31 January 2012 Mesoblast (MSB) Headed to the sweet spot in diabetes care Recommendation Buy (unchanged) Price $6.45 Target (12 months) $16.00 (unchanged) Risk Speculative Analyst Stuart Roberts 612 8224 2871 Associate Analyst Tanushree Jain 612 8224 2849 Authorisation Steve Goldberg 612 8224 2809 Expected Return Capital growth 148% Dividend yield 0 Total expected return 148% Company Data & Ratios Enterprise value A$1,580.3 m Market cap A$1,820.8 m Issued capital 280.3m Free float 100% Avg. daily vol. (52wk) 0.74m 12 month price range $5.05-$10.04 GICS sector Healthcare Equipment and Services Disclosure: Bell Potter Securities acted as lead manager in a May 2010 capital raising and a December 2010 selldown of stock and received fees for that service. Price Performance BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480 DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 29 THAT FORM PART OF IT. Page 1 (1m) (3m) (12m) Price (A$) 7.34 9.65 5.89 Absolute (%) -14.85 -35.23 6.11 Rel market (%) -18.10 -36.30 17.55 Diabetes represents strong new upside for Mesoblast Mesoblast has initiated clinical work in Type II diabetes with the clearance of its IND by the FDA. This follows on from highly favourable data in non-human primates which was reported in November 2011 and January 2012. With diabetes so widespread and growing, there is huge potential value for MPCs in this space. The current standard of care for diabetes of insulin therapy and/or oral diabetes medication have together created a global market worth ~US$34bn pa, serving 8% of the world’s adult population. By contrast heart failure is probably only a US$6bn global market. We see success in diabetes as boosting confidence in other intravenous applications of MPCs on which Mesoblast is now working on, such as anti-inflammatory disorders. We have previously assumed no value from Mesoblast’s diabetes programme. We now apply a conservative 5% probability of clinical trial success for diabetes under our base case valuation and a 10% probability of success under our optimistic case valuation, which equates to A$1.95 per share base case and A$4.84 optimistic case. Investment view – strong news flow matches a strong pipeline In view of the substantial opportunity of MSB’s cardiovascular and Bone Marrow Transplant franchises and other pipeline opportunities in diabetes, eye diseases & orthopedic becoming more substantial, we re-iterate our positive outlook on MSB. We value Mesoblast at A$10.91 base case and A$21.60 optimistic case. Our target price of A$16.00 sits at the mid-point of our DCF range. We expect significant news flow over the next twelve months as assisting in the stock being re-rated to our target price including a) initiation of the Phase II diabetes trial; b) initiation of a pivotal trial in heart failure; c) completion of the Phase II spinal fusion trials; d) interim data from the EU Phase II trial in Acute Myocardial Infarction; e) receipt of a Special Protocol Assessment by the FDA for the BMT Phase III Trial; f) Interim data from Phase II lumbar disc repair trial and g) potential licensing announcement for the diabetes program. Absolute Price Earnings Forecast Year end 30 June 2011a 2012f 2013f 2014f 2015f Sales (A$m) 15 27 27 27 337 EBITDA (A$m) -12 -23 -44 -62 208 NPAT (reported) (A$m) 91 -23 -38 -58 170 NPAT (adjusted) (A$m) -9 -16 -38 -58 170 EPS (adjusted) (cps) -3.9 -5.5 -13.1 -20.1 58.8 EPS growth (%) N/A N/A N/A N/A -392% PER (x) N/A N/A N/A N/A 11.0 EV/EBITDA (x) -133.1 -67.4 -35.7 -25.3 7.6 Dividend (¢ps) 0.0 0.0 0.0 0.0 0.0 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% Franking (%) N/A N/A N/A N/A N/A ROE (%) -1.7% -3.1% -7.9% -13.4% 27.5% SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Feb 10 Aug 10 Feb 11 Aug 11 MSB S&P 300 Rebased