Shares in regenerative medicine business Mesoblast limited (ASX: MSB) jumped higher last week after the company revealed an update on its clinical trials into heart failure and general funding of its operations.
The stem cell business reported that it plans to reduce its cash burn through cost reductions and a prioritisation of core assets. It also noted that it retains cash reserves of around US$80 million "to provide operational runway for 12-15 months". It anticipates all of its key Tier 1 research programs on heart disease, aGVHD and back pain will provide data read-outs within this time frame.
While the potential of stem cell science is exciting the bottom line remains that Mesoblast is burning through capital at prodigious rates with little in the way of commercial success. For the quarter ending March 31 2016 the company posted an operating cash outflow of US$22 million and the recent loss of pharmaceutical partner Teva as a funding partner for its heart failure trials has only added to its problems.
The company also updated the market that it intends to plug some of the funding gap via an equity facility agreement with Melbourne-based asset manager Kentgrove Capital. The equity facility means Mesoblast can potentially raise up to $60 million over the next 18 months, with an option to increase the facility to $120 million over 36 months.
The catch is that any issuance of shares by Kentgrove sounds like it will be dilutive, with seemingly little guarantee that shares will not be issued at a discount to the exchange traded price. Moreover, Kentgrove will also receive 4.5% of all funds raised just for arranging the placement of shares in what looks a good deal for Kentgrove and bad deal for retail shareholders.
The problem for Mesoblast is that taking on debt is not a realistic option for a company losing US$22 million a quarter and the terms of the equity funding deal reflect its weak position as it seeks to buy time while its clinical trials progress. To that end the company stated that it will bring forward to Q1 2017 a scheduled interim analysis of data from its heart failure trials to assess the primary endpoint between cell-treated and control patients.
Given the large cash outflows, latest capital management initiatives and substantial risk around the uncertainty of clinical trial results there's not much to like about Mesoblast as an investment in my opinion.
A preferable alternative in the biotech space that is also investing heavily in clinical trials to promote the use of its treatments is oncology business Sirtex Medical Limited (ASX: SRX).
Sirtex is highly profitable and continues to grow at double-digit rates with a decent outlook as awareness of its products builds globally amongst medical professionals. Today the stock sells for $26.26, which looks a reasonable entry point for long-term investors in my opinion.
