Bell Potter Securities Report on Mesoblast 1 31-2012

31 January 2012AnalystStuart Roberts 612 8224 2871Associate Analyst Mesoblast (MSB)Tanushree Jain 612 8224 2849Authorisation Headed to the sweet spot in diabetes careSteve Goldberg 612 8224 2809 Recommendation Diabetes represents strong new upside for Mesoblast Buy (unchanged) Mesoblast has initiated clinical work in Type II diabetes with the clearance of its IND by Price 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 $6.45 growing, there is huge potential value for MPCs in this space. The current standard of Target (12 months) care for diabetes of insulin therapy and/or oral diabetes medication have together $16.00 (unchanged) created a global market worth ~US$34bn pa, serving 8% of the world’s adult Risk population. By contrast heart failure is probably only a US$6bn global market. We see Speculative 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 aExpected Return conservative 5% probability of clinical trial success for diabetes under our base caseCapital growth 148% valuation and a 10% probability of success under our optimistic case valuation, whichDividend yield 0 equates to A$1.95 per share base case and A$4.84 optimistic case.Total expected return 148%Company Data & Ratios Investment view – strong news flow matches a strongEnterprise value A$1,580.3 pipeline m In view of the substantial opportunity of MSB’s cardiovascular and Bone MarrowMarket cap A$1,820.8 Transplant franchises and other pipeline opportunities in diabetes, eye diseases & m orthopedic becoming more substantial, we re-iterate our positive outlook on MSB. WeIssued capital 280.3m value Mesoblast at A$10.91 base case and A$21.60 optimistic case. Our target priceFree float 100% of A$16.00 sits at the mid-point of our DCF range. We expect significant news flowAvg. daily vol. (52wk) 0.74m over the next twelve months as assisting in the stock being re-rated to our target price12 month price range $5.05-$10.04 including a) initiation of the Phase II diabetes trial; b) initiation of a pivotal trial in heartGICS sector Healthcare Equipment and Services failure; c) completion of the Phase II spinal fusion trials; d) interim data from the EU Phase II trial in Acute Myocardial Infarction; e) receipt of a Special ProtocolDisclosure: Bell Potter Securities acted as leadmanager in a May 2010 capital raising and a Assessment by the FDA for the BMT Phase III Trial; f) Interim data from Phase IIDecember 2010 selldown of stock and receivedfees for that service. lumbar disc repair trial and g) potential licensing announcement for the diabetes program.Price Performance (1m) (3m) (12m)Price (A$) 7.34 9.65 5.89Absolute PriceAbsolute (%) -14.85 -35.23 6.11 Earnings ForecastRel market (%) -18.10 -36.30 17.55 Year end 30 June 2011a 2012f 2013f 2014f 2015f $12.00 Sales (A$m) 15 27 27 27 337 $10.00 EBITDA (A$m) -12 -23 -44 -62 208 $8.00 NPAT (reported) (A$m) 91 -23 -38 -58 170 NPAT (adjusted) (A$m) -9 -16 -38 -58 170 $6.00 EPS (adjusted) (cps) -3.9 -5.5 -13.1 -20.1 58.8 $4.00 EPS growth (%) N/A N/A N/A N/A -392% $2.00 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 $0.00 Feb 10 Aug 10 Feb 11 Aug 11 Dividend (¢ps) 0.0 0.0 0.0 0.0 0.0 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% MSB S&P 300 Rebased 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 ESTIMATESBELL POTTER SECURITIES LIMITED DISCLAIMER AND DISCLOSURESACN 25 006 390 7721 THIS REPORT MUST BE READ WITH THE DISCLAIMER Page 1AFSL 243480 AND DISCLOSURES ON PAGE 29 THAT FORM PART OF IT.

Mesoblast (MSB) 31 January 2012Mesoblast – Headed for the sweet spot indiabetes care Mesoblast is initiating a Phase II Trial in Type II Diabetes. Mesoblast has announcedMesoblast’s diabetestrial will report that it has received FDA approval to run a Phase II trial in Type II diabetics evaluating theresults later this year effect of a single injection of MSB’s MPC. The trial is essentially a dose finding safety study 1 with the potential for an efficacy readout , randomising 60 patients with ‘poorly controlled Type II diabetes’ (ie HbA1c over 7% and patients on metformin but not yet insulin dependent) to either placebo (15 patients) or any of the three escalating doses (0.3, 1, or 2 million cells - 45 patients). The trial subjects will be evaluated at the 12-week mark. Type II diabetes would be the first indication moving into human clinical trials from MSB’s intravenous (IV) product franchise. We expect data late in 2012. Why MSB’s diabetes application is poised for success. In our view MSB’s MPC technology has a strong potential to upstage the current ‘standard of care’ for Type II diabetes and also be effective in treating associated co-morbidities. Our belief stems from work done in non-human primates that generated strong efficacy signals (see the next section for details) and demonstrated the cardioprotective nature of MPCs. We expect that in later stage clinical work Mesoblast will focus on late-stage patients with renal failure where current treatment options are limited and the principal competition in a healthcare economics sense is costly renal dialysis therapy (typical cost US$70,000 pa). Diabetes represents strong new upside for Mesoblast. The current standard of care for diabetes are insulin therapy and oral diabetes medication, which together have created a global market worth ~US$34bn pa, serving 8% of the world’s adult population. We 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. We value diabetes opportunity for MSB at A$1.95 under our base case and A$4.84 under our optimistic case. We also 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. Big and Specialty Pharma companies are facing a huge patent cliff over the next 6 years with key diabetes drugs including Amylin’s Byetta, Merck’s Januvia and Novo Nordisk’s Victoza losing patent exclusivity. Consequently, we expect to see licensing interest from the pharma companies as MSB moves with its diabetes offering into Phase II trials and given the high costs involved in a Phase III diabetes trial, a strong likelihood of MSB establishing a partnership prior to Phase III. We Re-iterate our Buy Recommendation and $16 Price Target (Risk Speculative). In view of the substantial opportunity of MSB’s cardiovascular and Bone Marrow Transplant franchises and other pipeline opportunities in diabetes, eye diseases and orthopaedic becoming more substantial, we re-iterate are 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 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.1 That is, the primary endpoints will be those associated with safety and tolerability, although secondary endpoints like fasting blood glucose and C-reactive peptide will also be measured.Note that the trial will evaluate a single injection of MPCs, which reflects conservatism on Mesoblast’s part. As MSB noted in presenting its heart failure data in mid-November, MSB’s cellsgenerate a weak immune response in some recipients. In the heart failure trial there was a donor specific antibody response in 6 of the treated patients, or 13% of that group, but four losttheir antibodies in less than one month. There was no effect on therapeutic outcomes from the antibodies, and no clinical-signs or symptoms related to such antibodies. We understand that inrepeat dosing work in non-human primates there had been no immune response issues observed in terms of its impact on therapeutic effectiveness. We conclude from all this that immuneresponse is not an issue with MPCs. Page 2

Mesoblast (MSB) 31 January 2012Animal data points to solid clinicalprospects in Type II diabetes Today’s announcement follows on from favourable animal data in Type II diabetes which Mesoblast announced on 10 November, and follow-up data announced on 12 January: • The company’s investigators took 17 non-human primates with dietary-induced Type II diabetes, gave them a single dose of MPCs (0.1, 0.3, 1 or 2 million cells), and then 2 measured the effect on glucose metabolism over a twelve week period . Three of the 17 monkeys were used as controls; • The change from baseline in fasting blood glucose for the treated subjects versus placebo for each dose level was statistically significant at two, four, six and eight weeks (p<0.001), with the control group showing no significant changes in their high levels of fasting blood glucose; • At the highest doses of 1 million and 2 million cells, the change in fasting blood glucose at eight weeks from baseline was statistically significant (p<0.05) at eight weeks and 3 remained so at 12 weeks . • There was a correlation between fasting blood glucose and C-Reactive Protein (CRP), a marker of inflammation that is frequently used as an indicator of cardiovascular health. Also, there was a demonstrated dose response for CRP, with the higher doses seeing a statistically significant drop in CRP as opposed to the lower doses (p<0.05) We see six reasons why this data is important for the prospects of MPCs as a therapy for Type II diabetes: 1) The data was from a good animal model. Old world non-human primates have proved 4 viable animal models for studying Type II diabetes for many years . We understand Mesoblast’s data were generated using a colony of outbred cynomolgus monkeys, that is, ‘long-tailed macaques’ or ‘crab-eating macaques’ native to Southeast Asia (Macaca fascicularis). For this monkey there is a particularly robust body of science on its 5 usefulness as a diabetes model , since the monkey gets the same kind of diabetes as 6 humans when fed a high-sugar, high-fat diet , making it an ideal setting in which to study diabetes therapies. Also, the complete gene sequence of the monkey has 7 recently become available thanks to Roche researchers . 2) The statistical significance of the data was impressive. Obviously a greater number ofThe 2011 non-humanprimate study results control subjects would be desirable in order to show statistical significance in terms ofhad high statistical treatment versus control. However the low p values versus baseline suggest that thesignificance effect on fasting plasma glucose and CRP was real, particularly since the number of test subjects was so small. 3) The favourable effect at twelve weeks was important. Cynomolgus monkeys have a life 8 span of around 30 years in captivity , so, roughly speaking, twelve weeks worth of data in this monkey can be considered the equivalent of around 32 weeks in a human. Given that diabetes drugs are considered effective in people if they can reduce HbA1c below 7% at the 24-26 week point, we think the statistically significant effect at eight weeks on fasting blood glucose is highly relevant to any upcoming human trials.2 The eight-week data were presented in November 2011.3 Reported January 2012.4 See ILAR J. 2006;47(3):259-71 and ILAR J. 2006;47(3):186-98.5 See, for example, J Med Primatol. 1988;17(6):319-32; Lab Anim Sci. 1993 Feb;43(1):73-7; Vet Pathol. 1996 Sep;33(5):479-85; and Toxicol Pathol. 2001 Jan-Feb;29(1):142-8.6 See J Med Primatol. 2011 Oct;40(5):335-417 See Genome Res. 2011 Oct;21(10):1746-56. Epub 2011 Aug 23.8 Source: Wisconsin National Primate Research Center, University of Wisconsin-Madison. Page 3

Mesoblast (MSB) 31 January 2012 4) The drop in fasting blood glucose at the high dose could be a proxy for glycemic control. At eight weeks the 2 million cell dose group had dropped fasting blood glucose 9 by 44 mg/dl , to 110 mg/dl (assuming the controls in Mesoblast’s trial at 154 mg/dl represents an adequate baseline). That this was favourable is suggested by fasting 10 blood glucose of 100-125 being considered only ‘pre-diabetes’ in humans . Now compare the performance of MPCs in the current study to the diabetes drug Byetta, where a 10 mcg twice-daily injection of Byetta as a monotherapy at 24 weeks was only 11 able to bring fasting blood glucose down by 19 mg/dl, from 155 mg/dl to 136 mg/dl . This, drop however, was good enough to reduce HbA1c levels in Byetta’s patients from 7.8% to 6.9%, thereby restoring glycemic control. This suggests the potential for MPCs to be seriously competitive with existing diabetes drugs. 5) MPCs are cardioprotective. As the data released to date on MPCs in heart failure would suggest, MPCs have a favourable cardiovascular profile. Mesoblast has now demonstrated this through the data on C-Reactive Protein (CRP). CRP is often used in evaluating heart disease risk because the white blood cells associated with inflammation invade artery walls and release damaging chemicals, leading to plaque 12 13 formation . In this study CRP came down from levels >3 mg/L , generally considered 14 ‘high risk’ , to the low point of the range considered ‘medium risk’ (1.0–3.0 mg/L) and 15 remained so throughout the entire 12 week study period . We think the CRP data provides good confirmatory evidence not only of the ability of MPCs to turn down an 16 inflammatory response but also of the favourable cardiovascular profile of stem cells as a potential diabetes therapy. This is important given how cardiovascular issues knocked down GSK’s former blockbuster diabetes drug Avandia over the 2007-2010 period. 6) The non-human primate data builds on mouse data which Mesoblast generated twoMPCs may be able torebuild damaged years ago. In December 2009 Mesoblast reported the results of a study of MPCs in a 17pancreatic tissue mouse model of diabetes . A 35-subject experiment saw single-dose injections of MPCs boost pancreatic islet cells two-fold in the treated mice compared to the controls 18 (p=0.0012), with the ratio of beta-to-alpha islet cells 29% higher (p=0.005) , blood glucose levels down 35% (p=0.012) and blood insulin levels up 34% (p=0.04). This indicated that MPCs could potentially regenerate pancreatic islet beta cells in Type II diabetics. Mesoblast hasn’t reported data on pancreatic histology with regard to the non-human primate study because the monkeys hadn’t been sacrificed at the time the data was generated, however there is the potential, given the other data that is available, for regeneration to have happened. A diabetes application for MPCs would potentially dwarf all the others. As we note below, there is currently a US$34bn global market for insulin and diabetes drugs, growing strongly thanks to high and rising diabetes prevalence. MPCs, if successful in humans as a diabetes therapy, would have certain key advantages that would make it a contender for leadership of this market.9 Milligrams per decilitre. A decilitre is one-tenth of a litre.10 Source: American Diabetes Association. Healthy blood glucose is under 100.11 This was for 10 mcg twice-daily Byetta as a monotherapy at 24 weeks (source: Eli Lilly, Byetta prescribing information, Table 5).12 Data from the Physicians Health Study of 18,000 apparently healthy doctors found that elevated levels of CRP were associated with a threefold increase in the risk of heart attack (seeCirculation. 2002 Jun 4;105(22):2595-9). Meanwhile in the ~28,000 apparently healthy women in the Harvard Womens Health Study, CRP was more accurate than cholesterol levels inpredicting heart problems (see N Engl J Med. 2002 Nov 14;347(20):1557-65). In recent years CRP has come to be regarded as diagnostic of Metabolic Syndrome (see Circulation.2003;107:391-397).13 Milligrams per litre.14 See Circulation. 2003 Jan 28;107(3):499-511.15 At 0.3, 1 or 2 million MPC/kg.16 We noted in our 27 September 2011 comprehensive update note on Mesoblast (see page 47 of that note) that Mesenchymal Stem Cells had demonstrated ability in terms ofimmunomodulation, and we assume that MPCs are similarly well placed.17 Presumably mice in which the pancreas had been partially destroyed by the chemotherapy drug streptozotocin. See Lab Anim (NY). 2009 Feb;38(2):55-60.18 Islet cells are so-called because when looking at the cells through a microscope, they look like islands floating in the pancreas. Beta cells are the islet cells that actually produce the insulinwhich lowers blood glucose. Alpha cells produce glucagon, which increases blood glucose. A higher ratio of beta cells to alpha cells means less blood glucose. Page 4

Mesoblast (MSB) 31 January 20128% of the world’s adult population hasdiabetes The International Diabetes Federation has recently released a new estimate of 366 million 19 adults living with diabetes globally , which would represent around 8% of the adult population aged 20-79. Figure 1 – High income countries with significant diabetes Figure 2 – Diabetes patient populations grew strongly between populations 2007 and 2010 but the worst is yet to come Current 600 Diabetics Diabetics adult Growth rate Country now (million) 2030 (million) prevalence 2011-2030 (pa) 500 United States 23.7 29.6 10.9% 1.1% Japan 10.7 10.2 11.2% -0.3% 400 Million patients Germany 5.0 5.6 8.0% 0.5% Low income Italy 3.6 4.2 7.8% 0.9% 300 Middle income France 3.2 3.9 7.3% 0.9% High income Korea, South 3.2 4.3 8.8% 1.5% 200 United Kingdom 3.1 3.6 6.8% 0.9% 100 Spain 2.8 3.9 8.1% 1.6% Saudi Arabia 2.8 5.5 16.2% 3.5% 0 Canada 2.7 3.7 10.8% 1.5% 2007 2011 2030SOURCE: INTERNATIONAL DIABETES FEDERATION, BELL POTTER SECURITIES SOURCE: INTERNATIONAL DIABETES FEDERATION, CIA WORLD FACTBOOK, BELL POTTER SECURITIES Global diabetes prevalence has been rising rapidly 20At least 8% of the Type II Diabetes has been described as a ‘public health emergency in slow motion’ asworld’s adult the increase in Western-style diet and lack of exercise drives increased prevalence globallypopulation had year after year. International Diabetes Federation data from the last five editions of thatdiabetes in 2011 21 organisation’s Diabetes Atlas suggests that prevalence among adults aged 20-79 has increased from 4.6% in 2000 to 8.3% in 2011. Patient numbers over that time may have grown 8.2% pa, from 166 million to 366 million, with the current figure from IDF and recent 22 similar estimates published in The Lancet taking account of new data suggesting that 23 prevalence has previously been underestimated . 24 • The emergence of diabetes has been most noticeable in high income countries where, using IDF data, we estimate that prevalence has risen from 8.6% to 9.5% of 20- 79 year olds in just four years, from 2007 to 2011. • The world’s largest diabetes populations are those of India and China, with,There are over 150 25million diabetics in respectively, 61.3 million (8.3% of the adult population) and 90.0 million (9.3%)India and China estimated to be diabetics. We expect that rapidly rising incomes in these countries willalone ensure higher levels of medical expenditure directed to diabetes in the near future. • The problem is expected to get worse. The IDF has projected a 2.2% pa increase in diabetes patients numbers over the two decades to 2030, which would increase global prevalence by around 1.6% of the population aged 20-79, to 9.9%. This kind of growth19 See Diabetes "massive challenge" as cases hit 366 million by Ben Hirschler, Reuters, 13/9/2011.20 See Increase in diabetes: ‘A public health emergency in slow motion’ by Kim Janssen, Chicago Sun-Times, 16/9/2011.21 See www.diabetesatlas.com.22 See Lancet. 2011 Jul 9;378(9786):99.23 The 5th Edition of the Diabetes Atlas, which contains these new estimates, has recently been published online.24 That is, GDP per capita greater than US$20,000. Between 2007 and 2010 the prevalence of diabetes in middle-income countries (GDP per capita $10,000-20,000) rose from 7.5% to10.1% of 20-79 year olds, while over the same period low income countries increased prevalence from 5.0% to 7.6% of 20-79 year olds.25 Formerly IDF had estimated 43.2 million patients or 4.5% of the adult population, with numbers derived in part from Diabetologia 2003; 46: 1190-8. In March 2010 the IDF suggested that itsfigures probably underestimated diabetes in China by half. Page 5

Mesoblast (MSB) 31 January 2012 will see the number of diabetics in high and middle income countries rise by two to three times population growth.Figure 3 – India and China’s diabetes prevalence has been Figure 4 – 8% of adults in EU member countries are diabeticgrowing strongly 14% 10% Prevalence of diabetes in 20-79 year-olds 12% 9% Estimated percentage of population 8% 10% aged 20-79 with diabetes 7% 8% 6% 6% 5% India 4% China 4% 3% 2% 2% 0% Cyprus Slovenia Belgium Sweden Latvia Bulgaria Lithuania Greece Slovakia Portugal France Luxembourg Poland Austria Finland Spain Germany Denmark Hungary Czech Republic Netherlands Ireland United Kingdom Malta Romania Estonia Italy 1% 0% 2000 2003 2007 2011SOURCE: IDF SOURCE: IDF There have been two major beneficiaries of this increased need – the insulin suppliers, and the producers of pills that help boost pancreatic output of insulin. Together they have created the world’s fourth largest drug class, worth US$34bn pa, and growing 15% pa in local currency terms.Figure 5 – The global market for anti-diabetes medications is now Figure 6 – The anti-diabetes drug class has been growing 15% paworth US$34bn in local currency terms and 13% in US dollar terms 40 RoW spending 14.0% 40 US spending 13.5% 35 USDbn global sales of anti-diabetes agents 35 13.0% 30 Local currency sales growth 30 (RHS) 12.5% USDbn in sales 25 25 12.0% 20 Pills 20 11.5% 15 Insulin 11.0% 15 10 10.5% 10 5 10.0% 5 0 9.5% 2006 2007 2008 2009 2010 0 9.0% 2006 2007 2008 2009 2010SOURCE: IMS HEALTH, BELL POTTER SECURITIES SOURCE: IMS HEALTH Page 6

Mesoblast (MSB) 31 January 2012Insulin is now a ~US$14bn business 26The global insulin Around 27% of American diabetics currently use insulin as part of their therapy , whilemarket is growing possibly close to half of all diabetics become insulin-dependent within six years of 277% pa in volume diagnosis . Since diabetes is a chronic disease, this means many years of insulin usage 28terms by patients . With patient numbers increasing so rapidly the global market for insulin, now worth around US$14-15bn pa, is increasing at a 7% pa rate in volume terms and 17% pa in value terms: • The last five years has seen the rise of long-acting and ultra-short acting insulin 29 analogues, which improve the effectiveness of insulin therapy by providing adequate 30 basal and bolus insulin . We think these insulins are the main reason deaths from 31 diabetes are going down in the US and elsewhere . The cost for this, however, has been 7-8% pa inflation in the price of insulin as the mix has shifted; • We believe that the percentage of diabetics on insulin has increased by perhaps 2% of the patient population over the last five years, driven in part by a trend towards earlier 32 initiation of insulin treatment . The insulin market is completely dominated by three giant players: • America’s Eli Lilly, whose Humalog short-acting insulin enjoyed US$2bn in 2010 sales; • The French company Sanofi-Aventis best known for Lantus long acting insulin, which 33 th 34 did US$4.6bn in 2010 sales and was the world’s 15 most prescribed drug in 2010 . 35 • Denmark’s Novo-Nordisk , whose lead products are Levemir (a long acting insulin, US$1.2bn in global sales in 2010) and NovoRapid / Novolog (ultra-short acting insulin 36 products with US$2.2bn in global sales in 2010) . Figure 7 – Less people are dying from diabetes thanks to better Figure 8 – The insulin market has been growing at 17% pa as insulin products patients switch to longer-acting products 76,000 16 75,000 14 Worldwide sales (USDbn) US deaths from diabetes 74,000 12 10 Short acting, intemediate 73,000 and mixed 72,000 8 Ultra-short acting 71,000 6 Long-acting 70,000 4 69,000 2 68,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2010SOURCE: CDC SOURCE: NOVO NORDISK, SANOFI-AVENTIS, ELI LILLY26 Source: CDC, 2008 estimates. Remarkably, around 16% of American diabetics take no medications at all.27 This was a finding of the United Kingdom Prospective Diabetes Study, where 44% of subjects on the class of diabetes drug called sulphonylureas had failed within six years. See DiabetMed. 1998 Apr;15(4):297-303..28 Generally Type II diabetics have the same life expectancy as the general population - see PLoS One. 2009 Aug 28;4(8):e6817. In the US average age at diagnosis is around 46 – see AnnFam Med. 2005 Jan-Feb;3(1):60-3 - and US life expectancy is around 78. This potentially means up to three decades of insulin usage.29 See Arch Intern Med. 2008;168(19):2088-2094.30 Basal insulin being the base levels required to keep blood glucose stable between meals and overnight, and bolus insulin being the extra insulin needed to cope with sudden glucose intakeat mealtimes. In the last fifteen years the insulin market has segmented, with the short-acting insulins like Humalog (insulin lispro) emerging to provide the bolus solution, and two long-actinginsulins - insulin detemir (Levemir) and insulin glargine (Lantus) – leading the basal insulin space.31 In recent years diabetes has slipped to No 7, from No 6 previously, in the list of America’s most common causes of death.32 See Cleve Clin J Med. 2004 May;71(5):385-6, 391-2, 394 passim.33 It also sells Apidra, its ultra short acting insulin product that enjoyed US$200m in 2010 sales.34 Source: IMS Health.35 Bagsværd, Denmark, OMX: NOVO B, www.novonordisk.com.36 The company is currently seeking US approval for Deglugec, a long acting insulin that would compete with Lantus. Page 7

Mesoblast (MSB) 31 January 2012 Figure 9 – Humalog is now a US$2.2bn pa drug for Eli Lilly Figure 10 – Eli Lilly is still growing sales of Humulin 600 340 Humulin quarterly sales ( USDm) 550 320 Humalog quarterly sales ( USDm) 500 300 450 280 400 350 260 300 240 250 220 200 2003 2004 2005 2005 2006 2007 2008 2009 2010 2011 200 2003 2004 2005 2005 2006 2007 2008 2009 2010 2011SOURCE: ELI LILLY SOURCE: ELI LILLY Figure 11 – Sales of Sanofi-aventis’s Lantus long-acting insulin Figure 12 – Apidra has boomed for Sanofi-aventis since its 2008 have grown 24% pa since 2005 launch 80 1,600 75 1,400 Apidra global quarterly sales (USDm) Lantus global quarterly sales (USDm) 70 1,200 65 1,000 60 800 55 50 600 45 400 40 200 35 0 30 Mar-05 Jul-05 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Jul-10 Mar-11 Jul-11 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Sep-08 Sep-09 Sep-10 Sep-11 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Jul-10 Mar-11 Jul-11 May-08 Nov-08 Jan-09 May-09 Nov-09 Jan-10 May-10 Nov-10 Jan-11 May-11SOURCE: SANOFI-AVENTIS SOURCE: NOVO NORDISK, SANOFI-AVENTIS, ELI LILLY Figure 13 – Novo Nordisk’s Levemir long-acting insulin became a Figure 14 – Novo Nordisk’s NovoRapid ultra-short acting insulin blockbuster last year has grown sales by 23% pa since 2006 400 650 350 600 NovoRapid/NovoLog global sales Levemir global sales (USDm) 550 300 500 250 450 (USDm) 200 400 150 350 300 100 250 50 200 0 150 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Jul-10 Mar-11 Jul-11 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Jul-10 Mar-11 Jul-11SOURCE: NOVO NORDISK SOURCE: NOVO NORDISK Page 8

Mesoblast (MSB) 31 January 2012Diabetes pills is another US$20bn pamarket The drugs which help control blood sugar levels in people whose bodies still produce some insulin constitute a seriously large drug market worth ~US$20bn pa. Around half of this is represented by drugs from three ‘older’ classes, namely: 37 • The sulfonylureas such as Glipizide, Glimepiride and Glyburide, which prompt insulin release from pancreatic beta cells; 38 • The biguanides, represented by Metformin , that overcome insulin resistance by improving glucose uptake into the tissues, and prevent the liver from releasing stored sugar; 39 • The meglitinides, represented by the Novo Nordisk drug Prandin , which, like the sulfonylureas, prompt beta cell insulin release, but by a different receptor. Figure 15 – In the US the sulfonylureas are out of favour, but Figure 16 – Global sales for the newer drug classes is booming Metformin remains popular 700 10,000 600 9,000 US retail sales (USDm) 500 8,000 Global sales (USDbn) 400 7,000 300 6,000 Victoza 200 5,000 Byetta 100 4,000 Januvia 3,000 Actos 0 2,000 1,000 0 2007 2008 2009 2010SOURCE: DRUG TOPICS, JUNE 2011 ISSUE. SOURCE: TAKEDA, MERCK & CO, ELI LILLY, NOVO NORDISK Three new classes enjoyed US$8.9bn in global sales in 2010: 40 • the thiazolidinediones, represented by Actos , a US$4.5bn drug in calendar 2010; 41 • The DPP-IV inhibitors, represented by Januvia , a US$3.3bn drug in 2010; and 42 43 • The GLP-1 agonists, represented by Byetta and Victoza , which together did US$1.1bn in 2010.Three new diabetes Global sales of these three products have risen 80% in the three years to 2010, withdrug classes did Victoza alone enjoying >US$400 in 2010, its first full year of release, most of it outside the 44US$8.9bn in global US . At a basic level the older drugs are adequate to treat diabetes in a cost effectivesales in 2010 manner. Consider Metformin. It is orally available, and can bring HbA1c down by ~1.4%37 Sanofi Aventis’ Amaryl drug, which is the branded version of glimepiride, enjoyed US$632m in global sales in 2010.38 Around 60% of newly diagnosed diabetics are prescribed metformin as a sole agent. For metformin users overall, around half are on more than one drug. Source: Express Scripts DrugTrend Report for 2010.39 Generic name repaglinide, see www.prandin.com. Prandin was a US$489m drug for Novo Nordisk in 2010. The drug is currently being challenged in court by generic competitors.40 Generic name pioglitazone. See www.actos.com.41 Generic name sitagliptin. See www.januvia.com. Merck currently markets two sitagliptin products – Januvia as well as Janumet, which is a sitagliptin/metformin combination. Merck is inPhase III with a Januvia/Actos combination called MK-0431C.42 Generic name exenatide. See www.byetta.com. For the last two years this drug has had declining sales, in part because of concerns over the risk of pancreatitis. In October 2010 Amylinand Eli Lilly were rebuffed by the FDA for Bydureon, a once-weekly version of Byetta, for the second time, with the FDA requesting another study to assess the cardiovascular risks. Thecompanies resubmitted in July 2011 and received approval in January 2012. The drug gained European approval in June 2011.43 Generic name liraglutide. See www.victoza.com.44 th In 2010 Actos was the 11 biggest selling drug in America, with US$2.6bn in US sales, up 4%. Januvia was at No. 24 on the US best-seller list, with US$1.3bn in sales, up 13%. Byetta wasat No 78 with US$459m, down 18%. And Victoza was No 180 in its first year of US release, with US$169m in US sales. Page 9

Mesoblast (MSB) 31 January 2012 45 over 6-7 months , as against the average drop for newer drugs of ~0.9% over the same 46 period . However much of the growth in the diabetes drug market over the last decade has been as a result of the newer classes bringing benefits unknown in earlier drugs: Figure 17 – Actos global sales have grown 14% pa for Takeda Figure 18 - Januvia is a fast grower for Merck & Co since 2007 1200 4 Takeda global sales of Actos per quarter Januvia and Janumet (USDbn) 1100 3.5 Merck & Co global sales of 3 1000 2.5 900 2 Janumet 1.5 Januvia 800 1 700 0.5 600 0 Dec-07 Dec-08 Dec-09 Dec-10 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-07 Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11 Jun-11 2007 2008 2009 2010SOURCE: TAKEDA SOURCE: MERCK & CO Figure 19 - Victoza seems to be on its way to blockbuster status 350 Novo Nordisk quarterly global sales of 300 250 Victoza (USDm) 200 150 100 50 0 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 SOURCE: NOVO NORDISK • Actos helps overcome insulin resistance. Actos, from the Japanese drug company 47 Takeda , gained FDA approval in 1999, and represented a breakthrough in that the 48 thiazolidinedione class was the first to overcome the issue of insulin resistance , helping to slow the pace at which pancreatic function declines. Actos was the world’s th 49 17 most prescribed drug in 2010 , helped by the fact that its competitor, GSK’s Avandia, was effectively removed from the market by cardiovascular risks (see below for more). Actos loses US patent protection in August 2012. • Byetta reduces overproduction of insulin, and engineers weight loss in the 50 patient. Byetta, from the American biotech company Amylin Pharmaceuticals , gained FDA approval in 2005. It was the first of the so called ‘GLP-1 analogue’ drugs that mimic the effect of GLP-1, a naturally occurring stimulator of insulin production. Like45 See Table 2 of Glucophage prescribing information, available at www.bms.com/products/Pages/prescribing.aspx. Glucophage was branded Metformin for the US market. It had sales over$2 billion in 2001 before US patent expiry in January 2002.46 Estimated using data from prescribing information.47 Osaka, Japan, TSE: 4502, www.takeda.com. Takeda is the largest drug company in Asia.48 A situation where the pancreas is still pumping insulin but the body becomes less effective at using it to lower blood sugars. The thiazolidinediones overcome insulin resistant by binding toa receptor called PPAR-γ, which in turn inhibits expression of proteins known to hinder glucose uptake.49 Source: IMS Health.50 Nasdaq: AMLN, San Diego, Ca., www.amylin.com. Initially Byetta was co-marketed by Eli Lilly and Amylin, however in November 2011 Amylin agreed to end the partnership and assumeresponsibility for Byetta. Amylin will make an upfront payment of US$250m to Lilly as well as future revenue-sharing payments of $1.2bn plus interest. Page 10

Mesoblast (MSB) 31 January 2012 natural GLP-1, the drug quits causing insulin production when the level of sugar in the blood reaches a normal range. Another big advantage of Byetta versus earlier diabetes drugs is that because GLP-1 slows stomach emptying and increases satiety, it actually 51 promotes weight loss . The downside of all this is that Byetta is a twice-daily 52 injectable . Byetta begins to lose US patent protection in December 2016. • Januvia brought Byetta-style benefits, with oral availability. Januvia from Merck & Co gained FDA approval in 2006. It was considered a further advance on Byetta in that it works through the GLP-1 pathway – it’s a DPP-IV antagonist, meaning that it can stop 53 DPP-IV degrading natural GLP-1 – but is orally available . Januvia begins to lose US patent protection in April 2017. • Victoza brought Byetta-style benefits, with only one injection a day. Victoza, from Novo-Nordisk, gained FDA approved in early 2010. It is considered another advance on Byetta because, while it’s also a GLP-1 analogue, it’s only a once-daily injection. Victoza begins to lose US patent protection in August 2017. More GLP-1 agonists are coming. Given the size of the market, diabetes is always well- represented in Big Pharma portfolios: • GSK is in Phase III with albiglutide; • Sanofi-aventis is in Phase III with lixisenatide; and • Eli Lilly is in Phase III with dulaglutide (LY2189265), a GLP-1 analogue linked to an FC immunoglobulin fragment for longer duration. What’s the opportunity for new players? 54 There are two big issues facing the diabetes therapy market at the moment – safety and cost. The diabetes drug scene has faced a number of safety challenges in recent days: • Avandia being pulled from the European market in September 2010, at the same time as the FDA restricted the drug’s use to patients that have signed a consent stating that 55 they understand the risks involved. Avandia, GSK’s thiazolidinedione drug , had been 56 found to increase the risk of stroke and heart failure , and this hampered sales from mid-2007 when the cardiovascular concerns first emerged. Before that, Avandia was a US$3bn pa drug;The newer classes of • A study published in July 2011 highlighting the increased risk of pancreatitis and 57diabetes drugs have pancreatic cancer from Byetta and Januvia ;cardiovascular and • The FDA’s adding of a warning label to Actos in August 2011 concerning the increasedcancer risks risk of bladder cancer, a risk associated with long duration of use (ie > 1 year) at high 58 doses which had been established by a five-year company-sponsored study . France and Germany banned Actos because of the cancer risk in June 2011; • The decision by an FDA advisory committee in August 2011 against approval of dapagliflozin, from Bristol-Myers Squibb and AstraZeneca, and the FDA’s subsequent51 See Cleve Clin J Med. 2009 Dec;76 Suppl 5:S12-9. Insulin is often associated with weight gain in diabetes - see Diabetes Obes Metab. 2007 Nov;9(6):799-812.52 That said, the medical device developer Intarcia Therapeutics (Hayward, Ca, privately held, www.intarcia.com) is currently moving to Phase III with ITCA 650, a matchstick-size,subcutaneous mini-pump that allows smooth continuous delivery of Byetta from a once-yearly placement.53 Bristol-Myers Squibb and AstraZeneca gained FDA approval in 2009 for a me-too DPP-IV antagonist called Onglyza, generic name saxaglitpin, but this has not been as successful asJanuvia, with only US$127m in global sales in 3Q11 for Onglyza and Kombiglyze (Onglyza plus Metformin) versus over a billion for Januvia/Janumet. Eli Lilly gained FDA approval in May2011 for Tradjenta, generic name linagliptin, with its alliance partner, Boehringer Ingelheim.54 A recent study found that diabetes pills were responsible for around 11% of all emergency hospitalisations for adverse drug events in older Americans. See N Engl J Med. 2011 Nov24;365(21):2002-12.55 Generic name rosiglitazone. See www.avandia.com.56 See JAMA. 2010 Jul 28;304(4):411-8. Epub 2010 Jun 28.57 See Gastroenterology. 2011 Jul;141(1):150-6. Epub 2011 Feb 18. There have also been concerns voiced over the risk of GLP-1 analogues and thyroid cancer risk but the Gastroenterologypaper found no elevated risk for that cancer.58 See Diabetes Care. 2011 Apr;34(4):916-22. Page 11

Mesoblast (MSB) 31 January 2012 concurrence in that view in January 2012. This drug, the first of a new class called the ‘SGLT2 inhibitors’, has raised concerns about the risk of breast and bladder cancers in 59 the class . The decision potentially impacts the prospects of three other SGLT2 inhibitors now in Phase III - following behind dapagliflozin in Phase III are canagliflozin 60 from J&J, tofogliflozin from Roche; and empagliflozin from Eli Lilly . Figure 20 – Avandia was a US$3bn a year drug for GSK before Figure 21 – Concerns over pancreatitis and pancreatic cancer have the cardiovascular concerns emerged in 2007 hindered Byetta’s growth since 2009 Eli Lilly / Amylin quarterly global sales $1,000 200 $900 Avandia quarterly global sales $800 150 of Byetta (USDm) $700 for GSK (USDm) $600 $500 100 $400 $300 $200 50 $100 $0 0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-06 Jun-06 Mar-07 Jun-07 Mar-08 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11 Jun-11 Dec-07 Dec-08 Dec-09 Dec-10 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11SOURCE: GSK SOURCE: ELI LILLY The high cost of diabetes drugs creates an opportunity for more cost-effective therapies. Between 2001 and 2007, diabetes drug costs in the US increased from US$6.7bn to US$12.5bn, driven in part by average diabetes drug prescription costs up Diabetes is proving 61 from $56 to $76 as patients shifted to newer but costlier drugs . By 2007 the typical costly to Western diabetic cost the US healthcare system around US$700 pa in drug costs alone (ie healthcare systems US$12.5bn divided by 17.9 million diagnosed patients), while drugs like Byetta cost more 62 than US$2,100 pa . With diabetes so prevalent there are concerns that healthcare systems will not be able to afford costly diabetes drugs or costlier insulins in the medium 63 term . This presents an opportunity for companies to compete with more cost effective offerings. Figure 22 - The new diabetes drugs are much more costly Figure 23 - US diabetes drug costs are rising fast $300 Retail sales per US script in 2010 (USD) $70 $250 Diabetes drug costs Per Member Per $65 $200 $60 Year for US health insurers $150 $55 $50 $100 $45 $50 $40 $0 $35 $30 $25 $20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010SOURCE: DRUG TOPICS, JUNE 2011 ISSUE SOURCE: EXPRESS SCRIPTS DRUG TREND REPORT, BELL POTTER SECURITIES59 The SGLT2 inhibitors lower blood glucose levels by inducing renal glucosuria, that is, the pushing of glucose into the urine. SGLT2 inhibitors achieve this by targeting sodium-glucosetransporter-2 (SGLT2), a protein responsible for glucose reabsorption in the kidneys. The attraction of this class is that it does not work by affecting the supply or use of insulin, making iteasier to combine with other drugs. Also, the drug causes a small weight loss in treated patients.60 Pfizer is in Phase II with PF-04971729.61 See Arch Intern Med. 2008;168(19):2088-2094.62 See Ray of hope for diabetics by Alex Berenson, The New York Times, 2/3/2006.63 Consider, for example, Holden et. al. (BMJ Open. 2011 Jan 1;1(2):e000258), which looks at the £625m in extra costs over the 2000-2009 period of insulin analogues versus normal insulinfor the UK’s National Health Service. That paper concluded that ‘adherence to prescribing guidelines recommending the preferential use of human insulin would have resulted in considerablefinancial savings over the period’. Page 12

Mesoblast (MSB) 31 January 2012Valuation and Financials Since our previous note we have revisited our financial models and valuation of Mesoblast in order to be able to show the company’s near-term earnings profile as well as to better value some of the emerging programmes within the Meosblast portfolio. What follows is a description of our new approach. Valuation and Price Target BasisWe value MSB at Our DCF valuation model is based on a WACC of 16% using the capital asset pricingA$10.91 per share model (CAPM). We assume a terminal growth rate of 1% to arrive at our base casebase case and valuation of A$10.91 and our optimistic case valuation of A$21.60. Our price target ofA$21.60 per share A$16.00 sits at the mid-point of our DCF range.optimistic case The DCF scenario for our base case is laid out below:Table 1 – Base Case DCF Analysis 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E TerminalEBIT -12.05 -23.68 -44.61 -62.99 207.32 251.33 449.10 727.98 668.80 881.24 1118.10 1473.88 1908.59 2466.07 3198.85 2813.36 2325.68 2010.70 1707.68 1415.85Tax rate 0.0% 0.0% 0.0% 0.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%Less: Taxes 0.00 0.00 0.00 0.00 41.46 50.27 89.82 145.60 133.76 176.25 223.62 294.78 381.72 493.21 639.77 562.67 465.14 402.14 341.54 283.17EBIAT -12.05 -23.68 -44.61 -62.99 165.86 201.07 359.28 582.38 535.04 704.99 894.48 1179.11 1526.87 1972.86 2559.08 2250.69 1860.54 1608.56 1366.14 1132.68Adjustments:Depreciation and amortization 0.18 0.25 0.39 0.60 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81Capital expenditures -0.46 -0.46 -1.00 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50Changes in working capital 117.04 -30.31 -27.13 -27.13 -26.75 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00Unlevered Free Cash Flows 104.71 -54.21 -72.35 -91.03 138.41 161.37 319.59 542.69 495.35 665.30 854.78 1139.41 1487.18 1933.16 2519.39 2211.00 1820.85 1568.86 1326.45 1092.98 7,359.4Discount factor 0.86 0.74 0.64 0.55 0.48 0.41 0.35 0.31 0.26 0.23 0.20 0.17 0.15 0.13 0.11 0.09 0.08 0.07 0.06 0.05Years of discounting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Discounted Free Cash Flow (46.7) (53.8) (58.3) 76.4 76.8 131.2 192.0 151.1 174.9 193.8 222.7 250.5 280.7 315.4 238.6 169.4 125.8 91.7 65.1 378.2SOURCE: BELL POTTER SECURITIES Table 2 – Base Case Valuation Valuation Amount % Mix PV of FCF 2012-2015 -82 -2.8% PV of FCF 2016-2020 726 24.4% PV of FCF 2021-2025 1,263 42.4% PV of FCF 2026-2030 691 23.2% PV of Terminal Value 378 12.7% Total PV 2,976 100.0% Enterprise Value 2,976 Less: Debt 0 Add: Forecasted Cash at EOY 2012E 233 Equity Value 3,209 Fully Diluted Shares Outstanding 294 DCF Value/Share $10.91 Upside over last close 69.2% Assumptions Terminal Growth Rate (2031E onwards) 1.0% WACC 16.0% SOURCE: BELL POTTER SECURITIES Page 13

Mesoblast (MSB) 31 January 2012 The DCF scenario for our optimistic case is laid out below:Table 3 - Optimistic Case DCF Analysis 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E TerminalEBIT -12.05 -23.68 -44.61 -62.99 242.16 401.81 789.48 1312.08 1433.23 1867.31 2369.54 3047.60 3775.01 4842.15 6280.28 5531.38 4634.11 4013.87 3420.10 2851.20Tax rate 0.0% 0.0% 0.0% 0.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%Less: Taxes 0.00 0.00 0.00 0.00 48.43 80.36 157.90 262.42 286.65 373.46 473.91 609.52 755.00 968.43 1256.06 1106.28 926.82 802.77 684.02 570.24EBIAT -12.05 -23.68 -44.61 -62.99 193.73 321.45 631.59 1049.66 1146.59 1493.85 1895.63 2438.08 3020.01 3873.72 5024.23 4425.10 3707.29 3211.09 2736.08 2280.96Adjustments:Depreciation and amortization 0.18 0.25 0.39 0.60 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81Capital expenditures -0.46 -0.46 -1.00 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50 -1.50Changes in working capital 117.04 -30.31 -27.13 -27.13 -33.48 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00 -39.00Unlevered Free Cash Flows 104.71 -54.21 -72.35 -91.03 159.55 281.75 591.89 1009.97 1106.89 1454.16 1855.94 2398.38 2980.31 3834.02 4984.53 4385.41 3667.59 3171.40 2696.38 2241.26 15,091.2Discount factor 0.86 0.74 0.64 0.55 0.48 0.41 0.35 0.31 0.26 0.23 0.20 0.17 0.15 0.13 0.11 0.09 0.08 0.07 0.06 0.05Years of discounting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Discounted Free Cash Flow (46.7) (53.8) (58.3) 88.1 134.1 242.9 357.4 337.6 382.4 420.7 468.7 502.1 556.8 624.0 473.3 341.2 254.4 186.4 133.6 775.5SOURCE: BELL POTTER SECURITIES Table 4 - Optimistic Case Valuation Valuation Amount % Mix PV of FCF 2012-2015 -71 -1.2% PV of FCF 2016-2020 1,454 23.8% PV of FCF 2021-2025 2,572 42.0% PV of FCF 2026-2030 1,389 22.7% PV of Terminal Value 775 12.7% Total PV 6,120 100.0% Enterprise Value 6,120 Less: Debt 0 Add: Forecasted Cash at EOY 2012E 233 Equity Value 6,354 Fully Diluted Shares Outstanding 294 DCF Value/Share $21.60 Upside over last close 235.0% Assumptions Terminal Growth Rate (2031E onwards) 1.0% WACC 16.0% SOURCE: BELL POTTER SECURITIES Key Assumptions WACC: Our high WACC assumption of 16% factors in the high level of risk associated with the biotech sector in general and MSB in particular as relates to stock specific risks including the stem cell technology and also the fact that MSB is a pipeline company with currently no revenue generating inline products on the market. Terminal Growth Rate: Our terminal growth rate assumption of 1% after 2030 conservatively reflects the revenue and market share cannibalization from launch of competitive biogenerics after the patent life runs out in 2026. Our end of patent exclusivity assumption of 2026 does not take into account the likelihood of patent life extensions and other product lifecycle management strategies that MSB may come up with, which if successful would extend patent life of its products and represent an upside to our estimates. Sensitivity Analysis of DCF Page 14

Mesoblast (MSB) 31 January 2012 WACC & TERMINAL GROWTH RATE We performed a sensitivity analysis of our WACC and terminal growth rate assumptions. Table 5 - Base Case Valuation Sensitivity Analysis to WACC and Terminal Growth RateAt a WACC of 16%, for every WACC0.5% change in terminal $10.91 15.0% 15.5% 16.0% 16.5% 17.0%growth rate, our base case -0.5% $12.08 $11.40 $10.78 $10.20 $9.66 Terminal Growthvaluation changes by A$0.04- 0.0% $12.14 $11.45 $10.82 $10.23 $9.69A$0.06. We also established 0.5% $12.20 $11.50 $10.86 $10.27 $9.72that at a terminal growth rate 1.0% $12.26 $11.56 $10.91 $10.31 $9.76of 1%, every 0.5% change in 1.5% $12.33 $11.62 $10.96 $10.36 $9.79WACC, caused an A$0.56-A$0.70 change in our base 2.0% $12.41 $11.68 $11.02 $10.40 $9.83case valuation. 2.5% $12.49 $11.75 $11.08 $10.45 $9.88 SOURCE: BELL POTTER SECURITIES Table 6 - Optimistic Case Valuation Sensitivity Analysis to WACC and Terminal Growth RateAt a WACC of 16%, for every WACC0.5% change in terminal growth $21.60 15.0% 15.5% 16.0% 16.5% 17.0%rate, our optimistic case -0.5% $23.98 $22.60 $21.33 $20.15 $19.05 Terminal Growthvaluation changes by A$0.09- 0.0% $24.10 $22.70 $21.42 $20.22 $19.11A$0.12. We also established 0.5% $24.22 $22.81 $21.51 $20.30 $19.18that at a terminal growth rate of 1.0% $24.35 $22.92 $21.60 $20.39 $19.261%, every 0.5% change in 1.5% $24.49 $23.04 $21.71 $20.48 $19.33WACC, caused an A$1.13- 2.0% $24.65 $23.17 $21.82 $20.57 $19.42A$1.43 change in our optimisticcase valuation. 2.5% $24.81 $23.32 $21.94 $20.67 $19.51 SOURCE: BELL POTTER SECURITIES Sum-of parts Valuation Our DCF valuation model is a sum of DCF models of individual assets based on the different indications targeted by Mesoblast’s MPC’s. Each of the DCF models use risk- adjusted revenue numbers based on the probability of success in the clinical trials for each indication. The probability of success we attribute to each indication varies according to the development phase for each indication with the base case assumptions being more conservative than the optimistic case. Our sum-of-parts valuation is based on a WACC of 16% and a terminal growth rate of 1% to arrive at our base case valuation of A$10.91 and our optimistic case valuation of A$21.60. Our price target of A$16.00 sits at the mid-point of our DCF range. A summary of our sum-of-parts valuation for our base case is laid out below: Page 15

Mesoblast (MSB) 31 January 2012Table 7 - Base Case Sum-of-parts Valuation by AssetAsset Value Per %Mix Probability of Current Phase Share success /Risk adjustmentRevascor CHF $3.57 32.7% 50.0% Phase III IND to be filedRevascor AMI $0.63 5.7% 25.0% Phase IIRevascor CRA $0.62 5.7% 15.0% Phase II IND to be filedBMT $0.53 4.9% 65.0% Phase IIINeoFuse -Spinal Fusion $0.04 0.3% 33.0% Phase II interim data released. Final results due in 2012Invertebral Disc Repair $0.47 4.4% 25.0% Phase IIRepliCart - Knee Osteoarthritis $3.42 31.4% 25.0% Phase IILong Bone Fracture Repair $0.02 0.2% 5.0% Preclinical. IND for Human trials to be filed in 2012Age-related Macular Degeneration (AMD) $0.83 7.6% 25.0% Phase IIType 2 Diabetes $1.95 17.8% 5.0% Preclinical. Phase II to initiateOther Pipeline/Non-allocated -$1.96 -17.9% NA NACash $0.79 7.3% NA NATotal $10.91 100.0%SOURCE: BELL POTTER SECURITIES ESTIMATES A summary of our sum-of-parts valuation for our optimistic case is laid out below:Table 8 - Optimistic Case Sum-of-parts Valuation by AssetAsset Value Per %Mix Probability of Current Phase Share success /Risk adjustmentRevascor CHF $6.84 31.7% 60.0% Phase III IND to be filedRevascor AMI $0.98 4.5% 35.0% Phase IIRevascor CRA $1.08 5.0% 25.0% Phase II IND to be filedBMT $0.59 2.8% 75.0% Phase IIINeoFuse -Spinal Fusion $0.22 1.0% 43.0% Phase II interim data released. Final results due in 2012Invertebral Disc Repair $0.96 4.4% 35.0% Phase IIRepliCart - Knee Osteoarthritis $5.70 26.4% 35.0% Phase IILong Bone Fracture Repair $0.24 1.1% 10.0% Preclinical. IND for Human trials to be filed in 2012Age-related Macular Degeneration (AMD) $1.49 6.9% 35.0% Phase IIType 2 Diabetes $4.84 22.4% 10.0% Preclinical. Phase II to initiateOther Pipeline/Non-allocated -$2.13 -9.9% NA NACash $0.79 3.7% NA NATotal $21.60 100.0%SOURCE: BELL POTTER SECURITIES ESTIMATES Financials Gross Margin: As part of its partnering agreement with Teva/Cephalon, MSB will retain manufacturing rights for its MPCs and will manufacture products under its alliance with Lonza, selling them to Teva/Cephalon for a set transfer price. We expect gross margins to expand as volumes grow and as Lonza uses its technical knowhow and capabilities to reduce COGS. The transfer pricing arrangements of the Teva/Cephalon deal have not been disclosed; however we assume an initial transfer pricing arrangement of 35% of product sales. Under the Base Case scenario, we expect COGS to be 25% of revenues in 2015E reducing to 15% of revenues by 2020E and gross margins to expand from 75% in 2015E to 85% in 2020E. Under the Optimistic Case scenario, we expect COGS to be 15% of revenues in 2015E reducing to 5% of revenues by 2020E and gross margins to expand from 85% in 2015E to 95% in 2020E. Page 16

Mesoblast (MSB) 31 January 2012 R&D Costs : Under the Teva/Cephalon partnering deal, future development costs of the partnered indications are shared between MSB and Teva/Cephalon, with MSB being responsible for costs of preclinical development and Phase IIa trials and Teva to fund Phase IIb/Phase III trials. Thus, we expect Mesoblast’s R&D costs to grow gradually in the coming years from ~A$30mn in 2012E to ~A$68mn in 2015E. Under both the Base Case & Optimistic Case scenarios, we estimate R&D expenses to be split between orthopaedic and non-orthopaedic indications with orthopaedic indications accounting for 65% of total R&D expense till 2016E, reducing gradually thereafter to be 5% of total R&D expense by 2019E, assuming all the different orthopaedic products have been launched in the market by 2019E. Our R&D estimates include the milestone payments as well as royalties of 2.5% of net sales payable to Medvet by MSB/Angioblast.Assumption on R&D Spending: Mesoblast plans to partner at least some of its other un-partnered indications after gatheringproof of concept data, and if the partnering deal is on similar lines as the Teva/Cephalon deal, it is likely to involve sharing offuture development costs. Our current model assumes that for all currently un-partnered indications Mesoblast will takethe product to the market itself i.e. none of them will be partnered. Thus, any future partnering deal is likely to reduceMesoblast’s R&D spend below our current estimates and offsetting any resulting change in our modelled revenues from such adeal, is a potential upside to our estimates. General & Administration (G&A): Under both the Base Case & Optimistic Case scenarios, we have assumed that Mesoblast will allocate its G&A expenses only to those asset segments for which it records direct product sales, i.e. currently un-partnered indications. As such, our G&A expenses is split between the orthopaedic products and the IV products with orthopaedic indications accounting for 70% of total G&A expense till 2016E, reducing thereafter to ~66% of total G&A expense. Our allocation is based on the assumption that the later stage orthopaedic products will bear more of the G&A costs than the comparatively early stage IV products and then starting 2017E when the IV products are launched in the market, all the G&A expenses will be divided equally between the 6 indications (i.e. 4 orthopaedic products for Spinal Fusion, Disc Repair, Knee Osteoarthritis and Long Bone Fracture Repair and the 2 IV products for AMD & Type 2 Diabetes), bringing the 4 orthopaedic products G&A share to ~66%. Furthermore within the 4 orthopaedic indications we have further split the expense as 50% relating to spinal fusion and disc repair indications, 40% relating to knee osteoarthritis the largest market among the four and being a relatively small market 10% relating to Disc Repair. Moving forward, we expect G&A expenses for MSB to be higher from historical levels. We estimate G&A costs to grow from ~A$21mn in 2012E to ~A$54mn in 2015E. Selling & Distribution (S&D): Under the Teva/Cephalon partnering deal, commercialization costs of the partnered indications are to be borne by Teva/Cephalon. Therefore, we have split our selling and distribution costs among the un-partnered orthopaedic and IV products with the assumption that Mesoblast will not partner these indications in future and will take the products to the market itself building its own sales & marketing force. We estimate MSB’s annual S&D spend to be A$60mn in 2016E, reducing to A$31mn in 2019E and onwards. Our estimate is based on the assumption that the product launch expenses will be incurred for 2016E to 2018E and then starting 2019E, when all the products are on the market, MSB will only spend on sales & marketing and promotional efforts, thus accounting for our reduced S&D forecasts for 2019E onwards. Our key assumptions under both the Base Case & Optimistic Case scenarios are: • Launch expense per indication borne by Mesoblast is A$20mn to be split between US & EU launches. We have not allocated launch expenses for any other market at this point. • Annual Sales & Marketing expense (i.e. field force) will be ~A$14-15mn. Page 17

Mesoblast (MSB) 31 January 2012 • Promotional Expense (i.e. advertising & low cost distribution arrangements etc.) will be A$16mn per year at a run rate of ~A$4mn per quarter. • S&D expenses start from the first year of launch of product. • All the currently un-partnered 4 orthopaedic products (i.e. Spinal Fusion, Disc Repair, Knee Osteoarthritis and Long Bone Fracture Repair) and the 2 IV products (i.e. AMD & Type 2 Diabetes) have been launched in the US & EU markets by 2019E.Assumption on S&D Spending: Mesoblast plans to partner at least some of its other un-partnered indications after gatheringproof of concept data, and if the partnering deal is on similar lines as the Teva/Cephalon deal, it is likely to involve the partnerbearing the commercialization costs entirely or in worst case scenario sharing a part of it. Our current model assumes thatfor all currently un-partnered indications Mesoblast will take the product to the market itself i.e. none of them will bepartnered. Thus, any future partnering deal is likely to reduce Mesoblast’s S&D spend below our current estimates andoffsetting any resulting change in our modelled revenues from such a deal, is a potential upside to our estimates. Milestone Payments from Teva/Cephalon: Under the terms of the Teva/Cephalon partnering deal, MSB is to receive ~US$1.7bn as potential milestones. The milestone payments will get triggered on regulatory approval in the US & EU markets. We have split the milestone payments between Cardiovascular, Bone Marrow Transplant (BMT) and the pipeline CNS applications as laid out in Table 9. Table 9 - Milestone Receivable from Teva/Cephalon Partnered Indications Indication Milestone division Milestone per indication (US$mn) Congestive Heart Failure 15% 250 Acute Myocardial Infarction 15% 250 Chronic Angina 15% 250 Bone Marrow Transplant 15% 250 Other pipeline CNS applications 41% 700 100% 1700 SOURCE: BELL POTTER SECURITIES ESTIMATES Our key assumptions under both the Base Case & Optimistic Case scenarios are: • The milestone payment receivable per indication is equally split between the US and EU regulatory approvals, for example US$250mn for CHF indication will be receivable US$125mn on US regulatory approval from the FDA and US$125mn will be receivable on EU regulatory approval from the European Medicines Agency (EMA). • We have not modelled revenues for MSB’s CNS opportunity and hence have not modelled in the US$700mn potential milestone payment from Teva/Cephalon at this time. The CNS opportunity becoming substantial in future would be a potential upside to our estimates. • We have estimated the timing for the probable regulatory approval for each indication and its potential entry into the US & EU markets and based on that assumption we have modelled the milestone payments as ‘Revenue under collaboration’. • We have used Bell Potter’s current long term assumption for the AUD/USD cross rate to convert the US$1.7bn milestones into AUD. • We expect the first milestone payment to be triggered at the US FDA approval for the Bone Marrow Transplant indication in FY 1H15 (July 2014-December 2014). Any delays in the completion of Phase III trial or FDA submission and approval therein is likely to affect our estimates adversely. Page 18

Mesoblast (MSB) 31 January 2012 Debt/interest expense: Mesoblast does not have any debt on its books currently. In view of its cash position after the Teva/Cephalon deal, we think MSB has sufficient funds to meet future development costs of its un-partnered indications and its working capital requirements. Even in the event that it falls short of funds, it is likely to go for a capital raising rather than the debt way to fund the shortfall. Thus, we assume no debt and no related interest costs in our model under both the Base Case and Optimistic Case Scenarios. Tax Rate: Mesoblast under its manufacturing alliance with Lonza will manufacture and sell its MPC products from Singapore. Singapore has a low corporate tax rate of 17% and MSB is hopeful to negotiate with the Singapore Government to get further concessions. The Australian corporate tax rate is 30%. Depending on how Mesoblast will structure its operations and account for its Singapore transactions there is a probability for Mesoblast to take full advantage of the low Singapore tax rate of 17% or even lower it further depending on its negotiations with the Singapore Government. However, until we get clarity on how Mesoblast plans to structure the transactions we are conservatively estimating a higher tax rate of 20% (in between the Singapore and Australian tax rates). Also since MSB has been incurring net operating losses (NOL) and is carrying deferred tax assets and liabilities on its balance sheet, it can choose to offset its future taxes against the NOL carry forwards. At this point we have conservatively not accounted for tax offsets in our estimates. Any tax offsets received by MSB in future is a potential upside to our estimates. Capex: We expect MSB’s Capex requirements to be minimal since its manufacturing is outsourced to Lonza and the current Capex recorded on the balance sheet relates to mostly office equipment. We estimate MSB’s Capex spend to be ~A$4.5mn between 2012E-2015E. Net Change in Working capital: Under both the Base Case & Optimistic Case scenarios, we estimate net change in working capital to be negative A$39mn per year between 2016E and 2030E under the assumption that Mesoblast being a growing company will invest heavily in its Current Assets in the form of inventory and its Accounts Receivable is also likely to increase once it starts generating revenue from product sales, partially offset by a likely increase in its Current Liabilities in terms of Accounts Payables. Revenue: Under the Base Case scenario, we estimate Mesoblast’s Revenues to be A$27.3mn in FY 2012E rising to A$333.6mn in FY 2015E with the commercial sales of its first approved MPC product for the Bone Marrow Transplant Indication. Under the Optimistic Case scenario, we estimate Mesoblast’s Revenues to be A$27.3mn in FY 2012E rising to A$374.6mn in FY 2015E with the commercial sales of its first approved MPC product for the Bone Marrow Transplant Indication. Our estimate is based on the assumption that between 2012E to 2015E Mesoblast will recognize a portion of the remaining US$130mn upfront payment (i.e. ~A$27mn per annum) received from Teva/Cephalon as revenue in the Income statement each year and in 2015E with the launch of its Bone Marrow Transplant product, its revenue line will also include milestones & manufacturing revenues. Mesoblast recognized A$14.6mn of the upfront payment from Teva in FY2011 and recorded the balance net of Fx losses as deferred revenue in the Balance sheet. We have broken down Mesoblast’s Revenues into the following categories: • Product Sales: This comprises of worldwide revenues earned from all the un- partnered indications i.e. orthopaedic and IV products franchise with the assumption that Mesoblast will not partner these indications in future and will take the products to the market itself. • Manufacturing Revenues: As part of its partnering agreement with Teva/Cephalon, MSB will retain manufacturing rights for its MPCs and will manufacture products under its alliance with Lonza, selling them to Teva/Cephalon for a set transfer price. The Page 19

Mesoblast (MSB) 31 January 2012 transfer price offset by an MSB cost of manufacture, translates to an effective royalty on sales or net manufacturing revenues from the Teva/Cephalon alliance for MSB. We currently model revenues from Revascor and the BMT indication and have not modelled revenues for MSB’s CNS opportunity under the alliance at this point. The CNS opportunity becoming substantial in future would be a potential upside to our estimates. • Revenue under Collaboration: This includes the ~US$1.7bn potential milestones receivable by MSB under the terms of the Teva/Cephalon partnering deal. Also included in this category is the A$130mn upfront payment received by MSB. • R&D Revenue: This consists of any Government or other Grant revenue received by MSB assisting in the development of its pipeline. Our Revenue Forecast Methodology and Assumptions We have used patient-driven market models to estimate the revenue trajectory of each indication. We have estimated revenues for the US market and the RoW to arrive at Worldwide Revenues for each indication. The revenue numbers in each of the market models are then risk-adjusted based on the probability of success in the clinical trials for each indication. The probability of success we attribute to each indication varies according to the development phase for each indication with the base case assumptions being more conservative than the optimistic case. Our key assumptions under both the Base Case & Optimistic Case scenarios are: • We have used Bell Potter’s current long term assumption for the AUD/USD cross rate to convert the USD revenue numbers to AUD in each of the market models. • We have assumed market share cannibalization from launch of competitive generics after the patent life runs out in 2026 for each of the indications. Our end of patent exclusivity assumption of 2026 does not take into account the likelihood of patent life extensions and other product lifecycle management strategies that MSB may come up with, which if successful would extend patent life of its products and represent an upside to our estimates. • We have estimated the timing for the probable regulatory approval for each indication and its potential entry into the US & EU markets (as laid out in Table 10 below) and based on that assumption we have modelled our revenues. Table 10 - Mesoblast -Timing of Product launches in the US & EU Indication Estimated Fiscal Year of Estimated Fiscal Year of Entry -US Entry -EU Congestive Heart Failure 2015 2016 Acute Myocardial Infarction 2018 2017 Chronic Angina 2017 2018 Bone Marrow Transplant 2015 2016 Spinal Fusion 2016 2017 Invertebral Disc Repair 2016 2017 Knee Osteoarthritis 2017 2016 Long Bone Fracture Repair 2017 2018 Wet Age-related Macular Degeneration (AMD) 2018 2017 Type 2 Diabetes 2017 2018 SOURCE: BELL POTTER SECURITIES ESTIMATES • Each of our patient driven market models are based on our projected US population, breaking down into the age group targeted by each indication, to which we apply the indication-specific disease prevalence or incidence statistics (derived from research Page 20

Mesoblast (MSB) 31 January 2012 papers and Government bodies) as a percentage of the population, to arrive at Mesoblast’s Target US market. • Each of our market models estimates Mesoblast’s Target US market for each indication, with the Target Worldwide market assumed to be 1) 2.5 times that of the US for the Cardiovascular, BMT, Spinal Fusion and Disc Repair indications; 2) 2 times that of the US for the Knee Osteoarthritis, Long Bone Fracture Repair and AMD indications and 3) 5 times that of the US for the Diabetes indication. • For each of the indications, we have assumed Mesoblast gradually gains market share after launch with peak market share in both the US & RoW being 1) 10% for the Cardiovascular, BMT, Spinal Fusion and Disc Repair, AMD and Diabetes indications; 2) 5% for the large Knee Osteoarthritis market and 3) 20% for the smaller non-union Long Bone Fracture Repair market. • Each of our market models assume that Mesoblast increases its product pricing each year by 1-2% till 2025 and then after patent expiry starting 2026 to compete against generics reduces the prices by 2-5% of its products. • For each of the indications, we have used different pricing of Mesoblast’s MPC product. Our price expectations factor in the current costs of treatment for the particular indication and are based on the assumption that Mesoblast’s MPC’s will be cost effective as against current standard of treatments in the market and it will get re- imbursement from medical agencies in the respective jurisdictions in which it launches its products. We have also assumed that Mesoblast will sell its product in RoW at a 30% discount to its US selling price. • Each of our market models assumes a patient undergoing a single MPC treatment per year, with a single or double dosing regimen per treatment. At this point we have assumed a double dosing regimen only for Spinal Fusion, and our assumption is based on the fact that MSB’s MPC product will directly compete with the current BMP treatment used in Spinal Fusion which requires 2 doses in the form of two vials, hence we assume MSB will also target a similar dosing. Also, at present we have only assumed single dosing for Type 2 Diabetes but we think there may be a potential for MSB to target Diabetes as a repeat dosing product as seen with existing drug therapies in the market, which if happens would be a potential upside to our estimates. • The transfer pricing arrangements of the Teva/Cephalon deal have not been disclosed; however we assume an initial transfer pricing arrangement of 35% of product sales. Under the Base Case scenario, we expect COGS to be 25% of revenues in 2015E reducing to 15% of revenues by 2020E, translating to an effective royalty on sales or net manufacturing revenues of 10% in 2015E growing to 20% in 2020E. Under the Optimistic Case scenario, we expect COGS to be 15% of revenues in 2015E reducing to 5% of revenues by 2020E translating to an effective royalty on sales or net manufacturing revenues of 20% in 2015E growing to 30% in 2020E. • For the Milestone payments receivable from Teva, we have used our assumptions as detailed earlier in this section. • As explained earlier in this section, for the US$130mn upfront payment received from Teva, Mesoblast recognized A$14.6mn in FY2011 and recorded the balance net of Fx losses as deferred revenue in the Balance sheet. We have assumed that Mesoblast will recognize a portion of the deferred revenue in its income statement each year between 2012E to 2015E. Page 21

Mesoblast (MSB) 31 January 2012 Earnings Projections and Contribution from Each Asset FY 2012E – 2015E We present a summary of our base case earnings projections for the company and our estimates of how each of the key assets will contribute to earnings from 2012 to 2015 in Table 11 below. Table 11 – Base case – Earnings Projections and Contribution from Each Asset FY 2012E – 2015E Contribution to EPS 2012E 2013E 2014E 2015E Revascor CHF $0.02 $0.02 $0.02 $0.46 Revascor AMI $0.02 $0.02 $0.02 $0.02 Revascor CRA $0.02 $0.02 $0.02 $0.02 BMT $0.02 $0.02 $0.02 $0.41 NeoFuse - Spinal Fusion -$0.03 -$0.04 -$0.05 -$0.06 Invertebral Disc Repair -$0.03 -$0.04 -$0.05 -$0.06 RepliCart - Knee Osteoarthritis -$0.05 -$0.07 -$0.08 -$0.09 Long Bone Fracture Repair -$0.01 -$0.02 -$0.02 -$0.02 Age-related Macular Degeneration (AMD) -$0.02 -$0.03 -$0.04 -$0.04 Type 2 Diabetes -$0.03 -$0.04 -$0.05 -$0.05 Pipeline/ Non-Allocated $0.02 $0.01 $0.00 -$0.01 Total Estimated EPS -$0.05 -$0.13 -$0.20 $0.59 SOURCE: BELL POTTER SECURITIES ESTIMATES We present a summary of our optimistic case earnings projections for the company and our estimates of how each of the key assets will contribute to earnings from 2012 to 2015 in Table 12 below. Table 12 - Optimistic case – Earnings Projections and Contribution from Each Asset FY 2012E – 2015E Contribution to EPS 2012E 2013E 2014E 2015E Revascor CHF $0.02 $0.02 $0.02 $0.56 Revascor AMI $0.02 $0.02 $0.02 $0.02 Revascor CRA $0.02 $0.02 $0.02 $0.02 BMT $0.02 $0.02 $0.02 $0.41 NeoFuse - Spinal Fusion -$0.03 -$0.04 -$0.05 -$0.06 Invertebral Disc Repair -$0.03 -$0.04 -$0.05 -$0.06 RepliCart - Knee Osteoarthritis -$0.05 -$0.07 -$0.08 -$0.09 Long Bone Fracture Repair -$0.01 -$0.02 -$0.02 -$0.02 Age-related Macular Degeneration (AMD) -$0.02 -$0.03 -$0.04 -$0.04 Type 2 Diabetes -$0.03 -$0.04 -$0.05 -$0.05 Pipeline $0.02 $0.01 $0.00 -$0.01 Total Estimated EPS -$0.05 -$0.13 -$0.20 $0.68 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 22

Mesoblast (MSB) 31 January 2012 Forthcoming Milestones We see a number of upcoming catalysts helping to re-rate MSB to our target price of A$16.00 per share as laid out in Table 13 below.Table 13 - Mesoblast – Forthcoming MilestonesDate Product Indication MilestoneFY 20122H12 (Jan 2012-June 2012) NeoFuse Posterior Lumbar Spinal Fusion Data from Phase II trial2H12 (Jan 2012-June 2012) Revascor Chronic Angina IND to be filed for PhaseIIb trial with FDA (having ~150 patients)February 2012 IV formulation Type 2 Diabetes Initiation of Phase II Trial2H12 (Jan 2012-June 2012) Revascor Congestive Heart Failure IND to be filed with FDA for Phase III Pivotal Trial2H12 (Jan 2012-June 2012) Eye Diseases (AMD) IND to be filed for Phase II trial with FDA2H12 (Jan 2012-June 2012) NeoFuse Cervical Spinal Fusion Data from Phase II trial2H12 (Jan 2012-June 2012) Revascor Acute Myocardial Infarction Interim data from Phase II trial in EU2H12 (Jan 2012-June 2012) Lumbar Disc Repair Interim data from Phase II trial2H12 (Jan 2012-June 2012) Revascor Bone Marrow Transplant Interim data from Phase III trialFY 20131H13 (July 2012-Dec 2012) Long bone fracture repair/Osteoporosis IND to be filed for Phase II trial with FDA1H13 (July 2012-Dec 2012) NeoFuse Posterior Lumbar Spinal Fusion Initiation of Phase III Pivotal Trial1H13 (July 2012-Dec 2012) Lumbar Disc Repair Data from Phase II trial1H13 (July 2012-Dec 2012) IV formulation Type 2 Diabetes Data from Phase II trial1H13 (July 2012-Dec 2012) IV formulation Type 2 Diabetes Potential Licensing announcement1H13 (July 2012-Dec 2012) Revascor Congestive Heart Failure Initiation of Phase III Pivotal Trial1H13 (July 2012-Dec 2012) Lumbar Disc Repair IND to be filed with FDA for Phase III Pivotal TrialSOURCE: BELL POTTER SECURITIES Page 23

Mesoblast (MSB) 31 January 2012Sixteen reasons to own Mesoblast Who is Mesoblast? A Melbourne-based biotechnology company, Mesoblast is creating clinical therapies from a class of adult stem cell called Mesenchymal Precursor Cells (MPCs). The company is currently conducting multiple Phase II trials of the technology, and has initiated its first pivotal trial, in Bone Marrow Transplantation. In many cases there are multi-billion dollar markets to enter in the event of clinical success. Until 2010 Mesoblast focused on the orthopaedic applications of the technology while a 33%-owned associated American company called Angioblast Systems focused on the cardiovascular applications. Mesoblast acquired the Angioblast shares it did not previously hold late in 2010. We see sixteen reasons why investors should own MSB at current prices: 1. MSB is part of a wave of the future that is capitalised at only US$3.6bn globally.Mesoblast is theleading company in Stem cells, which are cells with the ability to develop into many different cell types, orthe stem cell sector promote the growth of new cells, have demonstrated over the last ten years that theyby market cap can potentially cure a wide variety of diseases. This makes stem cell technologies such as those owned by MSB increasingly powerful in terms of the upcoming commercial payoff from new drugs. Currently the entire listed stem cell sector of 15 64 companies is capitalised at ~US$3.5bn , reflecting the early stages of what we anticipate will be one of the most commercially significant areas of healthcare in the st 21 Century. 2. There is solid science behind Mesoblast’s technology. Since 2001 Mesoblast has perfected methods for obtaining and expanding its stem cells from donors so that they can be stored and then used in unrelated patients as an ‘off the shelf’ therapy. 3. Favourable clinical data is starting to emerge. Between 2005 and 2007 the company trialled its technology first in ‘autologous’ applications – ie the patient was given his own stem cells - in the orthopaedics and cardiovascular space. From 2007 it has been successfully trialling them in ‘allogeneic’ settings where stem cells from a donor are transplanted in an unrelated recipient. The first favourable allogeneic clinical data was obtained from Phase II trials in 2009, markedly boosting the credibility of the MSB story, and this credibility has now taken another step forward with full Phase II trial data in heart failure. 4. A major partnering deal with Cephalon has de-risked the company. In one of theThe Cephalon /Mesoblast partnering largest biotechnology transactions of 2010 globally, MSB announced, in December, adeal was the first partnering deal with the American specialty pharma company Cephalon that sawmajor deal in the Cephalon 1) take a 19.99% stake in the company 2) partner with MSB on thestem cell space cardiovascular and bone marrow transplant applications of the MPC technology and 3) agree to help fund new programmes in CNS applications like Alzheimer’s and Parkinson’s disease. We see this deal as a transforming one for the stem cell space, in that it sees an established pharma company commit substantial resources to stem cell development as a significant part of its pipeline for the first time. It is also transforming for Mesoblast in that it substantially de-risks the company by providing adequate funding for all programmes and strong financial upside. Cephalon’s due diligence prior to the deal will also serve as a comfort factor for investors. 5. Teva’s acquisition of Cephalon is a plus for Mesoblast. The Israeli drug major Teva announced that it was acquiring Cephalon for US$6.8bn in May 2011, and the deal closed in October 2011. We argue in this note that Teva’s involvement in Mesoblast is likely to be positive, since that company has a strategy of growing64 30 January close on Nasdaq and elsewhere. Page 24

Mesoblast (MSB) 31 January 2012 through branded innovator drugs, and is motivated to do so given the various threats faced by Copaxone, its Multiple Sclerosis blockbuster, which loses US patent protection in 2014. We expect Teva will seek to optimise the development pathway for Mesoblast’s cardiovascular and CNS programmes, and may also use Mesoblast’s technology to bolster its existing franchise in MS. 6. MSB now has A$240m in cash. The upfront payment and equity placement associated with the Cephalon deal has left MSB amply funded for further clinical development and negated the possibility of further capital raisings. As at December 2011 the company held $240m in cash. 7. Multiple trials are now underway with a pivotal now initiating. MSB is currentlyMesoblast is conducting or working towards Phase II or Phase III data in nine different applications,currently running or mostly cardiovascular and orthopaedic. In each case the MPC technology has beencompleting seven demonstrated to be able to make a difference in what have to date been underservedPhase II trials and is patient populations. With MSB collaborating on furthering the science of MPCs, wemoving towards itsfirst Phase III trials see the potential for other indications to emerge. Figure 24 - Clinical trials being undertaken by MSB Completion Application Current Phase optimistic case Completion base case Patients Posterior interbody lumbar fusion II Aug-12 Feb-13 24 Cervical spinal fusion II Apr-12 Oct-12 36 Intervertebral disc repair II Jan-13 Jul-13 100 Heart failure III pending June-2014 October-2014 500-1,000 Acute myocardial infarction II Feb-14 Feb-15 225 Knee osteoarthritis II Jan-12 Jul-12 24 AMD II Feb-14 Aug-14 18 Bone marrow transplant III May-13 Jul-13 240 Type II diabetes II Nov-12 Feb-13 60 SOURCE: MSB, BELL POTTER SECURITIES. 8. MSB is now a Phase III company with its bone marrow transplant application. After a successful Phase II trial, MSB’s Phase III trial of MPC technology in bone marrow transplantation (BMT) is being readied for commencement, with a cleared IND and a Special Protocol Assessment being sought from the FDA. We see the BMT indication as indicative of substantial upside for MSB. The indication will serve a patient population about as large as that currently served by the Australian medical 65 66 device major Cochlear Ltd , which has a market capitalisation of A$3.38bn . Also, we see the success of the Phase II trial as pointing towards a significant de-risking of the technology. 9. MSB’s heart failure trial reported favourable Phase II data. A 60-patient Phase IIMSB’s heart failuretrial has generated trial in NYHA Class II and III heart failure patients registered a reduction in MACEsolid Phase II data (Material Adverse Coronary Events) by 78% for the treated patients versus the controls (p=0.011), a reduction in cardiac mortality by 89% (p=0.02), and a reduction in heart failure-related hospitalisation by 43%. This data was reported at the American Heart Association meeting in Orlando, Florida in November 2011. We expect that Teva will initiate a Phase III trial in heart failure in 2012. 10. MSB has started to build a valuable spinal ‘franchise’. With the MPC technology being successfully applied across a spectrum of spine-related procedures in a Phase II setting, we see substantial value accruing to MSB for this franchise, since it allows a65 ASX: COH, Sydney, Australia, www.cochlear.com.66 In FY11 COH sold 24,661 cochlear implants globally, representing around 70% of the cochlear implant market. This is around the same as the number of allogeneic bone marrowtransplants performed globally each year (Source: National Marrow Donor Program). Page 25

Mesoblast (MSB) 31 January 2012 potential acquirer to comprehensively access a large and growing segment of the orthopaedics market. 11. Other applications are growing in importance. We like MSB’s potential in applications such as inflammation where the science suggests that MPCs can be disease-modifying. 12. The path to market is fast. With the FDA only requiring one Phase II and one pivotal trial before approving a stem cell therapy, we see MSB as requiring a relatively short time before the MPC technology begins to yield commercial revenues. 13. The management is commercial. We have a high regard for MSB’s leadership teamThe FDA onlyrequires two clinical led by Executive Director Professor Silviu Itescu, who owns 24.4% of the companytrials per MPC and is its largest shareholder. We like the commercial approach the company hasapplication taken to create shareholder value, as typified by the decision to make orthopaedic applications a key focus in the early days of the company. 14. We expect substantial news flow in 2012. The next 12 months will feature some strong news flow from MSB, with potential announcements including: • Dosing of first patient in the Type II diabetes Phase II trial; • Completion of the spinal fusion trials; • Progression to a heart failure pivotal trial; • Completion of the disc repair trial; • Initiation of Phase II trial in chronic angina; • Potential completion of the knee osteoarthritis trial; • Receipt of a Special Protocol Assessment by the FDA for the BMT trial; • The first patient in the bone marrow transplant Phase III trial; • The first patient in the Acute Myocardial Infarction trial in Europe; and • Animal data on new MPC indications including Alzheimer’s and Parkinson’s. 15. There is potential for M&A activity. We see a number of reasons why Mesoblast may attract further M&A interest from Big and Specialty Pharma: • Mesoblast has long-dated patent protection, with its earliest patent having a 1999 priority date and the most meaningful priority date having been established in 2006, allowing patent protection out to at least the mid-2020s; • Mesoblast is being set up to enjoy ‘pharma-style’ economics from its off-the-shelfBig Pharma likes ‘off-the-shelf’ business business model. The ability to obtain MPCs from one donor and then administer themmodels like to an unrelated donor allows Mesoblast’s products to be sold like they were smallMesoblast’s molecules or monoclonal antibodies; • Mesoblast would give its partners ‘first mover advantage’. When Roche first acquired a majority stake in Genentech in 1990 (the minorities were taken out in 2009) it effectively acquired first mover advantage in the Next Big Thing in pharmaceuticals – monoclonal antibodies - from which it benefited in a major way from the mid-1990s on. We believe Mesoblast can yield a similar advantage today in stem cells. 16. The stock is trading significantly below our target price. We assume the MSB pipeline has value for both the older as well as newer programmes. Our $16.00 target price for MSB is at the midpoint of our base case $10.91 / optimistic case $21.60 per share probability-weighted DCF valuation. Page 26

Mesoblast (MSB) 31 January 2012 Mesoblast COMPANY DESCRIPTION The Melbourne-based Mesoblast (MSB) is a biotechnology company commercialising the therapeutic use of mesenchymal precursor cells or MPCs – a kind of adult stem cell. MSB’s MPC technology allows these cells to be extracted from the bone marrow of donors, grown into therapeutic quantities and administered ‘allogeneically’ – ie, to patients that are not related to the donor - to treat disorders where new bone or tissue growth is required. We like the effectiveness of the technology as against existing therapies, as well as its non-controversial nature. The technology is being applied to a wide variety of orthopaedic and cardiovascular applications with the first commercial products set to emerge from the clinic around 2014/15. Mesoblast now has A$240m in cash on hand and therefore has no further need to raise capital from the equity markets. INVESTMENT STRATEGY We see the major partnering deal with Cephalon inked in late 2010 as providing significant upside since it funds the company’s leading programmes in bone marrow transplantation and heart failure. We also see a payoff to shareholders arising from further partnering deals for individual applications as the stem cells prove themselves in clinical trials. We expect a typical licensing deal will yield upfront and milestone payments as well as royalties. The Cephalon partnering resulted in that company owning 19.99% of Mesoblast, a stake that is now held by Cephalon’s new owner, the Israeli drug major Teva. We see Teva’s need for new branded drugs as a positive for Mesoblast. VALUATION We assume the MSB pipeline has value across a range of clinical development programmes. Our $16.00 target price for MSB is at the midpoint of our base case $10.91 / optimistic case $21.60 per share probability-weighted DCF valuation. We assume that MSB can be re-rated by the market as the near-term nature of the stem cell opportunity become apparent, and further clinical data emerges. RISKS We see the main risk in MSB as being clinical risk – ie that products fail to perform in human trials. Another major risk facing the company is that prospective licensing partners may drive too hard a bargain for MSB shareholders to enjoy a strong return. Page 27

Mesoblast Recommendation Buy, Speculative as at 31 January 2012 Price $6.45Mesoblast (MSB) 31 January 2012 Target (12 months) $16.00 Table 14 - Financial summaryMesoblast (MSB) Share price (A$) $6.450As at 31 January 2012 Market cap (A$m ) 1820.8Profit and Loss Valuation dataY/e June 30 (A$m ) 2011a 2012f 2013f 2014f 2015f Y/e June 30 2011a 2012f 2013f 2014f 2015fRevenue 15 27 27 27 337 Net profit (US$m) -8.9 -15.8 -38.1 -58.5 170.5EBITDA -12 -23 -44 -62 208 EPS (c) -3.9 -5.5 -13.1 -20.1 58.8Depreciation & Amortisation 0 0 0 1 1 EPS growth (%) N/A N/A N/A N/A -392%EBIT -12 -24 -45 -63 207 P/E ratio (x) N/A N/A N/A N/A 11.0Net interest & Other Expense 3 8 7 5 6 CFPS (c) 47.5 -15.2 -21.6 -28.5 50.5Pre-tax profit -9 -16 -38 -58 213 Price/CF (x) 13.6 -42.6 -29.8 -22.6 12.8Tax 0 0 0 0 43 DPS ( c ) 0.0 0.0 0.0 0.0 0.0Reported Net Profit -9 -16 -38 -58 170 Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%Less minority interests 0 0 0 0 0 Franking (%) N/A N/A N/A N/A N/ANet profit to shareholders -9 -16 -38 -58 170 EV/EBITDA -133.1 -67.4 -35.7 -25.3 7.6 EV/EBIT -131.1 -66.7 -35.4 -25.1 7.6CashflowY/e June 30 (A$m ) 2011a 2012f 2013f 2014f 2015f Share price now $6.45NPAT plus discontinued ops. 91 -23 -38 -58 170 Target price (12 m th): $16.00Non-cash items -96 2 2 3 3 Premium (discount) to price 148.1%Working capital 117 -30 -27 -27 -27 Recom m endation: BuyOther operating cash flow -3 7 0 0 0 Risk Rating SpeculativeOperating cashflow 108 -44 -63 -83 147 Profitability ratios Y/e June 30 2011a 2012f 2013f 2014f 2015fCapex 0 0 -1 -2 -2 EBITDA/revenue (%) N/A N/A N/A N/A 61.8%Investments 0 0 0 0 0 EBIT/revenue (%) N/A N/A N/A N/A 61.6%Other investing cash flow 5 0 0 0 0 Return on assets (%) -1.2% -2.2% -5.6% -9.6% 22.1%Investing cashflow 5 0 -1 -2 -2 Return on equity (%) -1.7% -3.1% -7.9% -13.4% 27.5% Return on funds empl’d (%) -1.7% -3.1% -7.9% -13.4% 27.5%Change in borrow ings 0 0 0 0 0 Dividend cover (x) N/A N/A N/A N/A N/AEquity issued 126 5 2 0 3 Effective tax rate (%) 0.0% 0.0% 0.0% 0.0% 20.0%Dividends paid 0 0 0 0 0Other financing cash flow 0 0 0 0 0 Liquidity and leverage ratiosFinancing cashflow 126 5 2 0 3 Y/e June 30 2011a 2012f 2013f 2014f 2015f Net (debt)cash (US$m) 263 233 180 105 262Net change in cash 239 -39 -62 -84 148 Net debt/equity (%) 51.0% 45.8% 37.3% 24.0% 42.1% Net interest cover (x) N/A N/A N/A N/A N/ACash at end of period* 263 233 180 105 262 Current ratio (x) 8.6 8.3 6.4 3.8 38.9* I n c l u de s e f f e c t o f e x c h a n ge r a t ef l uc t ua t i ons on c a sh ba l a n c eFree cash flow 108 -44 -64 -85 145Balance sheet Interim sY/e June 30 (A$m ) 2011a 2012f 2013f 2014f 2015f Y/e June 30 (A$m ) 2H11a 1H12f 2H12f 1H13f 2H13fCash 263 233 180 105 262 Revenue 13 14 14 14 14Current receivables 2 3 3 3 7 EBITDA -4 -8 -15 -16 -28Inventories 0 0 0 0 2 Depreciation & Amortisation 0 0 0 0 0Other current assets 0 0 0 0 0 EBIT -4 -8 -15 -16 -28Current assets 265 237 184 108 270 Net interest & Other Expense 4 2 6 3 4 Pre-tax profit 0 -6 -10 -13 -25PPE 1 1 2 2 3 Tax 0 0 0 0 0Non-current receivables 0 0 0 0 0 Reported Net Profit 0 -6 -10 -13 -25Intangible assets 475 475 475 475 475 Less minority interests 0 0 0 0 0Other non-current assets 22 22 22 22 22 Net profit to shareholders 0 -6 -10 -13 -25Non-current assets 498 498 499 499 500Total assets 763 735 682 608 770Payables 4 1 1 1 7Debt 0 0 0 0 0Provisions 7 7 7 7 7Other liabilities 236 216 189 162 135Total liabilities 247 225 198 171 149Shareholders’ equity 516 509 484 437 621Minorities 0 0 0 0 0Total shareholders funds 516 509 484 437 621Total funds em ployed 763 735 682 608 770W/A shares on issue 228 290 291 291 290 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 28

Mesoblast (MSB) 31 January 2012 Research Team Recommendation structure Staff Member Title/Sector Phone @bellpotter.com.au Buy: Expect >15% total return on a Steve Goldberg Head of Research 612 8224 2809 steve.goldberg 12 month view. For stocks regarded Emma Sellen Executive Assistant 612 8224 2853 esellen as ‘Speculative’ a return of >30% is Industrials expected. Sam Haddad Emerging Growth 612 8224 2819 shaddad Accumulate: Expect total return John O’Shea Emerging Growth 613 9235 1633 joshea between 5% and 15% on a 12 month Jonathan Snape Emerging Growth 613 9235 1601 jsnape view. For stocks regarded as Bryson Calwell Emerging Growth Associate 613 9235 1896 bcalwell ‘Speculative’ a return of between 5% Stuart Roberts Healthcare/Biotech 612 8224 2871 sroberts and 30% is expected. Tanushree Jain Healthcare/Biotech Associate 612 8224 2849 tnjain Paresh Patel Retail/Beverages 612 8224 2894 ppatel Hold: Expect total return between -5% Toby Molineaux Retail Associate 612 8224 2813 tmolineaux and 5% on a 12 month view Daniel Blair Telco/Media 612 8224 2886 dblair Reduce: Expect total return between - Sam Thornton Telco/Media Associate 612 8224 2804 sthornton 15% and -5% on a 12 month view Financials TS Lim Banks/Regionals 612 8224 2810 tslim Sell: Expect <-15% total return on a Lafitani Sotiriou Diversified 613 9235 1668 lsotiriou 12 month view James Tsinidis Financials Associate 613 9235 1973 jtsinidis Resources Speculative Investments are either start-up Stuart Howe Coal & Base Metals 613 9235 1782 showe enterprises with nil or only prospective David George Diversifieds 613 9235 1972 dgeorge operations or recently commenced Fred Truong Diversifieds 613 9235 1629 ftruong operations with only forecast cash flows, or Trent Allen Emerging Growth 612 8224 2868 tcallen companies that have commenced Michael Lovesey Emerging Growth 612 8224 2847 mlovesey operations or have been in operation for Stephen Thomas Emerging Growth 618 9326 7647 sthomas some time but have only forecast cash Chris Whitehead Emerging Growth 612 8224 2838 cwhitehead flows and/or a stressed balance sheet. Johan Hedstrom Energy 612 8224 2859 jhedstrom Such investments may carry an Judith Kan Energy 612 8224 2844 jkan exceptionally high level of capital risk and Fleur Grose Iron Ore 613 9235 1678 fgrose volatility of returns. Quantitative Mathan Somasundaram Head of Quantitative Services 612 8224 2825 mathan Janice Tai Quantitative & System 612 8224 2833 jtai Joshua Clark Quantitative & System Associate 612 8224 2869 jclarkBell Potter Securities LimitedACN 25 006 390 7721 Fixed IncomeLevel 38, Aurora Place Damien Williamson Fixed Income 613 9235 1958 dwilliamson88 Phillip Street, Sydney 2000 Barry Ziegler Fixed Income 613 9235 1848 bzieglerTelephone +61 2 8224 2811Facsimile +61 2 9231 0588www.bellpotter.com.auThe following may affect your legal rights. Important Disclaimer:This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter SecuritiesLimited. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of anyspecific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or thefinancial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be madeaware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document.While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information containedin the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that theinformation contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, orrecommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued.Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising incontract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise)suffered by the recipient of this document or any other person.Disclosure of interest:Bell Potter Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting andmanagement fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests inthe securities referred to in this document. Page 29

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