Company Overview: Mesoblast Limited (ASX: MSB) is engaged in the development of innovative cell-based medicines. It is an Australian-based medicine company, which seeks to offer treatments for cardiovascular illness, inflammatory ailments, and back pain. The company has made use of its proprietary mesenchymal lineage cell therapy technology platform to establish a broad portfolio of commercial products and late-stage product candidates.

MSB Details

Collaborations & Strategic Alliances Aids MSB: Mesoblast Limited (ASX: MSB) develops allogeneic cellular medicines. The market capitalisation of the company as on 17 March 2021, stood at ~$1.62 billion. The company remains on track to focus on its core strategic areas, which includes innovation and optimization of the company’s technology platform for cell-based therapeutics. The company has also taken necessary actions to develop a portfolio of clinically distinct products and focus on delivering late-stage products to market along with optimizing its product portfolio. The company also focuses on strategic partnerships and manages cash to strengthen its robust intellectual property estate.

It is worth noting that in November 2020, the company had entered into a global collaboration agreement with Novartis to develop, manufacture and commercialise its mesenchymal stromal cell (MSC) product Remestemcel-L, for an upfront payment of US$50 million. It expects to receive a milestone payment totalling US$505 million for pre-commercialization of ARDS vaccine and US$750 million post-commercialization based on sales milestone and royalties. In August 2020, MSB stated that the Oncologic Drugs Advisory Committee (ODAC) of the FDA voted in favour of the accessible data to augment the effectiveness of remestemcel-L (Ryoncil) in pediatric patients with steroid-refractory acute graft versus host disease (SR-aGVHD). We note that, a possible authorization of its top candidate will be a substantial boost for Mesoblast.

The company has shown various trails to offer decent top-line growth and remains on track to continue its growth trajectory via collaborations and, research and clinical development of its product candidate. The company’s vision involves delivering the highest quality products to its clients with exceptional customer service. The company is well-positioned to enhance its capabilities in the market and continues to experience robust levels of sales inquiries, leads, and contracted work. The demand for the company’s innovative cell-based medicines and product development capabilities continues to grow, thereby boosting orders. Notably, over a period of FY17-FY20, MSB witnessed a top-line CAGR of ~137.12%.

Revenue Trend Highlights (Source: Company Reports)

Remestemcel-L is also being used for other inflammatory diseases in children and adults, including moderate-to-severe acute respiratory distress syndrome (ARDS). Mesoblast Limited provided phase III results for its product candidates on February 11, 2021, for advanced heart failure and chronic low-back pain. The company looks good to reap the advantage of its mesenchymal lineage cell technology platform to establish a broad portfolio of products. Going forward, the company stands to benefit from the collaboration with Novartis to develop, manufacture and commercialise its key product Remestemcel-L.

2QFY21 Key Highlights: Total revenues for the period stood at US$2.24 million, as compared to US$2.2 million reported in the year-ago period. Loss before tax for the period came in at US$25.6 million, as compared to a loss of US$26.8 million reported in the year-ago period. During the quarter, the company realized $2.19 million in commercialization revenue pertaining to royalty income earned on sales of TEMCELL in Japan, up from $1.97 million reported in the year-ago quarter. The company is currently conducting phase 3 trials for covid-19 ARDS for adults. MSB will launch RYONCIL in the US market, which will focus on SR-aGVHD.

2QFY21 Key Highlights (Source: Company Reports)

Key Updates:

• Issuance of Warrants: On 15 March 2021, the company informed the market that it will issue warrants of more than 15 million shares for a consideration of A$2.88 per share, in connection with the US$110 million private placement. This represents a premium of 25% to the placement price, which might further increase up to A$43.2 million, on or before 15 March 2028.

• Completion of Private Placement: On March 8, 2021, the company successful completed its US$110 million private placement managed by a strategic US investor group. The company had raised US$110 million via the issue of 60 million shares at A$2.30 per share. The company intends to utilize these proceeds to carry out its operational and regulatory initiatives with the United States Food & Drug Administration (FDA) in the coming quarters. The company also intends to use the funds to build commercial inventory of remestemcel-L in advance of prospective authorization for SR-aGvHD in children.

Top 10 Shareholders: The top 10 shareholders together form around 34.71% of the total shareholdings, while the Top 4 constitutes the maximum holding. Itescu (Silviu) is the entity holding maximum shares in the company at 11.74%. M & G Investment Management Ltd. is the second-largest shareholder, with a holding of 8.81%, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Key Metrics & Decent Liquidity Position: At the end of 31 December 2020, the company’s cash balance stood at US$77.5 million, with total debt amounting to ~US$99.7 million. Operating cash outflow for the six months ended 31 December 2020 came in at US$60.1 million.  In 2QFY21, gross margins, operating margins and net margins improved from the previous quarter.  The company reported negative cash cycle days of 289.3, as compared to the industry median of 308.8 days. Debt to equity in 2QFY21 stood at 0.19x.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: MSB is yet to reach the commercialization phase. The company’s current revenues were based on the performance of the partnering companies and may not be sustainable. Delay in clinical trials may increase funding requirements and additional costs. A highly leveraged balance sheet might weigh on the company’s financial performance, going forward. As of December 31, 2020, the company’s cash and cash equivalents were $77.5 million, while total debt was $99.7 million, indicating that MSB doesn’t have ample cash to meet this debt load. Additionally, competition from peers, and the global threat environment remains add to the woes. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward. Further, the ongoing COVID-19 led uncertainties are expected to create a higher degree of uncertainty, especially in regard to Clinical Trials revenue.

Outlook: The company remains on track with a mature and diverse portfolio of cellular medicines for serious acute and chronic inflammatory conditions. The company plans to make higher investments to deliver high quality products to its clients with exceptional customer service. MSB continues to focus on cost control measures, while investing to support its growth objectives. The company is also taking necessary measures to grow organically in the short term, improve operational efficacy, thereby striving to be an innovative developer of cell-based medicines. Eventually, these strategic initiatives are likely to result in new sources of revenue for the company in near future.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading below the average of its 52-week’s high and low level of $5.7 and $1.02, respectively. The stock of the company went down by ~7.1% in the past one month. On a technical analysis front, the stock has a support level of ~$2.169 and a resistance level of ~$2.898. We have valued the stock using an EV/sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium as compared to its peer average, considering an increase in top-line in 2QFY21, collaboration with Novartis, and cost cutting initiatives. For the purpose, we have taken the peer group - Telix Pharmaceuticals Ltd (ASX: TLX), Probiotec Ltd (ASX: PBP), to name a few. Considering decent top line performance, strategic alliances with cash management activities, decent long-term outlook, and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $2.46, down by ~1.993% as on 17 March 2021.

MSB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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