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Why the Mesoblast limited share price plunged 10% this morning

The Mesoblast limited (ASX: MSB) share price plunged 10% after the company returned to trade this morning:

source: Google Finance

Mesoblast has been in a trading halt since Friday, raising capital from institutional investors in a 1-for-12 issue. Management announced this morning that the company had completed the $38 million capital raising from institutional investors, although it was not clear how much was contributed by external investors and how much was carried by the underwriter, Bell Potter. Retail investors who hold Mesoblast shares as of 7pm this evening will be invited to participate in the $12 million retail capital raising under the same terms as institutions.

The funds will go towards the ongoing costs of the company’s research, with several treatments currently in Phase 3 trials. At least one trial is expected to complete in the second half of 2018. If successful, the next step could be to achieve FDA registration and commence sales.

Is Mesoblast a buy? 

In my opinion, the current price of $1.45 – a $700 million market capitalisation – is obviously the wrong price for Mesoblast. In simple terms either its trials will not succeed, in which case the company is hugely overvalued, or they will succeed, in which case the company is likely considerably undervalued. The trouble for ordinary shareholders is that it is very difficult to know which is the case before the results. Additionally, even if successful, the company has a long road ahead even after registration as it will have to actually sell its product, which requires investing in sales infrastructure and so on.

In my opinion, any purchase of Mesoblast today should be considered high risk and speculative, and kept as only a small part of a diversified portfolio.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. 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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