Business Context and Reporting Period
Company: Mesoblast Limited (Mesoblast)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three and nine months ended March 31, 2017
Business Overview: Mesoblast is a global biopharmaceutical company developing regenerative medicine products based on mesenchymal lineage adult stem cells (MLCs). The company focuses on late-stage product candidates for cardiovascular, immunologic, orthopedic, and oncology indications. The company is dual-listed on the Australian Securities Exchange (ASX) and NASDAQ.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Mar 31, 2017 |
3 Months Ended Mar 31, 2016 |
9 Months Ended Mar 31, 2017 |
9 Months Ended Mar 31, 2016 |
|---|---|---|---|---|
| Total Revenue | $901 | $4,142 | $1,846 | $15,669 |
| Net Loss | $(9,784) | $(16,933) | $(49,633) | $(52,418) |
| Loss Per Share (Basic/Diluted) | $(2.46) | $(4.49) | $(12.87) | $(14.76) |
| Operating Cash Flow | N/A | N/A | $(72,036) | $(69,907) |
| Cash & Equivalents (End of Period) | $69,122 | $99,929 | $69,122 | $99,929 |
| Total Assets | $679,160 | N/A | $679,160 | N/A |
| Total Liabilities | $138,759 | N/A | $138,759 | N/A |
Note: Revenue consists primarily of commercialization royalties and milestone payments. The company has no product sales revenue from its own commercialization efforts as of this date.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 78% for the three months and 88% for the nine months compared to the prior year. This is primarily due to the cessation of revenue recognition from the Teva Pharmaceutical Industries Ltd. development agreement (which ended in June 2016) and a reduction in milestone revenue from the JCR Pharmaceuticals agreement.
- Net Loss Improvement: Despite lower revenue, the net loss decreased by 42% (three months) and 5% (nine months) year-over-year. This improvement was driven by a significant non-cash gain of $10.4 million (three months) and $10.7 million (nine months) from the remeasurement of contingent consideration related to the Osiris Therapeutics acquisition.
- Expense Management: Manufacturing commercialization expenses decreased by 50% year-over-year due to fewer production runs. However, Research & Development (R&D) expenses increased by 16% (three months) and 21% (nine months) as the company assumed full responsibility for the MPC-150-IM (heart failure) program after regaining rights from Teva.
- Liquidity: Cash and cash equivalents decreased by approximately $12 million during the nine-month period, primarily due to operating outflows, partially offset by $60 million in financing proceeds from share issuances.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Going Concern: Management has identified a material uncertainty regarding the company's ability to continue as a going concern. Viability depends on securing non-dilutive partnerships for Tier 1 product candidates (specifically MSC-100-IV for aGVHD and MPC-06-ID for chronic low back pain) and/or raising additional capital.
- Capital Resources: The company has an equity facility established in July 2016 for up to US$90 million over 36 months. It recently raised approximately US$40 million in March 2017 and US$21.7 million from Mallinckrodt Pharmaceuticals in January 2017.
- Clinical Progress:
- MPC-150-IM (Heart Failure): Phase 3 trial passed interim futility analysis; trial to continue.
- MPC-06-ID (Chronic Low Back Pain): 36-month Phase 2 data showed durable pain and functional improvements.
- MSC-100-IV (aGVHD): Received FDA Fast Track designation; Phase 3 trial passed interim futility analysis.
- MPC-300-IV (Rheumatoid Arthritis): Phase 2 data showed durable improvement in clinical symptoms.
Risks and Contingencies
- Capital Requirements: The company anticipates continuing to incur significant losses and requires substantial additional financing. Failure to raise capital could force delays or termination of product development.
- Regulatory and Clinical Risk: No stem cell products are currently approved in the U.S. Clinical trials are subject to high failure rates, and regulatory approval is uncertain.
- Manufacturing Dependence: The company relies exclusively on Lonza for manufacturing. Any disruption at Lonza could halt clinical trials or commercialization.
- Internal Controls: The company disclosed a material weakness in internal controls over financial reporting due to limited accounting personnel and segregation of duties.
Investor Verification Checklist
- Partnership Status: Verify the status of negotiations with Mallinckrodt Pharmaceuticals for the exclusive commercial and development partnership of MPC-06-ID and MSC-100-IV.
- Cash Runway: Assess the sufficiency of the current cash balance ($69.1 million) against the burn rate (~$72 million operating outflow for 9 months) and the likelihood of accessing the remaining equity facility.
- Contingent Consideration: Review the assumptions used for the $10.7 million non-cash gain on contingent consideration (Osiris acquisition) to understand its impact on reported losses versus cash reality.
- Internal Controls: Monitor the remediation plan for the disclosed material weakness in internal controls over financial reporting.
- Clinical Milestones: Track upcoming data readouts and regulatory decisions for the four Tier 1 product candidates, as these are critical for future valuation and partnership potential.