This $9 billion investor is selling off Mesoblast shares. Should you?

Mesoblast was dealt a major blow last week when the FDA knocked back its flagship drug for a second time.

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Mesoblast Ltd (ASX: MSB) shares took a cliff-fall last week after the United States Food and Drug Administration (FDA) once again knocked back its remestemcel-L drug.

And now it looks like one big institutional investor has lost at least some of its faith in the ASX biotech, selling millions of shares in the days since the bad news broke.

Which begs the question, should you do the same?

Mesoblast shares hit rock bottom

As shown in the chart, Mesoblast shares fell 57% last Friday when the company announced the bad news.

The share price fell from a close of $1.09 on Tuesday to 47 cents on Friday.

Mesoblast shares have continued to tumble in the fall-out, hitting an all-time low of 37.5 cents yesterday.

On Wednesday, Mesoblast shares opened at 38.5 cents, up 2.67%.

Big overseas investor sells down holdings

Two notices lodged with the ASX today reveal a large institutional investor has reduced its stake.

On the day of the news last Friday, M&G Plc (LON: MNG) — a global investment management firm with a $9 billion market capitalisation — offloaded 18.68 million of its 76,996,783 Mesoblast shares.

This reduced its stake in the company from 9.46% to 7.16%.

It remains a substantial investor, which is defined by a holding of 5%-plus.

On Monday this week, subsidiary company M&G Investments Funds also sold 10.39 million of its 51,954,410 Mesoblast shares, reducing its stake from 6.38% to 5.1%.

What's next for Mesoblast shares?

Doldrums, pretty much.

Investors are back in a holding pattern as Mesoblast begins preparations for the next study.

Just to recap, remestemcel-L is a stem-cell injectable medicine that treats steroid-refractory acute graft-versus-host disease (SR-aGVHD).

This is a severe immune reaction that can occur after bone marrow transplantation. It has a mortality rate of up to 90% in children.

Mesoblast's focus to date has been paediatric SR-aGVHD. There are currently no FDA-approved treatments in the US for children under 12 years of age with SR-aGVHD.

The next study Mesoblast will conduct will involve high-risk adults.

Last time the FDA knocked back remestemcel-L, it asked for another study in either kids or adults, and Mesoblast chose kids.

This time, Meosblast will do an adult study and has said this is in line with its commercial strategy anyway. The long-term plan has been to begin treating kids and then move to adults.

The next step will involve Mesoblast meeting with the FDA to design the study at what's called a Type A meeting within the next five weeks.

What should you do?

This is a very personal decision for Mesoblast shares investors.

Your choice partly depends on how patient you are.

The timeline last time involved almost three years.

Mesoblast received the first FDA knock-back in October 2020. It did more testing, then re-applied for approval in March this year, and the FDA made its decision this month.

So, that's almost three years.

Mesoblast has not provided an indicative timeline for the next study as yet.

Meantime, broker Bell Potter has reviewed the FDA's decision and downgraded Mesoblast shares to a speculative hold rating from a buy rating.

It has reduced its 12-month price target from $2 to 60 cents.

Motley Fool contributor Bronwyn Allen has positions in Mesoblast. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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