Why the Mesoblast limited share price has surged 31%

Shares of Mesoblast limited (ASX: MSB) have risen another 13% today to $1.525, giving them a total gain of almost 31% since Monday on high trading volumes.

While it is also listed on the NASDAQ exchange in the United States, Mesoblast is an Australian-based company that is engaged in the development of regenerative medicine. It’s a potentially lucrative industry based on the potential for breakthrough products, but it is also inherently risky in that it requires huge capital outlays while there is no guarantee of success.


For that reason, shares can either plummet on the release of bad news, or else soar on the back of positive results. Thankfully for shareholders, it was the latter which occurred for Mesoblast on Tuesday when it reported positive progress with its Phase 2 rheumatoid arthritis trials.

Commenting on the results, Mesoblast’s CEO Silviu Itescu said: “We are encouraged by the efficacy signals seen in the initial results using the lower dose of Mesoblast’s cell therapy in biologic refractory patients with rheumatoid arthritis. They suggest that a single intravenous administration of our cell therapy may result in rapid and sustained responses in patients with active disease where disease remission remains the clear goal.”

The company also noted that rheumatoid arthritis affected more than 5.3 million people in the United States, Japan, and the five major European markets in 2014, with 2.4 million of those from the US. It estimates that the market was worth $15.7 billion then, but could grow to $18.4 billion by 2024.


That optimism appears to have extended into today’s session after the group also released its earnings results for the six-months ended 31 December 2015.

Given that Mesoblast is generating very little in the way of revenues currently, it is vital that the company maintain a strong cash balance for the purpose of research and development (R&D), or else another capital raising may become necessary at some point in the future.

To combat the need for this, Mesoblast has implemented control measures to heavily reduce the rate of cash burn, which saw it end the period with US$120.8 million cash in hand. During the December quarter, the group’s operating cash outflow was US$19.8 million, down 25% compared to the September quarter in which outflows totalled US$28.1 million. R&D expenses were 23% lower than in the prior corresponding period, while management and administration costs were 22% lower.

It also reported a loss before income tax of $35.5 million, an improvement on the $43.4 million reported in the prior corresponding period.

Indeed, shareholders of Mesoblast could be very well rewarded in the long-run if it continues to report successful trial results, and if it can continue to decrease the rate at which it churns through cash. However, it is also a risky bet, and one that would be best avoided by those investors who are intolerant to potentially sharp share price falls.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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.

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