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, 2017
Business Overview: Mesoblast is a global leader in developing innovative cellular medicines based on mesenchymal lineage adult stem cells. The company focuses on late-stage product candidates for cardiovascular, orthopedic, immunologic, and oncologic conditions. Key products include MSC-100-IV (remestemcel-L) for acute Graft versus Host Disease (aGVHD) and MPC-150-IM for heart failure.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Dec 31, 2017 | 6 Months Ended Dec 31, 2017 | 6 Months Ended Dec 31, 2016 |
|---|---|---|---|
| Revenue | $13,397 | $14,571 | $945 |
| Research & Development Expenses | $(16,222) | $(31,590) | $(29,047) |
| Manufacturing Commercialization Expenses | $(801) | $(1,678) | $(7,085) |
| Management & Administration Expenses | $(5,643) | $(10,655) | $(10,338) |
| Loss Before Income Tax | $(9,639) | $(19,559) | $(46,080) |
| Income Tax Benefit | $23,342 | $26,240 | $6,231 |
| Net Profit/(Loss) | $13,703 | $6,681 | $(39,849) |
| Cash & Cash Equivalents (Dec 31, 2017) | $47,386 | ||
| Net Cash Outflow from Operations (6 Months) | $(35,221) |
Material Changes vs. Prior Period
- Revenue Surge: Revenue increased significantly to $14.6 million for the six months ended Dec 31, 2017, compared to $0.9 million in the prior year. This was driven primarily by $12.8 million in milestone revenue, including a $11.8 million recognition from a patent license agreement with TiGenix NV and $1.0 million from sales milestones with JCR Pharmaceuticals.
- Profitability Shift: The company reported a net profit of $6.7 million for the six-month period, a reversal from a net loss of $39.8 million in the same period in 2016. This turnaround was largely due to a non-cash income tax benefit of $26.2 million resulting from the remeasurement of deferred tax balances following the U.S. Tax Cuts and Jobs Act (reducing the corporate tax rate from 35% to 21%).
- Expense Management: Manufacturing commercialization expenses decreased by 76% to $1.7 million, attributed to a reduction in production runs as clinical supply demands were met. Research and development expenses increased by 9% to $31.6 million, reflecting continued investment in Tier 1 clinical programs.
- Contingent Consideration: A gain of $8.7 million was recognized on the remeasurement of contingent consideration related to the Osiris acquisition, compared to a loss of $1.3 million in the prior year.
Guidance, Outlook, and Risks
- Clinical Milestones: In February 2018 (post-period), the company announced that the Phase 3 trial of MSC-100-IV for steroid-refractory aGVHD met its primary endpoint with a 69% overall response rate. The FDA granted Regenerative Medicine Advanced Therapy (RMAT) designation for the MPC therapy in heart failure patients in December 2017.
- Liquidity and Going Concern: Management highlighted a material uncertainty regarding the company's ability to continue as a going concern. Viability depends on securing partnerships for Tier 1 products or raising additional capital. The company has a discretionary equity facility of up to A$120 million (approx. US$90 million) available over 18 months.
- Capital Requirements: The company anticipates continuing to incur significant losses for the foreseeable future as it advances clinical trials and seeks regulatory approvals. Additional funding will be required to sustain operations.
- Risks: Key risks include the failure to obtain regulatory approval, inability to raise capital on acceptable terms, manufacturing scale-up challenges, and reliance on third-party collaborators (e.g., Lonza for manufacturing, TiGenix for commercialization).
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of revenue streams, noting that the majority of the current period's revenue ($12.8M) was non-recurring milestone income from the TiGenix agreement.
- Tax Benefit Impact: Confirm that the reported net profit is driven by a non-cash tax benefit ($26.2M) rather than operational cash generation, as operating cash flow remains negative ($35.2M outflow).
- Cash Runway: Assess the sufficiency of the $47.4 million cash balance against the $35.2 million operating burn rate for the six-month period to estimate the runway without new financing.
- Partnership Status: Monitor progress on securing non-dilutive partnerships for Tier 1 product candidates, which management cites as critical for long-term viability.
- Clinical Data: Review the full data release for the Phase 3 aGVHD trial (announced post-period) to assess the likelihood of accelerated FDA approval.