Business Context and Reporting Period
Mesoblast Limited (Mesoblast) is a global regenerative medicine company developing products based on mesenchymal lineage adult stem cells (MLCs). This Form 6-K reports unaudited consolidated financial results for the three months ended September 30, 2015. The company is dual-listed on the Australian Securities Exchange (ASX) and the NASDAQ Global Select Market (NASDAQ), having completed its U.S. initial public offering (IPO) on November 18, 2015. Financial statements are presented in U.S. dollars in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended Sept 30, 2015 | Three Months Ended Sept 30, 2014 |
|---|---|---|
| Total Revenue | $7,513 | $6,967 |
| Net Loss | $(13,160) | $(15,545) |
| Loss Per Share (Basic & Diluted) | $(0.0394) | $(0.0490) |
| Operating Cash Flow | $(28,067) | $(27,862) |
| Cash and Cash Equivalents (Sept 30, 2015) | $77,761 | N/A |
| Accumulated Deficit (Sept 30, 2015) | $(277,120) | N/A |
Revenue Breakdown (Q3 2015): Commercialization revenue was $3.75 million (amortization of upfront payment from Teva/Cephalon). Milestone revenue was $3.5 million (regulatory approval of TEMCELL in Japan by licensee JCR). Interest revenue was $0.26 million.
Expense Breakdown (Q3 2015): Research and development expenses were $11.1 million. Manufacturing and commercialization expenses were $6.2 million. Management and administration expenses were $5.5 million.
Material Changes vs. Prior Period
- Net Loss Improvement: The net loss decreased by $2.4 million (15%) compared to the prior year period, primarily driven by a $5.4 million swing in the fair value remeasurement of contingent consideration (a $3.7 million gain in 2015 vs. a $1.6 million loss in 2014) and reduced operating expenses.
- Revenue Growth: Total revenue increased by 8% ($0.5 million), driven by a $1.5 million increase in milestone revenue from JCR. This was partially offset by a 78% decrease in interest revenue due to lower cash reserves and a strategic shift to holding more cash in U.S. dollars (lower yield) to mitigate currency risk.
- Expense Reductions: Research and development expenses decreased by 14% ($1.8 million) due to cost restraint on Tier 2 products and product support costs. Management and administration expenses decreased by 20% ($1.4 million) due to cost controls and favorable foreign exchange impacts.
- Contingent Consideration: The company recognized a $3.7 million gain from the remeasurement of contingent consideration related to the Osiris acquisition, reflecting changes in assumptions regarding market population, pricing, and timelines.
Guidance, Outlook, and Risks
Outlook and Liquidity: Management expects to continue incurring significant losses for the foreseeable future. As of September 30, 2015, cash reserves were $77.8 million. Following the November 2015 IPO, the company raised approximately $68.3 million in gross proceeds (approx. $58.8 million net). Management believes these funds are sufficient to support operations for at least the next 12 months.
Key Developments:
- Licensee JCR received full regulatory approval for TEMCELL in Japan in September 2015, triggering the $3.5 million milestone payment.
- On November 26, 2015, the Japanese National Health Insurance body set the price for TEMCELL.
- The company is advancing five MLC product candidates into Phase 3 trials or Phase 3-ready status.
Risks and Contingencies:
- Profitability: The company has never generated product sales revenue and may never achieve profitability. Future revenue depends on regulatory approvals and commercialization success.
- Capital Requirements: Significant additional funding will be required to fund clinical trials, manufacturing scale-up, and commercialization. Failure to raise capital could force the company to scale back operations.
- Regulatory and Clinical Risks: No industrially manufactured stem cell products have been approved in the U.S. Clinical trials are subject to high failure rates, delays, and regulatory uncertainty.
- Manufacturing: The company relies on third-party manufacturers (Lonza) and has no experience manufacturing at commercial scale. Supply chain disruptions or quality issues could halt development.
- Internal Controls: The company identified a material weakness in internal controls over financial reporting due to limited segregation of duties, though this did not result in material adjustments to the financial statements.
Investor Verification Checklist
- Verify the sustainability of the $3.7 million gain from contingent consideration remeasurement and the sensitivity of this liability to changes in market assumptions.
- Confirm the timeline and funding requirements for the Phase 3 trials of key product candidates (MPC-150-IM, MSC-100-IV, MPC-06-ID).
- Assess the commercialization strategy and royalty potential from the JCR TEMCELL launch in Japan, including reimbursement rates.
- Review the company's progress in addressing the material weakness in internal controls over financial reporting.
- Monitor the burn rate and the sufficiency of the combined cash balance (pre-IPO and IPO proceeds) to fund operations through the next 12-18 months.
- Evaluate the risks associated with reliance on Lonza as the sole manufacturer for MLC product candidates.