Mesoblast limited moves to reassure investors

Mesoblast limited (ASX:MSB) shares remain a risky bet.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares in regenerative medicine business Mesoblast limited (ASX: MSB) jumped higher last week after the company revealed an update on its clinical trials into heart failure and general funding of its operations.

The stem cell business reported that it plans to reduce its cash burn through cost reductions and a prioritisation of core assets. It also noted that it retains cash reserves of around US$80 million "to provide operational runway for 12-15 months". It anticipates all of its key Tier 1 research programs on heart disease, aGVHD and back pain will provide data read-outs within this time frame.

While the potential of stem cell science is exciting the bottom line remains that Mesoblast is burning through capital at prodigious rates with little in the way of commercial success. For the quarter ending March 31 2016 the company posted an operating cash outflow of US$22 million and the recent loss of pharmaceutical partner Teva as a funding partner for its heart failure trials has only added to its problems.

The company also updated the market that it intends to plug some of the funding gap via an equity facility agreement with Melbourne-based asset manager Kentgrove Capital. The equity facility means Mesoblast can potentially raise up to $60 million over the next 18 months, with an option to increase the facility to $120 million over 36 months.

The catch is that any issuance of shares by Kentgrove sounds like it will be dilutive, with seemingly little guarantee that shares will not be issued at a discount to the exchange traded price. Moreover, Kentgrove will also receive 4.5% of all funds raised just for arranging the placement of shares in what looks a good deal for Kentgrove and bad deal for retail shareholders.

The problem for Mesoblast is that taking on debt is not a realistic option for a company losing US$22 million a quarter and the terms of the equity funding deal reflect its weak position as it seeks to buy time while its clinical trials progress. To that end the company stated that it will bring forward to Q1 2017 a scheduled interim analysis of data from its heart failure trials to assess the primary endpoint between cell-treated and control patients.

Given the large cash outflows, latest capital management initiatives and substantial risk around the uncertainty of clinical trial results there's not much to like about Mesoblast as an investment in my opinion.

A preferable alternative in the biotech space that is also investing heavily in clinical trials to promote the use of its treatments is oncology business Sirtex Medical Limited (ASX: SRX).

Sirtex is highly profitable and continues to grow at double-digit rates with a decent outlook as awareness of its products builds globally amongst medical professionals. Today the stock sells for $26.26, which looks a reasonable entry point for long-term investors in my opinion.

Motley Fool contributor Tom Richardson owns shares of Sirtex Medical Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »