Big Pharma Eyeing Mesoblast?

This story features MESOBLAST LIMITED. For more info SHARE ANALYSIS: MSB

The company is included in ASX300 and ALL-ORDS

By Chris Shaw

Southern Cross Equities analyst Stuart Roberts has picked up a recent trend in the global pharmaceutical sector: an increase in merger and acquisition activity. In particular the large and medium-sized companies have been taking over smaller biotechs with promising products under development, largely as a means of re-stocking their product pipelines, says Roberts.

This trend towards deals in the sector could be significant for Mesoblast ((MSB)), as having successfully completed Phase II trials the company is now moving into Phase III trials of its Mesenchymal Precursor Cell (MPC) technology for bone marrow transplantation.

Southern Cross suggests the fact Mesoblast has some solid data behind it following the Phase II trials means there is better information available to potential acquirers. As well, the company offers a solid pipeline of stem cell applications given it is currently conducting seven Phase II trials, while it also offers long-dated patent protection out to at least 2026.

This latter point is important given Big Pharma is facing an increase in patent expiries, with a number of major drugs such as Lipitor coming off patent both this year and in 2011.

The other attraction of Mesoblast according to Southern Cross is the company's trials are helping it develop a valuable spinal franchise, as the MPC technology is being successfully applied across a spectrum of spinal related procedures. This is of value as any acquirer would therefore gain access to a large and growing segment of the orthopaedics market.

An advantage Mesoblast enjoys is the path to market in stem cell therapy is relatively short, as only one Phase II and one pivotal trial is required before approval. In the view of Southern Cross this offers scope for Mesoblast to begin earning commercial revenues as early as this year through a licensing deal with a big pharmaceutical player or medical device company.

A short development time is also important in lowering drug development costs, which are continuing to increase significantly. As Southern Cross notes, a new drug potentially costs anything from US$1.2-$1.5 billion to develop today, up from around US$800 million in the early 2000s.

Given the quick path to market the rest of 2010 should see substantial news flow for Mesoblast, which Southern Cross expects will keep investor interest in the company at elevated levels.

On Southern Cross's numbers, Mesoblast is valued at anything between $2.92 and $7.99, the lower number being its base case valuation using a probability weighted discounted cash flow approach. This has been adjusted for the company's recent capital raising and the Angioblast merger. The broker has set its price target at $3.00 in-line with this valuation.

Southern Cross rates Mesoblast as a Speculative Buy, though with a market capitalisation of less than $500 million the company doesn't receive a lot of analyst attention. The FNArena database highlights this as it shows only RBS Australia provides coverage, rating Mesoblast as a Buy with a price target of just $2.08.

Shares in Mesoblast today are higher and as at 1.50pm the stock was up 4c at $1.87. This compares to a trading range over the past year of $0.90 to $2.26 and implies upside of better than 35% to the price target of Southern Cross Equities.

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