU with ventilators. The need for a potential MSB cure is becoming existential for most politicians (generally older and with comorbidities).

11. I doubt that any MSB specific trials have started yet. or they would've been announced - but they're not far away after today's FDA announcement. Stay tuned!

12. I would assume that MSC cells are already being used in a very limited way on compassionate grounds in the US (either MSB cells or "research" cells) - just like they have been in other small trial announcements in China etc. In fact, it may be that this is why the FDA has made today's decision - they would be asked for special approval each time someone wanted to use the cells as a one-off, so now it can be done under extremis without a special approval each time.

13. Prof Graham, in an interview on the internet https://www.victorchang.edu.au/covid19-and-heart-disease says, "Yes, we are just starting a collaborative study where we try to use stem cells to see if we can dampen down the excessive immune response that occurs when you get the virus and that's what kills people. They get acute respiratory distress syndrome and they get this acute cardiac injury and there's a small study just published in seven patients suggesting that a certain type of cell can dampen down the immune response."

"The nice thing is it doesn't have the receptors, those proteins on the surface of the cell that allow the virus to get in and kill those cells. So we can use those cells to both dampen down the immune response and they are themselves immune to the virus. So they seem to be doing really good things. So we are looking into potentially starting a trial."

"It'll take time to get a vaccine. It's going to take 12 to 18 months at least to get a vaccine. In the meantime, there are lots of potential other avenues we could look at to see if we can help in mitigating the severity of the virus disease.
"That's going to take research and it's going to take cooperation and it's going to take ethics committees to be a little more lenient in what they require to allow these studies to go on in compassionate use. Now, that's a personal thing that we're grappling with, but these are serious times and we need to sometimes look at serious ways of trying to reduce the risk to a population."

14. Analyst price targets and valuations PRE COVID-19

I only consider analysts who have either updated their research in the past 6 months, and since the Grunenthal deal and capital raisings in October last year.

a) Bell Potter valuation is $A5.15

b) Dawson James price target is $US15 per MESO share (equivalent to $A5.00 per MSB share)
DJ use a swingeing discount rate of 30%, saying "A higher risk rate of 30% is applied (vs. 15% or 10%) since Mesoblast is a microcap company with drug candidates in clinical trials that have yet to gain FDA approval." So when Mesoblast finishes its phase 3 trials successfully, and are no longer a microcap, I presume DJ will drop the discount rate, and this will see a huge rise in the price forecast.

c) Cantor FitzGerald $US23 per MESO share (equivalent to $A7.67 per MSB share)

d) HC wainwright $US14 per MESO (ie $A4.67 per MSB share)

e) Maxim $US16 per MESO share (ie $A5.33 per MSB share)

f) Ladenburg Thalman $US10.50 per MESO share ($A3.50 per MSB share)

g) Edison $A7.53 per MSBshare

As a guide to how conservative these valuations are, consider the following table from Dawson James:


They currently use an earnings multiple of 10x estimated earnings in 2030 and discount it back to today's value at a huge discount rate of 30%, giving a NPV of $US14.24 per MESO ADR (or $A4.68 per MSB share).
If they were to use an earnings multiple of 30x and a discount rate of 10%, the NPV would be $US227 per MESO ADR ($A74.67 per MSB share).

Similarly, their Sum Of The Parts valuation uses very low probabilities of success for Revascor heart products (only 25% probabilities despite completion of phase 3 trials), to get a $US7.19 per MESO ADR valuation for heart products - if this went to 100%, the valuation would move up to $US28.76 even with the 30% discount rate. Likewise CLBP is only included at a 30% probability of success and a $US2.08 per MESO ADR valuation - this would rise to $US6.93 if the probability goes to 100%. There is nothing in the valuation for European back pain despite the partnership deal with Grunenthal - it could ultimately be worth a similar amount to the US figure. Finally, GvHD in the US and Europe for paediatric and adult is valued at $US4.11 per share on a 70% probability. At 100% probability, the value rises to $US5.87.

Adding up the potential at 100% probability and adding European and LatAm back pain gives a total of $US48.49 per MESO ADR - and that's still using a discount rate of 30%. Putting in a more reasonable discount rate of 10% obviously increases this figure dramatically and would around the $US227 above - again arriving at $A75 per MSB share.

These figures are all before considering Corona Virus as a potential new product, which would dwarf the other blockbuster products.

Please note that these are not my forecasts, they are just a result of applying different assumptions to the analyst's numbers.

Mesoblast is a tiny microcap in US terms with potential global solutions to the biggest healthcare problems of our time. The potential profits and share valuations are mind-boggling. This is not investment advice - it is just to show you the potential valuations if these products are approved. Please make your own assumptions and your own decisions - the stock is still speculative until it is earning more than its cash burn of around $US20m per quarter.

Here's the key to today's Corona Virus/ARDS from the announcement on March 10:

Mesoblast announced that it plans to evaluate its allogeneic mesenchymal stem cell (MSC) product candidate remestemcel-L in patients with acute respiratory distress syndrome (ARDS) caused by coronavirus (COVID-19) in the United States, Australia, China and Europe.

The Company is in active discussions with various government and regulatory authorities, medical institutions and pharmaceutical companies to implement these activities.

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.

In my opinion, MSB will require major partnerships with big pharma or governments to produce all the cells required for just the US market and then to market the product. Partnerships with big pharma can be expected to yield a big upfront payment (in excess of $US100m) plus milestone payments plus double digit royalties (I assume 20%).

I have previously argued for a share buyback if there is a large upfront payment and I still believe that is the most efficient use of the balance sheet. I would be open to considering the alternative of MSB using upfront payments to fund production of Covid-19 ARDS disease cells themselves, which could add even more value - although buying back shares at current prices is incredibly attractive.


Bottom Line

This is an incredible second chance to buy MSB for prices that existed pre the Grunenthal deal, pre the $2 capital raising, pre the FDA priority review status for Ryoncil and pre today's FDA announcement re Covid-19 related ARDS.

The technology has been proven with phase three trials, the balance sheet is secure, cash burn is more than covered from the Grunenthal upfront payments and the equity raising and now we have a "story stock" with a catalyst for international investors to take notice and buy.

Very strong chance of approval of aGvHD before the 6 months time frame expires with the FDA and good indications for results from the remaining blockbuster phase 3 trials in heart and back pain due by the end of June.

Valuations are already around 3x the current share price - and they are held down by very conservative probability discounts and very high discount rates. It is easy to see upgrades from analysts as the share price rises.