Business Context and Reporting Period
Mesoblast Limited is a global biotechnology company developing cell-based medicines based on its proprietary Mesenchymal Lineage Adult Stem Cell (MLC) technology platform. The company is incorporated in Australia and dual-listed on the Australian Securities Exchange (ASX) and the NASDAQ Global Select Market. This Form 20-F covers the fiscal year ended June 30, 2016. The company is in the clinical-stage development phase, with no significant revenue from product sales other than royalties from its licensee in Japan.
Key Financial Metrics
| Metric (in thousands, except per share) | Year Ended June 30, 2016 | Year Ended June 30, 2015 |
|---|---|---|
| Total Revenue | $42,548 | $19,761 |
| Net Loss | $(4,127) | $(96,244) |
| Loss Per Share (Basic & Diluted) | $(1.14) | $(29.99) |
| Cash and Cash Equivalents (End of Period) | $80,937 | $110,701 |
| Net Cash Used in Operating Activities | $(87,996) | $(101,036) |
| Total Assets | $684,018 | $781,766 |
| Total Liabilities | $155,857 | $313,779 |
| Accumulated Deficit | $(268,087) | $(263,960) |
Material Changes vs. Prior Period
- Revenue Surge: Total revenue increased 115% to $42.5 million. This was primarily driven by a $22.6 million non-cash recognition of deferred revenue from a 2011 upfront payment to Teva, following the termination of their joint development agreement and Mesoblast regaining full worldwide rights to the MPC-150-IM heart failure asset in June 2016. Additionally, milestone revenue increased to $3.5 million due to regulatory approval of TEMCELL in Japan.
- Significant Impairment Charge: The company recorded a non-cash impairment charge of $61.9 million related to two Tier 2 product candidates (MPC-MICRO-IO and MPC-CBE) which were suspended to prioritize funding for Tier 1 programs.
- Contingent Consideration Gain: A $37.4 million gain was recognized from the remeasurement of contingent consideration payable to Osiris Therapeutics, Inc., largely due to revised assumptions regarding the earn-out period.
- Improved Net Loss: Despite the impairment charge, the net loss narrowed significantly to $4.1 million from $96.2 million in the prior year, largely due to the non-cash income tax benefit of $86.7 million recognized in 2016.
- Cost Reductions: Research and development expenses decreased by 20% ($12.6 million) due to the reprioritization of Tier 1 programs and reductions in Tier 2 spending. Management and administration expenses decreased by 24% ($7.0 million) due to lower share-based payment valuations and reduced legal fees.
Guidance, Outlook, and Risks
- Going Concern Uncertainty: The auditor has included an "emphasis of matter" paragraph regarding the company's ability to continue as a going concern. Management states that future viability depends on securing non-dilutive funding through partnerships for Tier 1 programs or raising additional capital. An equity facility of up to A$120 million has been established.
- Strategic Focus: The company is prioritizing four Tier 1 programs: MPC-150-IM (Chronic Heart Failure), MPC-06-ID (Chronic Low Back Pain), MSC-100-IV (Acute Graft versus Host Disease), and MPC-300-IV (Immune Mediated Diseases). Tier 2 programs have been suspended or impaired.
- Key Milestones: The company expects interim analysis results for the Phase 3 Chronic Heart Failure trial in Q1 2017 and interim results for the pediatric Phase 3 aGVHD trial in Q4 2016.
- Risks:
- Capital Requirements: The company anticipates continuing to incur substantial operating losses and requires significant additional financing.
- Regulatory Approval: Success depends on obtaining regulatory approval for product candidates, which is uncertain and costly.
- Manufacturing: Reliance on a single contract manufacturer (Lonza) for clinical and commercial supply poses supply chain risks.
- Internal Controls: The company disclosed a material weakness in internal controls over financial reporting related to segregation of duties.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $80.9 million cash balance against the projected burn rate and the status of the A$120 million equity facility.
- Revenue Quality: Confirm that the majority of 2016 revenue ($22.6 million) was non-cash (deferred revenue recognition) and does not represent new cash inflows.
- Partnership Progress: Monitor the status of partnership discussions for Tier 1 programs, which are critical for non-dilutive funding.
- Clinical Trial Data: Review upcoming interim data readouts for the Phase 3 heart failure and aGVHD trials, which are pivotal for valuation and regulatory approval.
- Internal Controls Remediation: Assess the progress made in addressing the material weakness in internal controls over financial reporting.