Credit Suisse says Mesoblast limited has blockbuster potential

Credit: U.S. Army RDECOM

On January 19 Credit Suisse analysts in the US began initiating coverage on Australian biotech stock Mesoblast limited (ASX: MSB). The biotech has US-listed American Depository Receipts (ADRs) trading on the NASDAQ.

Credit Suisse has the stock ranked as an ‘Outperform’ and expects Mesoblast’s ADRs could soon be worth as much as $10 apiece, some 90% premium to today’s price of just above US$5.

Each US-listed Mesoblast ADR is equivalent to five ASX-listed ordinary Mesoblast shares. 

More tantalisingly, Credit Suisse believes that if all three of Mesoblast’s therapies were approved in their phase 3 trials, Mesoblast could earn an estimated $2 billion in revenue in 2025. Indeed, the broker even described the biotech’s potential as “blockbuster” with a fair value of US$24 on the ADRs if it can deliver on its heart and GVHD programs.

Investors are likely to be sceptical, given Mesoblast’s history of mediocre share price performance and capital raisings, a pattern which is the norm for biotech researchers. However, with a number of the company’s products in phase 3 trials, they are finally drawing close to potential regulatory approval and Credit Suisse expects the next 18 to 24 months to be a big period for Mesoblast shareholders.

Key metrics to watch will be the company’s cash holdings and burn rate. At the end of the first quarter 2016 (1Q16), Mesoblast had US$77.8m in cash, plus another US$63.5m raised in November (subsequent to the end of the reporting period) for a total of around US$140m.

During the same period, Mesoblast burned through US$29m in cash, which was roughly on par with the final quarter of 2015.

For the remaining three quarters of 2016, Mesoblast expects its cash expenditure to reduce by 20%-25%, which management believes should allow the company to achieve its ‘Tier 1 value inflexion point’, which is the launch of its GVHD product in the United States. Currently, this product is in a phase 3 clinical trial.

Credit Suisse itself notes that there are multiple large risks to its price target and Outperform rating, such as trial delays or failure, as well as cash flow risks. Should further trials be required by the US regulatory authority, Mesoblast could be forced to raise more cash.

Either way, the next 12 to 24 months are shaping up to be quite interesting for Mesoblast shareholders.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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