MESO

Business Context and Reporting Period

Mesoblast Limited (Mesoblast) is a clinical-stage biotechnology company developing allogeneic cellular medicines based on mesenchymal lineage adult stem cells. The company is incorporated in Australia and dual-listed on the Australian Securities Exchange (ASX) and the Nasdaq Global Select Market (Nasdaq). This Form 6-K reports unaudited financial results for the three and six months ended December 31, 2022.

Key operational milestones during the period included the resubmission of the Biologics License Application (BLA) for remestemcel-L (for pediatric steroid-refractory acute Graft versus Host Disease) to the FDA on January 31, 2023, and the completion of a $45.0 million global private placement in August 2022.

Key Financial Metrics

Note: Revenue consists primarily of royalty income from licensed products (TEMCELL in Japan and Alofisel in Europe). The company has not yet generated significant revenue from product sales of its own candidates.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by 39% to $3.6 million for the six months ended December 31, 2022, compared to $6.0 million in the prior year. This was driven by a $1.4 million decrease in commercialization revenue (primarily due to foreign exchange impacts on Japanese royalties) and the absence of a $1.2 million milestone payment from Takeda recognized in the prior period.
• Reduced Net Loss: Net loss improved by 15% to $41.4 million from $48.6 million. This improvement was largely due to a $6.0 million gain from the fair value remeasurement of contingent consideration (related to the Osiris acquisition) and a $6.1 million reduction in Research & Development expenses.
• Expense Reductions: R&D expenses decreased by 31% ($6.1 million) due to lower third-party costs for Phase 3 clinical trials as they transitioned to monitoring phases. Management and administration expenses decreased slightly by 3% ($0.4 million) primarily due to lower legal fees.
• Financing Activity: The company raised $45.1 million in proceeds from a global private placement in August 2022. Additionally, the Oaktree debt facility was amended to extend the availability of up to an additional $30.0 million, subject to milestones.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern Uncertainty: Management has identified material uncertainty regarding the company's ability to continue as a going concern. While cash reserves are $67.6 million, the company anticipates needing additional capital to fund operations over the next 12 months as it prepares for potential product approval and commercialization. The financial statements do not include adjustments that might result from this uncertainty.
• Outlook: The company expects to continue incurring significant losses. Future capital requirements will be met through equity offerings, debt financings, or strategic partnerships. Expenses are expected to remain relatively consistent over the next 12 months, with potential increases upon regulatory approval and commercialization.
• Unusual Items:
  • Contingent Consideration Gain: A non-cash gain of $6.0 million was recognized due to the remeasurement of contingent consideration liabilities, driven by changes in probability of payment and development timelines.
  • Warrant Liability: A loss of $0.7 million was recognized on the remeasurement of warrant liabilities granted to Oaktree Capital Management.
• Risks: Key risks include the failure to obtain FDA approval for remestemcel-L, reliance on third-party manufacturers (Lonza), supply chain disruptions, and the need for additional financing. The company is also subject to ongoing shareholder class action litigation in Australia and the U.S. regarding prior FDA communications and stock price declines.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $67.6 million cash balance against projected operating burn rates and debt service obligations over the next 12 months.
• BLA Status: Monitor the FDA's review timeline and decision on the resubmitted Biologics License Application for remestemcel-L (resubmitted Jan 31, 2023).
• Debt Covenants: Confirm compliance with the Oaktree facility covenant requiring a minimum unrestricted cash balance of $35.0 million in the U.S.
• Revenue Sustainability: Assess the volatility of royalty revenue streams from JCR and Takeda, which are subject to foreign exchange fluctuations and licensee sales performance.
• Legal Proceedings: Track the status of consolidated shareholder class actions in Australia and the U.S. regarding prior FDA interactions.