Mesoblast confounds the experts The Australian September 09,...

Mesoblast confounds the experts

• The Australian
• September 09, 2015 12:26PM

Stem-cell therapy pioneer Mesoblast continues to confound the so-called experts following a pivotal Japanese regulatory approval, with the shares valued at up to 335 per cent more than their current price — or up to 26 per cent less.
In the main, the overwhelming view is the stock is undervalued, given Mesoblast’s (MSB) pipeline of advanced drug development.
But some of the true believers aren’t cheering as vigorously as they once were.
Late last week Mesoblast’s Japanese partner JCR won approval from a key Japanese advisory committee to market its treatment for acute graft versus host disease (aGvHD), called JR-031.
aGvHD is a complication arising from transplants of haematopoietic stem cells, the ones that create other blood cells.
Approval still needs to be granted by the actual regulator, which rarely acts against the expert committee’s advice.
The approval opens the way for Mesoblast’s first commercial revenues in the guise of milestone payments and royalties.
US broker Ladenburg Thalmann overnight reiterated its “target price” at $US52 per Mesoblast American Depositary Receipt.
Given the five to one conversion ratio, this implies a price for the local shares of $14.80 in Aussie dollar terms.
Coincidentally Local Lodge Partnes and Maxim Group ascribe a $14 a share valuation for the local stock.
Lodge analyst Marc Sinatra says while aGvHD is an “orphan” disease — not many people suffer from it — the pricing opens up a “substantial market opportunity’’.
He believes Mesoblast is in line for a $7 million to $14 million milestone payment from JCR on approval, with mid-single digit royalties thereafter.
Morningstar, which values Mesoblast at $7 a share, says there are only 1700 annual cases of aGvHD in Japan. But at an estimated per patient treatment of $US150,000 the commerciality of the deal stacks up.
Ladenburg Thalmann estimates a 30 per cent-plus royalty. “Assuming a launch late in 2015, Mesoblast should begin to receive its first significant commercial revenues beginning in 2016,’’ the firm says.
“(This) in our view marks an important step in the company’s transition from a research-oriented business to a commercial franchise.’’
That’s the bullish view, anyway.
Applying the wet lettuce on to the Mesoblast story with a $2.50 valuation is long-term sceptic, Macquarie analyst Craig Collie.
Credit Suisse has also trimmed its valuation from $4.20 to $3.90 and Deutsche Bank from $4.50 to $3.90.
Goldman Sachs rates the stock a sell with a $3.15 valuation.
Collie is suspicious that the product had already been approved in New Zealand and Canada two years ago, with still no sign of first sales.
He also notes the compound was part of a portfolio held by Osiris, which Mesoblast acquired for $53m two years ago.
Given Osiris had been trialling stem-cell therapies for 20 years, the modest sale price was hardly a rousing endorsement of the potential.
Mesoblast is also developing treatments for lower back pain, congestive heart failure, inflammatory diseases, diabetic kidney disease and Crohn’s disease.
If any of these hit the mark, Mesoblast shares should go ballistic.
In the meantime the pessimists have prevailed, with Mesoblast shares trading close to five-year lows and well adrift of their record $9 a share attained in mid 2011.
We’ll stick with a speculative buy.
The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the stocks mentioned.