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This ASX biotech share is joining the race for a COVID-19 cure. Could it rejoin the ASX 200 too?

It was only 9 years ago, almost to the date, that Mesoblast Limited (ASX: MSB) was added to the S&P/ASX 200 Index (ASX: XJO). At the time, the company’s share price was trading near $9, giving Mesoblast a market value of $2.5 billion at its peak.

Fast-forward to the present time and the Mesoblast share price has struggled to gain any traction over the past years, barely cracking $3. However, the company’s fortunes could be poised for a turnaround as Mesoblast joins the race to find a drug for COVID-19.

How has Mesoblast performed?

Mesoblast is a world leader in developing regenerative medicines for inflammatory diseases. The company has used its cell therapy technology to establish a broad portfolio of commercial products and has a large pipeline of therapies in late-stage development and testing.

Earlier this year, Mesoblast reported a 43% increase in revenue of US$19.2 million for the half-year. Revenue growth was driven by the company’s licence for its flagship steroid-refractory acute graft versus host disease (Ryoncil) product in Japan.

How has Mesoblast responded to the COVID-19 pandemic?

Last week, Mesoblast informed the market that the company was about to begin formal trials for a product designed to treat patients suffering from COVID-19. In response, the Mesoblast share price has surged more than 130% from its lows in March.

As part of a randomised, placebo-controlled trial, Mesoblast’s Ryoncil product will be evaluated on its capability to counteract the inflammatory side effects of COVID-19. Ryoncil was already in a number of other clinical trials targeted at reducing inflammatory conditions on patients with steroid-refractory acute graft versus host disease (aGVHD).

What if the product is a success?

Mesoblast’s treatment is targeted towards patients who are already in a critical condition as a result of COVID-19 and require intubation. A successful treatment would mean a great deal, not only for the company but for the potential number of lives that it could save.

However, a successful treatment will not automatically translate to profits and an immediate cure. At current production levels Mesoblast would not be able to provide enough product for the people who are in a critical condition as a result of COVID-19. Therefore, it is important to keep in mind that the manufacturing challenges for a successful therapy would require a substantial capital injection.

Foolish takeaway

It is important to note that the Mesoblast share price has already rocketed substantially higher. For that reason, I think it would be irresponsible for investors to jump the gun and buy shares in the company purely in the hope that the drug is successful.

Mesoblast still has a long way to go before the company will be considered to join the ASX 200 again. I think a prudent strategy would be to keep Mesoblast on a watchlist and wait for a substantial pullback in the company’s share price before making an investment decision.

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Motley Fool contributor Nikhil Gangaram 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 Scott Phillips.

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