Business Context and Reporting Period
Company: Mesoblast Limited (Mesoblast)
Filing Type: Form 6-K (Quarterly Report)
Reporting Period: Three months ended September 30, 2016
Business Overview: Mesoblast is a clinical-stage biotechnology company developing regenerative medicine products based on mesenchymal lineage adult stem cells (MLCs). The company is dual-listed on the Australian Securities Exchange (ASX) and the NASDAQ Global Select Market. Its portfolio includes late-stage product candidates targeting cardiovascular diseases, immunologic conditions, orthopedic disorders, and oncology.
Key Financial Metrics
| Metric (in thousands USD) | Q1 FY2017 (Sep 30, 2016) | Q1 FY2016 (Sep 30, 2015) |
|---|---|---|
| Total Revenue | $395 | $7,513 |
| Net Loss | $(19,798) | $(13,160) |
| Loss Per Share (Basic & Diluted) | $(0.0524) | $(0.0394) |
| Operating Cash Flow | $(20,827) | $(28,067) |
| Cash and Cash Equivalents (Ending) | $60,355 | $77,761 |
| Total Assets | $665,444 | N/A |
| Total Liabilities | $155,572 | N/A |
Note: Revenue consists primarily of commercialization revenue ($218k) and interest revenue ($177k). There was no milestone revenue recognized in the current period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by 95% ($7.1 million) compared to the prior year. This was driven by the absence of a $3.5 million milestone payment from JCR Pharmaceuticals (received in 2015 for regulatory approval of TEMCELL in Japan) and the cessation of amortization of deferred revenue from the Teva agreement, which was fully recognized in June 2016.
- Increased Net Loss: Net loss increased by 50% ($6.6 million) to $19.8 million. This was primarily due to the significant revenue drop, partially offset by a $3.1 million non-cash deferred tax benefit recognized in the current period (absent in the prior period).
- Expense Fluctuations:
- R&D Expenses: Increased 26% to $14.0 million, driven by higher third-party costs for Tier 1 product advancement (specifically MPC-150-IM, MPC-06-ID, MSC-100-IV, and MPC-300-IV) following the termination of the Teva joint development.
- Manufacturing Expenses: Decreased 47% to $3.3 million due to fewer production runs for MSC-based products and a credit for prior year expenditures, offset by increased MPC-based production.
- Contingent Consideration: The fair value remeasurement gain dropped from $3.7 million in 2015 to $24,000 in 2016.
- Cash Position: Cash and cash equivalents decreased by $20.6 million during the quarter, though the burn rate (operating cash outflow) improved by 26% compared to the prior year due to cost containment measures.
Outlook, Risks, and Management Commentary
- 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 funding through partnerships for Tier 1 programs, raising additional capital, and successfully implementing cost containment strategies. A discretionary equity facility of up to US$90 million is available.
- Clinical Progress:
- MPC-150-IM (Heart Failure): Regained full worldwide rights from Teva in June 2016; Phase 3 trial advancement is a priority.
- MPC-300-IV (Diabetic Kidney Disease): Phase 2 results published showing improved renal function and safety.
- MPC-06-ID (Chronic Low Back Pain): 24-month Phase 2 results presented showing significant pain and functional improvement.
- MSC-100-IV (aGVHD): Phase 3 trial passed a pre-specified interim futility analysis.
- Cost Containment: The company has reduced full-time equivalents in R&D by approximately 22 (from 77.3 to 55.4) and is reprioritizing projects to focus on Tier 1 candidates.
- Key Risks:
- Failure to secure additional financing or partnerships.
- Regulatory approval delays or failures for novel stem cell therapies.
- Reliance on third-party manufacturers (Lonza) for clinical and commercial supply.
- Intellectual property protection and potential infringement claims.
- Internal control material weakness regarding segregation of duties.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $60.4 million cash balance against the current burn rate and the timeline for securing the committed Tier 1 partnerships.
- Partnership Status: Confirm the status of negotiations for non-dilutive funding for the four key Tier 1 programs (MPC-150-IM, MPC-06-ID, MSC-100-IV, MPC-300-IV).
- Revenue Sustainability: Assess the long-term revenue outlook given the cessation of the Teva deferred revenue amortization and the one-time nature of the JCR milestone.
- Internal Controls: Review the remediation plan for the material weakness in internal controls over financial reporting (segregation of duties) disclosed in the filing.
- Manufacturing Scale-up: Evaluate the risks associated with reliance on Lonza as the sole manufacturer and the transition to 3D bioreactor manufacturing.