Business Context and Reporting Period
Company: Mesoblast Limited (Mesoblast)
Filing Type: Form 6-K (Quarterly Report)
Reporting Period: Three months ended September 30, 2019
Business Overview: Mesoblast is a clinical-stage biotechnology company developing allogeneic cellular medicines based on mesenchymal lineage adult stem cells. The company has three product candidates in Phase 3 trials: remestemcel-L (for acute graft versus host disease), Revascor (for advanced heart failure), and MPC-06-ID (for chronic low back pain). The company is dual-listed on the Australian Securities Exchange (ASX) and the Nasdaq Global Select Market.
Key Financial Metrics
| Metric (in thousands USD) | Q3 2019 | Q3 2018 |
|---|---|---|
| Total Revenue | $17,048 | $11,637 |
| Net Loss | $(5,484) | $(19,498) |
| Loss Per Share (Basic & Diluted) | $(1.10) | $(4.07) |
| Operating Cash Flow | $(15,558) | $(19,544) |
| Cash and Cash Equivalents (End of Period) | $34,536 | $55,143 |
| Total Debt (Borrowings) | $83,732 | $81,286 |
| Net Debt | $(54,636) | $(30,860) |
Note: Figures are in U.S. dollars. Net Debt includes borrowings and lease liabilities less cash and cash equivalents.
Material Changes vs. Prior Period
- Revenue Increase: Total revenue increased 46% to $17.0 million, driven primarily by a $15.0 million milestone payment recognized from a new strategic partnership with Grünenthal GmbH. Commercialization revenue (royalties) also increased 85% to $1.9 million.
- Reduced Net Loss: The net loss narrowed significantly by 72% to $5.5 million, compared to $19.5 million in the prior year. This improvement was due to higher revenue and a 33% reduction in Research & Development (R&D) expenses.
- R&D Expense Reduction: R&D expenses decreased by $6.1 million (33%) to $12.4 million, primarily due to lower third-party costs as patient enrollment for Phase 3 trials was completed in prior periods.
- Finance Costs Increase: Finance costs increased 30% to $3.5 million due to higher interest expenses on existing debt facilities (Hercules and NovaQuest).
- Cash Position: Cash and cash equivalents decreased by $15.8 million during the quarter, resulting in a closing balance of $34.5 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Strategic Partnership: On September 10, 2019, Mesoblast entered a partnership with Grünenthal to develop and commercialize MPC-06-ID in Europe and Latin America. The company expects to receive up to $150 million in upfront and milestone payments prior to launch, plus tiered royalties.
- Capital Raise: Subsequent to the reporting period (October 3, 2019), the company raised approximately $50.5 million (A$75.0 million) through a private placement of shares to fund inventory build-up and sales force preparation for remestemcel-L.
- Manufacturing: A manufacturing agreement with Lonza Bioscience was announced in October 2019 to supply commercial product for remestemcel-L, with a minimum financial commitment of $15.1 million.
- Future Expenses: Management expects R&D expenses to decrease over the next 12-24 months as Phase 3 trials conclude, but anticipates an increase in total expenses driven by manufacturing and commercialization costs upon regulatory approval.
Risks and Contingencies
- Going Concern Uncertainty: The filing explicitly states there is a "material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern." The company's ability to meet debts depends on meeting milestones under Grünenthal and NovaQuest agreements, drawing down remaining funds from Hercules, or securing additional financing.
- Debt Covenants: The company has significant debt obligations with Hercules Capital and NovaQuest. While principal repayments for Hercules were deferred to April 2020 (post-period), the company must meet specific milestones to maintain deferrals and avoid default.
- Regulatory Risk: The company is awaiting FDA review of a Biologics License Application (BLA) for remestemcel-L. Approval is not guaranteed, and failure to obtain it would severely impact commercialization prospects.
Investor Verification Checklist
- Going Concern Status: Verify the company's ability to meet debt covenants and milestones with Hercules and NovaQuest to avoid default or acceleration of debt.
- Revenue Recognition: Confirm the timing and conditions for recognizing the remaining $135 million+ in potential milestone payments from the Grünenthal partnership.
- Cash Burn Rate: Monitor the net cash outflow from operations ($15.6 million for the quarter) against the cash balance ($34.5 million) and the recent capital raise to assess runway.
- Regulatory Milestones: Track the FDA's decision on the BLA for remestemcel-L and the outcomes of Phase 3 trials for Revascor and MPC-06-ID.
- Debt Structure: Review the terms of the NovaQuest loan, which is repayable from net sales of remestemcel-L, and the impact of sales forecasts on the carrying value of this liability.