Australia | Jul 25 2012
– Mesoblast returns positive early test results for rheumatoid arthritis
– Brokers caution there is some way to go for a human treatment
– Success offers upside given a substantial market
– Mesoblast still attracts a range of broker ratings
By Chris Shaw
For some time Mesoblast ((MSB)) has been developing Mesenchymal Precursor Cells (MPCs) for the treatment of various inflammatory tissue diseases. The company has now had some success, as animal testing of a rheumatoid arthritis treatment has delivered positive results.
While testing to date remains a long way from delivering a treatment for humans, BA Merrill Lynch notes the results offer a potential new market for Mesoblast. The rheumatoid arthritis market was worth US$10.3 billion in 2010 and is growing at 12% annually on BA-ML's numbers.
One advantage Mesoblast appears to have is the compound used in the tests reduced multiple rheumatoid arthritis-inducing cytokines. As Credit Suisse points out, this is a step up from current treatments which target only one inflammatory cytokine.
Credit Suisse agrees with BA-ML that while the Mesoblast results were a positive, any human MPC therapy for rheumatoid arthritis appears a long way off. This reflects the limited testing done in what was a small and short study, which implies more definitive results in human trials are needed before the market starts to factor the potential upside into models for Mesoblast.
A marketed product is at least three to five years away in the view of Credit Suisse but Mesoblast will continue development. Bell Potter notes a phase II trial to scheduled for late this year assuming FDA approval.
Aside from the positive results from Mesoblast's rheumatoid arthritis trial, BA-ML sees phase II trials for treatment of congestive heart failure (CHF) as they key to share price performance in coming months.
If the FDA approves the trial design the full trial will cost Teva, the large global pharmaceutical company providing MSB with financial backing, around US$150 million. But BA-ML expects a 'stop and look' element will be factored in that would reduce the initial cost to Teva to around US$30 million.
Assuming Teva didn't want to proceed beyond that point BA-ML suggests there would be a material negative for market sentiment towards the stock. On the plus side, Mesoblast has the balance sheet to be able to fund such a trial for themselves.
Looking beyond the CHF trial, Bell Potter suggests the opportunities for Mesoblast in cardiovascular and bone marrow transplants, as well as other pipeline opportunities in diabetes, eye disease and orthopaedic applications, continue to become more substantial.
This means a valuation range for Mesoblast according to Bell Potter of $9.87 per share base case to $19.24 per share on more optimistic numbers. Target price of $16.00 is around the midpoint of the broker's discounted cash flow valuation range.
Bell Potter's target is significantly above the consensus price target according to the FNArena database of $8.23. Within the database, targets range from Macquarie at $5.40 to BA-ML at $10.35. The database shows Mesoblast is rated as Buy twice and Hold and Sell once each.
In ratings terms, Credit Suisse suggests a Neutral rating is appropriate given the uncertainty of more trial results, Teva's funding decision and the upcoming full year results for Mesoblast. Macquarie is even more cautious, rating the stock as Underperform given strong competition in the areas in which Mesoblast is working and the lack of robust clinical data delivered to date.
BA-ML sides with Bell Potter and rates Mesoblast as a Buy, which reflects the upside on offer relative to a discounted cash flow valuation of just over $20.00 per share. Factoring in conservative pricing and timing assumptions sees the broker's price target set well below this level, though relative to the current share price there remains significant upside potential.
Shares in Mesoblast today are slightly higher in a weaker overall market and as at 11.30am the stock was up 2c at $5.92. Over the past year the shares have traded in a range of $5.44 to $10.04, the current share price implying upside of around 39% relative to the consensus target in the FNArena database.
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