MESO

Business Context and Reporting Period

Company: Mesoblast Limited (ASX:MSB; Nasdaq:MESO)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three and six months ended December 31, 2020
Business Overview: Mesoblast is a clinical-stage biotechnology company developing allogeneic cellular medicines based on mesenchymal lineage adult stem cells. Key product candidates include remestemcel-L (for pediatric SR-aGVHD, ARDS, and IBD) and rexlemestrocel-L (for chronic heart failure and chronic low back pain). The company is dual-listed in Australia and the United States.

Key Financial Metrics

Note: Revenue for the six months ended Dec 31, 2019 included a $15.0 million milestone payment from the Grünenthal partnership, which was not present in the 2020 period.

Material Changes vs. Prior Period

• Revenue Decline: Revenue for the six months ended Dec 31, 2020, dropped 82% to $3.5 million compared to $19.3 million in the prior year. This decrease is primarily due to the absence of the $15.0 million milestone revenue recognized in 2019 from the Grünenthal strategic partnership. Commercialization revenue (royalties) decreased slightly by 9% to $3.5 million.
• Increased Losses: Net loss for the six months ended Dec 31, 2020, increased 67% to $50.2 million from $30.1 million in the prior year. This was driven by higher operating expenses, partially offset by a significant non-cash gain.
• Expense Increases:
  • R&D Expenses: Increased 26% to $33.5 million, driven by higher product support costs (salaries and share-based payments) in preparation for potential US launches.
  • Manufacturing Commercialization: Increased 134% to $18.4 million, primarily due to stock build-up for potential remestemcel-L launch and process development.
• Non-Cash Gain: The company recognized a $16.6 million gain from the fair value remeasurement of contingent consideration related to the Osiris acquisition. This gain resulted from updated assumptions regarding development timelines following the FDA's Complete Response Letter for remestemcel-L.
• Cash Position: Cash and cash equivalents decreased by $53.4 million during the six-month period, resulting in a net cash outflow from operations of $60.1 million.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

• Going Concern Uncertainty: Management has prepared the financial statements on a going concern basis but notes a material uncertainty regarding the company's ability to continue as a going concern. The company requires additional cash inflows to meet forecast expenditures and loan covenants.
• Financing: As of February 26, 2021, the company commenced a proposed equity-based private placement to a targeted industry investor, expected to close in early March 2021. Proceeds will fund working capital, confirmatory trials, and manufacturing optimization.
• Strategic Partnership: In November 2020, Mesoblast entered into a worldwide license and collaboration agreement with Novartis for remestemcel-L, focusing on ARDS (including COVID-19). The agreement includes a potential $50.0 million upfront payment (including $25.0 million in equity) and up to $505.0 million in pre-commercialization milestones. The agreement had not closed as of Dec 31, 2020.

Key Risks and Contingencies

• Regulatory Hurdles: The FDA issued a Complete Response Letter (CRL) in September 2020 for the BLA of remestemcel-L for pediatric SR-aGVHD, requesting an additional randomized controlled study. While the ODAC voted in favor of efficacy, the FDA has not agreed to accelerated or full approval at this time.
• Clinical Trial Results:
  • ARDS (COVID-19): The Phase 3 trial for ARDS enrolled 223 patients. An interim analysis indicated the trial was unlikely to meet the primary endpoint of 30-day mortality reduction at the planned 300-patient enrollment. The trial will complete with the enrolled patients to evaluate secondary endpoints.
  • Heart Failure (DREAM-HF): Top-line results showed a 60% reduction in heart attacks/strokes and cardiac death in NYHA Class II patients, but the primary endpoint (recurrent non-fatal decompensated heart failure) was not met.
• Debt Covenants: The company has loan facilities with Hercules Capital and NovaQuest. It must maintain minimum unrestricted cash balances (four months liquidity) to comply with covenants. Failure to meet these could trigger an event of default.
• Legal Proceedings: A purported class action lawsuit was filed in October 2020 in the U.S. Federal District Court following the FDA CRL and stock price decline. The company has not accrued any amounts for this litigation.

Investor Verification Checklist

• Cash Runway: Verify the closing and proceeds of the proposed private placement announced in February 2021 to confirm sufficient liquidity to meet the four-month cash covenant with Hercules Capital.
• Novartis Agreement Status: Confirm the closing status of the Novartis collaboration agreement and the receipt of the $50.0 million upfront payment (including equity component).
• FDA Pathway: Monitor the outcome of discussions with the FDA regarding the remestemcel-L BLA for pediatric SR-aGVHD and the design of the required additional randomized controlled study.
• Debt Structure: Review the amended terms of the Hercules loan (extended interest-only period to March 2022) and the impact of the NovaQuest loan's sales-based repayment structure on future cash flows.
• Intangible Assets: Assess the valuation of in-process research and development assets ($427.8 million) and goodwill ($134.5 million) given the mixed clinical trial results and regulatory delays.