Date : 18/09/2020

Mesoblast Limited

ASX :

MSB

Market Cap : $2.8 Billion

Buy

52 Week Range : $1.02 - $5.43

Share Price : $4.91

A high-risk stock with a good balance sheet and growth outlook in the long term. We recommend a "Buy".

Company Analysis

 

Mesoblast Limited (MSB) is a bio-pharmaceutical company that uses its technology to develop medicines to treat complex diseases that are resistant to conventional care. The technology produces allogeneic cellular medicines based on mesenchymal lineage adult stem cells derived from bone marrow and is particularly helpful when treating the complex disorder when inflammation is present. Allogeneic medicines are “off-the-shelf”, and the firm has a number of drugs that are in the clinical stage prior to FDA approvals.

The products offer treatment for cardiovascular, spine orthopaedic disorder, hematology, and immune mediated and inflammatory diseases. The FDA is the drug regulator in the USA and any product has to go through multiple phases of testing before approvals. The below picture shows what stage the products are in:


Source: Mesoblast

Mesoblast is listed in the Australian Securities Exchange (MSB) and the NASDAQ (MESO) in the USA. The firm operates in Australia, USA, and Singapore. The firm also holds over 1000 patents for its product and technological advancements that have been achieved.

The firm has built a revenue stream through commercial partnership agreements with industry leading firms. These partnerships also reduce risks associated with the product due to synergy, and also offsets capital requirements. The details of its partners and agreements are below:

  • Grünenthal GmBH – Commercialisation of Mesoblast’s MPC-06-ID that is used in the treatment of low back pain. The firms have agreed to work together to meet European regulatory requirements by conducting a Stage 3 trial together.
  • JCR Pharmaceuticals Co. Ltd. – The agreement has helped Mesoblast’s technology to be used in Japan by JCR for the treatment of Epidermolysis Bullosa. JCR has received complete approval in Japan.
  • Tasly Pharmaceutical Group – The firms are working together in the treatment of chronic heart failure by commercialising Mesoblast’s products and Tasly already hold rights in China for manufacturing the drug.
  • Takeda Pharmaceutical – Access to patents to enhance the commercialisation of Alofisel that is used to treat fistulae.
  • Lonza Group – The partnership enables MSB to use Lonza’s facilities in Singapore and also aid with production.

Company Updates

Remestemcel-L is used in the treatment of Covid19 infection, and it is now awaiting trial results.
RYONCIL, the product that is used to treat GVHD in children is awaiting Biological License Application to come through on the 30th of September, and will make the medicine available in the USA if the result is positive.

The MSB stock is subject to high measures of volatility due to the nature of the business it is in. An approval or disapproval from regulatory authorities can make or break the future of their product. The volatility for MSB comes from the same stories. The huge dip in August was due to investors dumping the stock as fear crept in with FDA’s approval on the line. However, that rebounded quickly as the drug fetched a stunning 9-to-1 approval from the FDA.


Source: Tradingview.com

Industry Analysis

The pharmaceutical industry is a low growth industry due to the immensely high barriers to entry. It is an industry that is defined by revenue volatility, high capital intensity, high regulations just to name a few.

On the flip side, a successful approval of a drug results in massive profits post production. A few key trends that have been noticed in the industry lately are:

  • Rising costs and increased pricing pressures. This leads to questions over profitability metrics
  • Regulatory changes restrict export revenues
  • An aging population in the OECD may lead to increased demand for new innovations.

There are high barriers to entry in this industry and sector. The checklist for the barriers is as follows:

  • High Competition
  • Low Concentration
  • Mature Life Cycle Stage
  • High Technology Change
  • Very high policy and regulations

Investment Thesis

Mesoblast is not profitable and will not be until its products receive approvals from the regulators and mass production begins. The revenue they derive is through the commercialisation agreements the firm has entered into with the big players in the industry.

In FY2020, the company received US$32million in revenue, a 92% increase from FY2019. These all came from its partners as royalty for milestones and exclusive rights to their products. GmbH accounted for US$15million, while Tasly and Temcell accounted for US$10million and US$6.6million, respectively.

However, MSB’s operating expenses are US$82million, with R&D being the biggest contributor at US$56.2million. The firm has been losing money all this while, with its latest loss coming in at US$75m. These metrics should change if Mesoblast receives the approvals that are required to manufacture and sell its products.

The health of the firm on the other hand, is positive, The firm has a cash balance of US$130million, and its short-term liabilities are US$90m – indicating that MSB has enough cash in hand to meet any short term debt obligations. Its total assets excel its liabilities by 4x – another good sign of long-term financial health that is required given that its business model can generate cash flows in the long run.

The capital structure of the firm is a sign of strength. The firm is mostly capitalised by equity at 85% and the rest by debt of 15%. A healthy mix given the cash burn it requires initially to develop its products.

Recommendation

MSB is a stable company with regard to its balance sheet. However, the stock comes with a lot of volatility due to the upcoming announcements from its pending product approval status. We reckon this is a good time to “Buy” the stock and hold it over the long-term as its technology has already been trusted by the biggest players in the sector, we will believe MSB can and will overcome any short-term hurdles. In the short-term, MSB is a stock with a high risk-reward ratio.

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