MSB trading, page-1871

I agree, a great run so far and US close was equivalent to  $A2.26, so some will undoubtedly take profits. I think that's premature.

Is profit taking a good idea at these levels?

I don't think so.
This is a strong run in front of news- the old adage says buy the rumour sell the news. That may be the case here in the short-term, although there could well be more news after the news ie good results in a heart trial could well lead to a big partnering deal with big upfront cash payments.

When deciding on whether this is a profit taking opportunity, I reckon the key question is "can they show that they are within 12 months of positive cash?" Positive cash (i.e. More cash in than out) will be aided both by sales of aGvHD in second half of next year and also by big upfront and milestone payments by a partner.

If MSB can show they are within 12 months of positive cash then the US brokers' 12-month price targets of $A4-6 (average $5) come into play and the 26.5m shares shorted will add rocket fuel to the Blast Off!

I also know that if I get out, I'll find it more difficult to have the inclination to get back in, and I'll lose a chunk in tax. So, while there will probably be a pullback at some point, I'm in for the long-term and the big prize!

Some others may, quite rightly want to trim their holdings for risk management purposes (at the same time, some of the short sellers will also need to be buying for the same reason), HOWEVER THE HUGE UPSIDE POTENTIAL IS STILL MUCH GREATER THAN ANYTHING ELSE I AM LOOKING AT - SO WHERE DO I PUT MY MONEY IF I SELL?

It'd be a pity to sell, see it fall 9% (from last night's close of $A2.26) back to a bit over $2, then not get back in (because you are waiting for a 10% fall, or a test of $2), then see it go up strongly and miss the big run. Remember, some people have held it all the way down from $10 - taking profits on a bounce from $1 up to $2 seems a bit perverse.

If you take profits in stocks like this after a 100% rise (low was $1.00, now $2.26 overnight), i.e. you could now sell half and have the same amount invested as at the low, you lose the gearing effect of the price rise- that's the effect that makes billionaires out of the founders of companies like this who ignore the fluctuations and just let it ride!

However, as we know, when the price starts to plateau the shorts will be back (unless the positive cash flow looks like kicking in), so it remains thin and cranky.

Price is currently rising on big volume

That's a very strong signal, and is a reason to buy, not sell - if institutions are starting to enter this stock, there will be months of buying - that's how long it'll take any of the big guys to get set.

It's obvious to me that MSB will re-enter the index due to the rise in the share price and much higher volumes traded. That will bring in the index funds with more buying - the buying could continue well into next year - these things build slowly, but keep going!

Shortman.com is 4 days behind with net short reporting- but as of Monday last week shorts were at a 15-month high of 26.5m shares. Maybe there was a bit of covering pushing the big volume and price rises on Tuesday and Wednesday, we will know next week! But there is still 2 months of regular volume required to cover the short position, or more massive price rises to entice profit taking sellers to part with stock more quickly.

So the shorts now have to contend with the first real volume buying we have seen since the last big price spike up to $3.40.

It seems the Boston Children's Hospital trial has ignited buying in the US, with over 3x the average US buying last night. BCH reputation is first class and this helps perception of MSB and takes some of the risk away for investors.

I think it has also interested new investors in Australia, where institutions remain almost completely absent from the MSB register. That will change as the company derisks and as one insto enters, the others start to follow suit - it's less risky to your career as a manager if others are there with you.

Small cap managers will start to burn if they don't own a stock with an increasingly important percentage of the index if it is moving up quickly. So some of the small cap guys will move quickly, then the index funds as it enters their index, then the smarter, high performance large cap guys, then everyone - however this process can take years - just look at FMG, CGF, etc etc (former darlings who lost the market's confidence then took years to get it back).


Why MSB is worth multiples of the current share price

So, you can take profits, but I think the fundamentals and the pent up buying make that a short-term strategy at best, and a potentially costly one. LET YOUR PROFITS RUN!

How much is it worth? Let's have a look at just a few comparisons (ignoring the big one like CSL!)

1. Sirtex Comparison


The low $A1bn valuation of MSB is bizarre given what Chinese private equity just paid for Sirtex. MSB is earlier stage in terms of sales, but miles ahead in terms of trial results, governance, number of product candidates, and actually provides long-term benefits or complete cure rather than "add a few more months of time with family" in the case of Sirtex. MSB addressable market will eventually be millions of people in terms of heart failure, before considering lower back pain and then second tier indications like rheumatoid arthritis, diabetic necropathy etc. Sirtex is only around 200,000 people.

AND MSB HAS MET FDA PRIMARY ENDPOINT IN ITS FIRST COMPLETED PHASE 3 TRIAL (SIRTEX TRIAL FAILED).

MSB has invested far more than the $60m that Sirtex invested in trials, and MSB has NIH and Boston children's hospital funding trials for free. Tasly is about to fully fund a trial in China for heart, possibly leveraging data from the US trials.


AFR article today: Sirtex founder arguing the takeover price of $A1.9bn should've been more than $5bn. Says technology hasn't been adequately proven due to 12 years of complete mismanagement, poor governance, failing clinical trials etc. Former CEO charged with insider trading. Sirtex is not a cure, but extends time with family by a few months and improves quality of life for people dying of late-stage liver cancer. There were 12,500 doses worldwide in 2017 (up from 7,300 five years prior).

Trials were "poorly run and structured despite a $60m investment in them".


CDH Investments (the KKR of China) has paid 23.6x earnings for Sirtex. China is half the world's incidences of liver cancer with 100,000 per year (most of whom can't afford Sirtex treatment, though the number who can afford it are expected to rise 3x by 2022.


In contrast, once MSB product candidates pass FDA approved phase 3 trials in the US, health funds will reimburse patients because the funds will save big money on expensive follow up treatment and readmission to hospital. So the MSB market size is many multiples of Sirtex.

A $A1.9 bn price for MSB is $A3.80.

A $5bn price for MSB is $A10.



2. P/E Valuation for MSB


Put Oppenheimer's 2021 earnings forecast on a similar P/E of 23.6 and you get $A10.80 per MSB Aussie share in 2021. Then discount that back at a high rate of 15% pa for 3 years and you get $A7.10 as the current price target (on a takeover basis).


That gives a current market cap target of $A3.55bn for MSB in a takeover - still way below what the founder of Sirtex thinks his stock is worth (at least 30% less). In fact the 2021 price target of $A10.80 (in calculation above) is close to what he thinks Sirtex is worth.


YET MSB IS ALREADY SUCCESSFUL IN PHASE 3 TRIALS, GIVES A LONG-TERM BENEFIT OR A CURE AND HAS A HUGELY BIGGER ADDRESSABLE MARKET - SO SHOULD BE WORTH MUCH MORE THAN SIRTEX ONCE MSB IS IN POSITIVE CASH


I discount MSB at 15% pa because that is what I estimate its Weighted Average Cost of Capital is currently. However as the technology is proved up and derisked, interest rates will be cheaper and stock volatility will be less and the WACC should approach 10%. So if you are a believer and want to discount at 10% now, you get a current price target of $A8.10 instead of $A7.10.



3. US Analyst Discounted Cash Flow Valuation


The average US analyst price target is$A5 and the range of the main guys is $4 to $6. I THINK THEY WILL UPGRADE THESE PRICE TARGETS AS THE COMPANY DERISKS AND THE SHARE PRICE RISES.


They will reduce their DCF rates (of 15-30%), I think eventually getting down to 10-12% and increasing the valuation. As time goes by and hopefully positive phase 3 trial results confirm earlier phase trials, they will increase the probability of success from as low as 30% for some tier 2 indications. So those indications will triple in value over what is currently in the DCF valuation.


And remember, these cash flows are only US, Europe and Japan. THEY DONT YET INCLUDE ANYTHING FOR TASLY OR ANY OTHER PARTNERING DEALS IN KOREA, TAIWAN, ETC. NOR DO THEY INCLUDE ANYTHING FOR CARTHERICS JV.


The 12-month price target of $A5 could easily continue to rise to more than $10 by 2021.


4. TiGenix comparison


The current market cap of MSB is only marginally higher than what Takeda paid for TiGenix - and TiGenix portfolio consisted of one smallish indication in Crohn's fistulas (licensed from MSB) and another in phase 1 trial. AGAIN MSB's VALUATION SEEMS BIZARRELY LOW COMPARED TO THE TiGENIX VALUATION.

Bottom line - long term holders have plenty to hold on for - price could still rise multiples from here