Shares in Mesoblast limited (ASX: MSB) traded sideways today after the company provided an update for the quarter ending September 2016 over the status of its multiple clinical trials and financial performance.
The stem cell therapy hopeful continues to boast an impressive pipeline of drug products in trial status for the treatment of common medical complaints such as back pain, arthritis, heart failure and acute graft versus host disease. It currently has Phase II or III trials ongoing to test the efficacy of its stem cell treatment in treating the aforementioned conditions and hopes to one day receive regulatory approval to sell the treatments in the U.S. healthcare market.
There's little doubt that the science is exciting, although so far Mesoblast has little to show for it other than an almighty hole in shareholders' pockets.
Just over the three-month period to September 2016, US$9.4 million was spent on research and development, US$5.74 million on 'manufacturing and commercialisation', and US$2.44 million on staff costs, with US$3.4 million on 'other' expenses.
Revenues were just $US0.36 million for the quarter to produce a cash loss of US$20.87 million (A$27.6 million) and given that the company has US$60.2 million of cash left on its balance sheet it seems inevitable that substantially more equity will need to be issued over the next few years. After all, no career-minded banker is likely to lend to the business given its tremendous ability to burn cash with almost nothing coming in the door.
In response to its cash burn issues the company has established an 'equity facility' whereby it can issue up to US$90 million of new equity over the next three years via on-market placements of new shares by a broker appointed to work on behalf of Mesoblast in return for substantial fees. So while the science may remain exciting the lack of revenues currently or in the near future remains the gorilla in the room and means the company does not look investment grade to me.
Investors looking to take on more risk in pursuit of big returns would be far better off looking at already profitable businesses growing sales strongly on the back of their proven products. A couple that come to mind are Nanosonics Ltd (ASX: NAN) or Somnomed Limited (ASX: SOM). Both are higher up the risk chain due to their meaty valuations, but are cash flow positive and growing strongly.
