Cell Therapy Expansion Into Graft Versus Host Disease Will Transform Long Term Earnings Power

Catalysts

About Mesoblast

Mesoblast develops and commercializes allogeneic cell therapies that target severe inflammatory and cardiovascular diseases.

What are the underlying business or industry changes driving this perspective?

• Rapid uptake of Ryoncil as the first and only FDA approved mesenchymal stromal cell therapy in the U.S., supported by broad commercial and Medicaid coverage and a dedicated U.S. sales infrastructure, positions product revenue to scale quickly from a very low base and materially lift overall top line growth.
• Label expansion of Ryoncil into adult acute GvHD via an NIH backed pivotal trial in a population roughly three times larger than pediatrics, together with potential use alongside ruxolitinib, can significantly increase treated patient volumes and enhance operating leverage and net margins.
• Planned pivotal programs in biologic refractory inflammatory bowel disease, where durable remission rates remain low despite growing disease prevalence, could open a multi billion dollar market that meaningfully diversifies revenue and extends the commercial life of the remestemcel L platform.
• Advancement of rexlemestrocel L in chronic low back pain, a leading cause of disability and a major driver of opioid prescribing, offers a scalable, one time procedure that can command attractive pricing and drive high margin, recurring earnings as confirmatory Phase III data are de risked and adoption grows.
• FDA alignment on an accelerated approval pathway and confirmatory trial design for Revascor in heart failure with reduced ejection fraction, targeting patients at highest risk of major adverse events, creates a clear route to a second large cardiovascular franchise that can substantially expand revenue and improve long term earnings power.

Assumptions

This narrative explores a more optimistic perspective on Mesoblast compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Mesoblast's revenue will grow by 305.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -593.9% today to 51.1% in 3 years time.
• The bullish analysts expect earnings to reach $585.1 million (and earnings per share of $0.5) by about December 2028, up from $-102.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $46.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, up from -23.1x today. This future PE is lower than the current PE for the US Biotechs industry at 19.7x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ryoncil is launching from a very small base with only USD 17.2 million in cell therapy revenues in FY 2025 and relies on a narrow initial indication in pediatric steroid refractory acute GvHD, so any slower than expected uptake, competitive therapies or changes in reimbursement policy could constrain the projected ramp in product adoption and materially limit long term revenue growth.
• The investment needed to pursue multiple large pivotal programs simultaneously in adult GvHD, inflammatory bowel disease, chronic low back pain and heart failure will keep selling, general and administrative expenses and R and D spend elevated, and if scale benefits do not arrive as quickly as assumed the company may struggle to transition from current heavy losses to the sharply higher profit margins implied by the optimistic narrative, pressuring net margins and delaying positive earnings.
• Regulatory risk remains significant because the adult GvHD label extension, inflammatory colitis program and Revascor accelerated approval pathway all depend on future Phase III and confirmatory data, so any trial delay, inconclusive outcome or change in FDA stance on cell therapies could postpone or even prevent commercialization in these larger markets and cap both revenue and earnings potential.
• The long term commercial opportunity in chronic low back pain and heart failure assumes durable clinical benefit from a single injection and broad adoption as an alternative to opioids and surgery. However, if real world physicians are slow to change entrenched treatment patterns or payers are reluctant to reimburse high upfront biologic procedures, volume growth in these indications could fall short of expectations and reduce the trajectory of high margin revenue and operating leverage.
• Despite strong reported gross margins on product sales, the business still depends on substantial non cash items such as amortization of acquired intangibles and revaluation of contingent consideration and warrants. If future share price volatility, financing needs or higher than planned commercialization and manufacturing costs persist, the resulting accounting charges and cash burn could undermine confidence in the pathway from current negative earnings to the very high earnings level implied by the bullish scenario.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Mesoblast is A$4.71, which represents up to two standard deviations above the consensus price target of A$3.78. This valuation is based on what can be assumed as the expectations of Mesoblast's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.71, and the most bearish reporting a price target of just A$3.11.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $585.1 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of A$2.77, the analyst price target of A$4.71 is 41.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.