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Mesoblast (ASX:MSB) share price on watch for HY21, capital raising

The Mesoblast Limited (ASX: MSB) share price will be on watch this week after the company went into a trading halt last week with the announcement of a capital raising on the same day as releasing its FY21 half-year result.

Mesoblast is a healthcare business. It describes itself as a regenerative medicine company.

What was announced by Mesoblast?

On Friday morning, Mesoblast put its shares into a trading halt “in relation to a proposed private placement to a targeted industry investor”.

Mesoblast then released its FY21 half-year report during Friday evening.

For the six months to 31 December 2020, revenue fell over 80% to US$3.55 million. Yet all of the operating costs increased – research & development costs rose to US$33.5 million, manufacturing commercialisation went up to US$18.4 million and management & admin costs grew to US$15.5 million.

As you may have already have guessed. Mesoblast reported a sizeable (increased) loss after tax, of US$49 million.

The company’s balance sheet says that it has US$519 million of net assets, but US$581.3 million of that is intangible assets. It only had US$77.5 million of cash at the end of December 2020. Operating net cash outflows for the period amounted to US$60.1 million.

Auditors are concerned

Mesoblast’s auditors are/were concerned that the company may not be able to keep operating if its cash burn continued and it didn’t raise any extra cash to ensure its loan agreements didn’t become an issue.

The auditors said: “The ability of the group to continue as a going concern and realise its assets and discharge its liabilities in the normal course of business are dependent on cash inflows from successfully completing the private placement, as well as from existing strategic and financing partnerships which are subject to the group meeting future milestones and other performance conditions. These conditions, along with other matters indicate that a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern.”

Mesoblast expects the placement will close in the first week of March 2021 and the cash will be used for working capital and to prepare for confirmatory trials in lead programs as per FDA requirements. The proceeds will also allow for continued investment by the company. Mesoblast also said it intended to achieve cashflow from milestones being met from its partnerships, though there is uncertainty with this.

Management and directors believe the company will be successful. But they did acknowledge that there is a material uncertainty that may cast significant doubt on the ability of the company to continue as a going concern and that the group may be unable to realise its assets and discharge the liabilities in the normal course of business.

Summary thoughts

A lot seems to be riding on this capital raising. How low will the share price have to be to tempt this investor on board?

Biotech businesses can be risky propositions because they are steadily using up their cash until a product can generate enough cashflow to offset that burn. If I were interested in buying shares, I wouldn’t want to consider Mesoblast shares until there’s a lot more certainty about its balance sheet.

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Is BNPL the opportunity of a lifetime or is the sector a ticking time bomb?

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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