Valuation Musings

DYOR. Not advice. Highly-speculative analysis and scenarios.
The scenarios below assume a successful outcome in the NIH Phase 2 & 3 trials.
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I'm relatively new to MSB. Others have mentioned it to me for 2-3 years now. Took a position today after freeing up funds in my super last week. A steep learning curve, hence my analysis is focused on the COVID-19 and the treatment of patients with moderate / severe ARDS.

So what might happen to the Mesoblast if the results are good? By that I mean results good enough for fast-track FDA approval.

I think there are two scenarios.

1. A large licensing deal ( the most likely )
2. A takeover / buyout

First - what happens when the Pandemic is over?

@Gentrax posted (Post #: 44115205 ) this article on the incidence of Acute Respiratory Distress Sydrome. There are over 100,000 patients surviving ARDS each year, just in the USA.

https://www.faron.com/patients-and-physicians/information-ards

10.4% of patients admitted to ICUs have ARDs. This was before COVID-19 was even identified.

https://jamanetwork.com/journals/jama/fullarticle/2492877

So even beyond the current pandemic there’s a large number of people that could potentially be treated with remestemcel-L for ARDS. The breakdown is as follows:

• 30% mild
• 46.6% moderate
• 23.4% severe

So what is the worldwide incidence of ARDS? I found some extrapolated data here:

https://ardsglobal.org/acute-respiratory-distress-syndrome/

Tallying the data the are ~ 2.3M cases of ARDS each year, just in the countries identified and from proportions above ~ 1.6M would be moderate or severe. I don’t have a medical background but that’s a large proportion that could potentially benefit from treatment with remestemcel-L … a very, very large potential patient population for MSB’s treatment.

If just 10% of these patients were treated with MSB’s treatment, that would be ~ 160,000 patients per year.

EDISON assume that MSB’s treatment will be priced at USD $50,000 (page 16). I assume similar pricing for treating ARDS with remestemcel-L.

https://www.edisongroup.com/wp-content/uploads/2019/10/Mesoblast-Increasingly-positive-on-aGvHD.pdf



So, what sort of revenues and profit could that drive?

There are approximately 2.3M cases of ARDS each year (from above) and around 1.6M of these are moderate or severe. If just 10% of these were treated with remestemcel-L, (i.e. 160,000 per year), on the basis of USD $50,000 per treatment that would be 1-year revenue of AUD $12.3B.

Big Pharma net after tax margins average ~ 14%

https://www.news-medical.net/news/2...table-than-most-other-large-public-firms.aspx

On my analysis that would theoretically drive an NPAT of ~ AUD $1.7B just from treating ARDS.



Licensing Scenario

Potential revenues above are substantial, so I think Big Pharma could be keen to license the treatment. So what might that be worth?

The top 15 licensing deals of 2019 were reported here:

https://www.fiercebiotech.com/special-report/njcttq-abpro-top-15-biopharma-licensing-deals-2019

I have averaged the value of the top 3.



I think licensing or a partnership is more likely as I think the government would be reluctant to allow a full-takeover, particularly if it relates to something prominent like treatment of disease caused by COVID-19.

The interesting thing here is the average upfront payment in a deal, approximately AUD $2.9B. That would be a huge cash boost to mature as a company and for further trials and further R&D.

I think the high profile of COVID-19 could help drive competition for a strong licensing deal.

Buyout Scenario

Here’s the buyout scenario, even though I think it is less likely.

Scenario:

1. Current fully-diluted market cap AUD $1.8B
2. Shares are currently up approximately 65% since last week. I’m assuming that with a good result from the NIH trials, the shares will run hard and add another 130% to market cap ( double the ~ 65% run MSB have had since last week ).
3. Big pharma takeout has been occurring at average an 196% premium. I’m assuming this could happen quickly if FDA grants rapid approval. Important to recognise there’s potential for remestemcel-L to achieve fast-track approval in H120.

So how might a scenario like that look for the share price and the market cap?

Well it could support a buyout market cap of $12.5B based on reasoning above. This would equate to $23.33 per share fully-diluted.



So is this valuation realistic?

We can determine that by working backwards to work out number of patients.

COVID causes severe respiratory distress which can do severe ( and perhaps long-term ) damage to the lungs. The sooner a patient recovers the lower risk of long-term damage requiring expensive long term treatment ( an incentive for insurance companies to pay for the treatment ).

https://www.sciencenews.org/article...-some-patients-may-suffer-lasting-lung-damage

So using this information I can work out if a buyout in the order of $12.5B would be realistic.

What is the premium paid by Big Pharma in Buyouts?

On average Big Pharma has been paying 196% premium for takeovers in the 2017 to 2019 timeframe.

https://www.bloomberg.com/news/arti...thorx-in-2-5-billion-deal-to-expand-in-cancer



Big Pharma maintain and grow cashflows by buying new treatment pipelines / revenue streams. That’s why they pay up. It’s an industry that operates at nice margins so they are willing to pay up to acquire new treatments that maintain those margins. They like to have new technology / drug pipelines so that when older patents expire and treatments evolve they have new pipelines to replace and grow revenue.

There are some good examples in cancer buyouts. Buyout values as much as AUD $10.7B - just last year. This is analysis I had to hand for one of my other holdings.



What is the revenue multiple paid for buyouts by Big Pharma?

There are statistics that indicate Big Pharma industry buyouts are nominally at 5.1 x revenue.

https://www.statista.com/statistics...iple-of-generic-pharma-manda-deals-worldwide/



This multiple would have increased in the last 5 years, however COVID might impact Big Pharma revenues and available cash ( due to the general shutdown of the hospital system ).

So how many patients each year would need to be treated to support a buyout market valuation of $12.5B?

Assuming treatment cost USD $50,000, Mesoblast’s treatment would need to be treating 31,952 patients per annum (to support 5.1 years revenue at AUD $12.5B), the 5.1 years being the metric for a buyout valuation in Pharma deals above.



So revenue to agree with valuation for buyout aligning with a fast run in the share price on trial results only needs to be a fraction of potential. Earlier in the post I explained that revenue could be 4-5 times greater if remestemcel-L is generally applied to treatment of ARDS ( not just those cases initiated by COVID-19 ).

Happy to discuss, although be kind - MSB is relatively new to me.