Mesoblast (MESO) - 2021 Q4 - Annual Report

PART I Key Information This section outlines significant financial, clinical, regulatory, and operational risks, emphasizing historical losses and the need for additional funding Risk Factors This section details numerous financial, developmental, regulatory, manufacturing, commercialization, and intellectual property risks facing the company - The company incurred operating losses since inception, with a net loss of $98.8 million in FY2021 and an accumulated deficit of $647.6 million[25] - Mesoblast requires substantial additional financing to achieve its goals, with cash and cash equivalents at $136.9 million as of June 30, 2021[30] - Product candidates are based on novel mesenchymal lineage cell technology, making development time, cost, and regulatory approval difficult to predict[40] - The FDA issued a Complete Response Letter for remestemcel-L for pediatric SR-aGVHD in September 2020, recommending at least one additional randomized, controlled study[82] - The company relies on a single contract manufacturer, Lonza, for product candidate supply, entailing risks related to capacity, quality, and regulatory compliance[101][108] Information on the Company This section provides a comprehensive overview of Mesoblast's history, business strategy, technology platforms, product candidates, and regulatory environment History and Development of Mesoblast This section outlines Mesoblast's corporate history, key clinical and corporate developments, and strategic agreements during fiscal year 2021 - Successfully completed a $110.0 million private placement in March 2021, led by a strategic US investor group[217] - Announced top-line results from the DREAM-HF Phase 3 trial of rexlemestrocel-L in 537 patients with advanced chronic heart failure in December 2020[217] - Announced results from the Phase 3 trial of rexlemestrocel-L in 404 patients with chronic low back pain due to degenerative disc disease in January 2021[217] - Entered into a license and collaboration agreement with Novartis in November 2020 for remestemcel-L, initially focusing on ARDS, subject to closing conditions[220] - Received a Complete Response Letter from the FDA for the Biologics License Application (BLA) for RYONCIL™ (remestemcel-L) in pediatric SR-aGVHD in September 2020, recommending an additional study[221] Business Overview Mesoblast's business focuses on proprietary mesenchymal lineage cell therapy, developing off-the-shelf medicines for inflammatory and chronic diseases - Mesoblast developed two late-stage product candidate platforms: Remestemcel-L for systemic inflammatory diseases and Rexlemestrocel-L for localized inflammatory diseases[225] - The company's technology uses immuno-selected, culture-expanded mesenchymal precursor cells (MPCs) and their progeny, MSCs, sourced from healthy adult donors and administered without matching[227][228] - Two licensee products, TEMCELL (JCR in Japan) and Alofisel® (Takeda in Europe), have been approved, generating royalty income for Mesoblast[235][236][237] - The company holds a large patent portfolio with approximately 1,089 patents and patent applications across 77 patent families as of July 2021[289] Property, Plants and Equipment The company leases office and laboratory space in key global locations, with all manufacturing operations conducted by its partner, Lonza - Headquarters are located in leased office space in Melbourne, Australia[397] - Significant development and commercial activities are conducted from leased space in New York City[397] - All manufacturing operations are currently located at Lonza's manufacturing facilities[397] Operating and Financial Review and Prospects This section details Mesoblast's FY2021 financial performance, including revenue decline, increased net loss, liquidity, and capital resources Operating Results FY2021 saw a 77% revenue decrease to $7.5 million and a 27% net loss increase to $98.8 million, driven by non-recurring milestone payments Consolidated Income Statement Data (FY2021 vs. FY2020) | (in thousands of U.S. dollars) | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $7,456 | $32,156 | ($24,700) | (77%) | | Research & development | ($53,012) | ($56,188) | $3,176 | (6%) | | Manufacturing commercialization | ($32,719) | ($25,309) | ($7,410) | 29% | | Management and administration | ($30,867) | ($25,609) | ($5,258) | 21% | | Fair value remeasurement of contingent consideration | $18,687 | $1,380 | $17,307 | NM | | Finance costs | ($10,714) | ($14,109) | $3,395 | (24%) | | Loss before income tax | ($99,630) | ($87,355) | ($12,275) | 14% | | Income tax benefit | $819 | $9,415 | ($8,596) | (91%) | | Loss attributable to owners | ($98,811) | ($77,940) | ($20,871) | 27% | - Revenue decrease was primarily due to the absence of $25.0 million in milestone revenue in FY2021 from partnerships with Grünenthal and Tasly[420][422] - Commercialization revenue from royalties on sales of TEMCELL in Japan and Alofisel® in Europe increased by 12% to $7.4 million[421] - Manufacturing commercialization expenses increased by $7.4 million (29%) due to investment in manufacturing readiness for remestemcel-L and potency assay work[431][432] - A fair value remeasurement of contingent consideration resulted in an $18.7 million gain, primarily due to revised assumptions following the FDA's Complete Response Letter for remestemcel-L[438] Liquidity and Capital Resources As of June 30, 2021, Mesoblast held $136.9 million in cash, facing material uncertainty regarding going concern without additional financing - The company's ability to continue as a going concern is dependent on raising additional capital through partnerships or financing, indicating a material uncertainty[478] Cash and Cash Equivalents | (in thousands of U.S. dollars) | As of June 30, 2021 | | :--- | :--- | | Cash and cash equivalents | $136,881 | Cash Flow Summary (FY2021 vs. FY2020) | (in thousands of U.S. dollars) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (outflows) in operating activities | (106,681) | (56,365) | | Net cash (outflows) in investing activities | (1,647) | (3,273) | | Net cash inflows by financing activities | 114,466 | 137,044 | | Net increase in cash and cash equivalents | 6,138 | 77,406 | - The company has two main loan facilities: $50.0 million drawn with Hercules Capital and $30.0 million drawn with NovaQuest Capital Management, both with specific covenants[491][495][502] Directors, Senior Management and Employees This section details the company's leadership, executive compensation strategy, employee demographics, and share ownership by key management personnel Directors and Senior Management The company is led by an experienced Board of Directors and senior management team, including CEO Dr. Silviu Itescu and former CFO Josh Muntner - The Board of Directors is chaired by Joseph Swedish and includes members with significant experience from major pharmaceutical and healthcare companies[524][525][526] - Dr. Silviu Itescu serves as the Chief Executive Officer and Executive Director, having founded the company in 2004[537] - Josh Muntner served as Chief Financial Officer for FY2021 but resigned effective August 31, 2021, with Andrew Chaponnel appointed interim CFO[523][538][539] Compensation The executive remuneration strategy links pay to performance, with a shift towards long-term, performance-based incentives to align with shareholder value - The remuneration framework was significantly changed to reduce cash costs and increase the weighting of long-term, performance-tested options to align executive and shareholder interests[514] - For FY2021, the CEO's Short-Term Incentive (STI) outcome was 65% of the maximum opportunity, and the CFO's was 60%, reflecting mixed objective achievement[513][581] - No Long-Term Incentive (LTI) option tranches became eligible to vest for the CEO in FY2021, as the targeted FDA approval of remestemcel-L did not occur[585] Statutory Remuneration for Executive KMP (FY2021) | Name | Currency | Base salary | Short term cash bonus | Share based payments | Total Statutory Remuneration | % of performance based remuneration | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Silviu Itescu | A$ | 1,010,000 | 328,250 | 1,207,365 | 2,661,876 | 58% | | Josh Muntner | US$ | 382,000 | 159,771 | 302,898 | 885,900 | 52% | Employees As of June 30, 2021, Mesoblast had 83 global employees, a decrease from the prior year, with the majority based in the United States Employee Count by Year | As of June 30, | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Employees | 83 | 102 | 83 | - In FY2021, 58% of employees were in the USA, 30% in Australia, 11% in Singapore, and 1% in Switzerland[636] Share Ownership CEO Dr. Silviu Itescu is the largest individual shareholder among KMP, collectively owning 11.4% of outstanding ordinary shares - CEO Silviu Itescu beneficially owned 69,991,374 ordinary shares, representing 10.8% of the company as of June 30, 2021[666][667] - All directors and key management personnel as a group (9 persons) beneficially owned 74,250,295 ordinary shares, representing 11.4% of the company[666] Major Shareholders and Related Party Transactions This section identifies major shareholders and confirms no related party transactions beyond standard compensation for directors and key management personnel 5% or Greater Shareholders (as of June 30, 2021) | Name | Ordinary Shares Beneficially Owned | % | | :--- | :--- | :--- | | Silviu Itescu | 69,991,374 | 10.8% | | M&G Investment Group | 53,392,209 | 8.2% | | Thorney Holdings | 34,155,365 | 5.3% | - The company has not entered into any related party transactions during the year ended June 30, 2021, other than compensation for Directors and key management personnel[671] Financial Information This section covers legal proceedings, including a class action lawsuit, and the company's policy of not paying dividends to fund growth - A purported class action lawsuit was filed against the company in the U.S. in October 2020, alleging violations of the U.S. Securities Exchange Act of 1934 following the FDA's Complete Response Letter[673] - The company has never declared or paid any dividends and does not anticipate paying cash dividends in the foreseeable future, intending to retain all funds for operations and growth[674] Additional Information This section provides supplementary corporate information, including material contracts, exchange controls, and taxation relevant to shareholders Material Contracts Mesoblast's material contracts include manufacturing agreements with Lonza, commercialization partnerships, and significant non-dilutive loan agreements - Manufacturing: Agreements with Lonza for process development and commercial manufacture of product candidates, including remestemcel-L[720][725] - Grünenthal Partnership: Strategic partnership to develop and commercialize MPC-06-ID in Europe and Latin America, with potential milestone payments exceeding $1.0 billion[727][728] - JCR Pharmaceuticals Partnership: Collaboration for MSC products in the Japanese market, including TEMCELL for aGVHD, which generates royalty revenue for Mesoblast[730][732] - Financing Agreements: A $75.0 million credit facility with Hercules Capital and a $40.0 million loan agreement with NovaQuest, secured by company assets and future product revenues, respectively[737][739] PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2021 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[823] - Management concluded that its internal control over financial reporting was effective as of June 30, 2021, based on the COSO framework[824] - There were no changes to internal control over financial reporting during the period that materially affected, or are reasonably likely to materially affect, internal controls[825] Corporate Governance As a foreign private issuer, Mesoblast follows Australian corporate governance practices for shareholder meeting quorums instead of Nasdaq rules - As a foreign private issuer, Mesoblast is permitted to follow certain home country (Australian) corporate governance practices instead of certain Nasdaq requirements[834] - The company follows Australian practice for shareholder meeting quorums, requiring two shareholders present, rather than the Nasdaq rule of at least 33 1/3% of outstanding shares[836] PART III Financial Statements This section presents audited IFRS financial statements for FY2021, with the auditor highlighting a material uncertainty regarding going concern Report of Independent Registered Public Accounting Firm The auditor's report expresses substantial doubt about going concern and identifies impairment assessment and contingent consideration as critical audit matters - Going Concern Uncertainty: The auditor's report highlights a material uncertainty raising substantial doubt about the company's ability to continue as a going concern, noting the need for additional cash inflows[844] - Critical Audit Matter 1: The impairment assessment of in-process research and development (IPRD) intangible assets ($427.8 million) and goodwill ($134.5 million) involved significant management judgments regarding future cash flow projections and probabilities of success[852][853] - Critical Audit Matter 2: The fair value measurement of the provision for contingent consideration ($25.4 million) was a critical audit matter due to significant management judgments in estimating its value, particularly regarding probabilities of success[855][856] Consolidated Financial Statements FY2021 consolidated financial statements show a $98.8 million net loss, $7.5 million revenue, and $136.9 million cash, with going concern uncertainty Key Financial Statement Figures (as of June 30, 2021) | (in thousands of U.S. dollars) | Amount | | :--- | :--- | | Income Statement (FY2021): | | | Total Revenue | $7,456 | | Loss before income tax | ($99,630) | | Net Loss | ($98,811) | | Balance Sheet: | | | Cash & cash equivalents | $136,881 | | Intangible assets | $580,546 | | Total Assets | $744,717 | | Borrowings | $94,245 | | Total Liabilities | $163,320 | | Total Equity | $581,397 | - The company's ability to continue as a going concern is noted as a basis of preparation, with management believing it can secure necessary cash inflows despite the material uncertainty[875] - As of June 30, 2021, pre-launch inventory of $21.9 million was recognized on the balance sheet but fully provided for, with costs expensed within Manufacturing Commercialization expenses[1146]