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Mesoblast limited shares are going NUTS on trial success

Shares in regenerative medicine hopeful Mesoblast limited (ASX: MSB) are on fire this morning after the company announced that one of its trial drugs to treat acute versus graft host disease (aGVHD) in children “had been successful in a pre-specified interim futility analysis”. Mesoblast also updated the market that: “Enrolment in the 60-patient Phase 3 trial is ongoing across multiple sites in the United States, trial completion is expected in the first half of 2017, and commercial launch activities are underway”.

The stock has climbed around 10% to $1.30 on the strength of the announcement.

The company does currently have a treatment for aGVHD licensed for sale in Japan and its U.S. trial is ongoing with the goal of getting the clinical data necessary to persuade the U.S. healthcare regulator that the drug should be licensed for sale in the U.S.

Given the complex science behind the business the market often struggles to interpret the meaning of Mesoblast’s announcements which results in wild intra-day share price swings. However, over the long term the share price has been trending downhill from nearly $10 in 2011 to just over $1 in 2016 and there’s no doubt as to why. Cash burn. The company’s multiple clinical trials and operating costs are seriously expensive with the quarter ending September 30 2016 seeing US$20.8 million fly out the door with sales of just US$361,000.

Until the financials start to improve it’s unlikely investors are going to keep bidding the share price higher on the basis of its potential alone. Especially when this cash-burning machine has US$60 million worth of cash left on its balance sheet with a quarterly outflow around $US20 million at recent levels.

Given the lack of revenues, Mesoblast is unlikely to find any sane bankers willing to lend it large sums of money on reasonable terms, which is why it’s largely reliant on the largesse of shareholders willing to tip more capital into the business in the hope that the company will deliver on its reportedly giant potential.

Its cash burn means I don’t consider it investment grade, especially when there are other highly profitable, fast-growing healthcare companies on the ASX with loads of potential. Take Sirtex Medical Limited (ASX: SRX) for instance, which is also what I would consider a higher-risk investment but with far greater potential to deliver investors superb returns on the basis of its fast growing sales and profits.

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

You can find him 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.

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