Business Context and Reporting Period
Company: Mesoblast Limited (Mesoblast)
Filing Type: Form 6-K (Quarterly Report incorporating Half-Year Report)
Reporting Period: Three and six months ended December 31, 2016
Business Overview: Mesoblast is a global leader in developing innovative cellular medicines based on mesenchymal lineage adult stem cells (MLCs). The company focuses on late-stage product candidates for cardiovascular diseases, immunologic conditions, orthopedic disorders, and oncology. The company is dual-listed on the Australian Securities Exchange (ASX) and NASDAQ.
Key Financial Metrics
| Metric (in thousands USD) | Six Months Ended Dec 31, 2016 | Six Months Ended Dec 31, 2015 | Three Months Ended Dec 31, 2016 | Three Months Ended Dec 31, 2015 |
|---|---|---|---|---|
| Total Revenue | 945 | 11,527 | 550 | 4,014 |
| Net Loss | (39,849) | (35,485) | (20,051) | (22,325) |
| Loss Per Share (Basic/Diluted) | (10.50) cents | (10.31) cents | (5.27) cents | (6.29) cents |
| Operating Cash Flow | (46,364) | (47,873) | N/A | N/A |
| Cash & Equivalents (End of Period) | 33,902 | 120,783 | 33,902 | 120,783 |
| Total Assets | 660,880 | 684,018 | 660,880 | 684,018 |
| Total Liabilities | 150,363 | 155,857 | 150,363 | 155,857 |
Note: Revenue figures are in thousands of U.S. dollars. Loss per share is in cents.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue for the six months ended Dec 31, 2016, dropped 92% to $0.9 million from $11.5 million in the prior year. This was primarily due to the absence of $3.5 million in milestone revenue from JCR Pharmaceuticals (recognized in 2015) and the cessation of amortization of deferred revenue from the Teva agreement (fully recognized in June 2016).
- Net Loss Increase: Net loss increased 12% to $39.8 million for the six-month period, driven by higher R&D expenses ($29.0 million vs. $23.6 million) as the company regained full rights to the MPC-150-IM program from Teva, offset partially by a $6.2 million non-cash deferred tax benefit recognized in 2016 (none in 2015).
- Cash Position: Cash and cash equivalents decreased significantly to $33.9 million from $120.8 million at the end of the prior period, reflecting a net cash outflow of $46.7 million for the six months.
- Manufacturing Costs: Manufacturing commercialization expenses decreased 51% to $7.1 million, largely due to a shift from MSC-based production (which ceased) to MPC-based production.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Going Concern Uncertainty: Management and the Board have prepared the financial report on a going concern basis, but a material uncertainty exists regarding the company's ability to continue as a going concern. Viability depends on securing non-dilutive funding through partnerships for Tier 1 programs (specifically MSC-100-IV for GVHD and MPC-06-ID for chronic low back pain) and/or raising further capital.
- Partnership Activity: On December 23, 2016, Mesoblast entered an equity purchase agreement with Mallinckrodt Pharmaceuticals to exclusively negotiate a commercial and development partnership for MPC-06-ID and MSC-100-IV. Mallinckrodt purchased approximately 20 million shares (4.99% stake) for A$29.6 million ($21.7 million USD), with funds received in January 2017.
- Cost Containment: The company is implementing cost containment strategies, including reprioritization of projects and operational streamlining. An equity facility of up to A$120 million ($90 million USD) has been established for future funding needs.
- Clinical Progress: Positive interim data was reported for the Phase 3 trial of MSC-100-IV in steroid-refractory aGVHD. Phase 2 data for MPC-300-IV in rheumatoid arthritis showed durable improvement.
Risks and Contingencies
- Capital Requirements: The company anticipates continuing to incur significant losses and requires substantial additional financing. Failure to raise capital or secure partnerships could force delays or termination of product development.
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting due to limited accounting personnel and lack of segregation of duties.
- Regulatory and Clinical Risks: As a clinical-stage biotech, the company faces risks related to clinical trial outcomes, regulatory approvals (FDA/EMA), and manufacturing scale-up.
Investor Verification Checklist
- Cash Runway: Verify the sufficiency of the $33.9 million cash balance against the $46.4 million operating cash burn rate for the six-month period.
- Partnership Execution: Monitor the status of the exclusive negotiation period with Mallinckrodt Pharmaceuticals and the potential for non-dilutive funding from other Tier 1 programs.
- Capital Raising: Assess the terms and dilution impact of the recently issued unissued capital (A$29.6 million) and the utilization of the A$120 million equity facility.
- Internal Controls: Review the remediation plan for the disclosed material weakness in internal controls over financial reporting.
- Revenue Recognition: Confirm the sustainability of revenue streams given the cessation of Teva-related amortization and the reliance on milestone/royalty income from JCR.