The Vice Chairman (William Burns) doubled his shareholding this week with a purchase on-market of ~33,000 shares at $1.83. The Directors at MSB are not an active bunch and while collectively they hold ~15% of stock, roughly 14.5% is held by a single Director; Silviu Itescu.

The purchase still represents a solid buy with a value of ~$50k, but difficult to say whether this is a bullish sign. If you read through the fine print of the latest annual report you will find a note that William held ~80,000 options expiring November 2019 at an exercise price of $4 per share. So whether the buy is a bullish sign or just a Director trying to hold a bit of skin in the game...will wait to see if other Directors pop their heads up.

"I am not smart man" said Forest Gump...me either! I don't have the intelligence or the time to review, research and understand winners and losers in bio-tech. I would challenge any investor that thinks they understand the technology, or the science...I certainly don't! So why do I like Mesoblast? Because...people who are smarter than me, have more resources than me, and who pay other smart people to research whether the technology and science works...they like Mesoblast!

Rich lister and technology investor Alex Waizlits is a large holder of Mesoblast and has been for some time through both his privately owned fund (Thorney Investment Group) and also his public fund (Thorney Technologies). I think taken together the two entities own approximately 10% of Mesoblast.

In addition to the fact that someone much smarter than me is heavily invested, I like the amount of time he has been invested. This says to me this is a conviction play and that the potential return is worthwhile having your cash held up for years.

This article references his purchase of ~$67 million in Mesoblast back in April 2015: http://www.medifydaily.com.au/waislitz-emerges-with-mesoblast-stake-worth-67-3m/

In this more recent article he continues to talk up the potential: https://www.afr.com/leadership/afr-lists/rich-list/how-the-rich-invest-alex-waislitz-shares-his-stock-tips-20181004-h1682o

Sometimes it's ok to put your faith in the ability of others...particularly when their own money is in play!

Mesoblast (MSB) has recently completed a deal with Grunenthal giving the privately-owned pain management company exclusive commercial rights to MSB’s cell treatment for chronic back pain in Europe and South America. In announcing the agreement MSB called out $45 million (US) in upfront payments over the next 12 months (including $US15 million on signing) and up to $US150 million in milestone payments prior to commercialisation. The release also boldly states that dependant on study outcomes and patient adoption levels Grunenthal has the potential to pay more than $1 billion in milestone payments and that royalties from sales will be double digit.

Not a bad outcome at all, although the share price response has been more muted than I expected. My general thoughts are that ‘Mr Market’ is obsessively focussed on the short-term risk of capital raise rather than the long-term revenue potential this deal implies. Mr Market is not particularly smart at the best of times and I think in this instance he is showing particularly poor judgement.

I think a capital raise in the short-term is unlikely, or at least not required for working capital reasons. MSB has access to the following cash sources over the next 12 months (all in USD):

• $50 million in cash at the bank (at 30 June 2019)
• $15 million payment received from Grunenthal
• $20 million cash payment on regulatory approval to begin phase 3 trial (Gruenthal)
• $10 million cash payment on meeting clinical and manufacturing outcomes (Gruenthal)
• $35 million facility with Hercules Capital and Novaquest Capital Management

The above represents $130 million (USD) in non-dilutive capital available to the company. It also excludes any potential milestone and royalty payments from existing partners including Tasly, JCR and Takeda. Over the last 12 months MSB had costs of $116 million (USD), which is unlikely to slow down. Indeed, if it does slow down we have a problem! The blood flowing in the veins of a company like Mesoblast is R&D. Continued spend on R&D is critical to the long-term success of the business (and of my investment!).

In my view Mr Market is discounting Mesoblast on the basis that a capital raise could be required in the next 12 months. I think he is wrong and given this I think a serious rerate has the potential to occur when the next deal is done. So, what, where and when?

What?

This latest deal validates that big pharma believes in the efficacy of the back-pain cell treatment. Following this thought through I don’t think it takes too much imagination to ponder that the next deal might be more of the same.

Where?

Europe and South America are now stitched up. Potential big pharma only has the following options on the table:

• US (in the latest annual report MSB noted that the opportunity is 3.2 million people out of a total of 33.4 million people suffering from chronic lower back pain)
• Japan (MSB estimates that 14.9 million people suffer from chronic lower back pain so assuming a similar size of prize as the US would leave a target market of ~1.5 million people)
• China (the population pool in China is much larger, but I would assume that the opportunity is in the booming middle and upper classes, so maybe a reasonable assumption might be similar to the US opportunity)

When?

The race is on! I think the deal covering Europe and South America will have set the cat among the pigeons. A month ago, Mesoblast was negotiating on a treatment that had lots of potential, but many unknowns; effectively leaving the balance of negotiating power with big pharma. The risk hasn’t disappeared, but now Mesoblast is negotiating on a treatment that is “in demand”, has future commitments >$1 billion already, and has 15% of global population off the table. Even the most hardened executive can suffer from Fear of missing out (FOMO).

My supposition is that another deal (quite potentially multiple deals) for zone commercial rights to treatment for chronic back pain will occur within coming months. This deal (or deals) will create a platform for MSB to be self-financing. If my hypothesis becomes reality I think Mr Market will rerate quite violently.

EDIT 01/10/2019: One week post writing this Straw Mesoblast announced a capital raising. Boy do I have egg on my face!

I decided on a lazy sunday morning that having a valuation of $10 per share on a company currently valued around $1.40 with little or no reason for the valuation was a bit silly. So with that in mind I did some homework and came up with an even sillier valuation with some data to back it up....and I got a value of $32 per share....and thought that's crazy (?) you idiot (!) check the NPV calculation...which I did, and surely enough found a mistake, corrected it....and got a value per share of $105. Much better!

In 12 months time I will look back and try and decide which of the following has been the lesson learnt:

1. Valuing the future cash flows of an early stage bio tech company is stupid - why bother when it is all 100% made up!?

2. Valuing the future cash flows of an early stage bio tech company is interesting as it shows the potential size of the prize.

I have no doubt that there are a million things that are wrong with my valuation. Even looking at the numbers and estimating revenue of $40 billion per annum for the heart failure solution seems ridiculous...but saying that the problem costs the US $115 billion every year...so maybe it isn't crazy.

Really who the hell knows!

Found an interesting recent article by Tim Boreham, a former writer for the Australian newspaper, regarding Mesoblast. Given the complexity of biotech companies and their technologies I thought this was a very simple read that sums up in a nice basic way the main risks and potential rewards around Mesoblast.

I particularly liked his disclosure sign-off as it matches my own feel around investing in biotech: Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. He’s 95 percent sure he doesn’t really understand the science of stem cells but neither does the market.

http://www.biotechdaily.com.au/pages/dr-borehams-crucible.php

Mesoblast has released a ‘Corporate Review’ (three-page newsletter) detailing the major commercial focusses for the business in 2019.

• The company has a product gaining traction under licence in Japan and proving the case for Mesoblast to launch solo in the US in 2019.
• They are in advanced and active discussions with a number of partners for global commercialisation of their products.
• Also, the letter makes clear that they have enough of cash to meet their key commercial outcomes and access to additional funding that is ‘nondilutive’.

All great stuff, right…but nothing new. The commercial opportunities outlined, these are all generally well known. The company has previously advised that they are in commercial negotiation with potential global partners (to be honest most investors are probably a bit peeved that it is taking so long). There was no new price sensitive information contained in the letter, and yet the share price reacted strongly, jumping 15% on the day.

I think investors have reacted to a more holistic element of the letter than its contents; its tone. Historically Mesoblast has not focussed on its investors, it has focussed on the science. Releasing a note that focusses on the potential catalysts for success in 2019 is breaking new ground and creates a feel that success is inevitable. Did someone say FOMO…

I love a conspiracy theory and I wonder why the change of tone? If one of the global partnerships talked about takes off in H1-2019 then I think a capital raise is unlikely, but if we don’t see one then I think a capital raise may be necessary in late 2019 regardless of meeting key commercial outcomes. Time for management to start pumping up the tyres?

Despite my suspicions I liked the newsletter and I think 2019 will be a good year.