Another Wave of Buying Likely There is a massive surge in...

Another Wave of Buying Likely
There is a massive surge in Mesoblast interest with media coverage in Australia and the US, radio, TV and newspapers, internet coverage with articles and videos and a huge spike in internet searches for Mesoblast.

The story is getting out to the people who matter. Forbes is one of the top rated business magazines in the US and the article on Saturday 2 May is still gaining traction. At 10am yesterday (Sydney time) the Forbes article had 11,874 online views and this morning at the same time it had 18,200 views. The readers of Forbes are much more likely to be investors than viewers of the Today Show on TV in Australia! The Fox Business TV interview in the US was also likely to generate interest, especially from their number 1 fan in the White House!!
The Forbes article is now up to over 21,000 views:



Google trends shows searches on Mesoblast absolutely through the roof. Google trends scales the highest search volume period at 100 and everything else scales down from there – ie half as many searches as the peak would scale at 50. Dots mean the analysis for the current period (April) is not yet complete, so numbers are preliminary. The April 2020 preliminary data scales at 100 – ie record number of searches going back to 2004 (when MSB started). But more impressively, the previous high in June 2016 now only rates a score of 27 (previously it rated 100) – so the current month’s worldwide Google searches are nearly 4x the previous record high month:


Even more impressively, the ratings show that Australia rates 100 and the US only rates 4 ie the number of Google searches for “Mesoblast” in Australia are 25x those in the US. That has been a fairly consistent comparison (ie I have watched this for a long time and the US has been stable at 4). So, even though US searches are currently 100, they are tiny in number compared to searches in Australia.

Note that the previous highs in the US have been revised down from 100 to only 19 – so current searches are 5x the previous high (Dec 2010) when the company changing Celgene partnership was announced and the shares ran up to $A9.95 in less than 12-months. The other high interest month which rated 19 was Nov 2015 when the share price collapsed after the dismal US Nasdaq listing which revealed very little demand for the shares in the US at the time.

20 related topics and 25 related searches are at “breakout” status. The top searches are below – note that “mesoblast share price” is 100; mesoblast nasdaq is 41 and meso is only 12. Terms using ASX are higher than specific US terms – indicating the higher interest in Australia at present. So that presents tremendous upside when the Americans really get on to this!




Huge Volume Trading in the US Means Entry To US Nasdaq Biotech Index

More reason for Americans to take notice of Mesoblast – it has now traded enough MESO ADRs to average over 100,000 ADRs per day and qualify for entry into the Nasdaq Biotech Index in the December rebalance – even if no more shares trade between now and end October. Mesoblast has always had a big enough market cap (the total market cap of MSB is used) it just suffered from not having enough ADRs listed nor enough trading of the ADRs which were listed. That has all changed since March.

I had thought last year that MESO would need to do a 5:2 ADR split (or even a 5:1 at one stage) to have a chance of averaging over 100,000 ADRs traded per day over the year to end October 2020 and thus entering the US Nasdaq Biotech Index.

Now, amazingly, the average daily volume is up to 500,000 ie 5x the required 100,000 per day. In fact, the one big volume day of over 30m ADRs traded was enough to increase the trading volume average to over 100,000 per day for the year to November.

The graph below shows the monthly average daily trading volume (Blue Bars) and the cumulative average daily trading volume from end-October 2019 until April 2020 (Red line). That red line continues right out to November 2020 and shows the average daily trading volume will stay above 100,000 even if there is zero trading between end April and end October. The black line is the 100,000 line which is the minimum requirement for Nasdaq Biotech Index inclusion:




Does MSB Australia Lead or MESO NASDAQ ADRs Lead?

This is a perennial question. I have shown in the past that there is zero correlation between the US price and the MSB price the next day. Yet people want to believe that the Americans can value biotech better than Australians and that they will save shareholders one day by finally pushing Mesoblast up to the valuation it deserves.

It remains the fact that the vast bulk of Mesoblast shares are traded in Australia and it is in Australia where the price is set. Even if the US price goes rocketing up on any given night due to more demand than supply for stock in the US market – it very rarely continues into the Aussie market the next day – and there is no statistical correlation between the US closing price and the move in Australia the next day. Of course, if there is a general uptrend, there’s no reason Mesoblast can’t rise over an extended period and then it may appear that it goes up in Melbourne during the day and then rises further on the Nasdaq that night. My contention is that in this situation, the price would go up in Melbourne every day whether the Nasdaq market existed or not.

The one situation where the US price may lead is where there is a surge in demand in the US that can’t be met in that market and therefore it spills into the Australian market the following day. That can happen as American market makers short ADRs to their buyers in America and then cover this short in Australia. It could also happen by Australian share holders deciding that they could receive a higher price in the US market and converting their shares to ADRs and then selling them in America. That has never happened on a sustained basis – but it is possible the huge interest from Covid-19 ARDS could tip this balance. MSB has never before had such big media coverage in the US as in the past couple of weeks. If the buying in the US is more than the supply of ADRs, it is likely that Americans will start buying in the Australian market and converting those shares to ADRs. That has already expanded the number of ADRs recently from the long term number of around 8.5m (42m Australian MSB shares equivalent) to around 10m now. I will not be surprised to see another 2m or so ADRs created in the near term resulting from the enormous buying of the past two weeks.

So, the price is still set in Australia where the bulk of the volume is still traded, but the consistent and more aggressive US buying is starting to have more influence than previously. As Mesoblast becomes more recognised internationally and as more US buying inevitably spills over into the Aussie market, I believe the transfer of MSB shares into MESO ADRs will continue and that the US trading will exert much more influence.

I’m not getting too carried away by this just yet, as the Google Trends data still shows that US searches of Mesoblast are only 4% of Australian searches. US searches are currently running at their highest ever, but Australian searches have risen at the same rate so that the comparison between them has stayed fairly stable.


ASX200 Index Inclusion

As I have noted previously, MSB is likely to enter the ASX200 in the June rebalance. That is likely already creating buying by Australian institutions, which should continue and build up further right through to July, and hence create more buying pressure in Australia, whereas the Nasdaq Biotech Index inclusion is not likely until December.

The AFR cariied the story yesterday that MSB is likely to enter the index, and on my numbers I agree that it looks likely, with only the rest of May trading to go for the 6 months calculation, it is starting to get hard for it to drop out.


Shorting Has Hardly Increased Despite Huge Price Rise

The Australian net short position has previously always shot up when there are large share price rises after announcements. The shorts usually wait for the price rise to stop before entering and aggressively pushing the price back down.

That aggressive shorting is not evident this time – perhaps because the usual short theory is shot to pieces. The balance sheet is solid – with 6 quarters of cash burn available – so this overturns years of discounted capital raisings which the shorts used to buy back their positions at a discount. It was easy money and a feeding frenzy. Recently it has been a graveyard.

Shorting since the recent big volume and price rise which started on April 24 has gone up from 4.16% on April 23 to 4.4% on latest figures. That shows that the big volume trading has not been facilitated by shorting, but rather by long investors taking profits. There has been enormous turnover since Friday April 24 (over 25% of the company’s capital traded in the Aussie market in 8 trading days and 39% of the entire capital traded in the US Nasdaq ADRs – I believe there is a large amount of churn and double counting between the two markets – but it is a phenomenal amount of turnover in less than 2 weeks).

The net short is currently 23.64m shares or 4.4% of the issued capital. Over the past year the short position has fluctuated between 3% and 6% of the issued capital – so the current level of shorting is just in the lower half of the range and is lower than I would’ve normally expected. I think this shows the shorts are giving up and withering in the face of continued positive announcements and much stronger buying interest from the US market.

Shorts in the US market had increased to 600,000 ADRs (3m MSB shares) in mid-April. The end-April figures are not yet released, but will be interesting and I expect them to increase further given the high volume traded (3x the number of ADRs listed actually traded in one day on Friday 24 April – so there must have been some shorting to facilitate all of this buying).


Does this mean a large buyer has built a stake, signalling a takeover, or blocking stake?

If so, all sorts of rules may have been broken, as there have been no substantial shareholder notices which must be made when someone buys more than 5% of the company’s capital (and for each subsequent 1% rise in the holding) and a takeover bid must be made if one buyer goes over 20% of the share base. These kinds of holdings have been hidden in the past, eg by buying through prime brokers offshore and then lending the stock out, or by options positions disguising the actual amount of stock controlled by one player upon exercise of the options – so there could be more action yet, and it is very uncertain. Legitimate insto buyers usually take these reporting requirements very seriously.

The FIRB rules and government rules announced during the Covid crisis which are aimed at stopping unfriendly foreign (assume Chinese) takeovers of cheap Aussie stocks might not stop “friendly” government entities or large companies from “friendly” countries buying up to 20% of the company in a single line, or 40% by a combination of unrelated buyers. At current prices, 40% of MSB would cost less than $A800m (which is well below the $A1 billion threshold for automatic FIRB scrutiny) and if this was done by a major trading partner country (especially the US) the Liberal government may well not allow FIRB to stand in the way. I think further that “biosecurity” could be brought into the argument and that the Morrison government may flag through, say, a US sourced buyer if there were to be some guarantee that Australia would be able to receive an appropriate allocation of cells manufactured in the US to meet needs in Australia. This is all pure guesswork – but I can’t see the US Government being too pleased if they agree to fund a manufacturing plant in the US only to see a Chinese partner buy a controlling interest in MSB.

The fact that there has not been a substantial shareholder notice after all this crazy turnover is a bit suspicious. There has been some high frequency trading churn, but there has also clearly been strong long buying and equally strong profit taking. Retail profit taking has been up to 20-30% of volume on the busiest days (CommSec the biggest active Aussie broker) but a lot of the activity goes straight through the pipes (Direct Market Access) so the brokers on the lit desk don’t see who the buying clients are. There would also be some small trading instos who are taking advantage of the bargain basement buying prices of just over a month ago at close to $A1 – selling at $A3.20 isn’t a bad return in a month, no matter how high the shares are valued by analysts.

I have always assumed the Prof and a handful of major holders had enough stock to make a takeover impossible, however the massive recent trading volumes have dented that confidence – I just would not have ever believed you could see such massive volume in what has been a traditionally very tight stock. There is enough stock turning over for one or two big players to have bought significant quantities, though I doubt anyone would be stupid enough to go through 20% without launching a formal takeover bid (otherwise they may be forced to divest their stock).

Gilead?

Note that MSB is still only a $US1.1 billion market cap company. Gilead, on the other hand, is worth over $US100 billion and recently added $US25 billion to its market cap between the mid-March low and the late-April high. Gilead has less than whelming results from Remdesivir and could currently buy the whole of the most likely treatment to the worst aspects of Covid19 ARDS for not a starting point just over $US1 billion – peanuts - it must be tempting for them.


Stem Cell Trials Have MSB Way Out In Front – More Good Announcements To Flow

I noticed tonight that the Mount Sinai trial has gone live, with “Recruitment Status: Recruiting” finally going onto the Clinicaltrials.gov website.

That should spur further buying interest in the US tonight and Australia tomorrow.

MSB is pregnant with announcements and some of them could put enormous upside pressure on the share price – eg a positive trial result for Covid19 ARDS or a major partnering agreement.

The Mount Sinai study is designed to have three interim analyses for stopping accrual early for efficacy and futility when 30%, 45% and 60% of the 300 patients have reached the primary endpoint using Bayesian predictive probabilities.

Mount Sinai has already said it is encouraged by the results of the 12-person compassionate use group who received MSB’s cells after failing several other treatments (all had failed hydrozychloroquine and other drugs). This group had “dismal” prospects of survival and the 83% survival rate compared with an 88% death rate among similar patients in major New York hospitals over the same time period who were receiving standard of care. We know the cells are working for these patients and we also know there have been no adverse effects in over 1100 patients trialled on MSB’s cells over the years and that the IV infusions are well tolerated. We are streets in front.

The first recruitment for the Mt Sinai trial on May 5^th means that the first 30% of patients (90 in total) could be recruited by the start of June and the Primary Outcome (being the Number of all-cause mortality within 30 days of randomization) could be determined for this first 30% of patients by the end of June, or early July. If the trial is stopped early for efficacy, that could be announced late June/early July – which would be a major boost to the share price.

Despite MSB being the clear leader in this space, people seem to panic that much smaller company trials or academic studies might somehow derail the MSB trial. Remember that MSB has the leading patent portfolio in the stem cell space with over 1,000 patents covering composition of matter, uses of the cells and manufacturing. The only other companies producing commercial MSC’s are MSB’s licensees. The European courts have unanimously upheld MSB’s patents. There are no other allogeneic stem cells approved for use in the US by the FDA. MSB’s aGvHD trial was the first allogeneic stem cell trial to meet its primary endpoints in a trial in the US – and that was 18 months ago – with 18 months of paperwork and analysis required by the FDA even on its fast track and another 6 months for the FDA to consider the Biologic Licence Application. Nobody else is close to MSB in terms of an approvable US product.

The most likely path to approval for a MSC product to treat Covid19 ARDS is approval of MSB’s Ryoncil for aGvHD by September and then a label extension into ARDS supported by the current 300 person trial. The FDA asked MSB to expand the trial to 300 to make it robust – however the trial could finish after the first 30% of patients show 30-day survival at rates far higher than the control group (overwhelming efficacy).

Other stem cell trials suffer from several different drawback compared to MSB’s trial. The others are a combination of much smaller, are not phase 3 trials (ie are much earlier phase), do not use commercial grade cells, are in breach of MSB’s patents and do not have the funding required to complete an approvable trial.

Some people have been concerned about a trial in Spain which may use Takeda cells – it doesn’t appear to be a commercial trial (status of the sponsor “non-commercial”; it is only a trial of 100 patients; it has two primary endpoints and one of them is measured over 6 months – so it will finish well after MSB’s trial; MSB has not licensed Takeda to commercially treat ARDS in Europe (or anywhere else) and the Recruitment Status is “not yet recruiting”. So I don’t see why people are getting upset about these “competing” trials.

I think the default position should be that MSB has the leading trial in terms of numbers of patients, control group, funding and initial indications from the compassionate use programme, backed by the US Government’s CTSN arm of the NIH. MSB’s patents are solid and have won against competitors in the European courts. MSB has the cash and the cells available for the trial and has the highest quality manufactured cells for commercialisation. MSB has completed three phase 3 allogeneic stem cell trials and met primary endpoints in aGvHD and MSB has patents to protect all aspects of the technology, uses of the cells and manufacturing.

So, the question should not be “can these other trials compete with MSB”, but rather we should be asking how the other stem cell trials can possibly get over MSB’s moat and in what way are these trials superior to the MSB trial. Who else is running a fully funded phase 3 trial with the number of patients requested by the FDA to be able to have an approvable product. Who else has the safety data, years of phase 3 trials, proof of manufacturing consistency and efficacy (actually met a P3 endpoint in an FDA trial of allogeneic stem cells)? I haven’t found a trial which the FDA is more likely to approve than the MSB trial. MSB is way too far in front with years of trials and data and solid funding and partners. MSB will not try to stop other stem cell trials, especially research trials, but will vigorously defend its patents if a competitor tries to move to commercial manufacture.

The credibility and exposure and spectacular results that MSB is already gaining from this ARDS trial makes it even more likely that a partnering deal will be done in the near term. As mentioned above, major US companies like Gilead could be considering a takeover, or at least a partnering deal – and if they want a partnering deal, they may well want to put their foot on 20% of the company’s capital to stop someone else cutting the grass under their feet.


Non-Stem Cell Trials not providing much hope

If MSB is the clear leader in the stem cell space for treating Covid19 ARDS, what other treatments might be effective, and could they make it less likely MSB will bring a product to market?

The Prof has consistently said that MSB can’t treat all the effects of Corona virus and that he would welcome drugs or treatments which may reduce some of the worst impacts. However, nothing seems close to doing that at present.

Vaccines are thought to be 12-18 months away.
Single pathway treatments of the cytokine storm have failed in a highly inflammatory disease like GvHD, so there is no hope (that I can see) that they’ll be successful in switching off the whole cytokine storm along all the different pathway in another highly inflammatory disease like Covid19 ARDS.

Anti-virals are struggling. Lancet said on 29 April, “No specific anti-viral drug has been proven effective for patients with severe Covid19”. Although not statistically significant, patients using remdesivir had a numerically faster time to clinical improvement than the placebo group – however this is much milder disease than the moderate to severe ARDS being targeted by MSB.

These are all the guys who are falling left and right while MSB “does a Bradbury” and skates through the middle, just as its years of experience and trials in inflammation are close to approval. Right place at the right time.


Bottom Line

The Mount Sinai trial has just announced it has gone live today with Recruitment Status: Recruiting.

This should add to the interest generated in Mesoblast coming from Forbes Magazine, Fox Business News and a mention on CBS as well as several newspapers and internet coverage in the US.

Global Google Trends shows Mesoblast and associated terms and topics at breakout status and the number of mentions at record highs – 4-5x the previous highs. While this is great attention, the US number of searches is only 4% of Australian searches – so there is still a long way to go in terms of US saturation recognition.

Index inclusion in the ASX200 is likely in June and the Nasdaq Biotech inclusion is likely in December. Again driving more potential buying throughout 2020.

All this interest is driving record volumes and we are starting to see Aussie listed stock migrate to the US ADR register, although by far the bulk (90% or more) is still held as MSB Australian shares. Strong US buying could well spill over onto the Aussie market and lead the price higher, although at present the Australian market is clearly the price setter (even if some nights the MESO price trades well above the Aussie price).

The massive volume recently is still unexplained. It doesn't look like the shorts have increased their net position much. There may well have been some naked shorting to facilitate buyers in the US, with the shorts covered by buying in the Aussie market the next day. Has someone built up a takeover stake or a blocking stake to protect a future partnering deal? It’s possible, but apart from massive volume traded, there are no other indications of this happening. I think this is another potential reason for the share price to rise. Anyone doing a major partnering deal or funding MSB’s building of factories would want to make sure no-one else put their foot on 20-40% of MSB’s equity just to protect their position. I noted that $US1-2 billion is chicken feed to Gilead.

I see MSB’s Mount Sinai phase 3 trial with 300 patients as the most advanced and the most likely to succeed and I don’t jump at shadows when I see other trials for all the reasons listed above. I prefer not to think of MSB’s trial as potentially under threat by competitors, but instead think, well how could this competitor cross MSB’s moat, and is their trial better designed or more likely to succeed than the MSB trial – I haven’t yet answered yes to one of the competitors’ trials.

We may have to wait a bit longer for some of these developments to provide the next kick to the share price, but I think we’re talking days or weeks, not months. Then within 3 months there will be another spate of announcements with potential approval of aGvHD, readouts of the Back Pain and Heart trials and potential positive Covid19 ARDS trials results enabling a label extension of the aGvHD product.

So, it’s finally all coming together. Upside appears tremendous from all of the analysts’ forecasts I have seen recently, and the only one which includes anything for Covid 19 ARDS is Tanu Jain from Bell Potter (and even that is very conservative). So Covid19 prospects are definitely NOT in the current share price – in fact the MSB pricearound $A3.20 is only just back to where it was before the Covid Crisis Sell Off in markets, yet as I have previously noted Covid19 has no deleterious effect on the sales, profits or prospects of MSB – it is all upside.

Finally, in terms of analysts’ models and whether the market price is the best estimate of value in a stock I note that many specialist healthcare analysts still don’t cover Mesoblast. When I asked one of them why, he noted it wasn’t in the index, didn’t have sales so he couldn’t value it from a standard financial steady-state point of view and that he wasn’t a specialist scientist and so felt he would leave the current “early stage” analysis to the scientists and that he might look at it later in its development. I think that’s why the risk/reward is still so heavily tilted towards the upside at this stage – and that’s after a 3-bagger in just over the past month!

With all of the announcements due in the short and medium term, and the major lift in interest from the US, I expect the price rise to continue, and I expect the analysts to continue to upgrade their price targets as the share price rises. The potential for upgrades to between $A10 to $A20 are already in the analysts’ models – all you need to do is drop the probability discounts. The possibility of much bigger price rises (ie multiples of $A20) exists IFF everything goes right on the Covid 19 trial. Most analysts have nothing in their forecasts YET for Covid19. This is exciting and I’m hanging on for the ride , it's easy to be tempted to get off too early and that's where most investors make their biggest mistake - they can't handle the pressure of doing well and cut their profits, fearing a loss (even if they can't justify why a stock should fall, they get very nervous) – we’re poised for the next big move up once all the traders and profit takers are out of the way!