Melbourne, Sept 1, 2008 (ABN Newswire) - Mesoblast Limited's (ASX:MSB)(OTC:MBLTY) product has statistically significant higher fusion rates in anterior cervical interbody operations compared to a competitor. We believe the competitor's FY08 cervical fusion sales were cA$325m, but has recently been forced to exit the market.

Mesoblast (MSB.AX): FY08: spinal shock

Long term (12 months): Buy
Target price: A$1.50 (from A$1.30)
Reason: Change of target price

FY08 result - higher-than-expected interest income

MSB posted an NPAT of -A$10.1m for FY08, with a loss below our forecast of -A$10.4m due to higher-than-expected interest income. We believe MSB has sufficient cash (A$14.1m in FY08) to fund its clinical programme for the next one to two years.

A new cervical spine opportunity

Major recent news relates to a new indication for MSB's osteoinductive adult mesenchymal precursor cells (MPCs). MSB recently issued data showing that MSB's MPCs achieved a statistically significant improvement in cervical fusion rates compared to Medtronic's osteoconductive bulking agent (MasterGraft Granules). Given the recent issues with Medtronic's osteoinductive Recombinant Human Bone Morphogenic protein (rhBMP) product (also used in cervical fusion operations) we believe a significant opportunity exists with MSB's MPCs being potentially useful over the medium term in anterior cervical interbody fusion operations.

MSB's MPCs may address the gap in the market for cervical fusion

In July 2008, the US FDA issued a statement that the safety and effectiveness of rhBMP in the cervical spine had not been demonstrated and these products were not approved by FDA for this use. We believe the anterior interbody cervical spine fusion market for BMPs is worth cUS$325m. As a result of the FDA decision, we believe there is currently no synthetic bone graft approved for anterior interbody cervical spine fusions. Medium-term, MSB's MPCs may address this gap in the market.

Buy rating maintained, target price A$1.50

The major changes to our forecasts have been: 1) we believe MSB will get its product to market in FY11 (previously 2HFY10) - hence we believe MSB will not be cash flow positive until FY11; and 2) given the anterior cervical interbody fusion opportunity, we believe initial sales of MSB's cells will be greater, and have updated our forecasts accordingly. As a result of changes to forecasts, our DCF valuation and 12-month target price have increased by 15.4% to A$1.50 per share.

To view the full report, please visit:

http://mesoblast.com.au/investor_analysis.php