The investment case FOR Mesoblast, page-16

With Biotech, investors always need to think about good risk/reward entry points into a stock. In the medium term, risk/reward entry points relate to what has been priced into the stock currently and what catalysts (negative or positive) are coming up in the short term (3-6 months).

The following are 4 particular catalysts related to Mesoblast:

1. Risk of a CR: This is often a short term negative catalyst for a stock. Note, I write 'risk' rather than the actual CR itself, though that may create an overhang of stock in the short term or if an unfavorable CR was done. So the risk is now zero. But has the CR created an overhang of stock where there are greedy instos and sophisticated investor flippers for a short 5-10% profit? Well 'no', is the answer. That is the beauty of this Grandmaster move by SI. All stock locked up, in effect. No follow-up SPP or other offers to some pissed off instos. No one has any right to complain either as the SP yesterday was close to the CR price. So please guys, no complaints about dilution, go do the math and buy your dilution amount on market if you want to own the same amount of the company.

2. Trial results: Obviously for a biotech, these are key catalysts. Now, for Mesoblast, their 2 main blockbuster indications (CHF and CLBP) have been reported Phase 3 trial results. I won't go into the good or bad of those here but the point is there can be no SP catalyst for those P3 results any more. We have ARDS-C19 to report P3 results soon which we already know has failed it's primary endpoint. So again, no show stoppers there and the SP took a massive drop on that report, so we know the SP reflects that outcome. Of course, it hasn't reported on its secondary endpoints, interim primary endpoints (which are very critical for this study given the ridiculous nature of the changing controls and patients throughout the study) and of course the consequence of those results on Novartis ARDS-All Cause deal. I believe the market has already priced in a high likelihood of that deal not proceeding though as a few have pointed out, that primary endpoint was fairly ridiculous especially when you have no proper controls of patients coming into the study to ensure they reflect your pilot study.

3. Partnerships: There are currently 3 main partnership (CHF, CLBP and All-Cause ARDS) catalyst events to come in the next 1-4 months. I've already discussed the Novartis All-Cause ARDS (priced for failure in the SP to a large extent) and which was really a free bonus thanks for C-19 and funded by US Govt agencies. A CHF partnership, is a high probability event, given the quality and significance of the P3 RCT data and SI stating he WILL do a partnership as they can't self-fund the confirmatory trial. Given the blockbuster nature of the indication this will be a huge positive catalyst when it occurs. SI has increased is bargaining position by buying time (via the CR) to negotiate a better deal. The terms of the deal will have a significant impact on the long term value for MSB for this indication. Then we have CLBP which already has a partner (EU and Latam) who is required to stump up a milestone payment should it want to continue with the development of the program. The P3 results have provide a targeted sub-population who had significant benefits from the treatment. So, the market has probably priced in this partnership continuing. However, I do not believe it has priced in a US market partner. This will be a major catalyst but it may be delayed because of the next set of catalysts; regulatory.

4. Regulatory progress: This is most difficult to predict in terms of outcome, however there is no doubt due to the failed CRL for aGVHD after a 9-1 positive ODAC vote, the market rightly priced in any positive regulatory outcomes is very low probability. This is also a function of failed P3 endpoints for CHF and CLBP where the significantly positive aspects of those study results need to presented to FDA for a negotiated outcome of either approvable on current study data (zero probability assigned by market) or various accelerated/priority types of programs (maybe 30% probability assigned by market). The failure to negotiate either of those shortened pathways will result in a full confirmatory Phase 3 which is the remaining 70% market assigned probability, IMO. And of course, any direct approval from current data will have a multiplier effect on the SP due to the fact that MSB can negotiate from a very strong position with Partners or go it alone, altogether, as SI mentioned for CLBP. But I believe the CHF and CLBP partnership's won't progress until after they have negotiated with the FDA on current study data and/or requirements for confirmatory trials. Now, I could be wrong on that if they choose to bring in a partner to help with that negotiation on the proviso of one of the two outcomes in their partnership deal. That leaves the all but forgotten aGVHD regulatory status. Though this not a big earner, especially for pediatrics, an approval via the dispute resolution pathway will be a significant catalyst for a couple of reasons. Firstly, it will bring in revenue which will add longevity the current cash runway. But I think more importantly will remove the concern the FDA has about MSB's MSC's in terms of MOA, cQA's and other objections they had in their notes for ODAC. How much of that potential catalyst is in the current SP, I would say 0-20%.

So to go back to point of my post; how much of the potential catalysts (positive or negative) are priced into the current SP? When I systematically go through them, it appears to me there are few positive outcomes priced in, meaning a negative outcome from a number of those potential catalysts will have limited negative effect on the SP (as we saw in the failed CLBP primary endpoint which is a massive blockbuster and significant component of DCF models from analysts). Once the risk of the negative catalysts are taken care of by the current SP, then the positive will take care of themselves.

IMO. DYOR. Not financial advice.