Business Context and Reporting Period
Company: Mesoblast Limited (ASX: MESO, NASDAQ: MESO)
Filing Type: Form 6-K (Quarterly Report)
Reporting Period: Three months ended September 30, 2018
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: MSC-100-IV (remestemcel-L) for acute graft versus host disease (aGVHD), MPC-150-IM for heart failure, and MPC-06-ID for chronic low back pain. The company also holds commercialization rights for TEMCELL in Japan via a licensee (JCR).
Key Financial Metrics
| Metric (in thousands USD) | Q3 2018 | Q3 2017 |
|---|---|---|
| Total Revenue | $11,637 | $1,174 |
| Net Loss | $(19,498) | $(7,022) |
| Loss Per Share (Basic & Diluted) | $(0.0407) | $(0.0158) |
| Operating Cash Flow | $(19,544) | $(20,356) |
| Cash and Cash Equivalents (End of Period) | $55,143 | $62,941 |
| Total Borrowings | $61,159 | $0 |
| Accumulated Deficit | $(399,690) | $(351,924) |
Material Changes vs. Prior Period
- Revenue Surge: Total revenue increased by $10.5 million (891%) to $11.6 million. This was primarily driven by a $10.0 million milestone revenue recognition from the strategic alliance with Tasly Pharmaceutical Group for the development of MPC products in China. Commercialization revenue (royalties from JCR) also increased by $0.4 million.
- Increased Expenses:
- R&D Expenses: Increased by $3.1 million (20%) to $18.5 million, driven by higher third-party costs for Tier 1 clinical programs (MPC-150-IM, MSC-100-IV, MPC-06-ID).
- Manufacturing Commercialization: Increased by $3.4 million to $4.3 million, largely due to process validation activities for the MSC-100-IV Biologics License Application (BLA).
- Finance Costs: Increased by $2.7 million to $2.7 million due to interest expenses on new debt facilities with Hercules Capital and NovaQuest Capital Management.
- Debt Financing: The company entered into two significant debt facilities during the period: a $75 million credit facility with Hercules (drawn $35 million) and a $40 million secured loan with NovaQuest (drawn $30 million). Total borrowings on the balance sheet rose from $0 to $61.2 million.
- Contingent Consideration: The company recognized a $0.6 million loss on the remeasurement of contingent consideration related to the Osiris acquisition, compared to a $9.5 million gain in the prior year.
Outlook, Risks, and Management Commentary
- Going Concern Uncertainty: Management has disclosed a material uncertainty regarding the company's ability to continue as a going concern. Viability depends on securing non-dilutive commercial partnering transactions or equity-based financing to fund future operations, alongside cost containment strategies.
- Strategic Partnerships:
- Tasly: Completed a strategic alliance in China for MPC-150-IM and MPC-25-IC. Received $20 million upfront (recognized $10 million as revenue, $10 million deferred) and $20 million in equity purchase in October 2018.
- JCR: Expanded partnership in Japan to include wound healing for Epidermolysis Bullosa (EB).
- Clinical Progress:
- MPC-150-IM (Heart Failure): Phase 2 trial results showed reduction in gastrointestinal bleeding in LVAD patients. Company plans to meet with FDA in H1 2019 to discuss BLA pathway.
- MSC-100-IV (aGVHD): Phase 3 trial in children met primary endpoint (Day 28 Overall Response). Day 180 survival was 69% for the treated group.
- Capital Requirements: The company anticipates continuing to incur significant losses. It has a discretionary equity facility of up to A$120 million (approx. US$90 million) available over the next 9 months.
- Risks: Key risks include the inability to raise additional capital, failure to achieve regulatory approval for product candidates, reliance on third-party manufacturers (Lonza), and the impact of debt covenants on operations.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $55.1 million cash balance against the $19.5 million quarterly operating burn rate and upcoming debt service obligations.
- Debt Covenants: Review the specific financial covenants and repayment triggers in the Hercules and NovaQuest loan agreements, particularly the sales-based repayment structure of the NovaQuest facility.
- Revenue Recognition: Confirm the accounting treatment of the Tasly deal, specifically the $10 million deferred consideration and the conditions for future revenue recognition.
- Clinical Milestones: Monitor the FDA meeting scheduled for H1 2019 regarding MPC-150-IM and the potential BLA filing for MSC-100-IV.
- Going Concern Status: Assess the likelihood of securing the necessary non-dilutive partnerships or equity financing to avoid liquidity constraints.