Mesoblast Limited
Annual Report 2008
Contents
Message from the Chairman
Executive Director’s Report
Directors’ Report
Auditors’ Independence Declaration
Corporate Governance
Financial Statements
Directors’ Declaration
Independent Audit Report
Shareholder Information
Page
1
2
8
25
26
33
68
69
71
Message from the Chairman
When I joined Mesoblast last November, my expectation
was that Mesoblast was an organisation with great
potential and solid capability to produce excellent results
and new treatments for a wide range of people needing
medical help. I am pleased to say that my expectations
have been exceeded, with Mesoblast clearly on the way
to providing better outcomes for people worldwide.
As you all know, 2008 has been a challenging year in the
fi nancial markets. Throughout this period, the Mesoblast
team has shown considerable strength, depth and
character by consistently delivering successful outcomes.
During the 2008 fi nancial year, Mesoblast made
substantial progress in advancing development of our
cutting-edge technology towards the creation of new
treatment paradigms for major diseases in need of
effective solutions. We have continued to build on the
existing foundations, progressed our clinical programs,
and broadened the clinical indications which can be
addressed by our adult stem cell platform technology.
We have continued to work closely with our sister
company in the United States, Angioblast Systems Inc.,
to hit our milestones on time and on budget. During
the year, we increased our equity in Angioblast to
39.1 percent. Your Board believes that this investment
will increase its intrinsic value as Angioblast continues
to unlock our shared platform technology for cardio-
vascular, eye, bone marrow transplant and other
conditions. In addition, an equity investment by Abbott
Laboratories of USD$5 million in Angioblast underscores
the value inherent in the common platform technology,
and means that Mesoblast’s ascribed asset value in
Angioblast has appreciated over three-fold.
Signifi cant accomplishments during the fi nancial year
included the US Food and Drug Administration clearance
of three submissions to begin Phase 2 trials. Mesoblast’s
Phase 2 trial for spinal fusion in the US is underway, and
Angioblast had two Investigational New Drug submissions
cleared for two major applications – heart attacks and
congestive heart failure. Preclinical programs have shown
outstanding results in conditions ranging from
osteoarthritis of the knee to diabetic retinopathy and both
companies plan to move quickly on the path to market.
The successful transition from autologous to allogeneic
trials has allowed Mesoblast and Angioblast to execute
on commercialisation plans. Our business model, using
cells from an unrelated donor to treat thousands of
patients, will allow low cost of goods and high margins.
The timely raising of $13.4 million in equity last December
has helped fund Mesoblast’s clinical and preclinical trials.
The investment by existing and new institutional and
sophisticated shareholders shows the shared belief in
the great potential for our patented cells to achieve better
outcomes for numerous patient populations.
Our year-end fi nancial results are in line with our expecta-
tions and demonstrate the continued strong control over
our costs. Your Board is confi dent that we have suffi cient
capital to maintain our strong momentum in meeting our
commercial and clinical ambitions.
We will continue to build and develop our fi rst-rate team
as we continue to expand and grow. We are able to attract
and retain some of the best in the business, with our staff
and consultants showing extraordinary dedication and
excellence in progressing our technology towards delivery
of clinical products.
The results over the past fi nancial year have made your
Board and management more confi dent than ever in the
realistic clinical and commercial opportunities for our
proprietary technology.
On your behalf, I would like to record my appreciation to
the staff, consultants, members of the Scientifi c Advisory
Board and fellow Board members for their fi ne efforts,
diligence and commitment.
Finally, and most importantly, I would like to thank you,
our shareholders, for your support. We look forward to
building on our record of achievements and establishing
a world-class regenerative medicine company.
Mr Brian Jamieson
1
Executive Director’s Report
During 2008 Mesoblast continued to make signifi cant
advances in the clinical and commercial development of our
unique adult stem cell platform technology. After less than
four years as a public company, our technology platform
has been advanced to commercial grade scale-up and
manufacturing, has been substantially protected through
United States granted patents, and forms the basis of a
sound, high margin business model. Major global markets
with well defi ned unmet clinical needs have been identifi ed,
and we are currently in the midst of three United States
Food and Drug Administration (FDA) cleared Phase 2
clinical trials. We are well on the way to having multiple real
products developed for treating patients.
Our allogeneic business model: “off-the-shelf”
stem cell products have potential for greater
consistency and higher margins
The unique commercial advantages of our Mesenchymal
Precursor Cell (MPC) platform technology reside in two
key properties: (1) our MPCs can be highly expanded
from a very small number of starting cells, and (2) these
cells do not activate the immune system, and therefore
can be used from one healthy donor to potentially treat
thousands of unrelated recipients. This use of MPCs in
unrelated recipients is termed allogeneic, and means that
we can develop “off-the-shelf” products. Such allogeneic
cell products can be produced with high confi dence of
batch-to-batch safety and effi cacy, and low manufacturing
costs. This results in a business model that can generate
a more consistent product and high margins akin to
pharmaceutical sales.
Products for Orthopaedic Indications
Traumatic Bone Fractures
A major focus of the Company is to develop an allogeneic
MPC product for the treatment of traumatic bone fractures.
Results from our clinical and preclinical trials have clearly
shown that our MPC product may be ideal for the
treatment of severe fractures which are either at high risk
of not healing or have failed to heal for at least six months
(termed non-union fractures). In the United States alone,
this market accounts for over 220,000 new cases annually
and is forecast to generate over US$425 million in sales of
biological products by 2011.
Since approximately 80% of this market is accounted for
by non-union fractures, we performed a pilot clinical trial
at The Royal Melbourne Hospital to evaluate the effective-
ness of our MPC technology for non-healing, long bone
fractures. In 10 patients, a total of 11 non-healing fractures
of the long bones in the legs were treated with Mesoblast’s
proprietary stem cells. On completion of the trial at
12 months, the results were outstanding, with bony union
occurring in 9 non-healing fractures within a median time
of 4 months after stem cell implantation. Prior to cell
implantation, these fractures had been persistently non-
united for up to 41 months with a median time of 10 months.
Current therapies for non-healing fractures use bone
harvested from a patient’s own hip (termed autograft),
requiring a second surgical procedure which frequently
results in long-term complications such as chronic pain
and infection. The results of Mesoblast’s pilot non-union
clinical trial showed that our MPC therapy can eliminate
the need for autograft and the potential complications
arising from this second surgical procedure.
Mesoblast is now in discussions with potential commercial
partners regarding the specifi c clinical indication and
regulatory strategy needed to achieve early clearance from
the FDA and commercialisation of a fracture repair product.
Spinal Fusion
Mesoblast’s second product is NeoFuse™, an allogeneic
MPC product that will be used to generate bony fusion to
treat patients with degenerative intervertebral disc disease.
Today, almost 500,000 spinal fusion procedures are
performed annually in the United States alone. Almost half
of these are treated with autograft (bone harvested from
the patient) and the rest are treated with various biological
therapies, most notably recombinant human Bone
Morphogenetic Protein (rhBMP).
Biological therapies for spinal fusion generated over
US$800 million in sales in 2006. NeoFuse™ will target the
entire autograft and biological fusion markets, which are
growing at an average rate of 7% per year.
Mesoblast’s preclinical stem cell trials showed that
NeoFuse™ generated equally or more robust, continuous,
and mechanically strong fusion when compared with hip
bone autograft in the lumbar spine. These results indicate
that Mesoblast’s allogeneic MPC therapy can eliminate
2
the need for autograft and the potential complications
of this second surgical procedure. These preclinical
results are supported by encouraging initial results from
Mesoblast’s ongoing Phase 2 clinical trial for lumbar
spinal fusion at the Hospital for Special Surgery in the
United States where our allogeneic MPC product is being
compared to hip bone autograft.
In July 2008, the FDA issued a formal public health
notifi cation concerning life-threatening complications
associated with use of rhBMP for cervical spinal fusion,
including swelling of neck and throat tissue, which resulted
in compression of the airway and/or neurological structures
in the neck. Fusion of the cervical spine accounts for up to
40% of all spinal fusion procedures performed.
Given the limited treatment options available for patients in
need of cervical spinal fusion, Mesoblast believes that this
clinical indication may provide an accelerated path to
regulatory market approval and successful targeting of the
biological fusion market by its NeoFuse™ product.
To achieve this, Mesoblast initiated a preclinical trial at
Monash University during the year to determine the safety
and effi cacy profi le of its allogeneic stem cell therapy in
cervical fusion. Signifi cantly, no cell-related adverse events
were noted at any time throughout the study. Treatment
groups receiving Mesoblast’s allogeneic cells had earlier
and more robust fusion than the other groups.
We are encouraged that the profi le of our allogeneic cells in
the cervical interbody space may translate into a safer and
more effective clinical alternative to existing therapies. These
commercial advantages, particularly in light of the FDA
notifi cation concerning life threatening complications of
rhBMP, will strongly assist us in locking in the optimal global
partner to execute our sales and marketing strategies.
Intervertebral Disc Repair
For patients with intervertebral disc disease, Mesoblast
is developing an allogeneic MPC product which can be
injected using a minimally invasive approach into
degenerating discs of unrelated recipients in order to
repair and regenerate disc cartilage. This product is
expected to signifi cantly increase Mesoblast’s potential
revenue in the spine market as it will address the needs of
a much larger segment of patients with chronic back pain
than those at the extreme end who are in need of fusion.
Results of preclinical trials from existing studies with this
product are expected shortly.
Knee Osteoarthritis
During the course of the year, Mesoblast announced
exciting results from two large preclinical trials examining
the effects of its allogeneic MPC product injected into
knees with osteoarthritis. Osteoarthritis is the most
common musculoskeletal disorder and the leading cause
of joint pain and disability among the elderly. It is a
degenerative disease which is characterised by the loss
of cartilage. More than 15 million people in the United
States alone suffer from osteoarthritis of the knee.
Current therapies attempt to alleviate painful symptoms
but are unable to preserve the cartilage lining the joint.
Moreover, many of the currently used pharmaceutical
therapies are associated with severe side effects and can
even cause death. Joint replacement is often the only
option for restoring function.
Mesoblast’s preclinical trials evaluated the effects of our
allogeneic MPC product injected early in the course of
mild arthritis and late in the course of severe arthritis. The
results of both preclinical trials have shown that a single
injection of Mesoblast’s allogeneic cells into knee joints
damaged by osteoarthritis can both prevent further
deterioration and regenerate/regrow cartilage tissue lining
the damaged joint.
Over the six months of follow-up in the severe arthritis
group, osteoarthritic knees that received Mesoblast’s
allogeneic cells demonstrated as much as 20 – 25% thicker
and greater area of cartilage lining the damaged joint
compared with baseline measurements of joints before
treatment (both parameters p<0.001). This cartilage was
rich in proteoglycan, the natural constituent of joint lining
cartilage, indicating that the regenerative process had
induced normal, functional knee cartilage. In contrast, no
signifi cant improvement over baseline was seen with a
single injection of hyaluronic acid alone at either three or
six months.
These results form the basis for an IND submission to the
FDA for multiple Phase 2 clinical trials for treatment of
patients with degenerative osteoarthritis of the knee.
Products for Non-Orthopaedic Indications
Signifi cantly, Mesoblast has increased its equity in its
United States sister company, Angioblast Systems Inc., to
39.1 percent. Angioblast is simultaneously advancing the
platform stem cell technology towards commercialisation
of novel treatments for cardiovascular, eye, and bone
marrow conditions. To date, Angioblast has attained very
positive clinical and preclinical results in these indications,
supporting Mesoblast’s signifi cant equity investment and
the intrinsic value associated with these indications.
Congestive Heart Failure
Congestive heart failure remains a leading cause of
hospital admissions, morbidity and mortality in the western
world. There are currently fi ve million people in the United
States with congestive heart failure, with over 550,000 new
cases annually. Revascor™, a trademark of Angioblast
Systems Inc, is an allogeneic MPC product being
developed to rebuild both blood vessels and heart muscle
in order to reverse congestive heart failure.
Heart failure results from the progressive deterioration
of heart muscle function, leading to its inability to pump
suffi cient blood to the body’s tissues, organs and limbs.
The most common causes of heart failure are atheroscle-
rosis (blockage of the coronary arteries), prior heart attack,
hypertension, and rhythm disturbances. Existing therapies
do not repair nor regenerate heart muscle.
3
In October 2008, Angioblast announced successful
early safety results in the world’s fi rst clinical trial to use
allogeneic, or “off-the-shelf”, adult stem cells from an
unrelated donor to treat patients with congestive heart
failure. The FDA cleared multi-centre Phase 2 trial will
randomise up to 60 patients suffering from congestive
heart failure to receive either injection of Revascor™ by
catheter into damaged heart muscle or standard-of-care.
Safety data from the fi rst seven patients enrolled in the
Phase 2 trial by Angioblast at medical centres in Arizona,
California and Minnesota, were presented in October at
the Transcatheter Cardiovascular Therapeutics (TCT)
Conference in Washington D.C. No cell-related adverse
events had occurred in any of the fi rst patients implanted.
The Company expects to have the fi rst cohort of patients
recruited by the end of the year, and to report on effi cacy
results during 2009.
Coronary Artery Disease
A pilot clinical trial for chronic, multi-vessel coronary artery
disease was successfully conducted at the John Hunter
Hospital in New South Wales. This trial showed that
the MPC technology could be used effectively to reduce
angina, the need for anti-anginal medications, and
improvement of heart function in patients with severe,
chronic coronary artery disease.
At the other end of the disease spectrum, Angioblast is
evaluating the MPC technology in the treatment of acute
coronary artery disease and heart attacks. The aim of the
stem cell treatment is to prevent the onset of heart failure
after a heart attack, which ensues in a signifi cant
proportion of the 1 million patients per year in the United
States who survive a heart attack. The multi-centre FDA
cleared Phase 2 trial is focusing on the safety and
effectiveness of the Company’s allogeneic stem cells
injected by catheter into the damaged heart muscle around
10 days after an acute heart attack. Patients recruited to
date have demonstrated no cell-related safety issues.
AMD/Diabetic Retinopathy
Angioblast is developing an allogeneic MPC product for
the treatment of eye diseases associated with abnormal
blood vessels. These diseases include diabetic retinopathy
and age-related macular degeneration (AMD), the leading
causes of blindness in the western world.
In the United States alone, there are approximately 1.5
million people suffering from some form of AMD associated
with abnormal blood vessels, and over 200,000 new cases
arising per year. An additional 500,000 diabetics suffer
from macular oedema caused by abnormally leaky
vessels, indicating that both AMD and diabetic macular
oedema constitute major market opportunities.
In July 2008, Angioblast announced the results of a trial
using the allogeneic MPCs in 42 non-human primates for
the treatment of leaky blood vessels in the eye. The results
of this primate study, together with earlier preclinical
results, show that a single intra-ocular injection of the
Company’s proprietary allogeneic adult stem cells is highly
effective for reducing blood vessel leakage. Moreover,
it shows that combining the Company’s proprietary stem
cells with the current standard-of-care, an anti-VEGF
agent, results in superior outcomes compared with use of
an anti-VEGF agent alone.
4
These trials will form the basis of an IND submission to
the FDA to commence a Phase 2 clinical trial of the
Company’s allogeneic stem cells in combination with an
anti-VEGF agent, with the objective to show improvement
in vision, long-term disease remission, and reduction in
frequency of intra-ocular anti-VEGF maintenance injections.
Angioblast intends to form a strategic partnership with
a major global health care company in order to rapidly
commercialise its stem cell product for the treatment of
eye diseases caused by abnormal blood vessels, such
as diabetic retinopathy and AMD.
Bone Marrow Transplantation
In September 2008 the FDA granted Angioblast an
orphan drug designation to use the proprietary “off-the-
shelf” allogeneic mesenchymal precursor cells in patients
with haematologic malignancies who need a bone
marrow transplant but have insuffi cient haematopoietic
stem cell production.
The FDA granted this designation to Angioblast based
on results generated in collaboration with investigators at
the MD Anderson Cancer Centre in Houston in the United
States, which showed that the MPCs can be used to
expand the number of haematopoietic stem cells in culture.
Haematopoietic stem cells are needed to regenerate bone
marrow in patients whose own bone marrow is damaged
and destroyed by treatments for various cancers. The
greater the number of haematopoietic stem cells trans-
planted, the greater the likelihood that the bone marrow
transplant will successfully engraft and regenerate a
patient’s damaged bone marrow.
According to the March 2008 issue of Biology and Bone
Marrow Transplantation, the probability that an individual
in the United States will require a haematopoietic stem cell
bone marrow transplant sometime during their life is 1 in
217. Orphan drug designation allows for an accelerated
review process by the FDA, seven-year market exclusivity
in the United States upon obtaining marketing
authorisation, tax benefi ts, and exemption from user fees.
The future
In the next 12 months we will continue to focus on clinical
and commercial value drivers. Specifi cally, the emphasis
will be on:
• Executing commercial relationships that will add
substantial value to both companies and enhance
market-oriented execution capability
• Completion of ongoing and commencement of new
Phase 2 trials
• Progression of clinical programs towards Phase 3
registration trials
In the 2009 fi nancial year, both companies are set to
capitalise on the leading edge shared platform
technology. They are supported by robust and broadened
patent protection, strong management, adherence to
good corporate governance, suffi cient funds, and solid
communication capabilities.
These characteristics, driven by the extraordinary talent
and dedication of our staff and consultants, will underpin
both companies as they emerge as global leaders in the
very rewarding fi eld of regenerative medicine.
Making a difference
Patient Tony Giancola, 36,
with the Principal Investigator
of the non-healing, long
bone fracture trial at The
Royal Melbourne Hospital,
orthopaedic surgeon
Richard de Steiger.
Courtesy of HWT
Tony is playing football again
Stem cells heal where
surgery fails
Adult stem cells could improve healing of serious fractures,
writes Lynnette Hoffman in The Weekend Australian
By the time Dean Spizzirri arrived at the Royal Melbourne
Hospital for an experimental treatment to repair his badly
fractured tibia, 33 months had passed since he smashed
his leg in a motorbike accident one October night.
(thigh bone) and tibia. The tibia healed, but the fracture
in the femur did not. Another patient, a particularly
complex case, did not respond to the treatment and
required more surgery.
Before the crash, Spizzirri had been a fi t and active bloke:
a bricklayer who cycled, boxed, and enjoyed kicking the
footy around with his son during his spare time.
The median healing time for the patients in the trial was
four months; they had had non-uniting fractures for a
median of 10 months prior to the stem cell treatment.
But for some reason – and doctors couldn’t say what that
was – Spizzirri’s shin bone had refused to heal.
As yet, none has suffered adverse events related to the
stem cell therapy.
He’d had three operations, including one that involved
taking bone from his pelvis and grafting it to the fracture
site, the standard treatment doctors use when a bone
hasn’t healed by the six-month mark. But no luck. Spizzirri
could no longer work, and couldn’t walk without crutches,
let alone play sport.
The phase 1 clinical trial showed the procedure was safe,
and independent trial leader and orthopaedic surgeon
Richard de Steiger says if further randomised controlled
trials at multiple centres can replicate those results, and
the procedure becomes commercialised, it could have
signifi cant implications.
So when the Gold Coast man headed to Melbourne
for the experimental treatment, his expectations were
understandably low.
In the procedure, doctors take stem cells from the
patient’s bone marrow, isolate those responsible for
growing bone and inject them into the fracture site to
stimulate growth.
“It was the last resort,” Spizzirri said. Six months after that
fourth surgery, he was surprised to fi nd the bone healed.
“The break is actually stronger than the rest of my leg.”
He still hasn’t regained the fi tness and agility he
once had, but he’s back at work, walking, and able to
do light exercises.
Spizzirri was one of 10 patients with severe non-healing
fractures in their leg bones who took part in the clinical
trial at Royal Melbourne Hospital. Earlier this month
doctors announced they had used the patients’ own
stem cells to successfully repair nine out of 11 fractures
in 10 patients.
After 12 months of follow-up, eight patients had achieved
“complete bone union” – in other words, the fractures had
fully healed. A ninth patient had fractures in both his femur
Data from the Victorian Orthopaedic Trauma Register
shows that up to 15 per cent of severe bone fractures do
not heal. Worldwide, there are millions of people suffering
from long bone fractures that do not heal. The majority are
victims of road accident trauma, but industrial and
sporting accidents account for some of the cases as well.
Other patients suffer from severe fractures that heal slowly
or poorly, and are at high risk for non-union.
If fractures heal more quickly, it will not only reduce the
pain patients experience, but also the economic burden
to the community, de Steiger says. “There’s a large
economic cost to broken bones that don’t heal. It prevents
people from working and returning to normal activities,”
he said.
There are only two types of adult stem cells: the more
common type are called haematopoietic stem cells,
which are currently used to rebuild bone marrow in
cancer patients.
The 10 patients in the trial received much more specialised
and less common stem cells called mesenchymal
precursor cells, found in only about 1 in 100,000 bone
marrow cells.
6
Dean Spizzirri, 51, had three operations to heal
his fractured tibia, including autograft and Bone
Morphogenetic Protein, but with no success. After
33 months, he was implanted with Mesoblast’s
proprietary stem cells and within four months,
his fractured tibia had united.
Although they are much rarer, these cells have several
advantages. They can develop into many types of tissue,
not just bone marrow; they reproduce and expand to a
much greater level than the other stem cells because they
continue to keep dividing without stopping; and they
aren’t recognised as foreign by the immune system, even
when they are transplanted into unrelated people, says
Silviu Itescu, executive director of Mesoblast, the listed
biotech company that funded the trial and holds the
worldwide licence to commercialise adult stem cell
technology for orthopaedic applications.
Antibodies are used to isolate the cells, which are then
cultured in a lab until enough are formed that they can
be implanted onto the site of the fracture. In Melbourne,
it took about six weeks to culture enough cells.
De Steiger and Itescu both say it’s unlikely that particular
method of harvesting the stem cells from individual
patients will ever be commercially viable – it takes too
long and it’s too expensive to go through the whole
process each time.
The quality and quantity of the stem cells also vary from
person to person, so it may not be possible to get enough
direct from each patient, especially as poorly growing
stem cells may be one of the reasons the bone didn’t heal
in the fi rst place. According to Itescu, that was probably
the case in the patient in the trial who had two fractures,
only one of which healed.
But Mesoblast is currently trialling a procedure that uses
stem cells cultured from a single donor, which would
probably be at least 10 times cheaper than the method
used in this trial, Itescu says. Mass-produced cells from
a donor would also mean the cells were readily available,
so they could be used to treat fresh fractures as well.
Early results seem promising.
Researchers have successfully used cells from one
donor to treat hundreds of related sheep. They are now
testing the process in a phase 2 clinical trial in New York
in human patients with end-stage vertebral disease, to
see if they can use donor stem cells to grow new spine.
De Steiger says the results so far represent signifi cant
potential for improving on existing treatments. “If we could
use stem cells as an initial treatment in people with fresh
fractures, then we may be able to reduce the healing
time,” he said.
“The stem cells are delivered directly to the fracture site,
which could help bone heal more quickly. This would be
especially benefi cial in patients who had a high risk of
not healing, such as patients who had open fractures or
high-speed motorcycle injuries.”
De Steiger says one potential risk is that the stem cells
could continue to grow and form too much bone. “That
hasn’t happened with any of these patients though, and
I think, if anything, overall there are less likely to be risks
because you’re saving a second operation. Patients have
a faster recovery and less pain because there is no other
site being operated on.”
The standard procedure in patients whose bones haven’t
healed is to perform a second operation where bone is
harvested from the pelvis, and in those cases there is up
to a 10 per cent risk of complications including bleeding,
ongoing pain or infection.
Because the stem cell procedure uses a needle to retrieve
the cells rather than an additional surgery, it is far less
invasive. This is what appealed to Tony Giancola, another
patient who participated in the trial.
For him, it wasn’t the last-resort option. But when given
the choice between surgery on his hip to graft part of his
pelvic bone, and the trial where they would use a needle
to extract stem cells, he picked option two.
“They explained both of the procedures and said
I would be walking around a lot quicker, so I chose it,”
he says.
Two weeks after the operation, he was walking; eight
weeks later the bone had healed. “There’s no limp,
nothing,” he says.
This article is reproduced courtesy of
The Weekend Australian.
7
Directors’ Report
The Board of Directors of Mesoblast Limited has resolved to submit
the following annual fi nancial report of the Company for the fi nancial
year ended 30 June 2008. In order to comply with the provisions of the
Corporations Act 2001, the directors report the following information:
Directors
Directors of the Company in offi ce at any time during or since the end of the year (unless specifi ed) were:
Name
Position
Brian Jamieson
Non-executive Chairman (A)
Byron McAllister
Non-executive Director
Donal O’Dwyer
Non-executive Director
Effective Date
22 November 07
Full year
Full year
Michael Spooner
Non-executive Director (A); Non-executive Chairman (R)
22 November 07
Michael Spooner
Non-executive Chairman (A); Executive Chairman (R);
8 August 07
Silviu Itescu
Executive Director and Chief Scientifi c Adviser
Full year
(A) Appointed to this position
(R) Resigned from this position
Details of directors qualifi cations, experience and special responsibilities, together with meetings attended, can be
found on pages 14 to 16 of this report.
8
Principal Activities & Strategy
Mesoblast Limited is an Australian biotechnology
company committed to the development of innovative
biological products in the emerging and potentially highly
lucrative fi eld of regenerative medicine.
Our adult stem cell platform is being developed for use
in the global orthopaedic industry. We are specifi cally
targeting a range of bone, cartilage and musculo-
skeletal conditions.
Our aim is to bring at least three products to market in the
near term for treatment of these conditions which affect
many people.
Mesoblast Limited has the worldwide exclusive rights for
orthopedic indications relating to a series of patents and
technologies that have been developed over more than
10 years and which relate to the identifi cation, extraction
and culture of adult Mesenchymal Precursor Cells (MPCs).
The Company also holds a substantial interest in
Angioblast Systems, Inc. (Angioblast), an American
company developing the same platform technology for
the treatment of cardiovascular diseases, including repair
and regeneration of blood vessels and heart muscle.
Overview
During the last fi nancial year, which ended 30 June 2008,
Mesoblast remained on track to achieve its goals for
commercialising our unique adult stem cell technology
platform. These goals include bringing to market multiple
cell-based products for the treatment of a wide range of
degenerative conditions. Signifi cant clinical and
preclinical achievements during the past year mean that
Mesoblast’s products are progressively getting closer to
commercialisation. These highlights, discussed in detail
below, emphasise the progress made in the programs of
our cell-based products for large unmet global markets,
including diseases of bone, cartilage, heart muscle and
blood vessels.
Business Model
From the outset we have outlined a business model that
is based on low cost of goods and high margins, similar
to pharmaceutical drug development. To achieve this, the
focus has been on allogeneic or ‘off-the-shelf’ products
which are generated by large-scale expansion of a small
amount of donor starting material. Additional advantages
of allogeneic products are that they can be batched, with
each batch being highly reproducible and consistent
to ensure product safety and effectiveness. Equally as
important is that “off-the-shelf” products will be available
for immediate use at hospitals when the acute trauma or
injury needs rapid treatment.
Intellectual Property
Mesoblast continues to exploit and expand its patent and
intellectual property portfolio. Key patents have been
granted in the United States, the world’s largest market for
commercialisation of our products. The expanding patent
portfolio will continue to deliver major commercial
advantages, ensuring exclusive commercialisation of our
stem cell platform globally.
Funding
In December, Mesoblast Limited successfully completed
a capital raising of $13.44 million from Australian
institutional and sophisticated investors. The capital is
being used for ongoing clinical trial activities, expansion
of preclinical opportunities, and general administrative
operations. At 30 June 2008, Mesoblast had cash
reserves of $14.1 million.
Key achievements
Non-healing bone fractures
A pilot clinical trial for non-healing, long bone fractures
was completed just after the fi nancial year with
10 patients, with a total of 11 non-healing fractures of the
long bones in the legs, operated on using Mesoblast’s
proprietary stem cells. The patients had non-union for up
to 41 months prior to cell implantation, with a median time
of 10 months. Outstanding results were achieved in this
trial with bony union achieved within a median time of four
months after stem cell implantation. Mesoblast’s focus is
now on Phase 2 IND submissions to the FDA for use of its
allogeneic stem cells in the treatment of non-union and
high-risk fresh fractures.
Spinal Fusion
Patients with end-stage degenerative intervertebral disc
disease are usually treated with bone grafts from their
own pelvis to induce bony fusion, a procedure termed
autograft. Mesoblast is developing a cell product, called
Neofuse, to generate bony fusion eliminating the need for
an autograft and its associated pain and infection risk.
Spinal fusion for end-stage disc disease is a major global
market opportunity for Mesoblast, with over 500,000
patients expected to require this procedure in the United
States alone by 2010.
A Phase 2 trial for spinal fusion, using Mesoblast’s
allogeneic or “off-the-shelf” adult stem cells, commenced
at New York’s Hospital for Special Surgery, one of the
world’s leading orthopaedic, rheumatologic and
rehabilitation specialty hospitals. After encouraging initial
safety data, Mesoblast announced that it would
accelerate its clinical trial timetable by expanding its
Phase 2 trial activities to up to 10 new major clinical sites
throughout the US.
9
Intervertebral Disc Repair
For patients with earlier-stage intervertebral disc disease,
Mesoblast is developing an allogeneic adult stem cell
product which can be injected by a minimally invasive
approach into degenerating discs of unrelated recipients
in order to repair and regenerate disc cartilage. This
is likely to be a signifi cantly larger market than spinal
fusion. Results of preclinical trials are expected this
calendar year.
Knee Osteoarthritis
Osteoarthritis is a major degenerative disease of cartilage
in joints, with the knee being the most commonly affected.
Knee osteoarthritis affects as many as 15 million people
in the United States alone, and no approved therapies
currently have any effect on cartilage repair or
regeneration. The outstanding results of our preclinical
cartilage trials have shown that a single injection of
Mesoblast’s allogeneic cells into knee joints damaged by
osteoarthritis can both prevent further deterioration and
regenerate/regrow cartilage tissue lining the damaged
joint. These results form the basis for a planned IND
submission to the FDA for multiple Phase 2 clinical trials
for treatment of patients with degenerative osteoarthritis of
the knee.
Strengthened relationship with Angioblast Systems Inc.
in the United States
Mesoblast has increased its equity in its United States
sister company, Angioblast Systems Inc., to 39.1 percent.
Angioblast is simultaneously advancing the platform
stem cell technology towards commercialisation of novel
treatments for cardiac, vascular, and eye conditions.
To date, Angioblast has attained strong clinical and
preclinical results in these indications, supporting
Mesoblast’s signifi cant equity investment and the intrinsic
value associated with these indications.
All of Angioblast’s clinical trials to date have been
performed collaboratively with Johnson & Johnson’s
Cordis Corporation and Biosense Webster who have
provided their latest generation cardiac catheter
technologies for these trials.
During the fi nancial year, Angioblast entered into an
important new collaborative arrangement with Abbott,
a major healthcare company. Abbott is providing funding
for a collaborative program in heart failure, and has
made an equity-based investment of $US5 million.
Congestive Heart Failure
This condition affects an estimated 5 million people in the
United States alone, with 550,000 new cases each year.
A pilot clinical trial using the Company’s stem cells for
heart disease was successfully conducted at the John
Hunter Hospital in New South Wales. The primary
endpoint of safety at six months was achieved with no
cell-related adverse events. Equally as important, all
patients showed improvement in heart muscle function
and reduced symptoms of both heart failure and
severe angina.
The results of this pilot trial, together with additional
preclinical trials, formed the basis of a successful IND
submission to the FDA, which cleared Angioblast to
commence a Phase 2 trial of the stem cell technology for
treating patients with congestive heart failure. Patient
recruitment for this trial is actively occurring.
Heart Attack
Following rapid approval of an IND submission to the
FDA for a Phase 2 clinical trial in patients with heart
attacks, the study was launched at one of the world’s
premier cardiovascular medical centers, the Texas Heart
Institute. The trial is focusing on the safety and
effectiveness of the Company’s allogeneic stem cells
injected into the damaged heart muscle around 10 days
after an acute heart attack. The aim of the stem cell
treatment is to prevent the onset of heart failure after a
heart attack.
AMD/Diabetic Retinopathy
Preclinical trials showed that the proprietary stem
cells were highly effective for the treatment of leaky
blood vessels in the eye, the major cause of vision loss
in patients with wet age-related macular degeneration
(AMD) and diabetic retinopathy. These clinical indications
represent additional major market opportunities for
Angioblast.
Financial Summary
Operating results
The net loss for the year was $10,062,379 (2007:
$8,728,131) and is in line with expectations. The result
refl ects full year operations for the Company and the
continued development of our platform technology.
Income
Revenue during the period was $909,807 (2007:
$1,679,317) and is made up of:
30 June
2008
$
30 June
2007
$
Revenue from continuing operations
Commercial Ready
government grant
Interest revenue
Other income
-
719,698
909,807
939,557
-
20,062
909,807
1,679,317
10
Expenditure
In line with the Company’s policy and to comply with
accounting standards, all costs associated with research
and development are fully expensed in the period in which
they are incurred as the directors do not consider the
Company can yet demonstrate all the factors required in
order to capitalise development expenditure.
Total operating expenses for the period were $10,972,186
(2007: $10,407,448) and is made up of:
Mesoblast has now substantially completed its investment
in Angioblast under the Series B agreement and as a
result owns 39.1% of Angioblast. This investment is carried
on the balance sheet of Mesoblast and is made up of the
cash invested of $18,082,792 (2007: $11,663,339) together
with the Company’s share of Angioblast losses of
$5,321,545 (2007: $3,995,244) giving a net investment
of $12,761,247 (2007: $7,668,095).
Earnings per share
30 June
2008
$
30 June
2007
$
Research and development
6,207,372
6,325,130
Management and
administration
Share of losses of equity
accounted associates
2,642,016
2,368,192
2,122,798
1,714,126
Dividends
Basic earnings/(losses)
per share
Diluted earnings/(losses)
per share
2008
Cents
2007
Cents
(8.81)
(8.20)
(8.81)
(8.20)
No dividends were paid or declared during the course of
the fi nancial year and no dividends are recommended in
respect to the fi nancial year ended 30 June 2008.
Investment in Angioblast Systems, Inc.
Mesoblast has now substantially completed its investment
in Angioblast under the Series B agreement and as a
result now owns 39.1% of Angioblast. The remaining
0.1% investment under this agreement, being $200,000,
will be invested in furthering the platform technology, most
likely in the next six months.
Angioblast Systems, Inc. is a non-listed biotechnology
company based in New York. The company was
incorporated on 27 April 2001 in Delaware, United States
of America.
Angioblast’s principal focus is to commercialise
cardiovascular applications of our adult stem cell
technology which was acquired from the Hanson
Institute/Institute of Medical and Veterinary Science
in South Australia.
10,972,186
10,407,448
Cash fl ow statement
Net cash outfl ow from operations decreased to
$6,202,589 in 2008 (2007: $9,102,676) largely due to
the following reasons:
• government grant funding received in 2007 was
approximately $0.5m higher than in 2008;
• 2007 operating cashfl ow included $2.1m of research
and development expenses which related to 2006.
During the period under review the Company issued a
further 10,500,000 shares at $1.28 (2007: 13,882,800
shares at $1.25), providing approximately $13.4m in cash
which has largely been used to fund and support phase
2 clinical trials.
Balance sheet
At 30 June 2008 the Company’s cash position was
$14,094,219 (2007: $12,055,040) whilst Angioblast
Systems, Inc. had a cash balance of $6,084,775 (USD
$5,850,511) (2007: $449,923). When combined, the total
cash balance of $20.2m (2007: $12.5m) represents the
amount by which the platform adult stem cell technology
could be further developed and commercialized.
The Company’s policy is to hold its cash and cash
equivalent deposits in “A” rated or better deposits.
The Company’s strategy is to outsource manufacturing
and all continuing research to specialist, best of
breed partner organisations. As a consequence the
Company has not incurred any major capital
expenditure for the period and does not intend to
incur substantial commitments for capital expenditure
in the immediate future.
11
Share Options
Shares under option
Unissued ordinary shares of Mesoblast Limited under option at the date of this directors’ report are as follows:
Option Series
Issue Date
Number of shares
under option
Exercise price
of options
Expiry date
of options
1
29 September 2004
4,120,000
2(a),(b),(c)
16 December 2004
2(c)
3
3
4(a)
4(a)
4(b)
4(b)
4(b)
4(c)
5
6(a)
6(b)
6(d)
6(d)
6(d)
6(d)
6(d)
6(d)
7
8
16 December 2004
25 August 2005
25 August 2005
23 February 2006
23 February 2006
23 February 2006
23 February 2006
23 February 2006
23 February 2006
23 November 2006
17 March 2006
17 May 2006
1 January 2007
1 January 2007
1 January 2007
1 January 2007
1 January 2007
1 January 2007
27 July 2007
7 July 2008
700,000
80,000
350,000
350,000
34,000
66,000
166,667
200,000
350,000
20,000
150,000
50,000
10,000
15,000
45,000
30,000
40,000
30,000
30,000
2,480,000
2,736,000
12,052,667
$0.55
$0.60
$0.60
$0.65
$0.65
$0.65
$0.65
$0.65
$1.20
$1.20
$0.65
$0.65
$2.02
$1.52
$1.96
$1.96
$1.96
$1.96
$1.96
$1.96
$2.13
$1.00
29 September 2009
16 December 2008
04 July 2009
31 December 2008
30 June 2009
31 March 2009
1 May 2010
30 June 2009
30 June 2010
30 June 2011
23 February 2009
23 November 2009
17 March 2009
17 May 2009
1 July 2008
1 January 2009
1 January 2010
1 January 2011
1 August 2008
1 February 2009
30 June 2012
30 June 2013
No option holder has any right under the options to participate in any other share issue of the Company. Further details of the options
series can be found in Note 18 to the fi nancial statements.
Shares issued on exercise of options
Detail of shares or interests issued as a result of the exercise of options during or since the end of the fi nancial year are:
Option Series
Grant Date
Number of
shares issued
Amount paid
per share
Amount unpaid
per share
29 September 2004
16 December 2004
23 February 2006
23 February 2006
23 February 2006
600,000
80,000
150,000
150,000
60,000
1,040,000
$0.55
$0.60
$0.65
$1.20
$0.65
Nil
Nil
Nil
Nil
Nil
1
2(c)
4(b)
4(b)
4(c)
12
Signifi cant Changes in the State of Affairs
No signifi cant changes occurred in the state of affairs
of the Company during the fi nancial year other than those
disclosed in the review of operations.
Matters Subsequent to the End of the
Financial Year
No matters or circumstances have arisen since 30 June
2008 up to the date of this report that the directors believe
have signifi cantly affected or may signifi cantly affect:
• the Company’s operations in future fi nancial years; or
• the results of those operations in future fi nancial years;
or
• the Company’s state of affairs in future fi nancial years.
Business Strategy Prospects for Future Years
Mesoblast is committed to the rapid commercialisation
of its adult stem cell platform technology. Our ongoing
strategy is to maximise shareholder wealth through rapid
completion of existing clinical trial programs and to
signifi cantly extend our market opportunities by initiating
new programs that build logically on extensive work
that has been completed. Mesoblast will continue to
aggressively engage commercial partner organisations
as a key part of our ongoing strategy.
At the date of this report, Mesoblast’s business strategy
is to:
• focus on patient enrollment and trial completion
associated with our phase 2 clinical trial program
in the United States for spinal fusion;
• consider the fi ling of a new indication with the
United States Food and Drug Administration for
the commencement of clinical trials associated with
long bone fractures and/or knee osteoarthritis;
• pursue clinical and preclinical trial programs
associated with the treatment of diseases caused
by cartilage degeneration
Mesoblast has a strong and ongoing relationship with
its sister company Angioblast Systems, Inc. in the
United States. We will continue to work closely with
the management and board of directors of Angioblast
to protect and enhance our signifi cant investment in
that company.
Environmental Regulations
Mesoblasts operations are not subject to any signifi cant
environmental regulation under either Commonwealth
or State legislation. The Board, however, considers that
adequate systems are in place to manage the Company’s
obligations and is not aware of any breach of
environmental requirements as they relate to the Company.
Indemnifi cation of Offi cers
During the fi nancial year, the Company paid premiums
in respect of a contract insuring the directors and
company secretary of the Company, and all executive
offi cers of the Company. The liabilities insured are to the
extent permitted by the Corporations Act 2001. Further
disclosure required under section 300(9) of the
Corporations Act 2001 is prohibited under the terms of
the insurance contract.
Proceedings on Behalf of the Company
The Corporations Act 2001 allows specifi ed persons to
bring, or intervene in, proceedings on behalf of the
Company. No proceedings have been brought or
intervened in on behalf of the company with leave of the
Court under section 237 of the Corporation Act 2001.
Non-Audit Services
The Company may decide to employ the auditor on
assignments additional to their statutory audit duties
where the auditor’s expertise and experience are relevant
and considered to be important. PricewaterhouseCoopers
did not provide any non-audit services during the year
and accordingly there were no amounts paid or payable
to PWC for such services (2007: nil).
Auditor’s Independence Declaration
A copy of the auditor’s declaration under Section 307C
in relation to the audit for the year ended 30 June 2008 is
included on page 25 of the annual report.
13
Information on Directors
Brian Jamieson, Non-executive Chairman – FCA
Shares held:
Options held:
125,000
-
Mr Jamieson has over 30 years experience in providing
advice and audit services to a diverse range of public and
large private companies. He was chief executive of Minter
Ellison, Melbourne, from 2002 – 2005. Prior to that he was
chief executive offi cer of KPMG from 1998-2000, managing
partner of KPMG Melbourne and Southern Regions from
1993–1998, and chairman of KPMG Melbourne from 2001–
2002. He was also a KPMG board member in Australia and
a member of the USA management committee.
Mr Jamieson is currently a non-executive director of Tatts
Group Limited (since May 2005), Sigma Pharmaceuticals
Limited (since December 2005) and Oz Minerals Limited
(since August 2004), all ASX listed companies. He is also
a non-executive director HBOS Australia Pty Ltd, director
and treasurer of Care Australia and the Bionic Ear Institute,
and a director of Veski, The Sir Robert Menzies Foundation,
the Australian Council Major Performing Arts Board.
Donal O’Dwyer, Non-executive Director – BE, MBA
Shares held:
Options held: 300,000
-
Mr O’Dwyer has had 20 years experience as a senior
executive in the global cardiovascular and medical
devices industries. From 1996 to 2003, Mr O’Dwyer
worked for Cordis Cardiology, the cardiology division of
Johnson & Johnson’s Cordis Corporation, initially as its
president (Europe) and from 2000 as its worldwide
president. Cordis is the world’s largest manufacturer of
innovative products for interventional medicine, minimally
invasive computer-based imaging, and electrophysiology.
In his role, Mr O’Dwyer led Cordis through the launch of
the revolutionary Cypher drug eluting coronary stent
technology, and saw the company take over number one
market share of coronary stents worldwide. He directly
supervised an increase in sales from $US500 million in
2000 to $US2 billion in 2003. Prior to joining Cordis,
Mr O’Dwyer worked for 12 years with Baxter Healthcare,
rising from plant manager in Ireland to president of the
Cardiovascular Group, Europe, now Edwards Lifesciences.
Mr O’Dwyer is a qualifi ed civil engineer, has an MBA and
is on the board of a number of companies including
Cochlear Limited, Atcor Medical Holdings Ltd and
Sunshine Heart Inc.
Mr O’Dwyer is currently Mesoblast’s representative on the
Board of Directors for Angioblast Systems, Inc.
Silviu Itescu, Founder and Executive Director
– MBBS (Hons), FRACP, FACP, FACR
Shares held:
Options held:
36,632,196
-
A medically trained physician scientist, Professor Itescu
has established an outstanding international reputation in
the fi elds of stem cell biology, autoimmune diseases,
organ transplantation, and heart failure. He has been
a faculty member of Columbia University in New York and
of the University of Melbourne. His pioneering work
in the use of adult stem cells for heart disease has laid the
groundwork for a potential paradigm shift in the treatment
of cardiovascular disorders. Professor Itescu has consulted
for various international pharmaceutical companies, has
been an adviser to biotechnology and health care investor
groups, and has served on the Board of Directors of
several publicly-listed Australian life sciences companies.
In addition, he is the founder and a member of the Board
of Directors of Angioblast Systems Inc.
14
Byron McAllister, Non-executive Director – BS M.Agr
Shares held:
Options held: 150,000
-
Mr McAllister has extensive expertise in product
development, quality assurance, and obtaining FDA
regulatory approvals within the healthcare industry. He
has extensive expertise within the biologics, pharma-
ceutical and medical device industries, and has prepared
full documentation for approval by the US FDA, UK MCA,
and other world health regulatory authorities. Most
recently, Mr McAllister has served as Vice President,
Worldwide Quality Assurance, for the Ares-Serono Group
based in Geneva and Boston, overseeing operations in
over a dozen countries. Mr McAllister has held senior
management positions in manufacturing and quality
assurance with Abbott Laboratories’ Ross Laboratories
and Diagnostics Divisions, Amersham Corporation, and
Coulter Electronics Corporation. He is a member of the
PDA (Parenteral Drug Association), American Society for
Quality (ASQ), and the Regulatory Affairs Professionals
Society (RAPS).
Michael Spooner, Non-executive Director
– Bcom, ACA, MAICD
Shares held:
Options held: 1,100,000
-
Mr Spooner is a well known and respected business
leader. He has an extensive network of relationships with
investment fi rms and business communities across the
globe, having spent the majority of the past 25 years living
and working internationally. Mr Spooner is Executive
Chairman of Hunter Immunology Limited, a late stage
respiratory biopharmaceutical company, and is a non-
executive director of Peplin Inc, a dermatology focused
skin cancer company. Most recently, Mr Spooner was
the previous Chairman of Mesoblast Limited. Previously,
he was Managing Director & CEO of Ventracor Limited
where he led the transformation of a small Australian listed
life sciences company into the second highest performing
stock on the S&P/ASX 200 index in 2003. He was a
Principal Partner and Director of Consulting Services with
PricewaterhouseCoopers (Coopers & Lybrand) in Hong
Kong for several years.
Kevin Hollingsworth, Company secretary – FCPA, FCMA
Shares held:
Options held: 200,000
-
Mr Hollingsworth is a Fellow of CPA Australia, and a past
chairman of both the National and Victorian Industry and
Commerce Accountants Committees. He is also a Fellow
of the Chartered Management Accountants and a Past
National President of CIMA Australia. Mr Hollingsworth
has most recently been non-executive director and
company secretary for Alpha Technologies Corporation
Ltd, a global company with operations in the US, Mexico,
Europe and China, designing and manufacturing
temperature sensors for disposable medical devices, as
well as precision thermometry and instrumentation for the
biotechnical and life science industry.
15
Meetings of Directors
The number of meetings of the Company’s directors (including committee meetings of directors) held during the year
ended 30 June 2008 and the numbers of meetings attended by each director were:
Director
Michael Spooner
Silviu Itescu
Byron McAllister
Donal O’Dwyer
Brian Jamieson
Board of Directors
Audit &
Risk Committee
Nomination &
Remuneration
committee
Held
Attended
Held
Attended
Held
Attended
12
12
12
12
7
12
12
12
12
7
5
5
5
5
2
5
5
5
5
2
2
2
2
2
2
2
2
2
2
2
16
Remuneration Report
The directors of the Company present the following
remuneration report, which forms part of the directors’
report and has been prepared in accordance with s300A
of the Corporations Act 2001. The remuneration report
has been audited as required by s308(3C) of the
Corporations Act, 2001.
The remuneration report is set out under the following
main headings:
A. Remuneration principles and policies
B. Remuneration of key management personnel
C. Service agreements
D. Share-based compensation
A. Remuneration Principles and Policies
Board policy for determining remuneration
The Company’s goal is to engage and promote
excellence at Board level, in staff members and in partner
organisations. The Company looks to engage the
services of individuals and organisations with the
experience necessary to assist the Company in meeting
its strategic objectives.
The Board ensures that executive reward complies
with good reward governance practices:
Remuneration structure
(a) Non-executive directors fees
Director’s fees were determined initially at the date of
the Company’s public listing on 16 December 2004 by
reference to industry standard. Director’s fees were set
at this time at $75,000 for the non-executive chairman
and $40,000 for each non-executive director. A limit to
total directors’ fees of $500,000 was set at the time of
the public listing and has not subsequently changed.
On the appointment of Brian Jamieson to the role of
Chairman in November 2007, the non-executive chairman
fee was raised to $120,000. Recently the board approved
an increase to non-executive fees. These fees were
raised to $60,000, effective 1 July 2008, on the basis of
industry standard.
Components of the remuneration package include a cash
element together with unquoted medium term options in
some cases.
(b) Executive pay
The executive pay and reward framework has three
components, which in combination comprises the
executives’ total remuneration:
• Base pay and benefi ts (i)
• Competitiveness and reasonableness
• Short term performance incentives (ii)
• Acceptability to shareholders
• Long term performance incentives (iii)
• Performance linkage
• Transparency
• Capital management
The Company has structured an executive remuneration
framework that is market competitive and complimentary
to the reward strategy of the organisation.
The Company’s remuneration framework is aligned to
shareholders interests and in particular aligned to the
rapid commercialisation of the Company’s intellectual
property and in achieving its milestones in a highly ethical
and professional manner.
The executive remuneration framework provides a mix of
fi xed and variable pay and performance incentive rewards.
The Board has established a remuneration committee
which provides advice on remuneration and incentive
policies and practices and specifi c recommendations
on remuneration packages and other terms of
employment for executive directors, non-executive
directors, and executives of the Company.
(i) Base pay and benefi ts
A total employment cost package may include
a combination of cash and prescribed non-fi nancial
benefi ts at the executives’ discretion.
Executives are offered a competitive base pay
that comprises the fi xed component of pay and
rewards. The base pay for executives is reviewed
annually to ensure the executives pay is competitive
with the market. An executive’s pay is also reviewed
on promotion.
There is no guaranteed base pay increases included
in any executive contracts.
(ii) Short term performance incentives
Bonuses are payable to executives based upon the
attainment of agreed corporate and individual
milestones, which are reviewed annually and approved
by the Board of Directors.
17
(iii) Long term performance incentives
Performance conditions were attached to the following
options granted to key management personnel in
previous fi nancial years, which may form part of their
remuneration in the current and prior fi nancial year.
These performance conditions are described as follows:
Options granted to Paul Rennie*
• 80,000 options will vest on achieving a
Standard Operating Procedure (SOP) for the
manufacture of cells. This milestone was reached
on 6 September 2006;
• 80,000 options vest on approval of Mesoblast’s
US Food and Drug Administration (FDA) Investigative
New Drug (IND) approval. This milestone was
reached on 16 December 2006;
• 75,000 options vest should Angioblast Systems, Inc.
achieve IND approval from the US FDA for initiating
multi-centre cardiovascular clinical trials within a period
of 3 years after the Company became listed on the
ASX (16 December 2004). This milestone was reached
on 1 May 2007.
These performance conditions were chosen as they are
fundamental to the Company’s progress towards the
commercialisation of its products. The dates these
milestones are deemed to have been met are as follows:
• For options that are granted on obtaining IND approval,
IND approval is deemed to be the date 30 days
following the date when the IND application is lodged
with the FDA, provided the FDA has not placed a hold
on the clinical trial.
• 80,000 options vest on completing human pre-
• For options granted on achieving an SOP, the SOP
regulatory trials for a Mesoblast Orthopaedic
Application of the licensed technology. This
milestone was reached on 4 July 2008;
is deemed to have been achieved on the date
when the SOP has been approved and released by
Quality Assurance.
Options granted to Byron McAllister
• 75,000 options vest should the Company achieve
an IND approval from the US FDA for initiating
multi-centre orthopaedic clinical trials within a period
of 2 years after the Company became listed on the
ASX (16 December 2004). This milestone was
reached on 16 December 2006;
• For options granted on completing a human pre-
regulatory trial, the completion date is deemed to be the
date of the last patient’s follow-up visit, which normally
occurs 12 months after MPCs have been implanted into
the patient.
* Paul Rennie transferred these options to another holder
on 15 November 2007, consequently he no longer holds
these options.
18
Relationship between remuneration policy and company performance
16 December 2004 (date
of listing)
30 June
2005
30 June
2006
30 June
2007
30 June
2008
Closing share price (IPO price)
$0.50
Price increase/(decrease) $
Price increase/(decrease) %
Total key management personnel
remuneration
$0.43
$(0.07)
(14%)
$1.52
$1.09
255%
$2.02
$0.50
33%
$0.91
$(1.11)
(55%)
503,703
1,368,039
1,189,907
1,802,804
The Company’s remuneration policies seek to reward staff members for their contribution to achieving signifi cant
clinical and regulatory milestones. These milestones build sustainable and long term shareholder value. The increase
in remuneration since IPO refl ects the expansion of the clinical program of the Company.
The directors do note that the stock market has corrected signifi cantly over the 12 months to 30 June 2008. The stock
price for Mesoblast has similarly corrected in line with a diffi cult market. It is in this respect that we work diligently to
ensure that our shareholders and other stakeholders are regularly informed of our progress and the exciting opportunity
that is associated with our adult stem cell platform technology.
B. Remuneration of Key Management Personnel
Details of the remuneration of key management personnel are set out in this section of the remuneration report. Key
management personnel includes all directors (as disclosed on page X), and certain executives of the Company, who all
belong to the Senior Executive Management Group and they have authority and responsibility for planning, directing
and controlling the activities of the Company together with the Board of Directors.
In addition to the directors of the Company, key management personnel, as described above, also includes the
following people and positions held during the reporting periods:
Name
Kevin Hollingsworth
Suzanne Lipe
Jenni Pilcher
Paul Rennie
Jim Ryaby
Position
Company Secretary
Chief Financial Offi cer (R)
Vice President of Operations
Chief Financial Offi cer
Special Projects Consultant
Chief Operating Offi cer
Vice President of Research and
Clinical Affairs
Effective date
Full year
21 November 07
18 March 08 (A)
21 November 07 (A)
12 May 08 (A)
11 May 08 (R)
3 March 08 (A)
Donna Skerrett
Clinical and Regulatory Affairs
Full year
(A) Appointed to this position
(R) Resigned from this position
19
Details of the remuneration of each director of Mesoblast Limited and the other key management personnel
of the Company are set out below:
Short term
employee benefi ts
Post-employment
benefi ts
Sharebased
payments
Salary & fees
$
Bonus
$
Superannuation
$
Options & rights
$
Name
Directors
2008
Executive directors
Silviu Itescu
Michael Spooner*
Non-executive directors
Brian Jamieson**
Byron McAllister
Donal O’Dwyer
Michael Spooner*
2007
Executive directors
Michael Spooner
Silviu Itescu
Non-executive directors
Byron McAllister (iii)
Donal O’Dwyer
Other Key Management Personnel***
2008
Suzanne Lipe
Jenni Pilcher
Paul Rennie****
James Ryaby
Donna Skerrett
Kevin Hollingsworth
2007
Paul Rennie (iv)
Kevin Hollingsworth
Total 2008
Total 2007
20
174,312
63,008
66,935
40,000
36,697
41,958
-
137,615
-
-
-
-
422,910
137,615
275,229
160,130
40,000
36,697
512,056
47,256
130,000
122,552
56,520
65,472
112,600
534,400
176,583
113,069
289,652
957,310
801,708
137,615
-
-
-
137,615
-
21,918
76,697
-
20,252
-
118,867
50,000
-
50,000
256,482
187,615
15,688
14,990
6,024
-
3,303
3,777
43,782
37,156
6,537
-
3,303
46,996
4,253
13,682
27,912
-
-
-
45,847
21,248
-
21,248
89,629
68,244
-
-
-
-
33,571
-
33,571
29,000
-
10,875
70,571
110,446
-
60,335
168,032
-
125,152
90,330
443,849
21,894
-
21,894
477,420
132,340
Termination
benefi ts
$
Remuneration
consisting of
options
%
Total
$
Performance
based
remuneration
(ii)
%
0%
0%
0%
0%
45.6%
0%
6.1%
-
21.4%
63.8%
-
27.5%
40.3%
-
59.3%
44.5%
8.1%
-
-
63.8%
-
-
-
-
28.7%
-
-
-
-
10%
18.4%
-
9.6%
-
20.7%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
21,963
-
-
-
190,000
215,613
72,959
40,000
73,571
45,735
637,878
479,000
166,667
50,875
110,571
807,113
51,509
225,935
417,156
56,520
210,876
202,930
21,963
1,164,926
-
-
-
269,725
113,069
382,794
21,963
1,802,804
-
1,189,907
*
Michael Spooner was an executive
up until 8 August 2007, after that
date became a non-executive director.
His remuneration has been shown
separately.
**
Brian Jamieson was appointed
Chairman on 22 November 2007.
***
Refer to the table on page 11
for periods that remuneration has
been disclosed.
**** Termination benefi ts included
annual leave entitlements
for Paul Rennie upon the expiry of
his employment contract. His
new contract is as a consultant with
no leave entitlements.
21
(i)
(ii)
All bonuses reported in the above table are
100% of the bonus entitlement for each relevant
executive. Bonuses forfeited during the year as
a result of performance targets not being met were
nil (2007: nil).
Performance-based remuneration includes all
bonuses paid, and certain amounts of share-based
remuneration, as described in (iii) and (iv) below.
The grants of options that are subject to performance
criteria are further described in sub-section (iii) and
(iv) below. Share-based remuneration and bonuses
that are not subject to performance criteria relate to
options issued in order to facilitate the growth and
performance of the Company as a whole, rather than
for a specifi c milestone to be met.
(iii) Byron McAllister’s share-based remuneration is
Silviu Itescu, Director and Chief Scientifi c Adviser
• Term of agreement: commencing 1 February 2007;
• Salary: $190,000 inclusive of superannuation
per annum;
• Termination: no terms have been agreed;
Suzanne Lipe, Vice President of Operations
(from 18 March 2008)
• Term of agreement: commencing 18 March 2008;
• Salary: $190,000 per annum;
• Superannuation: 9% of $190,000 per annum;
• Termination: One month;
• Bonus: eligible to participate in the Company’s
bonus scheme.
100% performance based in 2007. He did not receive
share-based remuneration in the current year as the
options had vested.
Jenni Pilcher, Chief Financial Offi cer
(from 22 November 2007)
• Term of agreement: commencing 22 November 2007;
(iv) Paul Rennie’s share-based remuneration that
• Salary: $150,000 per annum, four days per week;
was performance based for the year was nil
(2007: $5,945).
C. Service Agreements
The non-executive directors and the company secretary
are engaged through a letter of appointment. Non-
executive directors are appointed by shareholders on the
basis that 1/3 of all non executive directors retire annually
and are eligible for re-election at the Company’s Annual
General Meeting.
Remuneration and other terms of employment for the
Chief Scientifi c Advisor and other key management
personnel are formalised in service agreements. These
agreements may provide for the provision of performance
related cash bonuses and the award of options.
Provisions of the agreements relating to remuneration
are set out as follows:
• Superannuation: 9% of $150,000 per annum;
• Termination: One month;
• Bonus: eligible to participate in the Company’s
bonus scheme.
Paul Rennie, Special Projects Consultant
(from 12 May 2008)
• Term of agreement: commencing 12 May 2008;
• Consulting fees: $1,000 per day, three days per week;
• Termination: 30 days
• Bonus: eligible to participate in the company’s
bonus scheme.
Jim Ryaby, Vice President of Research and Clinical Affairs
(from 3 March 2008)
• Term of agreement: commencing 3 March 2008;
• Consulting fees: US$156,000 per annum, 3 days
per week;
• Other benefi ts: Dental and health fully covered;
• Bonus: eligible to participate in the Company’s
bonus scheme.
Donna Skerrett, Clinical and Regulatory Affairs
• Term of agreement: commencing December 2004;
• Salary: $71,424 per annum, part time;
• Bonus: eligible to participate in the Company’s
bonus scheme.
22
D. Share-Based Compensation
Options to purchase fully paid shares of the Company were granted as remuneration during the
year as follows:
Grant Date Granted No.
Vesting
date(s)
Expiry Date
Exercise
price $
Fair value $
2008
Kevin Hollingsworth
27/07/2007
200,000*
01/07/2008
30/06/2012
Jenni Pilcher
Paul Rennie
27/07/2007
100,000*
01/07/2008
30/06/2012
27/07/2007
250,000*
01/07/2008
30/06/2012
Donna Skerrett
27/07/2007
200,000*
01/07/2008
30/06/2012
2007
Donal O’Dwyer(i)
23/11/2006
50,000
23/11/2006
23/11/2009
Donal O’Dwyer(i)
23/11/2006
50,000
23/11/2007
23/11/2009
Donal O’Dwyer(i)
23/11/2006
50,000
23/11/2008
23/11/2009
2.13
2.13
2.13
2.13
0.65
0.65
0.65
0.74
0.74
0.74
0.74
0.589
0.678
0.718
* Each grant of options is divided into three equal tranches. Tranche A has a vesting date which is shown in the above table. Tranches
B and C have vesting dates one and two years respectively after Tranche A. All tranches have the same expiry date, exercise price
and fair value which are as shown in the above table.
All share options issued to key management personnel were made in accordance with the provisions of the
executive share option plan. All options issued were issued for no consideration, therefore there are no amounts unpaid
with respect to these options. There are no performance criteria attached to any of the options granted during the year
(2007: nil).
Modifi cations to terms and conditions of options granted
There has been no modifi cation to any terms and conditions of options during the current fi nancial year. On 5 June 2007,
the Board of Directors approved that the conditions described below be removed from the terms and conditions
of affected options:
• 1/3 of the vested options could be exercised in the fi rst 12 months following vesting date;
• up to a total of 2/3 could be exercised between 12 and 24 months following vesting date;
• the balance being able to be exercised (to the extent not already exercised) between
24 months and 36 months of vesting.
By removing the above terms, those options held by Donal O’Dwyer in the table above are now able to be exercised
in full once vested. The share price of the securities under option as at the date of the modifi cation was $2.20.
Michael Spooner’s options, at the time of resignation from executive director, are to be held in Escrow in either shares
or as options until the earlier of Mr Spooner’s retirement from the Board or 31 July 2008. Mr Spooner may only exercise
these options within 60 days from the expiry of the escrow period, after which time they will lapse.
The directors do not believe there is any incremental fair value granted as a result of the above modifi cations. The share
price of the securities under option as at the date of the modifi cation was $1.95.
23
Options held by key management personnel that vested and were exercised during the year:
Number of options exercised
during the year
Number of options vested
during the year
Donal O’Dwyer
Byron McAllister
Michael Spooner
Jenni Pilcher
Donna Skerrett
2008
2007
-
-
-
-
-
-
-
-
-
-
2008
50,000
-
-
60,000
100,000
2007
125,000
150,000
200,000
-
100,000
Value of options issued to directors and key management personnel
The following table summarises the value of options granted, exercised or lapsed during the annual reporting period to
the identifi ed directors and executives:
Kevin Hollingsworth
Jenni Pilcher
Paul Rennie
Donna Skerrett
Value of options
granted at
grant date (i)
$
Value of options
exercised at the
exercise date
$
Value of options
lapsed at the
date of lapse
$
147,478
73,739
184,349
147,478
-
-
-
-
-
-
-
-
(i) The value of options granted during the period is recognised in compensation over the vesting period of the grant, in accordance
with Australian accounting standards.
Value of options yet to vest after the end of the current fi nancial year
Subsequent
fi nancial years
in which
options vest
Minimum total
value of grant
yet to vest
$
Forfeited
%
-
-
-
-
-
2009
2009/10/11
2009/10/11
2009/10/11
2009/10/11
-
-
-
-
-
Maximum
total value of
grant not yet
expensed
$
5,983
57,148
28,881
71,896
57,148
Vested
%
83.3%
-
27%
-
60%
Donal O’Dwyer
Kevin Hollingsworth
Jenni Pilcher
Paul Rennie
Donna Skerrett
This report is made in accordance with a resolution of the directors.
Mr Brian Jamieson
Chairman
28 August 2008, Melbourne
24
PricewaterhouseCoopers
ABN 52 780 433 757
Freshwater Place
2 Southbank Boulevard
SOUTHBANK VIC 3006
GPO Box 1331L
MELBOURNE VIC 3001
DX 77
Telephone 61 3 8603 1000
Facsimile 61 3 8603 1999
Website:www.pwc.com/au
Auditor’s Independence Declaration
As lead auditor for the audit of Mesoblast Limited for the year ended 30 June 2008, I declare that to
the best of my knowledge and belief, there have been:
a)
b)
no contraventions of the auditor independence requirements of the Corporations Act 2001
in relation to the audit; and
no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Mesoblast Limited during the period.
Anton Linschoten
Partner
PricewaterhouseCoopers
Melbourne
28 August 2008
Liability limited by a scheme approved under Professional Standards Legislation
25
Corporate Governance
The Board of Directors of Mesoblast Limited is responsible
for the corporate governance of the Company. The Board
guides and monitors the business and affairs of the
Company on behalf of the shareholders by whom they are
elected and to whom they are accountable. The Company
is committed to implementing the highest standards of
corporate governance.
In setting its standards the Company has considered
the ASX Corporate Governance Council’s Principles of
Good Corporate Governance and Best Practice
Recommendations (“ASXCGC recommendations”) which
were released in March 2003. Details of these
recommendations can be found on the ASX website at
http://www.asx.com.au/supervision/governance/index.htm.
Whilst the Company continues to develop and improve its
corporate governance processes and standards, the
Board is pleased to advise that Mesoblast’s practices are
largely consistent with the ASXCGC recommendations.
The Board will continue to ensure that the model is
relevant, effi cient and cost effective to the Company and
its shareholders.
In accordance with the ASXCGC recommendations, the
corporate governance statement that follows contains
certain specifi c information and discloses the extent to
which the Company has followed the guidelines during
the 2008 year. Any departures to the guidelines have
been fully explained. Mesoblast’s corporate governance
statement is structured with reference to the ASXCGC
principles and recommendations.
Principle 1. Lay solid foundations for
management and oversight
In general, the Board is responsible for, and has authority
to determine, all matters relating to the policies, practices,
management and operations of the Company. Specifi cally
the Boards functions include:
• setting the overall Company fi nancial goals;
• approving strategies, objectives and plans for the
Company’s businesses to achieve these goals;
• reporting to shareholders on the Company’s strategic
direction and performance including constructive
engagement in the development, execution and
modifi cation of the Company’s strategies;
• ensuring risks to the business are identifi ed, and
approving systems and controls to manage these risks
and monitor compliance;
• meeting statutory and regulatory requirements and
overseeing the way in which business risks and the
assets of the Company are managed.
• approving the Company’s major human resources (HR)
policies and overseeing the development strategies for
senior and high performing executives;
• monitoring executive management and business
performance in the implementation and achievement
of strategic and business objectives;
• ratifying and approving the appointment and removal
of executives;
• approving fi nancial plans and annual budgets;
• monitoring fi nancial results on an on-going basis;
• determining that satisfactory arrangements are in place
for auditing the Company’s fi nancial affairs;
• approving key management recommendations (such
as major capital expenditure, acquisitions, divestments,
restructuring and funding); and
• over-seeing the management of occupational health
and safety and environmental performance.
26
Principle 2. Structure the Board to add value
2.1 Board composition and independence
During the 2008 year, the Board of Directors initially
comprised four Directors (two executives and two
non-executives), then from 22 November 2007 onwards
the Board comprised fi ve Directors (one executive director
and four non-executive directors).
The term in offi ce held by each Director in offi ce as at
30 June 2008 is as follows:
Name
Term as
director
Position held
at 30 June 2008
Brian Jamieson
7 mths
Independent Chairman
Michael Spooner 3 yrs 9 mths
Independent Director
Byron McAllister
3 yrs 9 mths
Independent Director
Donal O’Dwyer
3 yrs 9 mths
Independent Director
Silviu Itescu
4 yrs 1 mths Executive Director
The skills, experience and expertise relevant to their
position for all Directors is contained in the Directors’
Report.
Directors are appointed to the Board based on the
specifi c governance skills required by the Company and
on the independence of their decision making and
judgment. The skills, experience and expertise relevant
to the position of director held by each Director in offi ce at
the date of the annual report is included in the Director’s
Report. Each member of the Board is committed to
spending suffi cient time to enable them to carry out their
duties as a Director of the Company.
Directors of Mesoblast are considered to be independent
when they are independent of management and free from
any business or other relationship that could materially
interfere with, or could reasonably be perceived to
materially interfere with, the exercise of their unfettered
and independent judgement. In the context of director
independence, “materiality” is considered from both the
Company’s and an individual director’s perspective.
The determination of materiality requires consideration
of both quantitative and qualitative elements. An item is
presumed to be quantitatively immaterial if it is equal or
less than 2% of the Company’s gross revenue or
expenditure (whichever is the greater). In accordance with
the defi nition of independence above, and the materiality
thresholds set by the Board, the following
Directors of Mesoblast were considered to
be independent:
• Brian Jamieson (Chairman)
• Donal O’Dwyer (Deputy Chairman and
Chairman of the Audit & Risk Committee)
• Byron McAllister
• Michael Spooner
There are procedures in place, agreed by the Board,
to enable Directors, in furtherance of their duties, to
seek independent professional advice at the Company’s
expense.
2.2 Independent Chairman
On 8th August 2007, Michael Spooner resigned as the
Executive Chairman and remained as the non-executive
Chairman until 22 November 2007. On this date Brian
Jamieson was appointed to the role of non-executive
Chairman and Michael Spooner became a non-executive
director of the Company.
2.3 Role of the CEO (or equivalent)
At the date of this annual report, the equivalent role
to that of CEO for the Company is not held by the
Chairman, which is in accordance with the ASXCGC
recommendations.
2.4 Nomination committee
The Board has established a nomination committee
comprising four directors as follows:
Name
Position held during the year
Michael Spooner
Independent Chairman*
Silviu Itescu
Executive member
Byron McAllister
Independent member
Donal O’Dwyer
Independent member
* Michael Spooner was an executive chairman up
until 8th August 2007.
Whilst the committee has been formed, given the size
and nature of the Company’s operations to date the
Board has chosen to discuss those matters usually
considered by the nomination committee at the regular
Board meetings. Details of meetings attended are found
in the Directors’ Report.
Principle 3. Promote ethical and responsible
decision-making
3.1 Code of conduct
As part of its commitment to recognising the legitimate
interests of stakeholders, the Company has established
certain Codes of Conduct to guide all employees,
particularly Directors, the Chief Financial Offi cer and other
senior executives in respect of ethical behaviour expected
27
by the Company. These Codes of Conduct cover
confl icts of interest, confi dentiality, fair dealing, protection
of assets, compliance with laws and regulations, whistle
blowing, security trading and commitments to
stakeholders.
3.2 Trading policy applied to directors, offi cers
and employees
The Board of Directors is committed to a free and open
market for the Company’s securities. Accordingly, the
Board fully supports the spirit and letter of the law and
the ASX listing rules concerning adequate and reasonable
disclosure of information relevant to the Company and
its securities in line with contemporary continuous
disclosure requirements.
The Board is also mindful that trading by directors and
other employees of the Company at certain times may
not be in the best interests of the above commitment.
Accordingly, the Board has established and promulgated
to all directors, staff and key consultants, a Security
Trading Code of Conduct to guide those offi cers in their
responsibilities in respect of trading in the Company’s and
other companies’ securities.
Trading restrictions
The directors, employees and key consultants are
permitted to trade in the Company’s securities at any
time subject to the following approval procedures:
• a request to trade is submitted to the Chief Financial
Offi cer who circulates this request to the Chairman
and any executive Directors;
• the Board have 7 business days to respond and either
approve or deny the request; and
• at the end of this 7 day period, if there is no objection,
then that person has a trading window of 7 business
days from the deemed approval date, provided they
do not hold any price sensitive information.
Reporting of trading
The Company Secretary is committed to reviewing
regularly the contents of the share register, which is
currently maintained by Link Market Services Limited.
Any share trading by Directors of the Company is duly
noted and shall be reported to the ASX in accordance
with the ASX Listing Rules.
Price sensitive information
The Company has published for offi cers’ guidance an
exhaustive defi nition and explanation of what may amount
to price sensitive information.
Trading in other companies’ securities
The Company’s Security Trading Code of Conduct is also
expressly applied to other companies with which the
Company may have dealings where an offi cer may have,
or be perceived to have, price sensitive information.
Principle 4. Safeguard integrity in
fi nancial reporting
4.1 Chief Scientifi c Adviser (CSA) and
Chief Financial Offi cer (CFO) declarations
The Company has processes in place designed to ensure
the truthful and factual presentation of the Company’s
fi nancial position, and prepares and maintains its accounts
fairly and accurately in accordance with the generally
accepted accounting and fi nancial reporting standards. In
accordance with the Board’s policy and the requirements
of the Corporations Act 2001, the CSA and the CFO made
the attestations recommended by the ASX Corporate
Governance Council Best Practice Recommendation 4.1
as to the Company’s fi nancial condition and its operating
results prior to the Board signing this annual report.
4.2 Audit and risk committee establishment
The Board has established an audit and risk committee,
to which it has delegated the responsibility for ensuring
that an effective internal control framework exists within
the entity. This includes internal controls to deal with both
the effectiveness and effi ciency of signifi cant business
processes, the safeguarding of assets, the maintenance
of proper accounting records, and the reliability of fi nancial
information as well as non-fi nancial considerations such
as the benchmarking of operational key performance
indicators.
4.3 Audit and risk committee structure
As at 30 June 2008, the audit and risk committee
comprised of at least three members, the majority of
whom are independent directors and the chairperson
of the committee is not the chairperson of the Board.
The members of the audit and risk committee during
the year and their qualifi cations can be found in the
Directors’ Report.
4.4 Formal charter
The audit and risk committee operates under a formal
charter approved by the Board.
Details of the number of meetings of the audit and risk
committee held during the year and the attendees at
those meetings can be found in the Directors’ Report.
In line with best practice the audit and risk committee is
charged with the selection, independence and rotation
of the external auditor.
The audit and risk committee reports to the Board the
following information:
• an assessment of whether the external reporting is
consistent with committee members’ information and
knowledge and is adequate for shareholder needs;
• an assessment of the management processes
supporting external reporting;
28
• procedures for the selection and appointment of the
external auditor and for the rotation of external audit
engagement partners;
• recommendations for the appointment or removal
of an auditor;
• an assessment of the performance and independence
of the external auditors and whether the audit committee
is satisfi ed that independence has been maintained,
particularly with reference to any non-audit services
provided; and
• results of its review of risk management and internal
compliance and control systems.
Principle 5. Make timely and
balanced disclosure
The Board has established a policy governing continuous
disclosure and has designated the Company Secretary
as the person responsible for overseeing and
coordinating disclosure of information to the ASX as well
as communicating with the ASX. In accordance with the
ASX Listing Rules, the Company immediately notifi es the
ASX of information:
6.2 External auditor requested to attend annual
general meeting
The Board has requested the external auditor to attend
the annual general meeting and be available to answer
shareholder questions about the conduct of the audit and
the preparation and content of the auditor’s report.
Principle 7. Recognise and manage risk
7.1 Establish policies on risk oversight
and management
As mentioned above the Board has established an
audit and risk committee (“the committee”) to inter alias,
review and monitor management’s risk management
and internal compliance and control systems.
On a continuous basis the Board has charged the
committee with responsibility to:
• clearly describe the respective roles of the Board,
the committee, and executive management;
• recommend independent internal audit reviews be
undertaken when deemed appropriate, given the
Company does not have a designated internal audit
function; and
• concerning the Company that a reasonable person
• prescribe the necessary elements of an effective risk
management system, namely, oversight, risk profi le, risk
management, compliance and control, and assessment
of system effectiveness.
7.2 Establish policies on risk oversight
and management
The Chief Scientifi c Adviser and the Chief Financial
Offi cer in providing written certifi cations in accordance
with the requirements of Section 295A (2) of the
Corporations Act have also certifi ed in writing to the Board
that such certifi cation is founded on a sound system of
risk management and internal compliance and control,
which implement the policies adopted by the Board, and
the Company’s risk management and internal compliance
and control systems are operating effi ciently and
effectively in all material respects.
would expect to have a material effect on the price or
value of the Company’s securities; and
• that would, or would be likely to, infl uence persons
who commonly invest in securities in deciding whether
to acquire or dispose of the Company’s securities.
Upon confi rmation of receipt from the ASX, the Company
posts all information disclosed in accordance with this
policy on the Company’s website at www.mesoblast.com.
Principle 6. Respect the rights of shareholders
6.1 Communications strategy
The Company respects the rights of its shareholders and
to facilitate the effective exercise of those rights the
Company is committed to:
• communicating effectively with shareholders through
releases to the market via the ASX, the Company’s
website, information mailed and emailed to shareholders
and the general meetings of the Company;
• giving shareholders ready access to balanced and
understandable information about the Company and
corporate proposals;
• making it easy for shareholders to participate in general
meetings of the Company.
The Company also makes available a telephone number
and e-mail address for shareholders to make enquiries of
the Company.
29
Principle 8. Encourage enhanced performance
The performance of key executives of the Company
is reviewed annually and assessed against the overall
Company objectives, and specifi c milestones where
applicable. This review is used in the majority of cases to
determine annual bonuses and remuneration packages
for the ensuing year.
Review of performance of the Board of Directors, both
individually and collectively, is currently being progressed
by the remuneration committee. The remuneration
committee will endeavour to complete its review by the
end of the calendar year.
Principle 9. Remunerate fairly and responsibly
9.1 Disclosure of remuneration policy
and procedures
The Board is responsible for determining and reviewing
compensation arrangements for the directors themselves,
the Chairman, the Chief Scientifi c Adviser and the
executive team. Details of the nature and amount of each
element of remuneration, including both monetary and
non-monetary components, for each director and the fi ve
highest-paid executives during the year can be found in
the Directors’ Report.
9.2 Remuneration committee
Composition and charter
The Board has established a remuneration committee,
comprising three directors, the majority of which are
non-executive directors, and Chairperson of the
remuneration committee is not the Chairperson of the
Board. The remuneration committee operates under
a formal charter approved by the Board.
Whilst the committee has been formed, given the size and
nature of the Company’s operations to date, the Board
has chosen to discuss those matters usually considered
by the remuneration committee, at the regular meetings
of the Board.
Responsibilities
The responsibilities of the remuneration committee
include providing a review and recommendation to
the Board of:
• executive remuneration and incentive policies;
• remuneration packages of senior management;
• the Company’s recruitment, retention and termination
policies and procedures for senior management;
• incentive schemes; and
• the remuneration framework for directors.
30
Remuneration policies
The expected outcomes of the remuneration structure
are to retain and motivate key executives, attract quality
management and provide performance incentives which
align performance and Company success in a manner
that is market competitive, consistent with best practice
and in the interests of shareholders.
Executives are given limited salary packaging options
for their base salary including superannuation. It is
intended that the manner of payment is optimal for the
recipient without increasing the cost to the Company.
Executive performance and remuneration includes an
“at-risk” component, the payment of which is dependent
upon individual and team performance relative to
specifi c targets.
Details of the nature and amount of each element of
remuneration for each director and the Company’s
highest-paid executives during the year can be found in
the remuneration report section of the Directors’ Report.
9.3 Directors remuneration framework
Executive Directors are remunerated in the same manner
as other executives of the Company, as described above.
Non-executive Directors are paid a director’s fee only, and
are not paid bonuses or provided with retirement benefi ts
other than statutory superannuation.
During the fi rst period following listing of the Company
on the ASX, it was considered appropriate to align the
interests of the Directors with the long-term goals of the
Company by granting options to non-executive Directors.
At the last Annual General Meeting held 23 November
2006, the shareholders approved the issue of share
options to one non-executive director on his appointment
as Deputy Chairman of the Company. No further share
options have been issued to non-executive directors.
9.4 Share-based executive remuneration
Long-term incentive arrangements have been provided
by participation in the Executive Share Option Plan, which
has been approved by shareholders, to ensure key
employees maintain a long-term interest in the growth
and value of the Company.
Principle 10. Recognise the legitimate
interests of stakeholders
The Board recognises the legitimate interests of wider
stakeholders in the Company and has, in its Code of
Conduct, made specifi c commitments to these respective
stakeholders.
The above information can also be found on the
Company’s website at www.mesoblast.com.
31
Financial Statements
for the year ended 30 June 2008
Contents
Income Statement
Statement of Changes in Equity
Balance Sheet
Cash Flow Statement
Notes to the Financial Statements
Directors’ Declaration
Independent Audit Report
Shareholder Information
Page
34
35
36
37
38
68
69
71
33
Income Statement
for the year ended 30 June 2008
Revenues from continuing operations
Expenses from continuing operations
Research and development
Management and administration
Share of losses of equity accounted associates
Total expenses from continuing operations
Loss before income tax expense
Income tax (expense)/benefi t
Loss after related income tax expense from continuing operations
Loss attributable to members of the company
Earnings/(losses) per share – from continuing operations:
Basic – cents per share
Diluted – cents per share
Notes
2(a)
30 June
2008
$
909,807
30 June
2007
$
1,679,317
(6,207,372)
(6,325,130)
(2,642,016)
(2,368,192)
(2,122,798)
(1,714,126)
(10,972,186)
(10,407,448)
(10,062,379)
(8,728,131)
-
-
(10,062,379)
(8,728,131)
(10,062,379)
(8,728,131)
cents
(8.81)
(8.81)
cents
(8.20)
(8.20)
4
6
6
The above income statement should be read in conjunction with the accompanying notes.
34
Statement of Changes in Equity
for the year ended 30 June 2008
Contributed
Equity
$
Accumulated
Losses
$
Notes
Share Based
Payment
Reserve
$
Foreign
Currency
Translation
Reserve
$
20,667,608
(9,768,956)
1,066,393
-
-
(8,728,131)
(8,728,131)
13
16,754,575
-
-
-
-
-
-
547,850
37,422,183
(18,497,087)
1,614,243
37,422,183
(18,497,087)
1,614,243
-
-
-
-
-
-
-
Total
$
11,965,045
(8,728,131)
(8,728,131)
16,754,575
547,850
20,539,339
20,539,339
-
-
-
-
-
-
(10,062,379)
(10,062,379)
13
13,596,900
-
-
-
-
-
-
-
-
1,345,774
796,498
796,498
796,498
796,498
-
(10,062,379)
796,498
(9,265,881)
-
-
13,596,900
1,345,774
51,019,083
(28,559,466)
2,960,017
796,498 26,216,132
As of 1 July 2006
Loss for the year
Total recognised
income and expense
for the year
Contributions of equity
net of transaction costs
Share based payment
At 30 June 2007
As of 1 July 2007
Exchange differences
on translation of
overseas associate
Net income recognised
directly in equity
Loss for the year
Total recognised
income and expense
for the year
Contributions of equity
net of transaction costs
Share based payment
At 30 June 2008
The above statement of changes in equity should be read in conjunction with the accompanying notes.
35
Balance Sheet
as at 30 June 2008
Current Assets
Cash and cash equivalents
Trade and other receivables
Prepayments
Total Current Assets
Non-Current Assets
Property, plant and equipment
Investments accounted for using the equity method
Intangible assets
Total Non-Current Assets
Total Assets
Current Liabilities
Trade and other payables
Total Current Liabilities
Total Liabilities
Net Assets
Equity
Issued capital
Reserves
Accumulated losses
Total Equity
Notes
30 June
2008
$
30 June
2007
$
7
8
9
10
11
14,094,219
12,055,040
123,900
85,533
509,907
28,735
14,303,652
12,593,682
197,997
12,761,247
526,006
13,485,250
158,235
7,668,095
818,226
8,644,556
27,788,902
21,238,238
12
1,572,770
1,572,770
1,572,770
698,899
698,899
698,899
26,216,132
20,539,339
13
14
51,019,083
3,756,515
37,422,183
1,614,243
(28,559,466)
(18,497,087)
26,216,132
20,539,339
The above balance sheet should be read in conjunction with the accompanying notes.
36
Cash Flow Statement
for the year ended 30 June 2008
Cash Flows from Operating Activities
Payments to suppliers and employees
Government grants and other income received
Interest and other costs of fi nancing paid
Net cash used in operating activities
Cash Flows from Investing Activities
Interest received
Investment in fi xed assets
Investment in patents & licenses
Investment in equity accounted associate
Loan repaid/(advanced) to associate company
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from issue of shares
Payments for share issue costs
Net cash provided by fi nancing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
FX losses on the translation of foreign bank accounts
Notes
30 June
2008
$
30 June
2007
$
(6,326,130)
(9,757,907)
123,541
-
655,773
(542)
15(b)
(6,202,589)
(9,102,676)
841,725
(100,956)
-
939,557
(146,665)
(35,187)
(6,419,452)
(3,880,548)
330,645
(258,660)
(5,348,038)
(3,381,503)
14,134,500
17,559,666
(537,600)
(805,091)
13,596,900
16,754,575
2,046,273
12,055,040
4,270,396
7,854,843
(7,094)
(70,199)
Cash and cash equivalents at end of year
15(a)
14,094,219
12,055,040
The above cash fl ow statement should be read in conjunction with the accompanying notes.
37
Notes to the Financial Statements
for the year ended 30 June 2008
INTRODUCTION
The fi nancial report covers Mesoblast Limited (“Mesoblast”), a company limited by shares whose shares are publicly traded on
the Australian stock exchange. Mesoblast is incorporated and domiciled in Australia and has its registered offi ce and principal
place of business as follows:
Registered offi ce
Level 2
517 Flinders Lane
Melbourne
Principal place of business
Level 39
55 Collins Street
Melbourne
The principal activity of the economic entity during the fi nancial year was the commercialisation of unique intellectual property
associated with the isolation, culture and scale-up of adult stem cells referred to as Mesenchymal Precursor Cells (“MPC”).
1. SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
The fi nancial report is a general purpose fi nancial report which has been prepared in accordance with the Corporations Act
2001, Accounting Standards and Urgent Issue Group Interpretations, and complies with other requirements of the law.
Accounting Standards include Australian equivalents to International Financial reporting Standards (“A-IFRS”). Compliance
with AIFRS ensures that the fi nancial report, comprising the fi nancial statements and notes thereto, complies with International
Financial Reporting Standards (‘IFRS’).
The fi nancial statements were authorised for issue by the Board of Directors of Mesoblast on the date shown on the Directors’
Declaration attached to the Financial Statements.
Basis of preparation
The fi nancial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets
and fi nancial instruments. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are
presented in Australian dollars unless otherwise noted.
The accounting policies have been consistently applied and, except where there is a change in accounting policy, are
consistent with those of the previous year.
38
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Going concern
For the year ended 30 June 2008, the company incurred an operating loss of $10,062,379 (2007 loss: $8,728,131) as it
continued to further its investment in research initiatives. As at year end, the company’s net assets stood at $26,216,132
(2007: $20,539,339), with available cash of $14,094,219 (2007: $12,055,040).
During the fi nancial year ending 30 June 2009, the company will work to further advance both the development of its core
technologies, and if possible, the commercialisation of those technologies. Based on the forecast cash fl ows approved by the
Board of Directors for the period ending 31 August 2009, which excludes any cash that may be raised through further allotment
of capital or through collaboration arrangements with third parties, the Directors believe that suffi cient cash will be available to
fund the company’s operations over the 12 month period subsequent to the date of signing the fi nancial statements.
Accordingly the fi nancial statements have been prepared on a going concern basis. The fi nancial statements do not include
any adjustments to the carrying values or classifi cation of assets or liabilities that would be necessary in the event that the
company, were unable to continue as a going concern.
Early adoption of standards
The Company has decided to adopt AASB 8 Operating Segments for the current reporting period. AASB 8 replaces AASB 114
Segment Reporting. The new standard requires a “management approach”, which aligns the disclosure to that used internally
for management reporting.
Critical accounting judgements and key assumptions
In the application of the Company’s accounting policies, which are described below, management is required to make
judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical experience and various other factors that are
believed to be reasonable under the circumstance, the results of which form the basis of making the judgements. Actual results
may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision
and future periods if the revision affects both current and future periods.
There have been no signifi cant judgements made in applying accounting policies that the Directors consider would have
a signifi cant effect on the amounts recognised in the fi nancial statements.
There have been no key assumptions made concerning the future, and there are no other key sources of estimation uncertainty
at the balance date, that the Directors consider have a signifi cant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next fi nancial year.
The following signifi cant accounting policies have been adopted in the preparation and presentation of the fi nancial report:
(a) Cash and cash equivalents
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term deposits with an insignifi cant risk of
change in value.
Bank overdrafts are shown within borrowing in current liabilities in the balance sheet. For the purposes of the cash fl ow statement,
cash and cash equivalents consist of cash and cash equivalents as defi ned above, net of outstanding bank overdrafts.
39
Notes to the Financial Statements
for the year ended 30 June 2008
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
(b) Contributed equity
Ordinary shares are classifi ed as equity.
Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of
the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the
issue of those equity instruments and which would not have been incurred had those instruments not been issued.
(c) Earnings per share
Basic earnings per share
Basic earnings per share is calculated by dividing the profi t attributable to equity holders of the company, excluding any costs
of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the
fi nancial year, adjusted for bonus elements in ordinary shares issued during the year.
Diluted earnings per share
Diluted earning per share adjusts the fi gures used in the determination of basic earnings per share to take into account the after
income tax effect of interest and other fi nancing costs associated with dilutive potential ordinary shares and the weighted
average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares.
(d) Employee benefi ts
A liability is recognised for benefi ts accruing to employees in respect of wages and salaries, annual leave and long service leave.
Liabilities recognised in respect of employee benefi ts which are expected to be settled within 12 months, are measured at their
nominal values using the remuneration rates expected to apply at the time of settlement.
Liabilities recognised in respect of employee benefi ts which are not expected to be settled within 12 months, are measured as
the present value of the estimated future cash outfl ows to be made by the Company in respect of services provided by
employees up to reporting date.
(e) Foreign currency
Foreign currency transactions are translated to Australian currency, which is the Company’s functional currency, at the rates of
exchange ruling at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such
transactions are recognised in the income statement, except when they are deferred in equity as qualifying cash fl ow hedges
and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation.
Monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at balance date.
Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities at year end exchange rates
are recognised in the income statement.
Exchange differences arising from the translation of any investment in foreign entities are taken to the foreign currency
translation reserve in shareholders equity. When a foreign operation is sold or any borrowings forming part of the net
investment are repaid, a proportionate share of such exchange differences are recognised in the income statement, as part of
the gain or loss on sale where applicable.
(f) Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the amount of GST except where the GST incurred on a purchase of
goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of
acquisition of the asset or as part of the expense.
Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to,
the taxation authority is included as part of receivables or payables in the Balance Sheet.
Cash fl ows are included in the cash fl ow statement on a gross basis. The GST component of cash fl ows arising from investing
and fi nancing activities, which is recoverable from, or payable to, the taxation authority, are classifi ed as operating cash fl ows.
40
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
(g) Government grants
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be
received and the Company will comply with all attached conditions.
Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match
them on a systematic basis with the costs that they are intended to compensate.
Government grants whose primary condition is for the Company to purchase property, plant and equipment are included in
non-current liabilities as deferred income and are credited to the income statement on a straight line basis over the expected
lives of the related assets.
(h) Impairment of assets
At each reporting date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether
there is any indication that those assets have suffered an impairment loss. Intangible assets with indefi nite useful lives and
intangible assets not yet available for use are tested for impairment annually and whenever there is an indication that the asset
may be impaired.
An impairment loss would be recognised if the amount by which the assets carrying amount exceeds its recoverable amount.
If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment
loss (if any). Where the asset does not generate cash fl ows that are independent from other assets, the Company estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset
(or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating
unit) is reduced to its recoverable amount. An impairment of goodwill is not subsequently reversed.
(i) Intangible assets
Patents and Licences
Patents and licences have a fi nite useful life and are carried at cost less accumulated amortisation and impairment.
Amortisation is calculated using the straight-line method to allocate the cost of the asset over its remaining useful life, which
equates to the remaining life of the underlying patent.
(j) Income taxes
Income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the
applicable income tax rate for Australia, adjusted by changes in deferred tax assets and liabilities attributable to temporary
differences and to unused tax losses.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amount in the fi nancial statements. Deferred income tax is not provided if it arises
from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time affects neither
accounting nor taxable profi t or loss. Deferred income tax is determined using tax rates and laws that have been enacted
by the reporting date and are expected to apply when the related deferred income tax assets is realised or the deferred liability
is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probably that future
taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances
attributable to amounts recognised directly in equity are also recognised directly in equity.
41
Notes to the Financial Statements
for the year ended 30 June 2008
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
(k) Investments accounted for using the equity method
Associates are all entities over which the Company has signifi cant infl uence but not control, generally accompanying a
shareholding of between 20% and 50% of the voting rights. The fi nancial statements of the associate are used by the Company
to apply the equity method. The reporting dates of the associate and the Company are identical and both use consistent
accounting policies.
The investment in the associate is carried in the balance sheet at cost plus post-acquisition changes in the Company’s share of
net assets of the associate, less any impairment in value. The income statement refl ects the Company’s share of the results of
operations of the associate.
Where there has been a change recognised directly in the associate’s equity, the Company recognised its share of any change
and disclosed this, when applicable, in the statement of changes in equity.
The carrying amount of an investment accounted for using the equity method is assessed annually to determine whether there
is any indication that the asset may be impaired. Where an indicator of impairment exists, the Company makes a formal
estimate of the recoverable amount. Where the carrying amount of the asset exceeds its recoverable amount, the asset is
considered impaired and is written down to its recoverable amount.
(l) Property, plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is
directly attributable to the acquisition of the item.
Property, plant and equipment, other than freehold land, are depreciated over their estimated useful lives using the straight line
method. The expected useful lives are between two and nine years, with the majority being depreciated over four years.
Gains and losses on disposal of plant and equipment are taken into account in determining the profi t for the year.
Impairment
The carrying values of plant and equipment are reviewed for impairment at each reporting date with recoverable amount being
estimated when events or changes in circumstances indicate that the carrying value may be impaired. Impairment exists when
the carrying value of an asset or cash-generating units exceeds its estimated recoverable amount. The asset or cash-
generating unit is then written down to its recoverable amount. Impairment losses are recognised in the income statement.
(m) Provisions
Provisions are recognised when the Company has a present obligation (legal and constructive) as a result of a past event,
it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of
the obligation.
(n) Research and development costs
Research and development expenditure is expensed as incurred except to the extent that its future recoverability can
reasonably be regarded as assured, in which case it is deferred and amortised on a straight line basis over the period in which
the related benefi ts are expected to be realised.
The carrying value of development cost is reviewed for impairment annually when the asset is not yet in use or when an
indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable.
42
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
(o) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. The Company recognises revenue when the
amount of revenue can be reliably measured, it is probably that future economic benefi ts will fl ow to the entity and specifi c
criteria have been met for each of the Company’s activities.
Interest revenue
Interest revenue is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable,
which is the rate that exactly discounts estimated future cash receipts through the expected life of the fi nancial asset to that
asset’s net carrying amount.
(p) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Senior Management
Executive Group and the Board of Directors, both of which make strategic decisions for the Company.
(q) Share-based payments
Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of
the equity instrument at the grant date. Fair value is measured by use of the Black-Scholes model. The expected life used in the
model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions,
and behavioural considerations. Further details on how the fair value of equity-settled share-based transactions has been
determined can be found in note 18.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis
over the vesting period, based on the Company’s estimate of shares that will eventually vest.
The above policy is applied to all equity-settled share-based payments that were granted since the date of incorporation and
that vested after 1 January 2005. No amount has been recognised in the fi nancial statements in respect of the other equity-
settled share-based payments.
(r) Trade and other receivables
Trade receivables and other receivables represent the principal amounts due at balance date less, where applicable, any
provision for doubtful debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable
and there is objective evidence of impairment. Debts which are known to be uncollectible are written off in the income
statement. All trade receivables and other receivables are recognised at the value of the amounts receivable, as they are due
for settlement within 60 days and therefore do not require re-measurement.
(s) Trade and other payables
Payables represent the principal amounts outstanding at balance date plus, where applicable, any accrued interest.
Liabilities for payables and other amounts are carried at cost which approximates fair value of the consideration to be paid
in the future for goods and services received, whether or not billed. The amounts are unsecured and are usually paid within
30 days of recognition.
(t) Changes in accounting policies
There have been no signifi cant changes in accounting policy during the reporting period, other than the early adoption of
AASB 8 Operating Segments.
(u) Comparative fi gures
Comparatives have been reclassifi ed where necessary so as to be consistent with the fi gures presented in the current year.
43
Notes to the Financial Statements
for the year ended 30 June 2008
1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
(v) New and revised accounting standards and interpretations
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2008 reporting
periods. The Company’s assessment of the impact of these new standards and interpretations is set out below:
(i) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8
AASB 8 is effective for annual reporting periods commencing on or after 1 January 2009. This standard allows for
a “management” style of disclosure of operating segments. The Company has decided to adopt this standard for the
current reporting period on the basis that it more accurately discloses the fi nancial information pertaining to the
segments of the Company.
(ii) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards
arising from AASB 123
Revised AASB 123 is effective for annual reporting periods commencing on or after 1 January 2009. The Company
has not adopted this standard for the current reporting period as it has no borrowing costs.
(iii) Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting
Standards arising from AASB 101
Revised AASB 101 is effective for annual reporting periods commencing on or after 1 January 2009. It requires the
presentation of a statement of comprehensive income and makes changes to the statement of equity. The Company has
decided not to adopt this standard on the basis that the changes are of a disclosure nature only and do not impact what
is recognised in the fi nancial statements.
(iv) AASB-I 14 The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and their interaction
AASB-I 14 is effective for annual reporting periods commencing on or after 1 January 2008. This standard does not
impact the fi nancial statements of the Company and therefore has not been adopted.
(v) AASB 2008-1 Amendments to Australian Accounting Standard - Share-based Payments: Vesting Conditions
and Cancellations
AASB 2008-1 was issued in February 2008 and will become applicable for annual reporting periods beginning on or
after 1 January 2009. The revised standard clarifi es that vesting conditions are service conditions and performance
conditions only and that other features of a share-based payment are not vesting conditions. It also specifi es that all
cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Company
will apply the revised standard from 1 July 2009, however it is not expected to affect the accounting for the Company’s
share-based payments.
44
2. REVENUE AND EXPENSES FROM CONTINUING OPERATIONS
(a) Revenue from continuing operations
Commercial Ready government grant*
Interest revenue
Other
*Further details of the grant are contained in note 17(a) to the fi nancial statements.
(b) Expenses
Employee benefi ts
Salaries and employee benefi ts
Defi ned contribution superannuation expenses
Share based payments
Depreciation and amortisation of non-current assets
Plant and equipment depreciation
Intellectual property amortisation
Other
Research & development – external
Intellectual property costs (excluding amortisation)
Share based payments – consultants
Finance costs
Foreign exchange losses
Write-off of intangible assets
30 June
2008
$
-
909,807
-
30 June
2007
$
719,698
939,557
20,062
909,807
1,679,317
1,530,719
1,198,932
110,662
425,435
99,207
259,182
2,066,816
1,557,321
62,721
94,038
156,759
26,335
36,185
62,520
3,075,548
3,675,794
396,762
920,339
-
10,032
198,182
104,810
288,668
542
38,274
-
45
Notes to the Financial Statements
for the year ended 30 June 2008
3. SEGMENT INFORMATION
(a) Description of segments
Management has determined the operating segments presented here are those that are internally reported on a regular basis
to the board of directors, who are ultimately responsible for the allocation of resources to those segments and for making
strategic decisions for the Company.
Two reportable operating segments have been identifi ed, the orthopaedic segment and the cardiovascular segment, both
having two distinct markets for which the MPC platform technology is currently being developed. The orthopaedic segment
operates in Australia, and the cardiovascular segment operates in the United States of America through our investment in
Angioblast systems, Inc.
(b) Segment information
2008
Revenue from external customers
Total segment revenue
Net loss after tax
Net loss after tax includes:
Research and development
Equity accounted losses
Amortisation of intellectual property purchased
Total segment assets
Total segment assets include:
Orthopaedic
$
Cardiovascular
$
-
-
-
-
Total
$
-
-
5,287,033
2,122,798
7,409,831
5,192,995
-
-
2,122,798
94,038
-
5,192,995
2,122,798
94,038
549,519
12,761,247
13,310,766
Carrying value of investments accounted for using the equity method
-
12,761,247
-
Total segment liabilities
2007
Revenue from external customers
Revenue from government grants
Total segment revenue
Net loss after tax
Net loss after tax includes:
Research and development
Equity accounted losses
Amortisation of intellectual property purchased
Total segment assets
Total segment assets include:
1,194,186
-
719,698
719,698
-
-
-
-
1,194,186
-
719,698
719,698
5,352,949
1,714,126
7,067,075
6,036,462
-
-
1,714,126
36,185
-
6,036,462
1,714,126
36,185
954,824
7,668,095
8,622,919
Carrying value of investments accounted for using the equity method
-
7,668,095
7,668,095
Total segment liabilities
206,186
-
206,186
46
3. SEGMENT INFORMATION CONTINUED
(c) Segment reconciliations
The following table reconciles each of the segment totals to the totals reported for the Company in the income statement
and balance sheet. These reconciling items are not considered by the Company to be an operating segment as defi ned in
AASB 8 Operating Segments (which has been early adopted in this current fi nancial year) and therefore are not disclosed
as such. They are administrative in nature and relate largely to the running of the Mesoblast head offi ce.
Total segment revenue
Interest revenue
Other revenue
30 June
2008
$
-
909,807
-
30 June
2007
$
719,698
939,557
20,062
Total revenue from continuing operations
909,807
1,679,317
Total segment net loss after tax
Interest revenue
Administration expenses
Other expenses
Share-based payments
Total net loss after tax
Total segment assets
Property, plant and equipment
Interest receivable
GST receivable
Prepayments
Receivable from associate
Cash
Total assets
Total segment liabilities
Trade payables and accruals – administration
Employee entitlements – administration
Payable to Angioblast
Total liabilities
(7,409,831)
(7,067,075)
909,807
939,557
(2,206,549)
(2,019,895)
(10,032)
(1,345,774)
(32,868)
(547,850)
(10,062,379)
(8,728,131)
13,310,766
8,622,919
197,997
68,081
39,195
62,021
16,623
158,235
-
26,215
15,681
360,148
14,094,219
27,788,902
12,055,040
21,238,238
1,194,186
293,317
22,523
62,744
1,572,770
206,186
267,725
199,763
25,225
698,899
47
Notes to the Financial Statements
for the year ended 30 June 2008
4. INCOME TAX EXPENSE
(a) Reconciliation of income tax to prima facie tax payable
Loss from continuing operations before income tax
Prima facie tax benefi t on operating loss before income tax at 30%
Tax effect of amounts which are (not deductible)/taxable in calculating taxable income:
Share based payments expense
Equity accounting loss
Tax benefi t not recognised
Income tax expense attributable to loss before income tax
(b) Income tax losses
Tax losses for which no deferred tax has been booked*
Deferred tax asset at 30% not booked
30 June
2008
$
30 June
2007
$
10,062,379
3,018,713
8,728,131
2,618,439
(403,732)
(636,839)
(164,355)
(514,238)
(1,978,142)
(1,929,846)
-
-
19,123,222
5,736,967
11,859,453
3,557,836
* Tax losses carried forward has not been brought to account at 30 June 2008 because the Directors do not consider it probable, at this
stage of the Company’s program, that suffi cient taxable amounts will become available which deductible temporary differences and
unused tax losses can be applied to. Realisation of the benefi t of tax losses would also be subject to the Company satisfying the
conditions for deductibility imposed by tax legislation. The Company has made no assessment as to the satisfaction of these conditions
at 30 June 2008.
5. REMUNERATION OF AUDITORS
(a) Assurance services
Audit services
Audit and review of fi nancial reports and other audit work under the Corporations Act 2001
• PKF Australian Firm
• PricewaterhouseCoopers (PWC)
-
87,500
87,500
68,980
-
68,980
There has been no remuneration for other assurance services, non-audit services or taxation services in the current or prior year.
6. EARNINGS PER SHARE
Net loss used in calculating basic earnings per share:
Net loss used in calculating diluted earnings per share:
Weighted average number of ordinary shares used in
calculating basic earnings per share
Dilutive potential ordinary shares
Weighted average number of ordinary shares and potential ordinary
shares used in calculating diluted earnings per share
10,062,379
10,062,379
8,728,131
8,728,131
No. of shares
No. of shares
114,209,029
106,445,430
-
-
114,209,029
106,445,430
48
7. CASH AND CASH EQUIVALENTS
Cash at bank
Deposit at call
Term deposits
8. TRADE AND OTHER RECEIVABLES
Current
Government grant receivable
Interest receivable
Goods and services tax recoverable
Loan to Angioblast Systems, Inc. (associate)
30 June
2008
$
753,606
4,231,882
9,108,731
30 June
2007
$
302,986
5,935,957
5,816,097
14,094,219
12,055,040
-
123,541
68,082
39,195
16,623
123,900
-
26,218
360,148
509,907
All trade and other receivable balances are within their due dates and none are considered to be impaired at both 30 June 2008
and 30 June 2007. See note 21 for the impact of credit risk on the Company.
9. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment
Cost
Balance at the beginning of year
Additions
Balance at the end of year
Accumulated depreciation
Balance at the beginning of year
Depreciation expense
Balance at the end of year
197,319
102,483
299,802
(39,084)
(62,721)
(101,805)
50,654
146,665
197,319
(12,749)
(26,335)
(39,084)
Net book value at the end of the year
197,997
158,235
49
Notes to the Financial Statements
for the year ended 30 June 2008
10. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Entity
Country of Incorporation
Principal Activity
Angioblast Systems, Inc.
USA
Adult stem cell research and development
for cardiovascular indications
Ownership Interest
30 June
2008
%
39.1
30 June
2007
%
34.6
(a) Carrying amount
Angioblast Systems, Inc.
(b) Movement in carrying amount
Carrying amount at the beginning of year
Additional investment
Share of losses
Exchange difference on translation
Carrying amount at the end of year
30 June
2008
$
30 June
2007
$
12,761,247
7,668,095
7,668,095
6,419,452
7,501,673
1,880,548
(2,122,798)
(1,714,126)
796,498
-
12,761,247
7,668,095
The following information has been extracted from the audited report of Angioblast Systems, Inc. and translated at the
exchange rate prevailing at year end:
Summaries fi nancial information of associates:
Financial position
Total assets
Total liabilities
Net assets/(liabilities)
Company’s share of net assets/(liabilities)
Financial performance
Income
Expenses
Company’s share of associates’ loss
Share of associates’ loss before tax
Share of associates’ income tax expense
Share of associates’ loss
6,244,935
935,631
(6,089,556)
(1,425,873)
155,379
60,753
(490,242)
(169,816)
873,380
67,035
(6,153,802)
(4,772,141)
(2,122,798)
(1,709,332)
-
(4,794)
(2,122,798)
(1,714,126)
The Directors have followed the guidance of AASB136 in determining whether an investment is impaired. The Directors
have made an assessment of the value of this investment in the accounts, reviewing the results to date against the original
milestones and work plans and having considered current market conditions and are comfortable to continue to carry it
at equity accounted cost. The value of the investment is dependent on its research and development and subsequent
commercialisation. The Directors are of the view that the investment in Angioblast Systems, Inc. is not impaired at balance date.
The contingent liabilities of the associate are disclosed in Note 17(c).
50
11. INTANGIBLE ASSETS
Patents and licences
Gross carrying amount
Balance at the beginning of year
Additions
Patent costs written off (i)
Carrying amount at the end of year
Accumulated amortisation
Balance at the beginning of year
Amortisation expense (i)
Patent costs written off (i)
Carrying amount at the end of year
Net book value
30 June
2008
$
30 June
2007
$
904,226
-
(214,226)
690,000
(86,000)
(94,038)
16,044
(163,994)
526,006
855,439
48,787
-
904,226
(49,815)
(36,185)
-
(86,000)
818,226
(i)
Intellectual property expenses are included in research and development in the income statement.
12. TRADE AND OTHER PAYABLES
Current
Trade payables
Employee benefi ts
Payable to Angioblast Systems, Inc.*
* associate and related party of the Company
1,428,780
81,216
62,774
1,572,770
458,371
215,303
25,225
698,899
51
Notes to the Financial Statements
for the year ended 30 June 2008
13. ISSUED CAPITAL
Ordinary shares participate in dividends and the proceeds on winding up of the company in equal proportion to the number
of shares held.
At shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one
vote on a show of hands.
30 June 2008
No.
30 June 2008
$
30 June 2007
No.
30 June 2007
$
(a) Movements in issued capital during the year
Fully paid ordinary shares
Balance at beginning of fi nancial year
107,716,133
37,422,183
93,510,000
20,667,608
Shares issued at $1.25 07 July 2007
-
-
13,882,800
17,353,500
Shares issued at $1.28
14 December 2007
Transaction costs arising on issue
of shares
Issue of shares under employee share
option plan (note 18)
10,500,000
13,440,000
-
(537,600)
-
-
-
(805,091)
1,040,000
694,500
323,333
206,166
Balance at end of fi nancial year
119,256,133
51,019,083
107,716,133
37,422,183
(b) Share options over ordinary shares
Balance at end of fi nancial year
9,316,667
Amounts unvested at end of
fi nancial year
2,680,000
7,956,667
1,180,000
Share options granted under the employee share option plan carry no rights to dividends and no voting rights. Further details of
the employee share option plan are contained in note 18 to the fi nancial statements.
52
14. RESERVES
(a) Reconciliation of reserves
Share based payments reserve
Foreign currency translation reserve
(b) Nature and purpose of reserves
Share based payment reserve
The share based payments reserve is used to recognise the fair value
of options issued and vested but not exercised.
Foreign currency translation reserve
Exchange differences arising on translation of the equity accounted
investment are taken to the foreign currency translation reserve.
15. CASH FLOW INFORMATION
(a) Reconciliation of cash and cash equivalents
Cash at bank
Deposit at call
Term deposits
(b) Reconciliation of net cash fl ows used in Operations with loss after income tax
Loss from ordinary activities
Add/(deduct) profi t and loss items as follows:
Depreciation and amortisation
Intellectual property disposal costs
Interest received
Foreign exchange losses
Equity settled share based payment
Equity accounted losses (Angioblast)
Change in operating assets & liabilities:
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade creditors and accruals
Cash fl ows used in operations
30 June
2008
$
30 June
2007
$
2,960,017
796,498
3,756,515
1,614,243
-
1,614,243
753,606
4,231,882
9,108,731
302,986
5,935,957
5,816,097
14,094,219
12,055,040
(10,062,379)
(8,728,131)
156,759
198,182
62,520
-
(909,807)
(939,557)
7,094
1,345,774
2,122,798
53,766
885,224
(6,202,589)
50,503
547,850
1,714,126
(19,040)
(1,790,947)
(9,102,676)
53
Notes to the Financial Statements
for the year ended 30 June 2008
16. COMMITMENTS FOR EXPENDITURE
(a) Capital commitments
Not longer than 1 year
(b) Further investment in associate*
Not longer than 1 year
Longer than 1 year and not longer than 5 years
30 June
2008
$
30 June
2007
$
-
21,000
200,000
-
200,000
5,280,000
1,139,452
6,419,452
*At an Extraordinary General Meeting held on 23 November 2006, the shareholders of the Company passed
the following resolution:
•
that pursuant to ASX Listing Rule 10.1 Chapter 2E of the Corporations Act 2001 and for all other purposes,
approval is granted for the Company to invest up to $8.5m in additional funds to subscribe for up to 425,000
further preference shares (designated “Series B Preferred”) in Angioblast Systems, Inc.
The structure of the payments to be invested under the Series B agreement is as follows:
(a) an initial outlay of $1m in exchange for 50,000 preference shares ;
(b) fi ve equal quarterly instalments of $360,000 (totalling $1.8m) in exchange for a total of 90,000 preference shares;
(c) $5.5m invested in Angioblast following Angioblast’s satisfactory demonstration of strict adherence to the pre-approved
Joint Expenditure Program for completion of a phase II clinical trial, in exchange for a total of 275,000 preference shares;
(d) Mesoblast has committed to incurring project costs of $200,000 for the purpose of continuing development of the
common platform adult stem cell technology in exchange for 10,000 preference shares.
As at 30 June 2008 the company has forwarded funds relating to (a) to (c) above. Funds for step (d) will be invested in the
fi nancial year ended 30 June 2009.
As at 30 June 2007, payments (a) and (b) had been made, and $160,548 of (c).
(c) Company’s share of associates expenditure commitments
Angioblast have report no expenditure commitments for the year ended 30 June 2008 (2007: nil).
54
17. CONTINGENT ASSETS AND LIABILITIES
(a) Contingent assets
A government grant was awarded to the Company under the Commercial Ready Program for reimbursement of 50% of
eligible expenditure incurred under the Allogeneic Stem Cell Based Therapy for Cartilage Regeneration project. The maximum
amount payable under the grant is $2,760,041 for the period 10 October 2005 through to 30 September 2008. The total
amount received as at 30 June 2008 is $2,573,746. The remaining amount of $186,294 will become due to the Company upon
completion of the cartilage program, provided the terms of the Commercial Ready government grant are met. The Commercial
Ready Program was abolished in the last Federal Budget, however this will not impact any outstanding payments due to the
Company under the current grant as at 30 June 2008.
(b) Contingent liabilities
Mesoblast will be required to make a milestone payment to Medvet of US$250,000 on completion of Phase III (human) clinical
trials and US$350,000 on FDA marketing approval. Mesoblast will pay Medvet a commercial arm’s length royalty based on net
sales by Mesoblast of licensed products each quarter.
The company has no pending litigation as at the end of the fi nancial year.
(c) Contingent liabilities of Angioblast in relation to Medvet
The contingent liabilities described below represent 100 per cent of the contingent obligations of Angioblast. By way of
its equity interest, Mesoblast currently has a 39.1% interest in these contingent liabilities. Mesoblast is not liable for these
contingent liabilities.
Angioblast has agreed to pay consideration for certain intellectual property assets assigned to it by Medvet on the basis of
future milestones being reached. These milestones will not be reached as part of the current development program which
envisages funding through to IND approvals. They represent payments on successful completion of subsequent clinical
milestones. If all milestones were to be reached these payments total US$1,500,000. In addition royalties at 2.5% of net sales
with stipulated minimum annual royalties scaling up from US$100,000 to US$500,000 over 5 years exist.
55
Notes to the Financial Statements
for the year ended 30 June 2008
18. SHARE-BASED PAYMENTS
The Company has adopted an Employee Share Option Plan to foster an ownership culture within the Company and to motivate
directors, senior management and consultants to achieve performance targets of the Company and/or their respective
business units. Selected directors, employees and consultants of the Company may be eligible to participate in the Plan at the
absolute discretion of the Company’s board of directors. Except as outlined in the remuneration report no options or shares will
be issued under this Plan to any directors without the prior approval of the Mesoblast shareholders.
The aggregate number of options which may be issued pursuant to the Plan and all other share purchase plans shall not at any
time exceed 5% of the total number of issued shares of the Company. All grants of options are subject to the following general
terms and conditions:
• option grants require approval from the board of directors;
• options are granted under the plan for no consideration;
• each share option converts into one ordinary share of Mesoblast Limited;
• options carry neither rights to dividends nor voting rights.
Per the Company’s current policy, options are issued in three equal tranches, each tranche having an expiry date of fi ve years
following grant date. The fi rst tranche typically vests 12 months after grant date, the second tranche 24 months after grant date,
and the third tranche 36 months after grant date.
The exercise price is the greater of $0.20 and:
•
in relation to an option on or before the date of the offi cial quotation of the Company’s shares, an amount per share
that is 20% higher than the offer price of $0.50; and
•
in relation to an option granted after the offi cial quotation of the company’s shares, the volume weighted market
price of a share sold on the ASX on the 5 trading days immediately before the grant date plus a premium determined
by the Board; and
• any other amount that is specifi ed by the Board.
56
18. SHARE-BASED PAYMENTS CONTINUED
(a) Existing share-based payment arrangements
(i) The following share-based payment arrangements were in existence during the current and comparative
reporting periods:
Series
Grant
date
Granted
No.
Exercised
No.
Lapsed
No.
Balance
No.
Vesting
date
Expiry
date
Exercise
price $
Fair value
$
1(a)(i)
29/09/04
2,160,000
(200,000)
1(a)(ii)
29/09/04
2,160,000
-
1(b)
2(a)
2(b)
2(b)
2(c)
2(c)
2(c)
3
3
4(a)
4(a)
4(b)
4(b)
4(b)
4(b)
4(b)
4(b)
4(c)
5
5
5
6(a)
6(a)
6(b)
6(b)
6(c)
6(c)
6(d)
6(d)
6(d)
6(d)
6(d)
6(d)
6(d)
7
26/10/04
400,000
(400,000)
16/12/04
550,000
16/12/04
16/12/04
75,000
75,000
-
-
-
16/12/04
80,000
(80,000)
16/12/04
80,000
(80,000)
16/12/04
80,000
25/08/05
350,000
25/08/05
350,000
-
-
-
23/02/06
150,000
(116,000)
23/02/06
150,000
(84,000)
23/02/06
150,000
(150,000)
23/02/06
150,000
(150,000)
23/02/06
150,000
-
23/02/06
200,000
(33,333)
23/02/06
200,000
23/02/06
200,000
-
-
23/02/06
90,000
(70,000)
23/11/06
23/11/06
23/11/06
50,000
50,000
50,000
17/03/06
50,000
17/03/06
50,000
17/05/06
17/05/06
06/06/06
06/06/06
01/01/07
01/01/07
01/01/07
01/01/07
01/01/07
01/01/07
01/01/07
10,000
10,000
10,000
10,000
15,000
15,000
30,000
30,000
40,000
30,000
30,000
27/07/07
2,480,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,960,000
29/09/05
29/09/09
2,160,000
16/12/05
16/12/09
-
16/12/04
30/12/07
550,000
16/12/05
16/12/08
75,000
16/12/06
16/12/08
75,000
01/05/07
16/12/08
-
-
06/09/06
06/09/07
16/12/06
16/12/07
80,000
04/07/08
04/07/09
350,000
31/12/05
31/12/08
350,000
30/06/06
30/06/09
34,000
31/03/06
31/03/09
66,000
01/05/07
01/05/10
-
-
30/06/06
30/06/09
30/06/07
30/06/10
150,000
30/06/08
30/06/11
166,667
30/06/06
30/06/09
200,000
30/06/07
30/06/10
200,000
30/06/08
30/06/11
20,000
23/02/06
23/02/09
50,000
23/11/06
23/11/09
50,000
23/11/07
23/11/09
50,000
23/11/08
23/11/09
(50,000)
-
17/03/07
17/03/08
-
50,000
17/03/08
17/03/09
(10,000)
-
17/05/07
17/05/08
-
10,000
17/05/08
17/05/09
(10,000)
(10,000)
-
-
06/12/06
06/12/07
06/06/07
06/06/08
-
-
-
-
-
-
-
-
15,000
01/07/07
01/07/08
15,000
01/01/08
01/01/09
30,000
01/01/08
01/01/09
30,000
01/01/09
01/01/09
40,000
01/01/10
01/01/09
30,000
01/08/07
01/08/08
30,000
01/02/08
01/02/09
2,480,000
01/07/09
30/06/12
0.55
0.55
0.55
0.60
0.60
0.60
0.60
0.60
0.60
0.65
0.65
0.65
0.65
0.65
1.20
1.20
0.65
1.20
1.20
0.65
0.65
0.65
0.65
2.02
2.02
1.52
1.52
1.75
1.75
1.96
1.96
1.96
1.96
1.96
1.96
1.96
2.13
0.290
0.290
0.290
0.290
0.290
0.290
0.171
0.229
0.251
0.19
0.21
0.96
0.96
0.89
0.65
0.75
0.89
0.65
0.75
0.92
0.589
0.678
0.718
0.554
0.702
0.404
0.521
0.303
0.380
0.512
0.601
0.601
0.749
0.873
0.512
0.601
0.74
10,760,000
(1,363,333)
(80,000)
9,316,667
The share options outstanding at the end of the fi nancial year have a weighted average remaining contractual life of 714 days
(2007: 762 days) and a range of exercises prices from 55c to $2.13. A further 2,736,000 share options were issued subsequent
to the end of the fi nancial year in accordance with the provisions of the employee share option plan.
57
Notes to the Financial Statements
for the year ended 30 June 2008
18. SHARE-BASED PAYMENTS CONTINUED
(a) Existing share-based payment arrangements (continued)
(ii) General terms and conditions attached to each series are as follows:
1. At the time of the IPO the Company provided initial seed investors and the underwriter with share options as follows:
(a) Seed investors, who subscribed for 4,320,000 fully paid preference shares, were provided with 4,320,000 options
to acquire ordinary shares at an exercise price of $0.55. These options expire on the fourth anniversary of the
expiry of two relevant imposed escrow periods being:
(i) 50% of each holder’s options are subject to an escrow period expiring on 29 September 2005, therefore
these options expire on 29 September 2009
(ii) 50% of each holder’s options are subject to an escrow period which expired on 16 December 2005,
therefore these options expire on 16 December 2009.
(b) Lodge Partners Pty Limited (or nominee), as underwriter to the Offer received in aggregate 400,000 options
to acquire 400,000 ordinary shares on the terms set out in 9.5(a) of the prospectus. These options have since
been transferred to Thorney Holdings Pty Ltd and were exercised during the current fi nancial year.
2. These options were granted as follows:
(a) Two equal tranches, the fi rst tranche vesting 12 months after listing date, the second 24 months after listing.
Both tranches expire on the fourth anniversary of the listing date.
(b) Two equal tranches, each expiring on the third anniversary of the Company being listed on the ASX. Vesting
occurs upon reaching the following milestones:
•
•
The Company obtaining IND approval from the US Food and Drug Administration (FDA) for initiating multi-
centre orthopaedic clinical trials within a period of two years after the options were granted, which was the
date of listing on the ASX (16 December 2004). This milestone was reached on 16 December 2006,
consequently the options vested on this date.
Angioblast Systems, Inc. (associate) must achieve IND approval from the US FDA for initiating multi-centre
cardiovascular clinical trials within a period of three years after the options were granted. This milestone
was reached on 1 May 2007 consequently the options vested on this date.
(c) Three equal tranches, each expiring 12 months after vesting. Vesting occurs upon reaching the
following milestones:
•
•
•
On achieving Standard Operating Procedure (SOP) for the manufacture of cells. This milestone was
reached on 6 September 2006, consequently the options vested on this date.
On approval of Mesoblast’s FDA Investigative New Drug (IND) approval. Approval was obtained
on 16 December 2006, therefore the options vested on this date.
On completing human pre-regulatory trials for a Mesoblast Orthopaedic Application of the licensed
technology. The last patient for this trial had their fi nal follow up visit on 4 July 2008, so the options
will vest on this date.
3. Options granted were approved by shareholders at the Annual General Meeting held 15 November 2005. The options
were issued in two equal tranches. There are no performance conditions attached to these options.
58
18. SHARE-BASED PAYMENTS CONTINUED
(a) Existing share-based payment arrangements (continued)
4. Options granted are subject to the following conditions:
(a) Two equal tranches, each expiring 36 months after vesting. Vesting occurs upon reaching the
following milestones:
•
•
The fi rst patient is treated with Human Autologous Mesenchymal Prescursor Cells (MPC’s). This milestone
was reached on 31 March 2006 and these options vested accordingly.
Angioblast Systems, Inc. (associate) receives Investigational New Drug Approval from the US FDA. This
was received on 1 May 2007 and these options vested accordingly.
(b) Three equal tranches, each expiring 36 months after vesting. The vesting dates for tranches 1, 2 and 3 are
30 June 2006, 30 June 2007 and 30 June 2008 respectively, and the exercise prices are $0.65, $1.20 and
$1.20 respectively. There are no performance conditions attached to these options.
(c) One tranche only, with a vesting date equal to grant date, and an exercise period of 36 months. There are
no performance conditions attached to these options.
5. Options granted were approved by shareholders at the Annual General Meeting held 23 November 2006. Options
were issued in three equal tranches, each having a three year life. The fi rst tranche vested on grant date, the second
tranche 12 months after grant date, and the third tranche 24 months after grant date. All tranches expire
36 months after grant date. There are no performance conditions attached to these options.
6. Options granted were approved by the Remuneration Committee on 14 February 2007. Options granted were in
two equal tranches, the fi rst tranche exercisable in twelve months following grant date, and the second exercisable
in 18 months following grant date. Grant dates are equal to commencement of employment/contract and the options
have exercise periods of 12 months. There are no performance conditions attached to these options.
7.
Options granted were approved by the Remuneration Committee on 27 July 2007. The options were granted in three
equal tranches vesting on 1 July 2008, 1 July 2009 and 1 July 2010 respectively. All tranches expire on 30 June 2012.
(iii) Modifi cations to terms and conditions
There have been no modifi cation to terms and conditions in the current fi nancial year.
During the prior fi nancial year, the Board of Directors approved that certain conditions in series 3 and 4 options
be removed. The conditions removed were as follows:
• 1/3 of the vested options could be exercised in the fi rst 12 months following vesting date;
• up to a total of 2/3 could be exercised between 12 and 24 months following vesting date;
•
the balance being able to be exercised (to the extent not already exercised) between 24 months and
36 months of vesting.
These options are now able to be exercised in full, between the vesting date and expiry date of the relevant tranche
of option. The directors do not believe there is any incremental fair value granted as a result of the modifi cation.
(b) Fair values of share options
The weighted average fair value of options granted during the year was $0.74 (2007: $0.633). The fair value of all options
granted has been calculated using the Black-Scholes option pricing model. The model requires the Company share price
volatility to be measured. The share price volatility has been measured with reference to the historical share prices of the
Company, and also similar company’s given the Company has only been listed since 16 December 2004. The offi cial
measurement of share price volatility for the options granted on 23 February 2006 was 55%, and for the options granted
23 November 2006 it was 54%. Given the consistency of the two volatility measurements, both volatility rates have been
used for series 6 and 7.
59
Notes to the Financial Statements
for the year ended 30 June 2008
18. SHARE-BASED PAYMENTS CONTINUED
(b) Fair values of share options (continued)
The model inputs for the valuations of options approved and issued during the current and previous fi nancial years are
as follows:
Option
series
Share price at
grant date $
Exercise Price $ Expected share
price volatility
Option life
Dividend
yield
Risk-free interest rate
3
4(a)
4(b)
4(c)
5
6(a)
6(b)
6(c)
6(d)
7
0.505
1.48
1.48
1.48
1.205
1.81
1.35
1.41
1.84
1.91
0.65
0.65
0.65 & $1.20
0.60
0.65
2.02
1.52
1.75
1.96
2.13
56.57%
128 & 310 days
55.0%
55.0%
55.0%
54.0%
3yrs & 3.98yrs
1.35 – 3.35 yrs
1.1– 3.1 yrs
3 yrs
54.0%
18 & 24 months
54.0%
18 & 24 months
54.0%
18 & 24 months
55.0%
18 & 24 months
55.0%
5 years
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
5.085%
5.18%
5.18%
5.18%
5.725%
6.39%
6.39% & 6.46%
6.27% & 6.39%
6.39%, 6.45% & 6.46%
6.25%
The closing share market price of an ordinary share of Mesoblast Limited (MSB) on the Australian Stock Exchange at 30 June
2008 was $0.91 (30 June 2007: $2.02).
(c) Reconciliation of outstanding share options
Share options over ordinary shares
Balance at beginning of fi nancial year
Granted during the year
Exercised during the year
Expired or forfeited during the year
Balance at end of fi nancial year
Unvested at end of fi nancial year
Exercisable at end of fi nancial year
Number
of options
7,956,667
2,480,000
(1,040,000)
(80,000)
9,316,667
2,680,000
6,636,667
2008
2007
Weighted average
exercise price $
0.69
2.13
0.67
1.89
1.06
2.05
1.51
Number
of options
7,800,000
480,000
(323,333)
-
7,956,667
1,180,000
6,776,667
Weighted average
exercise price $
0.63
1.33
0.64
-
0.69
1.13
0.62
60
18. SHARE-BASED PAYMENTS CONTINUED
(d) Share options exercised during the year
Option series
Number exercised
Exercise date(s)
Share price at
exercise date
2008
2(c)
4(b)
4(c)
1
1
2007
2(c)
4(a)
4(a)
4(a)
4(b)
4(c)
80,000
300,000
60,000
200,000
400,000
1,040,000
80,000
50,000
66,000
84,000
33,333
10,000
323,333
10 October 2007
10 October 2007
10 October 2007
13 December 2007
20 December 2007
18 December 2006
28 September 2006
18 December 2006
08 June 2007
28 September 2006
28 September 2006
$1.50
$1.50
$1.50
$1.28
$1.27
$1.78
$1.25
$1.78
$2.16
$1.25
$1.25
19. KEY MANAGEMENT PERSONNEL COMPENSATION
(a) Details of key management personnel
The directors and other members of key management personnel of the Company during the current and prior years were:
Name
Position
2008
Brian Jamieson
Non-executive Chairman (A)
22 November 07
Byron McAllister
Non-executive Director
Donal O’Dwyer
Non-executive Director
Michael Spooner
Non-executive Director (A);
Executive Chairman (R)
Silviu Itescu
Executive Director
Kevin Hollingsworth
Chief Financial Offi cer (R);
Company Secretary
Suzanne Lipe
Jenni Pilcher
Paul Rennie
Jim Ryaby
Donna Skerrett
Vice President of
Operations (A)
Chief Financial Offi cer (A);
Financial Controller (R)
Special Projects
Consultant (A)
Chief Operating Offi cer (R);
Vice President of Research
and Clinical Affairs (A)
Clinical and
Regulatory Affairs
(A) Appointed to this position
(R) Resigned from this position
Full year
Full year
8 August 07
Full year
21 November 07
18 March 08
21 November 07
2007
-
Full year
Full year
Full year
Full year
Full year
-
-
12 May 08
Full year
3 March 08
Full year
-
-
61
Notes to the Financial Statements
for the year ended 30 June 2008
19. KEY MANAGEMENT PERSONNEL COMPENSATION CONTINUED
(b) Key management personnel compensation
The aggregate compensation made to directors and other members of key management personnel of the Company is
set out below:
Short-term employee benefi ts
Post-employment benefi ts
Share based payments
30 June 2008
$
30 June 2007
$
1,235,755
1,030,882
89,629
477,420
68,244
132,340
1,802,804
1,231,466
Further disclosures regarding key management personnel compensation are contained within the remuneration report.
(c) Key management personnel equity holdings
Balance
at 1 July
No.
Granted as
compen-
sation
No.
Exercised
No.
Net
change
other
No.
Balance at
30 June
No.
Total
vested
30 June
No.
Vested and
exer-
cisable
No.
Unvested
No
Options
2008
Brian Jamieson
Byron McAllister
Donal O’Dwyer
Silviu Itescu
Kevin
Hollingsworth
Suzanne Lipe
Jenni Pilcher
Paul Rennie
James Ryaby
-
150,000
300,000
-
-
-
-
-
-
-
-
200,000
-
60,000
100,000
-
-
250,000
-
Michael Spooner
1,100,000
Donna Skerrett
300,000
200,000
2007
Silviu Itescu
-
Byron McAllister
150,000
-
-
Donal O’Dwyer
150,000
150,000
Michael Spooner
1,100,000
Paul Rennie (i)
690,000
Kevin
Hollingsworth
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
150,000
150,000
150,000
-
-
300,000
250,000
250,000
50,000
1,100,000
1,100,000
1,100,000
-
200,000
-
160,000
250,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
200,000
-
160,000
250,000
-
500,000
300,000
300,000
200,000
-
-
-
150,000
150,000
150,000
300,000
200,000
200,000
1,100,000
1,100,000
1,100,000
(690,000)
-
-
-
-
-
-
-
-
-
-
-
-
-
On 15 November 2007, 690,000 options granted to Paul Rennie were transferred to a non-related party.
62
19. KEY MANAGEMENT PERSONNEL COMPENSATION CONTINUED
c) Key management personnel equity holdings continued
Shareholdings
Fully paid ordinary shares held by key management personnel or their related parties (as defi ned by AASB 124):
Balance
at 1 July
No.
Granted as
compensation
No.
Received on
exercise of
options No.
2008
Brian Jamieson (i)
Byron McAllister
Donal O’Dwyer
Michael Spooner (ii)
Silviu Itescu
Kevin Hollingsworth
Suzanne Lipe
Jenni Pilcher
Paul Rennie
James Ryaby
Donna Skerrett
2007
Silviu Itescu
Byron McAllister
Donal O’Dwyer
-
-
-
839,255
36,632,196
-
-
6,000
-
-
-
43,120,000
-
-
Michael Spooner (ii)
839,255
Paul Rennie
Kevin Hollingsworth
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Net change
other No.
200,000
-
-
-
-
-
-
-
-
-
-
Balance at
30 June
No.
200,000
-
-
839,255
36,632,196
-
-
6,000
-
-
-
(6,487,804)
36,632,196
-
-
-
-
-
-
-
839,255
-
-
(i) Brian Jamieson owns 125,000 shares in his own name, with the balance held by a related party
as defi ned by the accounting standard AASB124 Related Party Disclosures.
(ii) Michael Spooner’s shareholding disclosed above is entirely held by a related party as defi ned by
AASB124 Related Party Disclosures.
63
Notes to the Financial Statements
for the year ended 30 June 2008
20. RELATED PARTY TRANSACTIONS CONTINUED
(a) Equity interests in related parties
Details of interests in associates are disclosed in note 10 to the fi nancial statements.
(b) Transactions with other related parties
Accounts receivable from and accounts payable to Angioblast Systems, Inc. as at the end of the fi nancial year are disclosed in
notes 8 and 12 respectively. Both parties may pay invoices in their local currency on behalf of the other party to facilitate timely
payment of suppliers. This results in a loan account between both parties which is settled monthly. The types of transactions
being paid for are detailed below:
Amounts paid on behalf of Angioblast, by Mesoblast
50% sharing of researchers and SAB fees
50% sharing of cell and antibody manufacturing
50% sharing of clinical research organisation costs
50% sharing of intellectual property costs
Research and development (Australia based)
Professional fees (Australia based)
Other
Amounts paid on behalf of Mesoblast, by Angioblast
Research and development (US based)
Employees and consultants (US based)
Other (US based)
30 June
2008
$
98,418
118,515
-
157,606
209,802
-
19,950
604,291
428,299
112,513
57,385
598,197
30 June
2007
$
81,136
379,365
198,049
64,278
86,452
67,921
46,605
923,806
93,048
-
5,922
98,970
64
20. RELATED PARTY TRANSACTIONS CONTINUED
(c) Transactions between related parties of the company
Together, Mesoblast and Angioblast have been jointly developing process manufacturing and scale-up of the MPC technology,
as well as pre-clinical and clinical components which were necessary to obtain Investigational New Drug (IND) clearance from
the FDA for orthopaedic and cardiovascular applications (respectively). Both companies have received IND clearance for their
respective applications during the current fi nancial year and are now embarking on phase 2 clinical trials. In order to maximise
economies of scale and expertise in both entities, certain members of key management personnel provide expert services to
both entities. These relationships are outlined below:
Mesoblast key
management personnel
Silviu Itescu
Donal O’Dwyer
Byron McAllister
Paul Rennie
Angioblast key
management personnel
Michael Schuster
Donna Skerrett
Relationship(s) with Angioblast
Nature of transaction(s)(i)
Director, Chief Scientist and Chairman
of the Scientifi c Advisory Board
Directors fees & contract
for services
Director and leader of medical device
collaboration strategies
Directors fees & Angioblast
share options
Consultant
Consultant
Contract for services
Contract for services
Relationship(s) with Mesoblast
Nature of transaction(s)(i)
Consultant
Consultant
Contract for services & Mesoblast
share options (ii)
Contract for services & Mesoblast
share options (ii)
(i) All contracts for services are prepared on normal commercial terms.
(ii) Mesoblast share options held by Angioblast employees are included in the table disclosed
in note 18 to the fi nancial statements.
21. FINANCIAL RISK MANAGEMENT
Financial risks impacting the company fall into three categories:
• Market risk (includes currency, interest rate and price risks)
• Credit risk
• Liquidity risk
A description of each risk, together with the risk as it relates to the Company, is presented below.
(a) Market risk
(i) Currency risk
The Company has certain clinical, regulatory and manufacturing activities in the United States of America. As a result of these
activities, the Company has certain amounts owing to creditors and Angioblast Systems, Inc. and a bank account that are
denominated in US dollars. These balances give rise to a currency risk, which is the risk of the exchange rate moving, in either
direction, and the impact it may have on the Company’s fi nancial performance.
The Company manages the currency risk by evaluating the trend of the US dollar in comparison to the Australian dollar and
making decisions whether to purchase US dollars in advance for the purposes of settling these liabilities. The Company has
a USD bank account for this purpose.
65
Notes to the Financial Statements
for the year ended 30 June 2008
21. FINANCIAL RISK MANAGEMENT CONTINUED
(a) Market risk continued
The balances held at the end of the year that give rise to currency risk exposure are presented in the table below, together with
a sensitive analysis which assesses the impact that a change of +/-10% in the exchange rate as at 30 June would have had on
the Company’s reported net losses.
30 June 2008
Balance held
+10%
-10%
US$
Profi t AU$
Equity AU$
Profi t AU$
Equity AU$
USD bank account
Trade payables
Amounts owing to
Angioblast Systems, Inc
47,368
(268,803)
(4,478)
25,816
(60,040)
6,007
-
-
-
4,478
(25,816)
(6,007)
-
-
-
(ii) Interest rate risk
The Company has exposure to interest rate movements from the interest income it earns on its term deposits and deposits
at call. The interest income derived from these balances can fl uctuate due to interest rate changes. This interest rate risk is
managed by spreading the deposits across various maturity periods and by keeping deposits subject to fl oating interest rates
at a level where they can be used for managing the cash fl ows of the Company. The balances held which derive interest
revenue are described in note 21(c). There is no material impact on the Company’s net loss and equity if the interest rates were
to be different, by any reasonable amount, as at the end of the fi nancial year. This is because interest is calculated daily and
has largely already been earned at the prescribed bank rates at this point in time.
(iii) Price risk
Price risk is the risk that future cashfl ows derived from fi nancial instruments will be altered as a result of a market price
movement, other than foreign currency rates and interest rates. The Company does not consider it has any exposure to price
risk other than those already described above.
66
21. FINANCIAL RISK MANAGEMENT CONTINUED
(b) Credit risk
Credit risk is the risk that one party to a fi nancial instrument will fail to discharge its obligation and will therefore cause fi nancial
loss to the other party. As the Company is non-revenue generating it generally does not have trade receivables. Its receivables
are typically due from the government in the form of GST and government grants, and from its related party. The Company
manages the exposure to credit risk by ensuring all amounts due from Angioblast are received monthly and that the balance is
not more than $200,000 at any one time without prior approval of a director. The credit risk to the Company is detailed below:
Cash and cash equivalents
Cash and cash equivalents (note 7) – AAA rated
14,094,219
12,055,040
30 June 2008
$
30 June 2007
$
Trade receivables
Receivable from Australian Government
Receivable from AAA rated bank deposits
Receivable from related party
(c) Liquidity risk
39,195
68,082
16,623
149,759
-
360,148
Liquidity risk is the risk that the Company will not be able to pay its debts as and when they fall due. The Company has had
no borrowings to date and the directors ensure that cash on hand is suffi cient to meet the commitments of the Company at all
times while it is in a loss making phase of research and development. The going concern basis of preparation is further
described in note 1.
All fi nancial liabilities held by the Company at 30 June 2008 and 30 June 2007 are non-interest bearing and mature within
6 months. The total contractual cash fl ows associated with these liabilities equate to the carrying amount disclosed within the
fi nancial statements.
22. SUBSEQUENT EVENTS
On 7 July 2008 the directors approved a total of 2,736,000 share options to be granted to employees and consultants,
including those disclosed in the director’s report.
There are no other subsequent events that the directors consider would have a material impact on the results of the Company
for the year ending 30 June 2008.
67
Directors’ Declaration
In accordance with a resolution of directors of Mesoblast Limited,
In the opinion of the directors:
(a) the accompanying fi nancial statements and notes on pages 33 to 67 are in accordance with the Corporations
Regulations 2001 and comply with the accounting standards and give a true and fair view of the company’s
fi nancial position as at 30 June 2008 and of its performance for the year ended on that date.
(b) At the date of this declaration there are reasonable grounds to believe that the company will be able to pay its
debts as and when they become due and payable.
(c) The remuneration disclosures set out on pages 17 to 24 of the director’s report comply with accounting standard
AASB 124 Related Party Disclosures and the Corporations Regulations 2001.
(d) The directors have been given the declarations by the Chief Executive Offi cer and the Chief Financial Offi cer
required by Section 295 A.
Signed in accordance with a resolution of the Board of Directors.
Mr Brian Jamieson
Director
28 August 2008, Melbourne
68
Independent auditor’s report to the members of
Mesoblast Limited
Report on the financial report
PricewaterhouseCoopers
ABN 52 780 433 757
Freshwater Place
2 Southbank Boulevard
SOUTHBANK VIC 3006
GPO Box 1331L
MELBOURNE VIC 3001
DX 77
Telephone 61 3 8603 1000
Facsimile 61 3 8603 1999
Website:www.pwc.com/au
We have audited the accompanying financial report of Mesoblast Limited (the company), which
comprises the balance sheet as at 30 June 2008, and the income statement, statement of changes
in equity and cash flow statement for the year ended on that date, a summary of significant
accounting policies, other explanatory notes and the directors’ declaration.
Directors’ responsibility for the financial report
The directors of the company are responsible for the preparation and fair presentation of the
financial report in accordance with Australian Accounting Standards (including the Australian
Accounting Interpretations) and the Corporations Act 2001. This responsibility includes
establishing and maintaining internal controls relevant to the preparation and fair presentation of
the financial report that is free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are
reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting
Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian
equivalents to International Financial Reporting Standards ensures that the financial report,
comprising the financial statements and notes, complies with International Financial Reporting
Standards.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial report based on our audit. We conducted
our audit in accordance with Australian Auditing Standards. These Auditing Standards require that
we comply with relevant ethical requirements relating to audit engagements and plan and perform
the audit to obtain reasonable assurance whether the financial report is free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial report. The procedures selected depend on the auditor’s judgement,
including the assessment of the risks of material misstatement of the financial report, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial report in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates
made by the directors, as well as evaluating the overall presentation of the financial report.
Our procedures include reading the other information in the Annual Report to determine whether it
contains any material inconsistencies with the financial report.
For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit.
Liability limited by a scheme approved under Professional Standards Legislation
69
Independent auditor’s report to the members of
Mesoblast Limited (continued)
Our audit did not involve an analysis of the prudence of business decisions made by directors or
management.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinions.
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations
Act2001.
Auditor’sopinion
In our opinion:
(a)
the financial report of Mesoblast Limited is in accordance with the CorporationsAct2001,
including:
(i)
(ii)
giving a true and fair view of the company’s financial position as at 30 June 2008
and of its performance for the year ended on that date; and
complying with Australian Accounting Standards (including the Australian
Accounting Interpretations) and the CorporationsRegulations2001; and
(b)
the company’s financial report also complies with International Financial Reporting Standards
as disclosed in Note 1.
Report on the Remuneration Report
We have audited the Remuneration Report included in sections A to D of the directors’ report for
the year ended 30 June 2008. The directors of the company are responsible for the preparation
and presentation of the Remuneration Report in accordance with section 300A of the Corporations
Act2001. Our responsibility is to express an opinion on the Remuneration Report, based on our
audit conducted in accordance with Australian Auditing Standards.
Auditor’sopinion
In our opinion, the Remuneration Report of Mesoblast Limited for the year ended 30 June 2008,
complies with section 300A of the CorporationsAct2001.
PricewaterhouseCoopers
Anton Linschoten
Partner
70
Melbourne
28 August 2008
Shareholder Information
A. SUBSTANTIAL SHAREHOLDERS
The Company’s Holders of Relevant Interests as notifi ed by ASX Substantial Shareholders and the number of shares in which
they have an interest as disclosed by notices received under Part 6.7 of the Corporation Act 2001 as at 16 September 2008 are:
Shareholder
AMP Life Ltd
Portfolio Partners Limited
Silviu Itescu
Thorney Holdings Pty Ltd
Number of ordinary shares held
8,228,525
6,198,261
37,120,000
8,350,957
B. NUMBER OF HOLDERS OF EQUITY SECURITIES AND VOTING RIGHTS
Number of holders
Ordinary shares (i)
Share options (ii)
1,994
28
The voting rights attaching to each class of equity securities are:
(i) Ordinary shares
On a show of hands, every member present at a meeting, in person or by proxy, shall have one vote and upon a poll each
share shall have one vote.
(ii) Share options
No voting rights.
C. DISTRIBUTION OF EQUITY SECURITIES
Distribution of holders of equity securities as at 16 September 2008
No. of holders
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,000 and over
Number of holders of less than a marketable parcel of shares
Ordinary shares
Share options
332
733
377
475
77
1,994
65
-
-
-
7
21
28
71
Shareholder Information
continued
D. TWENTY LARGEST HOLDERS OF QUOTED SECURITIES
The names of the 20 largest shareholders of each class of equity security as at 16 September 2008 are listed below:
No.
Name
No. of shares held
% of total shares
Professor Silviu Itescu
J P Morgan Nominees Australia
National Nominees Limited
AMP Life Limited
ANZ Nominees Limited
Invia Custodian Pty Limited
Medvet Science Pty Ltd
Dalit Pty Ltd
ANZ Nominees Limited
J G M Investment Group Pty Ltd
Thorney Holdings Pty Ltd
Cogent Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited
Cogent Nominees Pty Limited
Michael Spooner
RBC Dexia Investor Services
Citicorp Nominees Pty Limited
Queensland Investment Corporation
Hazlaha Investments Limited
Mr Gregory John Conlan
36,632,196
10,936,581
8,507,206
5,280,877
3,891,993
3,864,796
2,790,000
2,660,000
2,597,144
2,340,000
2,021,392
1,570,522
1,330,375
1,240,541
1,100,000
896,554
800,114
690,702
637,600
526,500
30.39%
9.07%
7.06%
4.38%
3.23%
3.21%
2.31%
2.21%
2.15%
1.94%
1.68%
1.30%
1.10 %
1.03%
0.91%
0.74%
0.66%
0.57%
0.53%
0.44%
90,315,093
74.92%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
72
Mesoblast Limited ABN 68 109 431 870
Board of Directors and Company Particulars
DIRECTORS
Brian Jamieson
Donal O’Dwyer
Silviu Itescu
Byron McAllister
Michael Spooner
COMPANY SECRETARY
Kevin Hollingsworth
REGISTERED OFFICE
Level 2
517 Flinders Lane
MELBOURNE VIC 3000
Telephone (03) 9629 5566
Facsimile (03) 9629 5466
COUNTRY OF INCORPORATION
Australia
PRINCIPAL PLACE OF BUSINESS
Level 39
55 Collins Street
MELBOURNE VIC 3000
Telephone (03) 9639 6036
Facsimile (03) 9639 6030
STOCK EXCHANGE LISTING
Australian Stock Exchange
(ASX Code: MSB)
AUDITORS
PricewaterhouseCoopers
Freshwater Place
Level 19, 2 Southbank Boulevard
MELBOURNE VIC 3006
SOLICITORS
Middletons Lawyers
Level 25, Rialto Tower
525 Collins Street
MELBOURNE VIC 3000
BANKERS
National Australia Bank Ltd
221 Drummond Street
CARLTON VIC 3053
SHARE REGISTRY
Link Market Services Limited
Level 4
333 Collins Street
MELBOURNE VIC 3000