James Hardie Industries (ASX:JHX) is a leading international building materials group that produces a wide range of fibre cement building materials used in the exterior and interior of residential and commercial buildings.

The company is also the largest seller of home siding (imitation wood) in the US, and produces fibre cement in the US, Australia, New Zealand and the Philippines.

Approximately 80% of JHX’s sales come from the housing industry, and the majority of this exposure is via the US housing market.

Although the US property crash has been a millstone on JHX, recent evidence suggests the market may have turned the corner.

JHX focus on efficiency and market share gains has placed it in an advantageous position to benefit from increased US housing activity.

US housing recovery

Although the US housing sector has been in a well established decline for much of the past five years, recent evidence is pointing to a long-awaited recovery.

Among the relevant housing indicators for James Hardie are housing starts and building permits.

Housing starts measure the number of new monthly building constructions, whilst building permits are more of a leading indicator in that they measure the number of new monthly residential building permits.

Since May 2011, both these indicators have been steadily rising in a sign Americans are beginning to take advantage of the country’s record low interest rates.

Furthermore, we see this momentum continuing due to the slowly strengthening US jobs market and the Federal Reserve’s pledge to maintain low interest rates until the end of 2014.

Operating results

In late November, JHX reported a 1Q12 net operating profit of US$41.2 million, which was double its result in 1Q11.

Despite reporting low demand, James Hardie was able to achieve its profit on the back of operational improvements such as a reduction in fixed costs, as well as an increased share of the fibre cement market.

This increased market share, positions JHX well in the event of an acceleration of the US housing recovery.

Outlook

JHX forecast FY12 net operating profit of US$126 – US$140 million.  Although management was cautious about the outlook for US housing, recent data points to a noticeable pickup in this industry.

With US employment inching higher, housing affordability high and the Fed committed to a record low interest rate environment, there are enough incentives to drive continued improvement in residential construction activity.

We at Australian Stock Report believe that a focus on cost control and increasing market share has placed JHX in a strong position to leverage off any US housing recovery.

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QR National (ASX:QRN) is Australia’s largest rail freight operator and the world’s largest rail transporter of coal from mine to port for export markets.

QRN is a provider of specialist rail engineering, construction and maintenance services in Australia, operating a network of five terminals and more than 40 depots across five states.

The company not only transports minerals but agricultural goods, and is a significant transporter of grain.

Since being privatised by the Queensland government in November 2010, QRN has been a stock to watch with a large percentage of retail shareholders.

QRN has faced some major headwinds since listing, principally the early-2011 flooding and cyclone in that state.

However, the company proved its resilience by managing to record a healthy FY11 underlying profit despite the impact to coal volumes from the floods.

The expansion into the WA and NSW markets also positions the company well for future growth.

Profit shines despite floods

QRN delivered an FY11 net profit of $349.5 million, which compared to a $36.8 million loss a year earlier when it was still owned by the Queensland government.

QR National faced a number of difficulties last year due to the Queensland floods, yet still managed an 11% lift in revenue and a 35% rise in underlying EBIT.

The growth in earnings was achieved due to the company’s focus on cost management and better revenue quality (more customer-focussed contracts).

With a net gearing ratio of less than 10% at the end of FY11, QRN’s balance sheet was in strong enough shape financially to pursue growth initiatives.

Volumes down, but significant growth potential

The Queensland floods had a big impact on QRN’s coal haulage volumes, and the company is yet to fully recover from the damage.

The slow recovery in Queensland coal volumes necessitates an ongoing focus on cost initiatives as well as pursuing new growth opportunities.

The company has recognised the importance of that second point, and is looking to expand its presence in the NSW Hunter Valley coal region and WA’s lucrative iron ore market.

QRN recently signed an iron ore haulage contract with the Karara Iron Ore Project, which is expected to deliver $900 million in additional revenue over the next ten years.

That is not say QRN has forgotten its core Queensland market.  Asciano and QRN recently signed a multi-year deal with Rio Tinto to haul millions of tonnes of coal from its Queensland mines.

Importantly, this deal will leverage QRN’s $1.1 billion project to expand the Goonyella-Abbot Point rail network link.

Outlook

QRN’s management has thus far proven its ability to grow earnings in periods of turbulence.

A focus on improving operational efficiency paid dividends for the company in FY11, and given the slow recovery in Queensland coal haulage, we would look for similar diligence this year.

Along with cost initiatives, QRN is positioning itself for growth via the Goonyella-Abbot Point project and its expansion into the WA and NSW mining industries.

In our view, the positive momentum will translate into more near-term growth for QRN.

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Aristocrat Leisure (ASX:ALL) develops, manufactures, and distributes gaming machines and systems in Australia, New Zealand, the Americas, Asia Pacific, South Africa and Europe.

ALL is the largest gaming machine company in Australia and the world’s second-largest slot machine maker.

The company has been a basket case over the past few years amid weak consumer spending and adverse FX movements, as well as industry and operational problems.

Although ALL’s 1H11 profit was down sharply on-year, certain elements of the earnings release indicate the company is better placed to leverage off a cyclical rebound in its core markets – Australia and the US.

Gambling on weak 1H11

Aristocrat Leisure reported a 1H11 net profit of $24.9 million, which was down 49.5% from 1H10.  On a normalised basis, earnings were down 32% (1H10’s profit was inflated by a one-off gain on an asset sale). An interim dividend of 2.5 cents was declared.

The profit was impacted mostly by higher net interest costs, adverse FX movements and an 8.8% fall in revenue to $310.6 million.

Sales weakened amid tough trading conditions in North America – ALL’s biggest segment.  The division’s EBIT margin also contracted 5.6 basis points due to a higher proportion of second hand sales.

However the Australian operations performed solidly, with revenue there rising 5.5% on-year to $73.4 million.

The launch of the Viridian WS cabinets was well received by customers, driving average selling prices higher and improving margins despite competitive market conditions.

Encouraging outlook

Despite a tough half, ALL confirmed FY11 net profit guidance of 10% – 20% growth on FY10’s $77.2 million.

Although the North American division struggled, there was positive momentum towards the end of the half, with average daily fees increasing due to the rollout of new game titles.

Assuming a continuation of this trend, higher selling prices could be an important driver of earnings in the second half. Also, as legacy products are cycled out, ALL’s margins could see a turnaround due to a more favourable selling mix.

The operating environment is at least showing signs of improvement, with US consumer sentiment having shot higher in recent weeks.

Although market conditions were expected to remain challenging in Australia, Aristocrat Leisure nevertheless forecast a continuation of top line momentum, along with improved selling prices and margins.

Importantly, Aristocrat Leisure’s new product rollout makes it well placed to leverage off a cyclical rebound in both countries.

Market sentiment towards the stock has improved in recent months, and we believe there is further near-term upside to come.

ALL is a defiantly a stock to watch.

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Saracen Mineral Holdings Ltd (ASX:SAR) is an Australian mid-tier gold producer based in WA.

The company bought its major assets off Sons of Gwalia back in 2006 – when the latter went bankrupt – and has done well to develop the assets and move from an explorer to a producer.

SAR’s key assets are located in the South Laverton mining district, 120km North-East of famed gold mining town Kalgoorlie, in Western Australia. This includes around 200 granted tenements and applications pending spread over 2,500 square kilometres.

Since purchasing these assets, SAR has spent money exploring the tenements and developing the projects to production.

The company completed a Definitive Feasibility Study on the South Laverton gold project in December 2008 and started producing gold in early 2010.

Ramping up

Having started production in April last year, SAR has achieved strong production quite quickly and established itself as an enticing small producer.

The company produced 111,163 ounces of gold in FY11, its first full year of production, at an average cash cost of $738 an ounce.

SAR has forecast production of around 125,000 ounces in FY12 at costs of around $700-$750 an ounce. So far FY12 is off to a solid start, with the company recently releasing its September quarter Activities Statement. Production of 31,790 ounces at cash cost of $730 was right in light with guidance.

By de-watering some of its flooded pits, SAR hopes to ramp up production to over 160,000 ounces a year by 2015.  Management has proven to be conservative and reliable so far, offering some reassurance in what is a speculative sector.

Saracen Mineral Holdings has managed significant upgrades to its gold resources and reserves, presently standing at around 3,300,000oz and 880,000oz respectively.  Most of the reserves are open-pit, which allows for easier and cheaper mining.

The sizeable resources and potential underground mining pave the way for a long mine life, while the company has extensive exploration potential to upgrade this further.

The hunt for Red October

SAR’s has planned to spend $35 million on exploration activities in FY12, a sizeable budget given the size of the company.

The company recently completed a placement, raising $50.2 million and helping the company to end the September quarter with $60.3 million in net cash and no debt. A share purchase plan and subsequent placement have raised a further $15 million since.

Together with cash generated from production (almost $10 million last quarter), SAR will not need to raise significant fresh capital to fund this.

Much of SAR’s exploration efforts will be in exploring its Red October project. The company expects to have completed dewatering the pits shortly, to be followed by underground development work.

Previous drilling results have confirmed the continuity of ore body at Red October and further exploration efforts could lead to significant resource upgrades relatively quickly.

Production from Red October is expected to commence in FY12, but potential major exploration success could provide a major share catalyst before then.

Outlook

SAR only started gold production just over 18 months ago but is already generating output of around 125,000 ounces a year.

Incremental production upgrades could come in the next few years, but the significant upside potential comes from the development of its Red October operation.

While SAR offers significant exploration upside, its existing production provides extra protection, and suggests that the market could re-rate the stock and push SAR shares much higher than current levels.

SAR is a defiantly a stock to watch.

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Nexus Energy (ASX:NXS) is small cap emerging oil and gas producer, with operations focused on the Gippsland Basin, offshore Victoria and the Browse Basin, offshore Western Australia.

In 2009, NXS transitioned from explorer to producer with the start-up of the Longtom gas project.

The Longtom project was plagued by production problems in late 2010 due to the detection of mercury in its gas.  However those issues have since been resolved and the project has been delivering record production of late.

A lot of interest currently surrounds NXS’s 85% stake in the Crux liquids project (15% Osaka Gas-owned), which is Shell-operated and has a reserve estimate of around 75 million barrels of oil.

With liquefied natural gas (LNG) seeing global demand as an alternative fuel source, NXS and its peers are in good standing owing to the LNG boom and recovering commodities market.

The company is in the midst of securing financing for its share of Crux’s development, and a final investment decision (FID) is expected by the end of the year.

The Crux of the matter

Nexus is looking to commercialise the Crux project, but before a FID can be reached, it must secure financing.  The group is currently trying to obtain up to US$1 billion in financing, with the lenders currently conducting due diligence.

Encouragingly, NXS has also identified a potential JV partner for the project, and is expecting a binding proposal in the next few weeks.

NXS’ proposed 35% sell-down of its equity stake in the project, combined with the potential US$1 billion in debt financing, are signs that the group is on track achieve the FID by the proposed target date.

The economics of the project have already been confirmed under varying capex and schedule sensitivities.  Construction of the project is expected to total around $1.78 billion.

Therefore, achieving FID by the target date will help alleviate concerns over NXS’ ability to fund the project’s developments costs.

Whilst the stock has rallied ahead of the FID, we believe the market has yet to fully price in the huge revenue potential of the project (assuming a positive FID).

The Longtom and short of it

In late October, NXS reported Longtom gas production of 6.4 petajoules (PJ), which was 7.4% higher than the previous quarter.

Saleable gas production totaled 6.2 PJ, which was up 6.7% on June quarter output. This drove revenue up from $27 million to $29 million in the same period.

The increase in Longtom output has continued the turnaround in this asset, which faced production issues early in the financial year due to mercury detection in the delivered gas.

The installation of mercury removal equipment has so far allowed Nexus Energy to meet gas nominations under its contract with customer, Santos.

Future growth will come from the exploration of Longtom South, which is a prospect located 4km south of Longtom.

Given the proximity of the two fields, it wouldn’t cost NXS as much to develop Longtom South. If gas is ultimately discovered, it will provide another source of cash flow, thus increasing the company’s value.

Outlook

NXS has had a fantastic turnaround in the past few months, as anticipation builds ahead of its proposed FID by the end of the year.

The company is in the midst of securing financing for the project and is also in negotiations to sell down part of its stake.

That’s not to say either of these will definitely happen, as there is always the chance of NXS failing to obtain the required funding.

However, NXS hasn’t indicated any issues with the FID process thus far.  Therefore we believe the potential payoff from taking a position in Nexus Energy is worth the risk.

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Myer Holdings (ASX:MYR) is one of Australia’s largest department store groups targeting a wide spectrum of consumers.

Myer has a national network of stores in Australia. It retails designer, national, and international fashion and apparel for men, women and children.

MYR focuses on its retail presence and execution, and also operates a consumer loyalty program.

A cloudy macroeconomic picture has been a major thorn for MYR and its retail peers in recent times.

However, the RBA’s recent rate cut could be the first sign of a near-term turnaround in the company’s fortunes.

Although MYR’s first quarter sales were weak, we see a pickup in momentum heading into 2012, which makes the stock an attractive proposition around current levels.

Confidence is key

MYR’s troubles have stemmed largely from concerns about the Australian economy, specifically the deterioration in consumer sentiment.

Consumer sentiment has remained weak for much of the past year amid global market volatility and the RBA’s hawkish stance on monetary policy.

This has prompted consumers to save more and cut back on discretionary spending, which has hit the sales of retailers such as MYR and David Jones.

However, things have improved in recent weeks, particularly with the RBA’s recent dovishness translating into an interest rate cut this month.

Consumer sentiment shot up 6.3% this month in response to the rate cut as well as the potential for further easing.

When combined with the Aussie dollar’s recent decline, the economic conditions are ripe for a near-term pickup in domestic consumer spending. This should come as a welcome relief for MYR’s sales heading into 2012.

Deflating trading conditions

Yesterday MYR reported a 3.5% fall in 1Q12 sales from a year earlier to $$681.million. On a like-for-like basis, sales were down 5.1%.

The group experienced a tough trading environment during the quarter, but nevertheless said sales were tracking expectations.  It also reaffirmed its full year forecast for flat sales and a 10% fall in net profit.

This came as a relief to the market, which had feared a worse result given the recent global economic turbulence.

The sales result came on the back of a tough FY11, in which net profit fell 3.6% to $162.7 million. Sales were also down for the year amid challenging retail conditions.

A final dividend of 11.5 cents was declared, bringing the full year dividend to 22.5 cents. Maintaining this dividend in FY12 would result in a robust yield ~9%, but even if the group cuts its dividend by 10% (20.25 cents), it would still deliver a healthy yield of ~8%.

Just how valuable?

Despite MYR’s weak 1Q12, we expect an improvement in sales heading into Christmas as consumers take advantage of the recent rate cut.

Unless Europe’s debt crisis intensifies, the rate cut may also prompt consumers to release pent up demand in 2012, which we see as underpinning a sales recovery for MYR.

Heading into FY13, we see a rebound in both earnings and sales for MYR as the Australian economy gathers steam due to the mining boom.

Myer is currently trading at a deep discount to its rivals, given the poor earnings expectation for FY12.  The group’s current P/E of just 8.9x represents a ~30% discount to its industry average.

However we believe the discount is too deep given the company’s relatively stronger leverage to improving consumer sentiment.

Adjusting the discount to 15%, and using a blended EPS spread over FY12, FY13 and FY14, our fundamental-based price target for MYR is $2.77, which represents good value around current levels.

Outlook

Aussie retailers have been out of favour for a while due to cyclical issues (tough economy) and more serious structural problems (strong AUD and online competition).

Whilst we are cautious on retailers as whole due to those structural issues, there is finally some value in the sector given the potential for an improvement in trading conditions.

The RBA’s recent rate cut could prompt consumers to release pent-up demand, which we believe will benefit retailers with strong operational leverage such as MYR.

Although the group’s first quarter sales were weak, we see a pickup in momentum heading into 2012.

Adjusting MYR’s deep discount to its peers, we have a price target of $2.77, which offers decent value at the current share price, particularly when factoring the healthy dividend yield.

If MYR keeps picking up momentum it will be a stock to watch right into the new year.

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Azimuth Resources (ASX:AZH) is a junior gold and uranium explorer, with projects based in Guyana and South America.

The group holds approximately 8000km² of gold tenements in Guyana, and its main asset is the West Omai gold project, which it is currently exploring.

AZH’s other interests are the East Omai gold project, the Amakura uranium project, and the Pandanus West uranium project in Australia.

The company is an exciting prospect that has produced encouraging drilling results at West Omai. There is growing hope that the group’s maiden resource discovery will be significant enough to help underpin the start of production.

Go Guyana

The West Omai project is AZH’s flagship project, and which may contain the discovery of significant gold resources.

West Omai is part of the same corridor that hosts the Omai gold mine, which is the biggest gold mine in South America, having so far produced 3.7 million ounces of gold.

Azimuth Resources is expected to release a maiden resource estimate from the project sometime this quarter.

Given West Omai’s proximity to the Omai gold mine and the encouraging drilling results thus far, a significant resource discovery could be on the cards.

Gold shoots higher

Being an explorer, AZH is tightly leveraged to gold prices.

Although gold was sold-off heavily in September, the precious metal has bounced back strongly in recent weeks amid global economic uncertainty.

The spot price of gold is back above US$1750 an ounce after crashing to just above US$1500 in late September.

Europe’s debt crisis and the potential for another round of bond purchases by the Fed is likely to lure more nervous investors back into gold, which is likely to support prices further.

Such an outcome would be very beneficial for AZH.

Balanced out

AZH completed a $19.4 million capital raising on 31 October, giving it the balance sheet strength to pursue its Guyana exploration program well into 2012.

The raising has come at an ideal time for AZH, which has smartly taken advantage of its strong share price to shore up its finances.

The group also announced plans in April 2011 to list on the Toronto Stock Exchange.

The listing is expected to boost AZH’s global profile, which will come in handy when the group looks at future capital raisings.

Outlook

AZH an exciting prospect that has produced encouraging drilling results at its West Omai project.

The group is expected to release a maiden resource estimate from the project sometime this quarter, and there is hope the estimate will be significant enough to help underpin the start of production.

AZH’s fortunes are closely linked to the price of gold, and with the precious metal on track for continued gains, we believe this will translate into continued strength for AZH’s share price.

This is one of the hot stocks of the year, rising from 25 cent in June to currently be trading beyond 50 cents.

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WorleyParsons (ASX:WOR) provides professional engineering and management services to the energy, resource and complex process industries.

WOR offers a broad range of services, from feasibility studies to design and project services, and is exposed to a number of sectors.

The group is a leader in its industry and has established long-term relationships with a number of companies, including some blue chip stocks.

Despite facing obstacles in FY11, WOR was able to grow its profit and revenue, with the Hydrocarbons business driving the result.

Moreover, WOR is ideally placed for the future, as the lure of higher energy prices is likely to drive demand for its services from the bigger oil companies.

FY11 results highlight underlying strength

On 24 August, WOR reported a 25% lift in FY11 net profit to $364.2 million. On an underlying basis, profit was up 2.5% to $298.5 million, matching previous guidance.

A final dividend of 50 cents was declared, bringing the full year dividend to 86 cents per share.

It was a solid result considering WOR faced a number of headwinds such as the strengthening AUD, Middle East instability and natural disasters.

The result didn’t really reflect the strength of the underlying business. Revenue grew 19% on-year to $5.9 billion, driving by a strong performance in the Hydrocarbons business.

The group was also in financially strong shape, with a gearing ratio of just 22% and operating cash flow growth of 5.1% in FY11. Moreover it had more than 50% in untapped debt facilities.

Taken together, this tells us WOR has significant firepower to expand its business –organically and/or through M&A activity.

The group forecast good underlying profit growth in FY12, continuing the momentum displayed in the 2H11. The guidance was reaffirmed at WOR’s AGM last week.

Hyper about Hydrocarbons

The majority of WOR’s earnings are in the Hydrocarbons division. Hydrocarbons are organic compounds, found mostly in crude oil.

WOR’s leverage to the energy market is a key attraction, particularly as demand for oil and gas is expected to strength in coming years due to emerging market growth.

The recent market turbulence has raised questions about faltering energy demand in the developed economies, which has been a factor behind WorleyParson’s recent share price weakness.

However we believe these fears are overblown given the oil supply/demand imbalance (dwindling oil supplies vs. growing energy demand) is only expected to worsen in coming years.

The lure of energy price appreciation at a time of growing demand is likely to see the big energy companies continue their ramp up of capex spending, putting WOR in an ideal position to accelerate its contract win rate.

LNG is the future

The big oil companies have also recognized that the world is moving towards more unconventional sources of energy such as LNG.

There are number of massive projects being undertaken throughout Australia, and WOR has had a hand in some of the key ones such as Pluto and more recently, Wheatstone.

WOR won a $235 million contract from Chevron for the construction of management services at the Wheatstone Project.

WOR’s experience in developing LNG projects, coupled with the established relationships it has with its blue-chip clients, makes it ideally placed to benefit from this increased focus on alternative energy.

Outlook

As the global growth engine continues to shift from developed economies to the developing regions, there will be increased demand for commodities.

As mining companies look to meet this demand, there is going to be a significant increase in capex activities over the coming years.

This will strengthen the market for WOR’s services, providing it with plenty of growth opportunities, especially in the hydrocarbons space.

WOR is in sound financial position and is expected to continue the positive earnings momentum into FY12.

The long-term relationships WOR has fostered with its blue-chip clients is likely to yield considerable benefits for the company, particularly as miners look to capitalize on rising commodity prices as well as the world’s shift to alternative energy sources.

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Mineral Deposits (ASX:MDL) is an exploration and development company, focussing primarily on the Grande Cote Minerals Sands Project in Senegal.

Grande Cote is a world class ore body that extends more than 100 kilometres and boasts high quality zircon and ilmenite.

Growing demand for mineral sands means production from Grande Cote is likely to occur in a period of rising prices, boding well for future profitability.

The market has acknowledged this, and as a result MDL has been one of the hot stocks in recent times.

Although capex costs at the project are expected to be significant, MDL’s cash balance and JV with Eramet puts it in a good position to meet funding requirements.

Magnificent Mineral Sands

The mineral sands industry is expected to boom in coming years due to a widening supply deficit.

Global zircon supply is forecast to shrink over the next decade, which will coincide with soaring demand from high growth countries such as China.

Zircon demand is driven predominantly by its use in ceramics. With China modernising its economy, the demand for ceramics, such as tiles, is expected to surge.

This is likely to drive significant zircon price growth, which will benefit MDL as it begins production in 2013.

The supply deficit will take time to narrow given the more than seven years required to bring projects from exploration to commissioning.

Titanium is anticipated to follow a similar path to zircon, in that demand is likely to be fuelled from its use in paint, plastics and paper – key ingredients for China’s growing economy.

Tizir is born

On 28 July the group formed a 50/50 JV with French-based miner, Eramet, known as Tizir Limited.

Under the JV, Mineral Deposits will contribute its 90% interest in Grande Cote (Senegal’s government owns the other 10%), with Eramet contributing its Tyssedal titanium and iron plant in Norway, along with $30 million in cash.

The JV was crucial for MDL as it secures off-take for the majority of Grande Cote’s ilmenite. The ilmenite will be used in the production of titanium feedstock at the Tyssedal plant.

The agreement also secures additional titanium supply for Tyssedal, giving it the capacity to meet growing demand from pigment producers.

Therefore it appears the JV is a win/win for both companies.

Grande Cote is grand

The Grande Cote project is strategically placed in Senegal, located not too far from the Dakar coast. This reduces the time it will take to transport the minerals from the mine separation plant to the port for shipment.

The lack of significant vegetation and overburden also allows for an efficient processing of the mined ore.

Thus when production begins MDL will be operating towards the lower end of its cost curve, giving it a significant competitive advantage.

Grande Cote has the potential to be a Tier 1 asset, with an operating mine life of 25+ years, and expected annual production of 85,000 tonnes of zircon and 575,000 tonnes of ilmenite.

These output estimates will amount to approximately 7% of global supply, putting MDL on track to become one of the world’s bigger producers.

Cash is king

MDL is in sound financial shape, having secured US$136.2 million in a capital raising in June. The raising brought the group’s cash balance at the end of June to US$173.3 million.

Moreover, the company has no external borrowings.

Although Grande Cote requires approximately US$516 million in capex requirements, Mineral Deposits’ array of financing options, including the contribution from Eramet, will help ensure sufficient funding for the project.

Outlook

Mineral sands producers stand to reap significant benefits from China’s voracious demand for resources.

The supply deficit is expected to linger for a while yet, putting MDL in line to achieve major price increases at the same time it begins production.

Grande Cote appears to be a long-life, low-cost asset for MDL, thus giving it a competitive advantage in the mineral sands industry.

Importantly, the company is in sound shape with cash in the bank, no external debt, and a JV with Eramet that has secured off-take for its ilmenite.

Therefore the future appears bright for MDL, and it will be one of the stocks to watch in coming months.

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Mesoblast (ASX:MSB) is a world leader in the development, manufacture and commercialisation of biologic products in the broad field of regenerative medicine.

MSB has the worldwide exclusive rights to a series of patents and technologies developed over more than 10 years relating to the identification, extraction, culture and uses of adult Mesenchymal Precursor Cells (MPCs).

MSB’s stock has been one of the hot stocks since the start of the year on market excitement over the therapeutic power of MPCs.

A unique business

The commercialisation of MPCs allows adult stem cells to be extracted from the bone marrow of donors, grown into therapeutic quantities and administered to non-related patients.

MSB’s lead products will target cardiovascular conditions, diabetes, inflammatory conditions of lungs and joints, eye diseases, bone marrow cancers, bone fractures, cartilage degeneration and musculoskeletal conditions.

The company aims to generate a series of high margin, off-the-shelf adult stem cell products that are obtained from a single donor, commercially expanded and frozen, and subsequently used in potentially thousands of unrelated, or allogeneic, recipients at the time and place of need.

Bone marrow approval

Mesoblast recently received approval from US authorities to begin an advanced trial of a treatment that could boost the number of bone marrow transplants for patients who cannot find a matched donor.

Following the approval, MSB has commenced the Phase III trial for bone marrow regeneration in patients with blood cancers.

MSB aims to produce a product that can be used in bone marrow transplants where a perfectly matched donor cannot be found.

Hearty hopes

Another key driver for MSB will be the results of its Phase II congestive heart failure trials in November.

Clinical results have thus far been encouraging, and if the full results turn out to be positive, MSB is likely to request a Phase III trial from the US Food and Drug Administration (FDA).

We believe a positive Phase II result will help deliver a significant jolt to MSB’s share price, as it moves the group closer to receiving regulatory approval to market its product.

Moreover, given the large number of reported heart problems in the US, Phase III approval can open up a huge market for MSB.

The Lonza and short of it

On 27 September, MSB announced an alliance with Swiss-based Lonza Group for the clinical and commercial production of its MPC product.

Under the deal, Lonza will supply MSB’s product requirements, in return for MSB having exclusive access to Lonza’s Cell Therapy facilities in Singapore.

The alliance is a critical plank in Mewsoblast’s strategy to market its product, as it creates certainty in the ability of the group to manufacture its MPCs.

Another interesting aspect of the alliance was Lonza using its intellectual property to help lower MSB’s manufacturing costs.

This would be in keeping with MSB’s aims to generate higher margin products, and would also provide it with the flexibility to develop new technologies.

Looking ahead

Whilst market excitement grows surrounding the therapeutic potential of MPCs, MSB has turned heads with its unique product innovation.

With regulatory approvals continuing to roll in and a global manufacturing alliance locked in, MSB is in a good position to bring its MPC technology to market.

The bone marrow product could be the company’s first revenue generating biologic therapy in the US and Europe.

MSB has huge revenue potential and exclusive rights to a series of patents and technologies relating to MPCs.

Furthermore, a successful outcome for MSB’s Phase II congestive heart failure trial could make MSB one of the stocks to watch in coming weeks.

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