Business Context and Reporting Period
Company: Mesoblast Limited (Mesoblast)
Filing Type: Form 6-K (Quarterly Report)
Reporting Period: Nine months ended March 31, 2019
Business Overview: Mesoblast is a clinical-stage biotechnology company developing allogeneic cellular medicines based on mesenchymal lineage adult stem cells. The company has three product candidates in Phase 3 trials: remestemcel-L (MSC-100-IV) for acute graft versus host disease (aGVHD), Revascor (MPC-150-IM) for advanced heart failure, and MPC-06-ID for chronic low back pain. The company generates revenue primarily through licensing agreements and royalties from approved products in Japan (TEMCELL) and Europe (Alofisel).
Key Financial Metrics
| Metric (in thousands USD) | 9 Months Ended Mar 31, 2019 | 9 Months Ended Mar 31, 2018 |
|---|---|---|
| Total Revenue | $14,755 | $15,641 |
| Net Loss | $(69,073) | $(14,456) |
| Loss Per Share (Basic & Diluted) | $(0.1402) | $(0.0312) |
| Operating Cash Flow | $(38,704) | $(54,824) |
| Cash and Cash Equivalents (End of Period) | $70,385 | $59,539 |
| Total Debt (Borrowings) | $79,577 | $59,397 |
| Accumulated Deficit | $(449,265) | $(359,358) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by 6% ($0.9 million) compared to the prior year. This was driven by a $1.8 million decrease in milestone revenue (due to the absence of $11.8 million recognized from the Takeda agreement in the prior year), partially offset by a $10.0 million milestone recognition from the new Tasly strategic alliance and a $0.7 million increase in commercialization royalties.
- Significant Increase in Net Loss: Net loss increased by 380% (from $14.5 million to $69.1 million). Key drivers include:
- Manufacturing Costs: Increased by $9.5 million (181%) due to process validation activities for the remestemcel-L Biologics License Application (BLA).
- Finance Costs: Increased by $7.5 million due to interest expenses on new debt facilities (Hercules and NovaQuest).
- Contingent Consideration: A $3.4 million loss on remeasurement of contingent consideration (Osiris acquisition) replaced a $7.9 million gain in the prior period.
- Tax Incentives: Loss of eligibility for the Australian refundable R&D tax offset due to revenue exceeding A$20 million, resulting in a $1.5 million decrease in income compared to the prior year.
- Debt Expansion: Total borrowings increased by approximately $20.2 million following the drawdown of an additional $15.0 million tranche from the Hercules facility and the initial $30.0 million draw from the NovaQuest facility.
Guidance, Outlook, and Risks
- Going Concern Uncertainty: Management has identified a material uncertainty regarding the company's ability to continue as a going concern. Viability depends on securing non-dilutive commercial partnerships or equity financing. A discretionary equity facility of up to US$90 million is available for the next three months.
- Regulatory Milestones:
- remestemcel-L (aGVHD): Filed the first component of a rolling Biologics License Application (BLA) with the FDA in May 2019. The company holds Fast Track designation.
- Revascor (Heart Failure): Completed dosing in the Phase 3 trial for advanced chronic heart failure. Results are expected within 12 months.
- TEMCELL (Japan): Licensee JCR filed for marketing approval extension for Epidermolysis Bullosa (EB).
- Strategic Partnerships:
- Tasly (China): Strategic alliance for MPC-150-IM and MPC-25-IC. Tasly funds all China activities; Mesoblast received $20 million upfront (recognized $10 million revenue, deferred $10 million).
- NovaQuest: $40 million loan facility repayable from net sales of remestemcel-L in pediatric aGVHD. Interest accrues at 15% but is deferred until commercial sales.
- Risks:
- Capital Requirements: The company anticipates continuing significant losses and requires substantial additional funding for operations and commercialization.
- Manufacturing: Reliance on Lonza as the sole manufacturer for clinical and commercial scale production.
- Regulatory Approval: No assurance that product candidates will receive FDA or other regulatory approvals.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $70.4 million cash balance against the $38.7 million operating cash burn rate and upcoming debt obligations.
- Debt Covenants: Review compliance with financial covenants for the Hercules and NovaQuest loan facilities, particularly regarding interest payments and principal repayment triggers.
- Revenue Recognition: Confirm the timing and conditions for recognizing the remaining $10 million deferred consideration from the Tasly agreement.
- BLA Status: Monitor the FDA's rolling review process for the remestemcel-L BLA and any requests for additional data.
- Partnership Execution: Assess the progress of the Tasly partnership in China and the potential for additional non-dilutive funding from commercial partners.