Business Context and Reporting Period
Company: Mesoblast Limited (ASX: MESO, NASDAQ: MESO)
Filing Type: Form 6-K (Quarterly Report incorporating Half-Year Report)
Reporting Period: Three and six months ended December 31, 2015
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 in Australia and the United States (NASDAQ listing commenced November 18, 2015). Key product candidates include 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 (rheumatoid arthritis).
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Dec 31, 2015 |
3 Months Ended Dec 31, 2014 |
6 Months Ended Dec 31, 2015 |
6 Months Ended Dec 31, 2014 |
|---|---|---|---|---|
| Total Revenue | $4,014 | $4,377 | $11,527 | $11,344 |
| Net Loss | $(22,325) | $(27,882) | $(35,485) | $(43,425) |
| Loss Per Share (Basic/Diluted) | $(0.0629) | $(0.0878) | $(0.1031) | $(0.1368) |
| Operating Cash Flow | N/A | N/A | $(47,873) | $(50,752) |
| Cash and Cash Equivalents (Ending) | $120,783 | N/A | $120,783 | $122,370 |
| Total Assets | $790,953 | N/A | $790,953 | N/A |
| Total Liabilities | $298,199 | N/A | $298,199 | N/A |
Note: The company reported no income tax expense for the periods presented. Revenue consists primarily of commercialization revenue from a 2010 agreement with Teva (formerly Cephalon) and milestone revenue from JCR Pharmaceuticals.
Material Changes vs. Prior Period
- Net Loss Reduction: Net loss decreased by 20% for the three months ended Dec 31, 2015, compared to the prior year period, and by 18% for the six-month period. This improvement was driven by reduced R&D expenses and favorable fair value remeasurements.
- Revenue Composition: For the six months ended Dec 31, 2015, the company recognized $3.5 million in milestone revenue from JCR Pharmaceuticals following full regulatory approval of TEMCELL® in Japan. This compares to $2.0 million in milestone revenue in the prior year period.
- Expense Management: Research and development expenses decreased by 30% ($5.3 million) for the three-month period and 23% ($7.1 million) for the six-month period, primarily due to reduced spending on Tier 2 products and product support costs. Conversely, manufacturing commercialization expenses increased by 46% ($2.6 million) for the three-month period due to increased production runs for Tier 1 clinical supply.
- Capital Raise: The company completed its NASDAQ IPO in November 2015, raising net proceeds of approximately $59.2 million. This significantly improved liquidity, with cash balances rising from $110.7 million at June 30, 2015, to $120.8 million at December 31, 2015.
- Contingent Consideration: The company recorded a $4.3 million gain from the fair value remeasurement of contingent consideration related to the Osiris acquisition for the six months ended Dec 31, 2015, compared to a $4.5 million loss in the prior year period.
Guidance, Outlook, and Risks
- Clinical Progress:
- CHF Trial: The Phase 3 trial for MPC-150-IM (chronic heart failure) is being optimized with the FDA. The trial size is being reduced from 1,165 to approximately 600 patients, with a revised primary endpoint focusing on recurrent heart failure-related major adverse cardiovascular events (HF-MACE).
- Rheumatoid Arthritis: Top-line results from the first cohort of the Phase 2 trial for MPC-300-IV showed safety and early clinical responses. 47% of treated patients achieved the ACR20 efficacy endpoint at 12 weeks.
- Japan Launch: JCR is expected to launch TEMCELL® in Japan in Q1 2016 following National Health Insurance pricing approval.
- Liquidity Outlook: Management expects cash and cash equivalents of $120.8 million to be sufficient to fund operations for at least the next 12 months. The company anticipates continuing to incur significant losses as it advances clinical trials and seeks regulatory approvals.
- Key Risks:
- Profitability: The company has never generated revenue from product sales and may never achieve profitability. Future capital requirements are substantial.
- Regulatory Approval: Success depends on obtaining regulatory approval for novel stem cell products, a process that is costly, time-consuming, and uncertain.
- Manufacturing: The company relies on third-party manufacturers (Lonza) and has no experience manufacturing at commercial scale. Supply chain disruptions or quality issues could delay trials or commercialization.
- Internal Controls: The company identified a material weakness in internal controls over financial reporting due to limited segregation of duties, though no material misstatements were found.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $120.8 million cash balance against the projected burn rate for ongoing Phase 3 trials and manufacturing scale-up.
- CHF Trial Design: Confirm the FDA's acceptance of the revised Phase 3 trial design (reduced patient count, new primary endpoint) and the timeline for initiation.
- Japan Commercialization: Monitor the actual launch date and initial sales performance of TEMCELL® by JCR Pharmaceuticals in Japan to validate royalty revenue projections.
- Manufacturing Capacity: Assess the progress of establishing 3D bioreactor manufacturing capabilities and the reliability of the Lonza supply chain for clinical and potential commercial supply.
- Internal Controls Remediation: Review the company's plan and progress in remediating the material weakness in internal controls over financial reporting to ensure compliance with Sarbanes-Oxley Act Section 404(a) requirements.