Australia | Aug 25 2011
– Awareness of stem cells as a disease cure growing rapidly
– Mesoblast a leader in the market
– Trials are underway, revenues could be generated by the end of 2013
– Bell Potter lifts price target, reiterates a Buy rating
By Chris Shaw
According to Bell Potter, public awareness of the ability of a person's own stem cells (autologous stem cells) to potentially cure a number of diseases has increased significantly over the past year.
Big Pharma has also recognised this as well as the success achieved with the use of allogeneic or so called off-the-shelf stem cells, as evidenced by Cephalon taking a 19.9% stake in Mesoblast ((MSB)) late in 2010. Cephalon has since been acquired by Israeli drug major Teva.
This increased focus on stem cells is important for Mesoblast, as the company is commercialising Mesenchymal Precursor Cell (MPC) technology. This technology allows for adult stem cells to be extracted from a donor's bone marrow. These cells are then grown into therapeutic quantities and finally administered to non-related patients.
While Mesoblast had initially focused on MPCs for orthopaedic and cardiovascular applications, Bell Potter notes this has since been expanded to inflammatory disorders and central nervous system diseases. At present Mesoblast has five Phase II trials underway and is initiating a Phase III trial in Bone Marrow Transplant, something Bell Potter suggests offers a revenue opportunity equivalent to that of Cochlear ((COH)).
This is far from being reflected in the Mesoblast share price, as Bell Potter notes the 15 stem cell technology companies currently listed globally only have a combined market capitalisation of around US$3.5 billion. FDA requirements are for one Phase II trial and a pivotal trial before approving successful stem cell therapy, Bell Potter seeing this as offering the potential for Mesoblast to generate commercial revenues by late in 2013.
On Bell Potter's numbers the Mesoblast share price undervalues the cardiovascular applications alone, especially given the Phase II trial has offered evidence MPCs can rebuild heart muscle and improve blood flow to the heart muscle. This should reduce adverse coronary events and hospitalisations. As Bell Potter notes, applications in heart failure, heart attacks and chronic angina represent multi-billion dollar market opportunities. Other opportunities include spinal fusion, osteoarthritis and both Parkinson's disease and Alzheimer's disease.
Given the Phase II trial success achieved so far, Bell Potter has changed its valuation approach for Mesoblast. A 75% probability of clinical success for the cardiovascular and Bone Marrow Transplant programs is now applied, so estimating commercial payoffs suggests a valuation range of $7.35 to $14.00.
Bell Potter has also added $2.83-$6.63 per share for potential opportunities in bone marrow, orthopaedic, inflammatory disease, CNS and manufacturing. Combined with cash on hand this generates a valuation range of $11.14 to $21.59. Price target has increased to $16.00 from $11.00 to reflect this model change.
Payoff assumptions are reasonable in Bell Potter's view, as drugs such as Plavix and Humira enjoy multi-billion dollar revenues annually. The stem cell technology being developed by Mesoblast could enjoy similarly large market opportunities.
Given its revised target Bell Potter retains a Buy rating on Mesoblast, supported by the expectation of substantial news flow in both 2011 and 2012. As well, there remains scope for merger and acquisition activity given Mesoblast has long-dated patent protection and the acquisition of the company's technology would give its partners first-mover advantage.
Despite a market capitalisation of more than $2 billion at present, Mesoblast receives very little coverage in the broader market. As evidence of this, none of the eight brokers in the FNArena database currently research the company.
Shares in Mesoblast today are higher and as at 11.50am the stock was up 17c at $7.72. Over the past year Mesoblast has traded in a range of $1.80 to $9.95.
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