Business Context and Reporting Period
Company: Mesoblast Limited (ASX:MSB; Nasdaq:MESO)
Filing Type: Form 6-K (Quarterly Report)
Reporting Period: Three months ended September 30, 2020
Business Overview: Mesoblast is a clinical-stage biotechnology company developing allogeneic cellular medicines based on mesenchymal lineage adult stem cells. Key product candidates include remestemcel-L for pediatric steroid-refractory acute graft-versus-host disease (SR-aGVHD) and acute respiratory distress syndrome (ARDS) due to COVID-19, REVASCOR for chronic heart failure, and MPC-06-ID for chronic low back pain.
Key Financial Metrics
| Metric (in thousands USD) | Q3 2020 | Q3 2019 |
|---|---|---|
| Revenue | $1,305 | $17,048 |
| Net Loss | $(24,544) | $(5,484) |
| Loss Per Share (Basic & Diluted) | $(4.21) | $(1.10) |
| Operating Cash Flow | $(28,167) | $(15,558) |
| Cash and Cash Equivalents (End of Period) | $108,123 | $34,536 |
| Total Borrowings | $90,991 | $89,478 |
| Net Debt | $7,100 | $30,014 |
Note: Revenue figures are in thousands. Net Debt includes leases and borrowing arrangements.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by 92% to $1.3 million, primarily due to the absence of a $15.0 million milestone payment recognized in Q3 2019 from the Grünenthal strategic partnership. Commercialization revenue (royalties) also decreased by 31% to $1.3 million.
- Increased Loss: Net loss widened significantly to $24.5 million from $5.5 million. This was driven by higher operating expenses, partially offset by a $15.1 million non-cash gain from the remeasurement of contingent consideration.
- Expense Growth:
- R&D Expenses: Increased 56% to $19.3 million, driven by third-party costs for the COVID-19 ARDS Phase 3 trial and increased product support costs.
- Manufacturing Commercialization: Increased significantly to $11.9 million (from $2.7 million) due to platform technology costs and stock build for potential product launch.
- Management & Administration: Increased 41% to $7.7 million, largely due to higher labor and share-based payment expenses.
- Contingent Consideration Gain: A $15.1 million gain was recognized due to the remeasurement of contingent consideration related to the Osiris acquisition, reflecting updated assumptions following the FDA's Complete Response Letter.
Guidance, Outlook, Risks, and Unusual Items
Regulatory Developments and Outlook
- FDA Complete Response Letter (CRL): On September 30, 2020, the FDA issued a CRL for the Biologics License Application (BLA) for remestemcel-L for pediatric SR-aGVHD. Despite a favorable vote by the Oncologic Drugs Advisory Committee (ODAC), the FDA requested an additional randomized controlled study.
- Dispute Resolution: A Type A meeting with the FDA was held in November 2020 to discuss a potential pathway for accelerated approval. Management indicated the FDA review team currently appears unlikely to agree to accelerated approval, and the company may initiate the FDA dispute resolution pathway.
- Novartis Collaboration: On November 20, 2020, Mesoblast entered a worldwide license and collaboration agreement with Novartis for remestemcel-L (focusing on ARDS/COVID-19). The deal includes a $50 million upfront payment (cash and equity) and potential milestones totaling up to $1.255 billion.
Liquidity and Going Concern
- Material Uncertainty: The filing includes a material uncertainty regarding the company's ability to continue as a going concern. Management relies on the Novartis deal, existing financing partnerships (up to $170 million available), and potential equity financing to fund operations over the next 12 months.
- Cash Position: Cash and cash equivalents stood at $108.1 million as of September 30, 2020.
Risks and Contingencies
- Legal Proceedings: A purported class action lawsuit was filed in October 2020 in the U.S. Federal District Court following the FDA CRL and share price decline. No amounts have been accrued.
- COVID-19 Impact: The pandemic has caused delays in data readouts for Phase 3 trials in heart failure and low back pain due to hospital capacity constraints. However, the company is actively conducting a Phase 3 trial for COVID-19 ARDS.
- Debt Covenants: The company has loan facilities with Hercules Capital and NovaQuest Capital containing restrictive covenants. The company reported compliance with these covenants during the period.
Investor Verification Checklist
- FDA Dispute Resolution Outcome: Verify the formal minutes from the November 2020 Type A meeting with the FDA regarding the remestemcel-L BLA and the likelihood of accelerated approval.
- Novartis Deal Closing: Confirm the closing of the Novartis license agreement and the receipt of the $50 million upfront proceeds (cash and equity).
- Cash Burn Rate: Monitor quarterly cash outflows from operations against the $108 million cash balance to assess runway without additional financing.
- Class Action Litigation: Track the status and potential financial impact of the securities class action lawsuit filed in October 2020.
- Debt Maturity: Review the terms of the Hercules and NovaQuest loans, specifically the deferral of principal repayments and interest payment triggers tied to commercial sales.