Mesoblast just cleared a key FDA hurdle. So why are investors exiting?

Shares in Mesoblast Ltd (ASX: MSB) are under pressure, despite the company releasing a positive regulatory update today.

The Mesoblast share price is down almost 15% over the past week and is trading around $2.59 this afternoon, down another 1.89%. That puts the stock at a 2-month low, despite news of progress with the US Food and Drug Administration (FDA).

So, what’s driving the weakness?

What did the FDA say?

According to the release, the FDA said Mesoblast’s lead treatment, rexlemestrocel-L, helped reduce pain levels. The feedback relates to patients with long-term lower back pain caused by degenerative disc disease.

The update follows a Type B meeting with the FDA, where the regulator reviewed results from Mesoblast’s first Phase 3 trial. The FDA said the pain reduction results looked better for patients treated with rexlemestrocel-L and that the data support the treatment working as intended.

The FDA also noted that strong reductions in opioid use seen in at least one major trial could potentially be included on the product label. Mesoblast said many patients treated with rexlemestrocel-L were able to reduce or stop opioid use for long periods after treatment.

A second Phase 3 trial is already underway in the US and is now more than halfway enrolled. Mesoblast expects recruitment to finish later this year, which keeps the regulatory process moving forward.

So why is the share price falling?

Despite the positive announcement, the share price reaction has been underwhelming.

Part of the weakness appears to be technical. Mesoblast shares have pulled back sharply over the past week and are now trading at their lowest level in roughly 2 months, which can weigh on short-term sentiment.

There is also likely some profit-taking at play. The stock rallied strongly late last year, and some investors appear to be taking profits after the update rather than waiting for the next stage.

Adding to the pressure, director activity may have unsettled some investors. Filings show that Executive Director Dr Eric Rose recently sold around 640,000 shares on market at prices near $2.97, ahead of the recent pullback. While director sales do not necessarily reflect concerns about fundamentals, they can influence near-term confidence.

What investors need to keep in mind

Mesoblast remains a high-risk, high-reward biotech stock. While the FDA response is encouraging, the product is still not close to being commercialised.

With the share price on the back foot, investors appear to be weighing long-term potential against short-term uncertainty. However, with more work still needed before approval, the share price is likely to remain volatile.

The post Mesoblast just cleared a key FDA hurdle. So why are investors exiting? appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. 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.