Cr4sac "Chumps like the rest of us".... interesting point...worth consideration.
In some ways I feel you are right ...in other ways I think the analysts are actually pretty brave in staking their credibility on continuing to value the shares at substantially higher than their current valuation.
Lets me explain where I am coming from.
From a purely technical point you are right. All things being equal, in respect of a growth business that does not return capital, valuations should increase year on year, because of the impact of high discount rates on future cash flows . If analysts do not upgrade their valuation after a period of time to compensate, they are effectively downgrading their valuation As regards Mesoblast, most of the US analysts apply a 15% discount rate whilst Bell Potter has used a weighted average cost of 21% and a terminal growth rate of 1% in determining its DCF valuation model.
The irony is that all the analysts are probably over prudent for reasons very few people will have contemplated ;
Patricia Danzon, currently the Cecilia Moh Professor at the Wharton School of the University of Pennsylvania, has recently published a paper, "Differential Pricing of Pharmaceuticals", which sheds much more cogent view of modern day Pharmacoeconomics:
Professor Danzon draws our attention to a number of trends. "Between 2008 and 2016, the Express Scripts Price Index for Brand Name Prescription Drugs increased threefold, whereas the Generic Prescription Price Index fell over 50%.... For originator drugs in the USA, annual price increases of up to 10% are a norm. Annual Reports from Canada's Patented Medicine Prices review show the contrast between positive annual price growth. in the US and flat /negative price change. in major EU markets and Canada". She further illustrates what marked compounding effect this has with the following example: To illustrate, assume that drug X was launched at the same price in the USA and Germany in 2008, that annual originator price growth in the USA and Germany has been 10 and 0%, respectively, and exchange rates have not changed. By 2018, the US–Germany price differential for X would exceed 150%.
To finish making my point, I have to also draw attention to the fact that the average pricing differential between US and European patented drugs (shown in Fig 2 in her paper linked above), was approx 300% on average.
So next time you are looking at an analyst report, it is worth bearing in mind that using a WACC of 21% might appear a unwise against favourable forward pricing trends ... imagine how this would undervalue Mesoblast's forecast US revenues from Remestemcel-L ... alternatively , it might be appropriate in determining future cash flows of generic drugs. I should stress that historic data is not necessarily a predictor of future pricing trends and at some stage this discrepancy must be resolved.
The reason I am drawing your attention to the above points, is that getting your pricing strategy right in the US market is absolutely essential. Many global pharmas are not compromising with European health care providers over price, to protect their US revenue streams. I will come back to this point, at a future date, when I will draw attention to revenue potential from Alofisel... who are currently completing Phase 3 trials in the US and may not want their US pricing initiatives being undercut by negotiations with European customers. Just remember that Mesoblast gets circa 6% royalty on Alofisel which EvaluatePharma has stated that global consensus sales will reach $524m by 2024 ! Bell Potter recognise this potential revenue stream exists but have not included it in their forecasts. I think that is probably wise because despite gaining approval it has not formally agreed a pricing strategy. However, there are signs that Takeda are close to launch:
"The company is now assessing Alofisel's profitability under the proposed pricing scheme, which will reimburse part or all of the payment to patients not seeing improvement. The drug is expected to go on sale by the end of fiscal 2019 in the U.K. and elsewhere in Europe."
Now lets take a closer look at what Bell Potter has to say about Remestemcel-L (marketed under licence as Temcell by JCR in Japan). In Table 4, MSB-Probablility-Weighted-Sum-Parts Valuation Summary . They attribute a value to Temcell of $42m or 8c per share based on 50% peak market share. Here they are on safer ground as the Government National Health Insurance Body formally set the price at $7,079 per bag of 72 million cells. In Japan the average adult patient is expected to receive 16 up to 24 bags of 72 million cells, requiring reimbursement of between US$113,000 and US$170,000. This type of pricing is unlikely to be repeated in the US. I am not sure weight based pricing will ever be applied in an anti discriminatory US legal system. Just as well for Mesoblast, since the average patient weight is approx 35kgs in the paediatric segment of the market. I think net royalties, which are tiered averaging around the mid twenties, will result in royalties payable to peak at approx $7-8m per annum in about 2 years time from a current run rate of circa $5m . The reason, the net royalties are so low, is that despite Temcell enjoying large market share for both adults and children...is that in Japan, there are many more autologous ( family donors which are matched) as opposed to allogenic donors . Furthermore, JCR has a relatively small market opportunity, so has not invested in serum free production methods needed for large scale commercial exploitation. I also believe JCRs relatively high COGS, from using expensive, less effective FBS serum and additional marketing expenses, mean that net royalties received do not make a good comparison with the US market opportunity.
So what is the US market worth to Mesoblast for aGVHD ? I think the latest Oppenheimer note has made a sensible analysis of the addressable market...calculating that there will be 400 paediatric patients annually in the US. Mesoblast has mentioned a potential market size of $120m for the sub 18 year old patient category...inferring a price of approx $300,000 per treatment. There is a chance that pricing could be more favourable as refractory patients often require constant hospitalisations at a cost of over $500,000. Remestemcel-L can also be IV administered in an outpatient clinic. As regards costs, I believe Mesoblast has considerable confidence that its own proprietary serum free media, will eventually be able to replace expensive Fetal Bovine Serum based media. For this reason, COGS should be materially lowered in future years assuming the FDA allows media substitution. This is highly probable in my view, since removing animal derived products from the process should be very well received, in view of potential concerns about disease transmission between humans and animals. Mesoblast are fully aware at the opportunity to go for the adult market for aGVHD which is currently 3-4 times bigger than paediatric. Assuming they receive approval for the current BLA submission, a confirmatory trial of approx 100 patients over 6 months, would probably be all that was required. During the intervening period, I dare say many physicians will probably be happy to prescribe Remestemcel-L if it receives paediatric approval . It is entirely plausible that once it is approved in the US adult market (primarily for GI and Liver Grade C&DaGVHD) , sales for Remestemcel-l could easily exceed $250m annually by 2022. For this reason I feel that. Bell Potter may wish to revisit their tentative "probability adjusted NPV for ex Japan sales of Remestemcel-l " of only $148m.
I do not mean to single out the Bell Potter note in a negative way. I am sure that they have suffered from setting price targets which have not been met in the past. In general , their note is very helpful and informative. It is very important to maintain a prudent and responsible approach to forecasting . What is different this time is that I think Mesoblast will have submitted its final BLA module by Sept/Oct 19. If my timing is correct, I think the investment community will begin to realise that aGVHD is probably worth the current market capitalisation on its own...and lets face it, Remestemcel-L is a side show, compared to the potential valuation for Mesoblast, post a successful phase 3 trials for CHF and CLBP. I will elaborate further in due course....but maybe we should remind ourselves of this Company's history and the potential for a global partnering deal. Mesoblast entered into a Development and Commercialisation Agreement with Cephalon in December 2010 in a deal that included an upfront payment of US$130m and potential milestone payments of up to US$1.7bn . Teva acquired Cephalon for US $ 6.8bn in October 2011. Teva in finalising its US$40.5bn acquisition of Allergan Generics, announced in July 2015 that it would focus on its core CNS and respiratory interests and took the decision to ditch its cardiovascular programme which was several years away from commercial launch and had already accumulated a carrying value of US$ 258m ,for in process R&D associated with Revascor development. Teva agreed to return its 60% interest in Revascor to be relieved of its future funding commitments to the ongoing clinical trials. Based on sunk cost alone that implied a value in todays money of US$0.5bn for 100%. of the Company...more of less the current market capitalisation of Mesoblast today. No wonder every analyst concludes that even on a heavily risk adjusted basis , there is major upside to the shares. I totally agree.
MSB Price at posting:
$1.40 Sentiment: Buy Disclosure: Held
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