Australia | Nov 03 2011
– Mesoblast to release further trial results this month
– Bell Potter expects good results, see stock as undervalued
– In Macquarie's view the risks remain high
By Chris Shaw
In September Bell Potter highlighted two developments for stem cell biotech Mesoblast ((MSB)) that were potential positive drivers of the stock – a new heart attack trial and a manufacturing alliance (see: News Flow For Mesoblast Remains Positive).Results from a 60 patient Phase II trial of Mesenchymal Precursor Cell (MPC) technology for treating heart failure are due to be released at a special session of the American heart Association's annual meeting on November 14.
As Bell Potter notes, if the trial results confirm expectations MPCs can rebuild heart muscle and improve blood flow to the heart, thereby reducing adverse coronary events and hospitalisations, Mesoblast has an entry into multi-billion dollar market opportunities.
On the numbers of Bell Potter, the current Mesoblast share price undervalues the cardiovascular applications of MPCs alone. This is because the MPC technology works in the broker's view, as the stem cells injected appear to release soluble factors that contribute to tissue repair and regeneration.
Tests already conducted also suggest Mesoblast's MPC technology is effective, as a previous 60-patient trial registered no cardiac mortality over an average 18 months of follow up and showed a reduction in the number of patients developing any severe adverse cardiac events.
Data to date for Mesoblast shows its MPC technology is superior to other stem cell approaches, as Bell Potter notes trials by other developers have not delivered results of similar quality. The broker expects the full trial results to be presented this month will allow the company to move straight to a pivotal trial of around 1,000 patients from next year.
The other supportive factor for Mesoblast in the view of Bell Potter is the company is starting to build a valuable spinal franchise, as Phase II trials are being conducted for applications such as posterior interbody lumbar fusion and cervical spine fusion.
For Bell Potter, this opens up Mesoblast to the possibility of being an acquisition target as any buyer would be able to more comprehensively access a large and growing segment of the orthopaedics market.
Given the upside potential it has identified, Bell Potter rates Mesoblast as a Speculative Buy, down from a Buy rating previously. This "downgrade" implies an upgrade to risk. Price target remains at $16.00 per share.
Not everyone has such a positive view of Mesoblast's value though, as last week Macquarie initiated coverage on the stock with an Underperform rating and $5.80 price target. This follows a series of meetings with a number of experts in the field, including cardiologists, surgeons and stem cell researchers.
Macquarie suggests while Mesoblast is making good progress with its MPCs, there remain questions as to the effectiveness of stem cells in repairing tissue. This relates in part to there being many types of stem cells with no clear winner in the field, as well as other issues such as the potential for a body's immune system to kill off donated stem cells.
Another problem is potential difficulties associated with ramping up stem cell production without having to re-run clinical trials, as Macquarie notes no commercial production of stem cells has yet been done.
In Macquarie's view the market is currently underestimating the risks and uncertainties associated with stem cell technology in general and with Mesoblast's product. This suggests a far more conservative assessment of Mesoblast is appropriate, Macquarie's valuation range for the stock standing at $4.30-$7.29.
Given the uncertainties in the stem cell market Macquarie argues it is difficult to justify a material premium relative to peers for Mesoblast. Yet at present, Mesoblast has a market capitalisation five times greater than its nearest competitor and 10 times that of its second nearest competitor.
Such a premium appears far from justified as data from the heart failure trials being undertaken by Mesoblast, while promising, was not wholly positive in Macquarie's view. The data suggested while the MPC treatment appears safe, it is not possible to prove its efficacy on the information provided.
While Macquarie doesn't expect this will impact on the expected Phase III trial next year, it does suggest gaining significant market share will be challenging unless the trial delivers outstanding results. There is also the risk multiple Phase III trials will be needed before stem cell technology takes a high market share.
When all this is factored in, Macquarie's argument is simply while Mesoblast appears to have some promising technology, it is simply too early to get excited about the stock given the potential for setbacks or the need for significant additional testing. This means investors need not rush to get set in what remains a risky investment.
Shares in Mesoblast today are stronger and as at 11.45am the stock was up 48c at $8.09. This compares to a trading range over the past year of $2.59 to $10.04. Macquarie is the only broker in the FNArena database to provide coverage on the company.
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