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Why the Mesoblast limited share price has rocketed in 2016

Shares in regenerative stem cell medicine business Mesoblast limited (ASX: MSB) have rocketed 36% over the course of 2016, compared to a 6% fall for the market.

The strong performance of Mesoblast this year reflects the share price rebounding off multi-year lows and renewed investor confidence in the company’s ability to deliver on its ground-breaking potential.

Mesoblast is in the process of developing a range of therapies for common diseases and medical complaints, the science being to develop stem cells that regenerate ageing or diseased body parts such as cartilage, bone, and muscle.

In late February the company achieved a significant milestone when it announced one of its stem cell medicine products for the treatment of aGVHD had been commercially launched in Japan by its business partner JCR Pharmaceuticals.

The deal in Japan has money-making potential and the big prize of approval in the lucrative US healthcare market for its aGVHD product could be won in 2017.

The company’s stem cell technology also has a wide variety of other applications in treating common diseases like arthritis or diabetes, while it has two late stage clinical trials in progress to prove the efficacy of its treatments for chronic heart failure and chronic lower back pain due to disc degeneration.

This all sounds exciting, but the fly in the ointment remains the company’s high cash burn due to the expense of conducting multiple clinical trials and extensive scientific research all at the same time.

In Q2 2016 the company posted negative cash flow of $19.8 million from operating activities. It had $120.8 million cash in hand at the end of 2015, which means it needs to start generating serious revenues within the next 12-18 months otherwise the potential for another capital raising comes onto the horizon.

Mesoblast though could avoid this scenario if able to secure a distribution partner and licensee for its aGVHD product in the US. This could result in a large upfront payment and substantial royalties if Mesoblast seals a deal.

Today its shares sell for $2.50 and are likely to remain volatile due to the blockbuster potential, but unfavourable economics.

Another Aussie healthcare pioneer delivering good news to the market today is cancer treatment specialist Sirtex Medical Limited (ASX: SRX). Today it received a boost after announcing UK healthcare authorities approved its SIR-Spheres product for a wider range of clinical conditions suffered by oncology patients. Sirtex shares are up 0.2% to $29.

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Motley Fool contributor Tom Richardson owns shares of Mesoblast Limited and Sirtex Medical Limited. 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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