I'm always a bit wary of buying into biotechnology stocks when they are in the development phase.
The results of a clinical trial can make or break a company, with the associated wild swings in share prices following.
That's one of the reasons I think Mesoblast Ltd (ASX: MSB) is so attractive.
The company has a relatively large and growing income stream as well as a few more irons in the fire on the development front.
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Cash burn dropping close to breakeven
Mesoblast recently reported its quarterly revenue figures, showing a 44% year-on-year increase in revenue from sales of its Ryoncil drug.
Revenues were down when considering sequential quarters; however, that seasonality is to be expected according to the company.
What I found particularly encouraging was that the company had cash burn of only US$2.1 million during the quarter, down from US$14.9 million in the same quarter a year ago.
This indicates that the company can currently fund its research programs from its cash flow, and that its large cash burn days may well be behind it.
But in terms of growth, what really excites me about the company is its Phase 3 trial in 350 patients of its compound, rexlemestrocel-L, for chronic inflammatory low back pain due to degenerative disc disease.
The company is testing the compound to see if it delivers 12 months of durable pain reduction, with results out next year.
Back pain is a huge problem, so any success on that front could be significant.
The company also, during the quarter, met with the US Food & Drug Administration about using the same compound "for treatment of patients with end-stage heart failure with reduced ejection fraction being kept alive by a left ventricular assist device''.
Mesoblast is also registering patients for a trial of Ryoncil in adults.
All of these workstreams, plus the ongoing revenues and low cash burn, come together to create a compelling story in my view, and the analyst team at Bell Potter agrees.
Mesoblast shares looking cheap
The broker issued a new research note on the company on 29 October, noting that Mesoblast had a record number of patient starts on Ryoncil in September.
But Bell Potter lowered its FY27 revenue forecast for the company by about 18% following the quarterly report.
Bell Potter has a buy recommendation on Mesoblast shares, with a price target of $4.20, compared with $2.31 at the time of writing.
If achieved, this would be an increase of 81.8%. Mesoblast is valued at $2.94 billion.
