Annual
Report
2015
Contents
Message from the Chairman
Chief Executive’s Report
Directors’ Report (incorporating Remuneration Report)
1
2
7
Auditor’s Independence Declaration 46
Financial Statements 47
Directors’ Declaration 111
Independent Auditor’s Report 112
Shareholder Information 114
Corporate Directory 116
Message from the Chairman
1
It is a great pleasure to present the
2015 Mesoblast Annual Report. This year’s
many achievements are the result of careful
and prudent long-term strategic planning and
our strong commitment to bring our distinctive
adult stem cell assets to market.
With growing clinical and scientific evidence and an
advanced pipeline, the Board believes our business is
exceptionally positioned for long-term sustainable growth,
delivering both clinical and financial value.
The progress achieved in 2015 will be carried forward into
the year ahead and beyond with a focus on delivering on
the value and opportunity our technology holds. We look to
this coming year as another year of progress as we pursue
our goal of making a meaningful difference in the lives of
people worldwide.
Brian Jamieson
Chairman
During the 2015 financial year, your Board and
management continued to focus on asset prioritization
and the allocation and management of our financial
resources in a well-considered and strategic manner.
Good governance is an essential part of our long-term
success. The varied skills of the Board and its experience
drawn from the pharmaceutical industry and business
community provided significant input to the Company’s
judicious allocation of capital, as well as guiding and
monitoring performance against strategy.
The Board is pleased with the progress and the
performance of the Mesoblast team. Chief Executive
Silviu Itescu and his team have made a significant
contribution to advancing our clinical programs and
operational capabilities, as well as building our partnerships
with key industry leaders. The Board continues to work
cohesively and constructively to ensure the Mesoblast
management team has the resources to execute on our
global growth plans now and into the future.
We believe our strategy of forming effective international
relationships and partnerships will enhance our opportunity
for long-term success worldwide. In this regard, we
are particularly pleased by the recent news that our
Japanese partner, JCR Pharmaceuticals, has been
formally recommended to receive approval in Japan for
JR-031, an allogeneic mesenchymal stem cell-based
product for acute graft versus host disease, licensed from
Mesoblast. If successful, this development will represent
a significant step for our business in our transition from an
R&D company to a revenue-generating company with an
approved stem cell product in a major healthcare market.
As our business grows, we benefit from a committed
workforce located across United States, Europe, Asia and
Australia, and providing the necessary expertise, insights
and innovation required to remain successful in a
global environment.
2
Chief Executive’s Report
I am pleased to report on our corporate strategic
direction following the 2015 financial year and,
further to the Directors’ Report of August 2015,
provide you with an update on our considerable
progress over the past year, and the outlook for
the Company.
2015 Financial Year Summary
The 2015 financial year reinforced Mesoblast’s position
as a global leader in the development of cell-based
regenerative medicine. Notably, two additional
Phase 3 clinical programs were initiated – in chronic
low back pain due to degenerative disc disease (CLBP),
and steroid-refractory acute graft versus host disease
(GVHD) in children. We now have three Tier 1 product
candidates, including our heart failure therapy, in active
Phase 3 recruitment. Furthermore, based on encouraging
Phase 2 results in diabetic kidney disease announced
during the 2015 financial year, we elevated our product
candidate for inflammatory and immune-mediated
conditions to Tier 1 status, reflecting our belief that it
represents a major new opportunity for the Company.
Mesoblast is focusing its predominant resources on these
four advanced product candidates. In addition, we continue
to invest in a strong and valuable pipeline of products that
will be prioritized depending on newly-generated data,
market opportunity or partnering options.
Corporate Strategy
Our corporate strategy drives the business and has the
following objectives:
1. Continue to innovate and optimize our disruptive
technology platform for cell-based therapeutics
2. Develop a portfolio of clinically distinct products
3. Focus on bringing late-stage products to market and
portfolio prioritization
4. Enable manufacturing scale-up to meet demands
of the portfolio
5. Leverage talent base to continue to establish a culture
of shared leadership and accountability
6. Continue to build strategic partnerships
7. Continue to invest in our substantial and robust
intellectual property estate
Disruptive Technology Platform and
Robust Intellectual Property Estate
Our proprietary mesenchymal lineage adult stem cell
(MLC) platform allows us to develop product candidates
that have the potential to significantly improve the treatment
outcomes of a number of serious and debilitating conditions
due to the ability of MLCs to secrete biomolecules that
induce tissue repair through multiple diverse mechanisms.
Regenerative medicines aim to restore affected cells and
tissues, and therefore may have broad applicability in
treating diseases where current standards of care are often
inadequate or where no approved therapy currently exists.
The Company has a strong intellectual property position
which underpins this technology platform and which we
believe provides substantial competitive advantages for the
commercialization of our regenerative medicine products.
Our extensive patent estate encompasses more than
650 patents across 67 patent families. In the reporting
period, we had 33 new patents granted including nine
in the United States (US), six in Japan, five in China and
13 in other jurisdictions.
PRODUCT CANDIDATES
PROGRAMS
PRECLINICAL
PHASE 2
PHASE 3
FILED FOR APPROVAL
3
TIER 1
MPC-150-IM
Advanced chronic heart failure
End-stage chronic heart failure
MPC-06-ID
Chronic low back pain
MSC-100-IV
Acute steroid-refractory GVHD
JR-031
Acute GVHD (Japan)
MPC-300-IV
Diabetic kidney disease
Rheumatoid arthritis (biologic refractory)
TIER 2
MSC-100-IV
Crohn’s disease (biologic refractory)
MPC-25-IC
Acute cardiac ischemia
MPC-25-Osteo
Spinal fusion
MPC-CBE
Bone marrow transplant
This chart is figurative and does not purport to show individual trial progress within a clinical program. For product registration purposes,
Phase 3 programs may require more than one trial.
We are committed to the ongoing expansion, broadening
and development of our intellectual property portfolio to
protect our technologies, products and manufacturing
processes across all major healthcare markets.
pleased with the recruitment rate in multiple sites across
North America, and believe MPC-150-IM will be well
positioned to fill the significant treatment gap in patients
with advanced CHF.
A Prioritized Portfolio of Clinically-Distinct
and Late-Stage Product Candidates
Each of our product candidates has its own distinct
characteristics, target indications, individual reimbursement
strategy, separate commercialization potential, and unique
partnering opportunities.
We have prioritized our portfolio into tiers based on
stage of development, largest market opportunities and
anticipated time to market. Tier 1 programs represent our
lead programs where we focus the majority of our time and
resources. Tier 2 programs are also in development and
may advance to Tier 1 depending on the merit of newly
generated data, market opportunity or partnering options.
Additionally, we have a significant pipeline of earlier-
stage programs.
The development of our Tier 1 product candidates remains
the primary focus for our resources. The progress in these
product candidates is summarized below.
MPC-150-IM for Chronic Heart Failure
MPC-150-IM is in development for patients with advanced
chronic heart failure (CHF) in conjunction with our
development and commercialization partner for this
product, Teva Pharmaceutical Industries Ltd. We are
The Phase 3 CHF program for MPC-150-IM was recently
streamlined following a meeting between Teva and the
United States Food and Drug Administration (FDA). As a
result, there is a potential to achieve early completion
of the current Phase 3 trial, and an earlier filing for
regulatory approval.
Pursuant to the FDA meeting, the total number of
subjects to be recruited for the ongoing Phase 3 trial
was reduced from approximately 1,730 to 1,165, with a
time to first event analysis of heart failure-related major
adverse cardiovascular events (HF-MACE) as the primary
endpoint. An interim analysis will be performed in the
ongoing Phase 3 trial when 50% of the HF-MACE have
occurred, which will include a test for superiority allowing
for the possibility of stopping of the trial early based on
overwhelming efficacy. A second, confirmatory study is
planned to be conducted in parallel in an identical patient
population of approximately 500 subjects using recurrent
HF-MACE as the primary endpoint. Significantly, the clinical
data from these two studies will be supportive to each
other for product approval.
The use of recurrent HF-MACE as a primary endpoint in
the confirmatory study is supported by a new analysis
of the completed Phase 2 trial, where patients treated
with MPC-150-IM had no HF-MACE over 36 months of
4
follow-up, compared with 11 recurrent HF-MACE in the
control group (p<0.001, log rank test). This analysis is
due to be presented in full at an upcoming cardiovascular
scientific meeting.
A Phase 2b trial of MPC-150-IM in patients with end-stage
CHF requiring mechanical support, such as implantation
of a left ventricular assist device, is actively recruiting in the
US. This 120-patient trial is being funded by the US National
Institutes of Health. Patients with end-stage CHF represent
a serious unmet medical need.
MPC-06-ID for Chronic Low Back Pain due
to Degenerative Disc Disease
MPC-06-ID is a Tier 1 product candidate for the treatment
of CLBP, using a unit dose of 6 million mesenchymal
precursor cells (MPCs) injected directly into a targeted
damaged disc in an outpatient procedure. This dose
is being trialled in a randomized, placebo-controlled
Phase 3 program for patients with CLBP, aiming to
confirm the positive outcomes seen in the Company’s
Phase 2 clinical trial where MPC-06-ID demonstrated the
potential to provide improvement in pain and function
for at least 24 months.
The Phase 3 trial for MPC-06-ID was initiated in the
2015 financial year and is currently recruiting well across
North American sites. During the reporting year, we
received positive feedback from discussions with the
European Medicines Agency and expect to expand the
program to European sites.
MSC-100-IV/JR-031 for Acute Graft Versus
Host Disease
Our Japanese partner JCR Pharmaceuticals Co. Ltd.
filed for approval of its mesenchymal stem cell-based
product, JR-031, for acute life-threatening GVHD in children
and adults in Japan in September 2014. This product
was granted orphan drug priority review and on
2 September 2015, JR-031 was recommended for
approval at a meeting organized by the Committee on
Regenerative Medicine Products and Biological Technology
of Pharmaceutical Affairs and Food Sanitation Council
of the Japan Ministry of Health, Labour and Welfare.
If successful, JR-031 will be the first allogeneic cell-based
product and regenerative medicine fully approved in Japan.
Under our agreement with JCR, Mesoblast is entitled to
receive milestone payments on JR-031 product regulatory
approvals, as well as royalties and other payments at
pre-defined thresholds of cumulative net sales.
Through a meeting with the FDA in the 2015 financial
year, we identified a pathway to accelerated US approval
for our mesenchymal stem cell product candidate for
steroid-refractory acute GVHD in children. An open-label
Phase 3 study of approximately 60 children has been
initiated in the 2015 financial year and is enrolling patients
in the US, with a view to supporting a US Biologics
License Application.
MPC-300-IV for Immune Mediated and
Inflammatory Conditions
Our intravenously delivered product candidate MPC-
300-IV has the potential to be a major new opportunity
for our Company, with strong advances made during
the reporting year in this emerging portfolio targeting
inflammatory and immune-mediated diseases. The lead
indications for MPC-300-IV are diabetic kidney disease and
biologic-refractory rheumatoid arthritis.
The diverse and potent anti-inflammatory properties of
MPCs are the foundation for their usefulness in immune-
mediated diseases, where monocytes, macrophages
and activated pro-inflammatory T cells play a very active
and destructive role in disease pathogenesis through
activation of multiple pro-inflammatory cytokine pathways.
More specifically, MPC-300-IV was designed for intravenous
delivery to treat systemic and localized conditions of
excessive inflammation, whereby our MPCs can counteract
inflammatory processes by downregulating the production
of pro-inflammatory cytokines, increasing production of
anti-inflammatory cytokines, and enabling recruitment of
anti-inflammatory cells to involved tissues.
During the reporting year, positive clinical results obtained
in patients with diabetic kidney disease were presented
at the late-breaking scientific sessions of the 75th
American Diabetes Association Annual Meeting.
5
the world’s largest established healthcare markets: the US,
Japan and Europe.
We also intend to work closely with our existing
Japanese partner, JCR, in order to ensure a successful
launch of JR-031, our first licensed stem cell product in
a major established market. Japan is the world’s second
largest healthcare market and it will continue to be a
substantial focus for us, due in part to the changes in law
during the 2015 financial year that established a framework
for expedited approval for certain regenerative medical
products.
Additionally, we intend to expand our strategic alliances
in order to enhance the likelihood of successful product
commercialization across our portfolio.
Silviu Itescu
Chief Executive
The results of the Phase 2 trial in diabetic kidney disease
demonstrated that a single infusion of MPC-300-IV was well
tolerated and resulted in preservation or improvement in
renal function over at least 24 weeks, relative to controls.
In addition, the results supported an anti-inflammatory
mechanism of action and identified biomarkers to
be further investigated as predictors of treatment
response. Clinical trial design planning is underway
for a Phase 2b/3 study.
The first cohort of a 48-patient Phase 2 trial for patients
with biologic-refractory rheumatoid arthritis has completed
enrollment, with the second cohort actively recruiting
across multiple sites in the US.
Scalable Manufacturing
Our manufacturing, translational and clinical activities
are structured to meet stringent criteria set by regulatory
agencies in all jurisdictions in which we operate. Our
manufacturing capabilities are designed to enable us to
have a robust source of readily available standardized
products for clinical and commercial use.
Manufacturing scale-up is a key priority for the Company
in order to meet projected commercial demands and to
reduce supply costs. Substantial advances were made in
the 2015 financial year in the development of consistent
high yield manufacturing processes to improve efficiency
and yields in large commercial-grade bioreactors.
Additionally, an in-house proprietary serum-free media
has been identified, and is being developed to deliver
step-change yield improvements.
Our People
Our management team, through prior employment at
leading drug development companies and regulatory
agencies, has substantial experience in the clinical
development, manufacturing, regulatory management
and commercialization of biopharmaceuticals.
Strategic Partnerships
We have established strategic relationships with several
industry leaders, including Teva, Lonza and JCR, to support
the development and potential commercialization of our
product candidates. Our collaborators provide clinical
development, manufacturing and commercial capabilities
as well as financial support to enhance the potential for the
success of our product candidates, which mitigates our
capital obligations and commercial risk.
Positive Outlook
We will continue to focus our financial and human resources
over the 2016 financial year to execute on the development
and commercialization of our Tier 1 product candidates in
6
Corporate Governance
Mesoblast Limited and its Board of Directors
are committed to implementing and achieving
an effective corporate governance framework
to ensure that the Company is managed
effectively and in an honest and ethical way.
The Company’s Corporate Governance statement
for the financial year ending 30 June 2015 has been
approved by the Board and is available on our
website at http://www.mesoblast.com/about-us/
corporate-governance
Directors’ Report (incorporating Remuneration Report)
7
The Board of Directors of Mesoblast Group has
resolved to submit the following annual financial
report of the Group for the financial year ended
30 June 2015. In order to comply with the
provisions of the Corporations Act 2001, the
Directors report the following information:
Review of Operations and Activities
Principal Activities
Mesoblast, a global leader in regenerative medicine, is committed to delivering innovative cell-based therapeutics.
The Company’s portfolio of therapeutic products is being developed using its proprietary technology platforms, which
include specialized cells known as mesenchymal lineage adult stem cells (MLCs), to treat conditions with significant unmet
medical needs including cardiac diseases, spine and musculoskeletal disorders, oncology and hematology diseases, and
immune-mediated and inflammatory conditions. Five programs are in active Phase 3 clinical studies or Phase 3-ready.
Additionally, Mesoblast has a strong pipeline of products for additional indications.
Publicly listed on the Australian Securities Exchange (ASX:MSB), Mesoblast also has a Level 1 American Depositary
Receipt (ADR) program facility trading in the Over-The-Counter (OTC) market in the United States (USOTC:MBLTY).
Review of Operations
2015 Highlights
During the year, we made substantial progress in the development of our clinically advanced portfolio of regenerative
cell-based product candidates, in line with our timelines and objectives as we move towards product commercialization.
In addition, we significantly advanced our commercial manufacturing processes and made important headway in our
corporate objectives.
The following table outlines 2015 achievements:
2015 Highlights
MPC-150-IM
• The Phase 3 trial in advanced CHF patients is recruiting well across North American sites.
Chronic Heart
Failure (CHF)
• Our development and commercial partner Teva Pharmaceutical Industries Ltd recently met
with the USA Food and Drug Administration (FDA) and important changes to the Phase 3
program have been agreed.
• The Phase 2b NIH-funded trial in end-stage CHF patients requiring LVAD support has been
initiated and is actively recruiting.
MPC-06-ID
• The Phase 3 program in CDLBP has been initiated and is actively recruiting across
North American sites.
• Positive feedback from discussions with the European Medicines Agency and Health
Technology Assessment expected to result in expansion to European sites.
Chronic Discogenic
Low Back Pain
(CDLBP) Due to
Degenerative Disc
Disease
8
MSC-100-IV
• An open-label Phase 3 study of ~60 children has commenced and is actively recruiting in
Acute Graft
Versus Host Disease
(GVHD)
the USA.
• Japanese partner, JCR Pharmaceuticals Co. Ltd., has filed for Japanese approval of its
culture-expanded Mesenchymal Stem Cell (MSC)-based product, JR-031, for acute GVHD in
children and adults in Japan.
• A potential pathway to accelerated USA approval was clarified through the FDA.
MPC-300-IV
• MPC-300-IV has been elevated to our Tier 1 product portfolio based on clinical results in
Diabetic Kidney
Disease
Biologic Refractory
Rheumatoid Arthritis
(RA)
diabetic kidney disease.
Type 2 Diabetes and Kidney Disease
• A Phase 2 trial in diabetic kidney disease completed enrollment with results demonstrating
preservation or improvement in renal function over at least 24 weeks.
• Clinical trial design planning for a Phase 2b/3 study is underway.
Biologic Refractory RA
• The first cohort of a 48-patient Phase 2 trial in patients with biologic refractory RA has
completed enrollment, with the second cohort actively recruiting across multiple sites in the
United States.
Peer Reviewed
Publications and
Presentations
• Phase 2 CHF results were published in the American Heart Association journal,
Circulation Research.
• Phase 2 trial results in CDLBP were presented at the North American Spine Society
Annual Meeting.
• Results of 160 pediatric patients with steroid-refractory acute GVHD were presented at the
2015 American Society for Blood and Marrow Transplantation Meeting.
• Phase 2 diabetic kidney disease trial results were presented at the 75th American Diabetes
Association 2015 late-breaking scientific sessions.
• Phase 2 results for glucose control in Type 2 diabetes patients were published in the
American Diabetes Association journal, Diabetes Care.
• Results of a preclinical RA study were published in the PLOS One journal.
Corporate
• Active discussions are being undertaken with multiple potential strategic partners.
• Celgene acquired a 4.5% equity stake in Mesoblast.
• Mesoblast was selected by the Japan External Trade Organization to receive assistance for a
specially tailored market and incentive roadmap across all levels of government in Japan.
Manufacturing
• Substantial advances were made in the commercial scale 3D manufacturing process.
• A proprietary serum-free media was developed with potential to greatly improve yields.
Intellectual Property
• 33 new patents granted including nine in the United States, six in Japan, five in China and
13 in other jurisdictions.
• New Japanese patent covering the use of MPCs for the formation and repair of blood vessels
in ischemic tissues.
• New US patent covering the use of MPCs in the treatment of degenerated intervertebral discs.
9
Product Development and Commercialization
As noted in our 2014 annual report, our product candidates have been prioritized into two tiers. Tier 1 represents our high
priority lead programs where the majority of resources are focused. Tier 2 programs are continually evaluated, and have
the potential to advance to Tier 1 depending on newly-generated data, market opportunity or partnering options. Based
on encouraging Phase 2 results in diabetic kidney disease, intravenous product candidate MPC-300-IV was elevated to
Tier 1 status this year.
Tier 1 Product Candidates
MPC-150-IM – Intra-myocardial Delivery of MPCs for the Treatment of Advanced Chronic Heart Failure (CHF)
Lead Indication
Advanced CHF
Development Phase
Phase 3
Secondary Indication
End-stage CHF with Mechanical Support
Development Phase
Phase 2b
Partnering Status
Product candidate is partnered with Teva Pharmaceutical Industries (Teva)
MPC-150-IM is a Tier 1 product candidate which consists of 150 million mesenchymal precursor cells (MPCs) administered
by direct cardiac injection in patients suffering from CHF and progressive loss of heart function. MPC-150-IM is being
developed by Mesoblast’s development and commercial partner, Teva.
Advanced CHF – Lead Indication
Disease Indication and Patient Population
CHF is a condition characterized by an enlarged heart and insufficient blood flow to the organs and extremities of the body.
The condition progresses over time and can be caused by many factors that put an excess demand on the heart muscle,
including high blood pressure, incompetent valves, infections of the heart muscle or valves, or congenital heart problems.
The American Heart Association reports 5.7 million adults in the United States with diagnosed CHF, or about 2% of
the adult population, with 825,000 new cases diagnosed each year. CHF prevalence is expected to grow 46% by 2030,
affecting more than 8 million Americans. The estimated annualized cost for CHF care in the United States is approximately
USD31 billion, and is projected to grow to approximately USD70 billion by 2030.
We believe patients with advanced disease continue to represent the greatest unmet medical need despite recent advances
in new therapeutic agents for heart failure.
Completed Phase 2 Trial
The primary objective of the Phase 2 study was to evaluate the safety and tolerability of three increasing doses (25, 75,
or 150 million cells) of MPCs in patients with heart failure due to left ventricular systolic dysfunction of either ischemic or
non-ischemic etiology. The secondary objectives were to look at efficacy via multiple parameters, and to identify an optimal
effective dose and the optimal target population for MPC treatment.
Key results of the 60-patient, placebo-controlled trial were as follows.
Primary Endpoint of Safety
• Transendocardial injections of allogeneic MPCs into the hearts of patients with either ischemic or non-ischemic heart
failure due to left ventricular systolic dysfunction were feasible and safe, with a similar incidence of adverse events
across all control and treatment groups.
• Treatment of patients with allogeneic MPCs was not associated with any clinically significant immune response.
Secondary Efficacy Endpoints
• Patients treated with the highest dose, MPC 150M, showed the greatest improvement in left ventricular remodeling
compared to controls. This was evidenced by significant reductions in Left Ventricular End Systolic Volume (LVESV),
p=0.015, and Left Ventricular End Diastolic Volume (LVEDV), p=0.02, at month 6 post treatment relative to controls.
• Parallel improvements in both LVESV and LVEDV in the MPC-treated patients may have accounted for the observed
non-significant changes in ejection fraction.
10
• Patients treated with the highest dose, MPC 150M, showed the greatest improvement in functional exercise capacity
compared to controls (6 minute walk test: p=0.062) at month 12 post treatment.
Major Adverse Cardiovascular Events (MACE)
•
In a post-hoc analysis after all patients had completed 36 months of follow up, treatment with MPC 150M was shown
to be associated with a significantly lower incidence of heart failure-related major adverse cardiovascular events
(HF-MACE) compared to the control group (0% vs 33% HF-MACE by Kaplan-Meier, p=0.026 by log-rank).
• Patients treated with MPC-150-IM had no HF-MACE over 36 months of follow-up, compared with 11 recurrent
HF-MACE in the control group (p<0.001, log rank test).
Ongoing Phase 3 Trial
Teva is conducting a double-blinded, 1:1 randomized, placebo-controlled Phase 3 trial to evaluate a single dose of
MPC-150-IM in advanced CHF patients across multiple sites in North America. The enrollment criteria for this trial,
including a prior heart failure hospitalization within the previous 9 months and high levels of NT-proBNP, a protein used in
diagnosis and screening of CHF, are expected to result in enrichment for patients with substantial left ventricular contractile
abnormality, advanced heart failure and higher risk of recurrent hospitalizations and death. The ongoing Phase 3 trial
continues to recruit well.
A recent meeting between Teva and the FDA was held and resulted in important changes to this Phase 3 clinical program.
Key conclusions regarding the ongoing Phase 3 trial were:
• There will be a reduction in the total number of subjects to be recruited for the ongoing Phase 3 trial, whose primary
endpoint is a time to first event analysis of HF-MACE, from approximately 1,730 to 1,165.
• An interim analysis will be performed in the ongoing Phase 3 trial when 50% of the HF-MACE have occurred, which will
include a test for superiority allowing for the possibility of stopping of the trial early based on overwhelming efficacy.
A second, confirmatory study in an identical patient population of approximately 500 subjects is planned to be conducted
in parallel using recurrent HF-MACE as the primary endpoint. The use of recurrent HF-MACE as a primary endpoint in the
confirmatory study is supported by the new analysis of the completed Phase 2 trial, as shown above.
The clinical data from these two studies will be supportive to each other for product approval.
End-Stage CHF with Mechanical Support – Secondary Indication
Ongoing Phase 2b Trial
A Phase 2b trial in patients with end-stage heart failure whose circulation is supported mechanically by a left ventricular
assist device, or LVAD, has commenced enrollment. This 120-patient trial is being conducted by a multi-center team of
researchers within the United States National Institutes of Health (NIH)-funded Cardiothoracic Surgical Trials Network
(CTSN), led by Icahn School of Medicine at Mount Sinai, New York.
The double-blind, placebo-controlled, 2:1 randomized trial, is being conducted across multiple North American sites.
The primary objectives of this trial are to evaluate the safety and efficacy of injecting 150 million MPCs into the native
myocardium of LVAD recipients. The primary efficacy endpoint of this study is survival over six months, and the co-primary
endpoint is functional status, while temporarily weaned from LVAD support, over the six months post randomization.
MPC-06-ID – Intra-discal Injection of MPCs for the Treatment of Chronic Discogenic Low Back Pain (CDLBP)
Lead Indication
Chronic discogenic low back pain due to moderate intervertebral disc degeneration
of the lumbar spine
Development Phase
Phase 3
MPC-06-ID is a Tier 1 product candidate for the treatment of CDLBP. It consists of a unit dose of 6 million MPCs injected
directly into a targeted damaged disc in an outpatient procedure.
Disease Indication and Patient Population
Over four million patients in the United States alone suffer from CDLBP. After failure of conservative measures (medication,
injections, physical therapy, etc.), there is no treatment that prevents progression of disc degeneration, reduces pain and
improves function over a sustained period of 6 to 12 months. When disc degeneration has progressed to a point that pain
11
and loss of function can no longer be managed by conservative means, major invasive surgery such as spinal fusion is the
only remaining option.
All therapies for progressive, severe and debilitating pain due to degenerating intervertebral discs treat the symptoms of the
disease, but are not disease-modifying and thus do not address the underlying cause of the disease. Surgical intervention
is not always successful in addressing the patient’s pain and functional deficit. Surgeons estimate that between 50% to
70% of patients ultimately fail back surgery, with failure defined as either not achieving at least a 50% reduction of symptoms
within four months or experiencing new-onset pain and spasm. Total costs of low back pain are estimated to be between
USD100 billion and USD200 billion annually with two thirds attributed to patients’ decreased wages and productivity.
As a result, we believe that the most significant unmet need and commercial opportunity in the treatment of CDLBP is a
therapy that has the ability to reverse, halt or slow the progression of the disease.
Completed Phase 2 Trial
The study evaluated intra-discal injection of two separate doses: 6 million MPCs, which is MPC-06-ID, and 18 million
MPCs with both MPC doses administered with hyaluronic acid (HA), and compared to saline (placebo control) or
HA alone (vehicle control) injection.
With respect to the primary endpoint of safety, allogeneic MPC treatment, including MPC-06-ID, was well tolerated
with the most frequently reported adverse event, back pain, occurring across all patient groups.
With respect to secondary efficacy endpoints, the FDA has provided guidelines on how to evaluate patient response,
utilizing a composite endpoint based on achieving minimally important clinical differences (MICD) in both pain and function
from baseline. Such a composite endpoint for restorative or replacement disc therapies is different than that typically used
for pharmacologic agents developed solely for palliative improvement in symptoms, such as analgesics, where short term
improvement in mean pain scores between groups is sufficient to support a label for short term pain reduction.
Highlights of the clinical results were:
Improvement in chronic low back pain: At both 6 and 12 months, a reduction in pain from baseline of 50% or more,
without any additional intervention, was seen in 59.3% of the MPC-06-ID group, 44.8% of the 18 million MPC group,
18.8% of the saline group, and 15.8% of the HA group, as measured by visual analog scale, or VAS (p = 0.006 across
all four groups, p<0.05 for 6 million MPC against each of saline and HA). At 6, 12 and 24 months, 44.4% of the
MPC-06-ID group achieved a 50% reduction in back pain without intervention compared with 12.5% of saline controls
and 15.8% HA controls (p=0.05 and 0.06,respectively).
Improvement in function: Over a 24 month period of follow-up, both MPC dose groups had a greater proportion of
patients with 15 point or more improvement in function from baseline, without any additional intervention, compared to
control groups, as measured by Oswestry Disability Index (ODI), at 6, 12 and 24 months (MPC-06-ID: 42.3%, 18 million
46.4%, saline 11.8%, HA 22.2%, p=0.05 across all four groups; 6 million MPC against saline p<0.05; 18 million v. saline,
p<0.05).
Reduced need for additional surgical and non-surgical interventions: By Kaplan-Meier analysis of time to a first
additional treatment intervention, treatment with either MPC-06-ID or 18 million MPC significantly reduced the need for
additional interventions compared with saline treatment (p=0.024 and p=0.010, respectively).
Radiographic measurements: At 12 months, MPC-treated patients demonstrated a reduction in radiographically-
determined translational movement of the disc, suggesting a treatment effect on disc degeneration, anatomy, and improved
disc stability.
Composite endpoint: Based on precedent and FDA feedback from our end-of-Phase 2 meeting, we developed a composite
endpoint requiring at least a 50% improvement in low back pain, 15 point improvement in ODI and no treatment intervention
(surgical or injection) that we believe would be sufficient to meet FDA’s requirements for product approval. Utilizing this
composite endpoint in a post-hoc analysis of Phase 2 data, the MPC-06-ID group, the 18 million MPC group, the HA control
and the saline control groups had 44.4%, 37.9%, 15.8% and 11.8% of subjects meet the composite endpoint criteria at both
6 and 12 months (MPC-06-ID vs. saline p<0.05). The MPC-06-ID group had nearly three times the proportion of patients
achieving treatment success at 6, 12 and 24 months compared with saline controls (32% versus 11%).
Ongoing Phase 3 Trial
Based on an end-of-Phase 2 meeting with the FDA, the first of two Phase 3 clinical trials has commenced and is
actively recruiting CDLBP patients across multiple sites in the United States. The two studies will be double-blinded,
and include approximately 330 patients each.The composite primary end point of pain relief and improved function
12
described above (consisting of a 50% reduction in lower back pain as measured by VAS and a 15-point improvement
in ODI at both 6 and 12 months, with no intervention at 12 months) will be used in the Phase 3 program.
The Phase 3 program is planned to be international in scope including sites in North America, Australia and
potentially Europe.
MSC-100-IV – Intravenous Delivery of MSCs for Steroid Refractory Acute GVHD
Lead Indication
Steroid Refractory Acute GVHD
Development Phase (lead)
Phase 3
Secondary Indication
Biologic Refractory Crohn’s Disease
Partnering Status
JCR Pharmaceuticals Co. Ltd. has the license to manufacture and market the
culture-expanded MSC product in Japan for acute GVHD in children and adults.
MSC-100-IV is a Tier 1 product candidate comprising 100 million mesenchymal stem cells (MSCs) under investigation for
the treatment of steroid refractory acute GVHD following an allogeneic bone marrow transplant (BMT). It can be delivered
intravenously in single or multiple dose regimes. MSC-100-IV is designated by the FDA as an orphan drug product candidate.
Steroid Refractory Acute GVHD – Lead Indication
Disease Indication and Patient Population
In patients who have received a BMT, donor cells may provoke an immune response in the person receiving the transplant,
causing acute GVHD which is often fatal.
According to the Center for International Blood and Marrow Transplant Research, there are approximately 30,000 allogeneic
BMTs globally per year for diseases including hematological cancers, with 25% of all cases in the pediatric population.
Nearly 50% of all allogeneic BMT patients develop acute GVHD. Liver or gastrointestinal involvement occur in up to 50%
of all patients with acute GVHD and are associated with the greatest risk of death, with mortality rates of up to 85%. The cost
of treating patients with steroid refractory GVHD, who represent approximately 50% of all cases, is around USD325,000
per patient.
Currently, there are no approved therapies for steroid-refractory patients with GVHD in the United States, and off-label
options have demonstrated mixed efficacy with high toxicity. As such, we believe there is a significant need for effective
treatment with a favorable risk/benefit profile.
Product Registration – Japan
During the 2015 financial year, our licensee, JCR Pharmaceuticals Ltd, filed for regulatory approval for its GVHD MSC-based
product, JR-031, in children and adults in Japan. JR-031 was granted orphan drug priority review. If successful, it will be the
first allogeneic cell-based product approved in Japan.
Ongoing Phase 3 Trial – United States
For the pediatric indication, a 60-patient open label Phase 3 trial was initiated in the 2015 financial year and is enrolling
across multiple sites under an accelerated approval pathway.
During the conduct of our pediatric Phase 3 trial, we expect to have discussions with the FDA regarding the trial design
for a potential Phase 3 trial to support approval of this product for adults with steroid refractory liver or gut GVHD.
MPC-300-IV – Intravenous Delivery of MPCs for Immune Mediated and Inflammatory Conditions
Lead Indication
Diabetic Kidney Disease
Development Phase
Phase 2
Secondary Indication
Rheumatoid Arthritis (biologic refractory)
Development Phase
Phase 2
MPC-300-IV is a Tier 1 product candidate consisting of up to 300 million MPCs delivered intravenously to treat systemic
conditions of excessive inflammation, including diabetic kidney disease (or diabetic nephropathy) and biologic refractory
rheumatoid arthritis.
13
Diabetic Kidney Disease – Lead Indication
Disease Indication and Patient Population
While all classes of current anti-diabetic agents are effective at improving glucose control, they are not effective in
preventing or potentially reversing the renal complications in type 2 diabetes, which affect approximately 40 to 50% of
people with diabetes. Diabetic kidney disease is the single leading cause of end-stage renal disease, accounting for nearly
half of all end-stage renal disease cases in the United States. The prevalence of moderate to severe diabetic kidney disease
in 2013 was estimated to be approximately 2.0 million.
The current standard of care of diabetic kidney disease (rennin-angiotensin system inhibition with angiotensin converting
enzyme inhibitors of angiotensin II receptor blockers) only slows the rate of progression of the disease to renal failure by
16 to 25%, leaving a large residual risk for end-stage renal disease. For subjects that reach end-stage renal disease the only
treatment option is renal replacement (dialysis or kidney transplantation) at high cost in the United States with medical costs
of $100,000 for dialysis and $250,000 for kidney transplant. Due to a severe shortage of kidneys, in 2012 approximately
92,000 persons in the United States died while on the renal transplant list. Furthermore, for those on dialysis the mortality
rate is high with an approximately 40% fatality rate within 2 years after initiation of dialysis. To the extent MPC-300-IV can
be shown to be effective in this population, additional applications may be possible for the over 20 million people in the
United States who are estimated to have chronic kidney disease.
Phase 2 Trial
MPC-300-IV was evaluated in a double-blind, randomized, placebo-controlled, dose escalating Phase 2 trial of 30 patients
with type 2 diabetes and moderate to severe renal impairment, stage 3b-4 chronic kidney disease who were already
on a stable regimen of the standard of care therapy for diabetic nephropathy (renin-angiotensin system inhibition with
angiotensin converting enzyme inhibitors or angiotensin II receptor blockers). Patients received a single infusion of
150 million MPCs, 300 million MPCs, or saline control.
Key findings in the MPC-300-IV trial were that the safety profile for MPC treatment was similar to placebo, with no treatment-
related infusion or other events, and that efficacy testing showed that MPC-treated subjects had improved renal function
relative to placebo, as defined by preservation or improvement in glomerular filtration rate (GFR) at both 12 and 24 weeks.
There was a correlation between baseline severity of interleukin-6 (IL-6) levels and improvement at 12 weeks in both serum
creatinine and GFR (r=0.57, p=0.008) in MPC-treated patients. Finally, MPC treatment was associated with a dose-
dependent inhibition of IL-6 increase over 12 weeks.
Key study conclusions were:
• Positive response to MPC therapy may be enhanced by the presence of viable, but at-risk, renal tissue and an aberrant
pro-inflammatory milieu in the kidney.
• Baseline GFR>30 ml/min/1.73 m2 and high IL-6 levels may be biomarkers that predict efficacy with MPC treatment.
• Reduction in IL-6 levels suggests that the mechanism of action by MPCs may involve reduction of pro-inflammatory
M1 monocyte cytokines in the diabetic kidney.
• MPC therapy may have applications in diverse renal conditions where inflammation plays a central role.
Rheumatoid Arthritis (biologic refractory) – Secondary Indication
MPC-300-IV is also being developed for biologic-refractory rheumatoid arthritis (RA).
Disease Indication and Patient Population
RA is a chronic progressive disease causing inflammation in the joints and resulting in painful deformity and immobility,
especially in the fingers, wrists, feet, and ankles. It affects approximately 1.7 million people in the United States.
The incidence increases with age, climbing from 8.7 per 100,000 for those 18-34 years of age, to 89 per 100,000 for
those 65-74 years of age. RA is responsible for up to 250,000 hospitalizations and 9 million physician visits per year.
If left untreated, RA can lead to joint destruction, deformity, disability, and decreased quality of life. Existing biologic
therapies have made major inroads to the treatment of RA, however, despite the variety of options available,
approximately one third of patients either do not respond or cannot tolerate these therapies. Such patients are
in need of effective treatment.
14
Ongoing Phase 2 Trial
A 48-patient Phase 2 trial to evaluate the safety, tolerability and effectiveness of a single intravenous infusion of either
of two MPC dose levels for the treatment of active RA in patients who have failed at least one TNF-alpha inhibitor is
being conducted in the United States. The first cohort of patients has been fully enrolled and the second cohort is
actively enrolling.
Tier 2 Product Candidates
MSC-100-IV is also being developed for the treatment of biologic refractory Crohn’s disease. A Phase 3 trial is ongoing.
MPC-25-IC consists of 25 million MPCs administered by intracoronary infusion into a patient during an angioplasty
procedure. This product candidate is being developed in conjunction with Teva. The Phase 2 allogeneic trial for myocardial
infarction is actively enrolling patients.
MPC-25-Osteo for spinal fusion is a Phase 3-ready product candidate consisting of 25 million MPCs delivered on a
collagen ceramic carrier material into the disc space with stabilizing hardware.
MPC-CBE is being evaluated to expand hematopoietic precursors from cord blood for transplantation in hematological
cancer patients. A Phase 3 study is actively enrolling patients across multiple sites in the United States.
Pipeline Technologies
In addition to establishing what we believe to be the most advanced regenerative medicine product portfolio in the industry,
we have also strategically targeted the acquisition of rights to technologies that are complementary to and synergistic
with our MLC platform. The aim of this activity is to maintain what we see as our technology leadership position in the
regenerative medicine space, while simultaneously managing the life-cycle of our current lead programs and expanding
our targeted disease applications in areas such as immuno-oncology.
Manufacturing Operations
Manufacturing scale-up is a major focus for Mesoblast in order to meet projected commercial demands and reduce
costs for supply.
Our manufacturing strategy for our cell-based product candidates is focused on the following objectives.
• Clear product delineation by creating distinct products using discrete manufacturing processes, culture conditions,
formulations, routes of administration, and/or dose regimens.
• Establishing proprietary commercial scale-up and supply to meet increasing demand.
•
Implementing efficiencies and yield improvement measures.
• Maintaining regulatory compliance with best practice.
• Establishing and maintaining multiple manufacturing sites for product supply risk mitigation.
Mesoblast has developed manufacturing processes employing both two dimensional (2D) cell stack and three dimensional
(3D) bioreactor technologies that we expect will enable production at commercial scale with reproducibility, batch-to-batch
consistency and well-defined potency and release assays. Our manufacturing processes are designed to meet stringent
criteria set by international regulatory agencies.
The main focus and progress in the last 12 months have been in the development of 3D bioreactor manufacturing
processes, with greater capacity to improve efficiency and yields, and the development of a proprietary serum-free media
that has the potential to greatly enhance the yields achieved in manufacturing of product candidates and to eliminate
source material constraints.
15
Intellectual Property
Mesoblast continued to strengthen and extend the reach of its patent portfolio in the 2015 financial year increasing
the number of patent or patent applications to 652 across 67 patent families, covering the major healthcare markets
of the United States, Europe and Japan.
In the 2015 financial year, Mesoblast has been granted 33 new patents including nine in the United States, six in Japan,
five in China and 13 in other jurisdictions. Among these new patents are:
• a new Japanese patent covering the use of MPCs for the formation and repair of blood vessels in ischemic tissues,
and providing exclusive commercial rights in Japan through to at least 29 March 2024 (with potential for patent
term extension);
• a new US patent covering the use of MPCs in the treatment of degenerated intervertebral discs, and providing exclusive
commercial rights through to June 2029 (with potential for patent term extension).
The intellectual property portfolio includes broad coverage for our product candidates including composition of matter and
manufacturing processes (138 patents or patent applications valid through to at least 2024 to 2035), specific therapeutic
applications (378 patents or patent applications valid to at least 2035) and complementary technologies and additional
candidates (136 patents or patent applications through to at least 2024 to 2032).
We believe our robust intellectual property delivers commercial advantages and long-term protection for our product
candidates based on our proprietary technologies. Additionally this supports our corporate strategy to target large, mature
and emerging healthcare markets for our exploratory therapeutic product candidates.
Corporate
During the 2015 financial year, we continued to work closely with our strategic partners to support the development and
potential commercialization of our numerous product candidates.
We were pleased that Celgene Corporation, a global biopharmaceutical company engaged in the development and
commercialization of innovative therapies for the treatment of cancer and immune-inflammatory related diseases, chose
to make an investment in Mesoblast. Celgene acquired a 4.5 % stake, purchasing 15.3 million ordinary shares for a
consideration of A$58.5 million/USD45 million.
Mesoblast was selected by the Japan External Trade Organization (JETRO) to receive assistance for a specially tailored
market and government incentive roadmap aimed at providing a more attractive business environment. Japan is a major
market for our cell-based therapeutics and offers near-term potential for product approvals and revenues.
Our People
Fundamental to our business execution strategy are our product-focused, multidisciplinary teams focused on bringing
our diverse range of products to market as soon as possible.
Our management team is highly skilled in stem cell biology, clinical development and product commercialization.
Through prior employment at leading drug development companies and regulatory agencies, our team has
substantial experience in the clinical development, manufacturing, regulatory management and commercialization
of biopharmaceuticals.
We are a global organization. Our clinical development center is in the United States, our manufacturing hub in conjunction
with our external partner Lonza is in Singapore, and our corporate headquarters is located in Australia.
Additional detail about our people is provided in a section on ‘Our Talent’ within the Remuneration Report.
16
Financial Review
Loss before income tax
Loss before income tax
Income tax expense
Loss after income tax
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
119,368
–
119,368
80,953
5
80,958
38,415
(5)
38,410
Loss after income tax was $119.4m for the year ended 30 June 2015 compared with $81.0m for the year ended
30 June 2014, an increase of $38.4m. This increase reflects the continued clinical development of our programs as
they transition to late-stage development and our continued investment in resources to execute our clinical programs.
Further detail is explained in the following sections.
Revenue from continuing operations
Revenues were $23.7m for the year ended 30 June 2015, compared with $26.0m for the year ended 30 June 2014,
a decrease of $2.3m. The following table shows the movement within revenue for the year ended 30 June 2015 and
2014, together with the changes in those items.
Commercialization revenue
Milestone revenue
Interest revenue
Revenue from continuing operations
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
18,199
2,284
3,265
23,748
16,410
–
9,570
25,980
1,789
2,284
(6,305)
(2,232)
The $1.8m increase in commercialization revenue from the year ended 30 June 2015 compared with 30 June 2014 is due
to the effect of foreign exchange rate movement. Commercialization revenue is recorded in USD and there has been no
change in the underlying USD amount recorded in the year ended 30 June 2015 when compared with the year ended
30 June 2014.
The $2.3m increase in milestone revenue has been recognized upon our partner, JCR, achieving a substantive milestone
being the filing for marketing approval of MSC product JR-031 in Japan. No further performance obligations are required
of the Group in relation to this revenue.
The $6.3m decrease in interest revenue from the year ended 30 June 2015 compared with 30 June 2014 is driven by a
decline in cash reserves and through the Group holding a higher proportion of cash reserves in USD compared with AUD in
the year ended 30 June 2015, when compared with the year ended 30 June 2014. These changes in cash reserve holdings
decreased revenue as yields on USD cash deposits are lower than yields on AUD cash deposits. The Group increased the
proportion of cash reserves held in USD to reduce currency risk. Currency risk is minimized by ensuring the proportion of
cash reserves held in for each currency matches the expected rate of spend of each currency.
Other income
Other income was $18.8m for the year ended 30 June 2015, compared with $11.1m for the year ended 30 June 2014,
an increase of $7.7m. The following table shows movements within other income for the year ended 30 June 2015 and
2014, together with the changes in those items:
Foreign exchange gains
Research & development tax incentive income
Other revenue
Rental income
Release of excess provision for services
Other income
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
12,846
5,309
523
122
–
18,800
–
8,595
–
–
2,524
11,119
12,846
(3,286)
523
122
(2,524)
7,681
17
$12.8m foreign exchange gains were recognized for the year ended 30 June 2015, compared with nil for the year ended
30 June 2014. For the year ended 30 June 2015 the Group recognized a foreign exchange gain due to movements in
exchange rates as the AUD depreciated against the USD during the year ended 30 June 2015. We hold certain cash and
term deposit balances in USD, resulting in foreign exchange gains on the revaluation of foreign currency denominated
monetary assets and liabilities. As of 30 June 2015, in addition to our AUD cash reserves we held a total of USD70.6m of our
cash reserves in USD. For the year ended 30 June 2014 the net result of foreign exchange movements for the Group was a
$4.2m loss and this loss was recorded in Other expenses.
Research & development tax incentive income decreased by $3.3m from $8.6m for the year ended 30 June 2014 to $5.3m
for the year ended 30 June 2015. We have recognized incentive income pertaining to the eligible expenditure undertaken
in each of these periods. At each period end management estimates the refundable tax offset available to us based on
available information at the time. This estimate is also reviewed by external tax advisors. Of the $5.3m Research and
development tax incentive recorded in other income for the year ended 30 June 2015, $0.6m relates to a change in
the original estimate of the Research and development tax incentive income we estimated we would receive from the
Australian Government for the year ended June 30, 2014.
Other revenue increased by $0.5m for the year ended 30 June 2015 as we recognized a one-off insurance recovery.
Rental income increased by $0.1m for the year ended 30 June 2015 as we entered into a sublease agreement for
a portion of the Melbourne office space in December 2014.
For the year ended 30 June 2014, other income includes a one off release of a provision of services that has been
settled during the year. The settlement was $2.5m less than the recorded provision.
Expenses from continuing operations
Expenses from continuing operations were $161.9m for the year ended 30 June 2015, compared with $118.1m for the year
ended 30 June 2014, an increase of $43.8m. The following table shows the movement within expenses from continuing
operations for the year ended 30 June 2015 and 2014, together with the changes in those items.
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
Research and development
Manufacturing commercialization
Management and administration
Finance costs
Other expenses
77,593
29,206
36,172
10,529
8,416
55,305
27,608
26,562
4,329
4,248
Expenses from continuing operations
161,916
118,052
22,288
1,598
9,610
6,200
4,168
43,864
Research and development expenses
Research and development expenses were $77.6m for the year ended 30 June 2015, compared with $55.3m for the year
ended 30 June 2014, an increase of $22.3m. The $22.3m net increase in Research and development expenses reflects the
continued clinical development of the MSC assets acquired from Osiris, the clinical advancement of our MPC programs as
they transition to late-stage development, and our continued investment in resources to execute our clinical programs.
Third party costs
Product support costs
Intellectual property support costs
Research and development expenses
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
38,583
35,711
3,299
77,593
22,251
30,078
2,976
55,305
16,332
5,633
323
22,288
Third party costs, which consist of all external expenditure on our research and development programs, have increased by
$16.3m for the year ended 30 June 2015 compared with the year ended 30 June 2014.
Of this $16.3m, $14.8m of the increase in third party costs for the period relates to the advancement of our Tier 1
products, and in particular the clinical programs for CDLBP and aGVHD. Third party costs for the MPC-150-IM product for
CHF are predominantly funded by our collaborators, Teva (advanced heart failure) and the NIH (end-stage heart failure
18
with mechanical support). Third party costs for our Tier 2 and pipeline products increased by $1.5m for the year ended
30 June 2015, compared with the year ended 30 June 2014 as the ongoing Tier 2 clinical trials and pipeline activities
progressed during the period.
Product support costs, which consist primarily of salaries and related overhead expenses for personal in research and
development functions, have increased by $5.6m for the year ended 30 June 2015 compared with the year ended
30 June 2014. This increase is across all programs primarily reflecting the costs of the additional resources required to
run the MSC-100-IV product late-stage programs acquired in October 2013, together with increased development costs for
our MPC-06-ID product for CDLBP as we progress to Phase 3 clinical development. In the year ended 30 June 2015, full
time equivalents increased by 18 from 64 for the year ended 30 June 2014 to 82 for the year ended 30 June 2015.
Also included in research and development expenses are intellectual property support costs, which consist of payments
to our patent attorneys to progress patent applications and all costs of renewing our granted patents, which have risen by
$0.3m in the year ended 30 June 2015 compared with the year ended 30 June 2014. This increase reflects the purchase of
MSC patent families from Osiris.
Manufacturing commercialization expenses
Manufacturing commercialization expenses were $29.2m for the year ended 30 June 2015, compared with $27.6m for the
year ended 30 June 2014, an increase of $1.6m.
MSC-based manufacturing commercialization
MPC-based manufacturing commercialization
Manufacturing commercialization support expenses
Manufacturing commercialization
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
14,249
10,645
4,312
29,206
3,615
20,171
3,822
27,608
10,634
(9,526)
490
1,598
MSC-based manufacturing commercialization expenses, which consist of fees paid to our contract manufacturing
organizations and laboratory supplies used in manufacturing commercialization of our MSC-based products, increased
by $10.6m for the year ended 30 June 2015 compared to the year ended 30 June 2014. This increase was due to the
MSC assets not being acquired until October 2013 and as a consequence expenditure on the MSC-based manufacturing
commercialization expenses only commenced after this date. In the year ended 30 June 2015, expenditure was incurred
on production and the manufacturing development process in anticipation of upcoming clinical and commercial
production requirements.
This abovementioned increase was offset by a decrease of $9.5m on MPC-based manufacturing commercialization
expenses. MPC-based manufacturing commercialization expenses consist of fees paid to our contract manufacturing
organizations and laboratory supplies used in manufacturing commercialization of our MPC-based products. The decrease
in these expenses was due to a reduction in clinical grade production for MPC-based products as we focused on
establishing the manufacturing process for our newly acquired MSC-based products.
Manufacturing commercialization support expenses, which consist primarily of salaries and related overhead expenses for
personal in manufacturing commercialization functions, increased by $0.5m for the year ended 30 June 2015 compared
with the year ended 30 June 2014 as full time equivalents increased by 2 from 8 for the year ended 30 June 2014 to 10 in
the year ended 30 June 2015.
Management and administration
Management and administration expenses were $36.2m for the year ended 30 June 2015, compared with $26.8m for the
year ended 30 June 2014, an increase of $9.4m.
Labour and associated expenses
Corporate overheads
Legal and professional fees
Management and administration
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
17,374
11,921
6,877
36,172
13,654
8,465
4,660
26,779
3,720
3,456
2,217
9,393
19
Labour and associated expenses increased as a result of increased full time equivalents during the year ended
30 June 2015. Corporate overheads also increased as a result of increased full time equivalents, rent and depreciation
expenses. Full time equivalents increased by 5 from 22 for the year ended 30 June 2014 to 27 for the year ended
30 June 2015.
Legal and professional fees increased on intellectual property management and associated legal, taxation and accounting
compliance advice.
Finance costs
Finance costs of $10.5m in the year ended 30 June 2015 represent the change in fair value of contingent consideration
financial liabilities pertaining to the acquired MSC assets of Osiris. These costs relate to the unwinding of the risk adjusted
discount as the time period shortens between the valuation date and the potential settlement date of the contingent
consideration. With respect to future milestone payments, contingent consideration will be payable in cash or shares at
our discretion. With respect to commercialization, product royalties will be payable in cash which will be funded from the
profits generated.
Other expenses
Other expenses were $8.4m for the year ended 30 June 2015 compared with $4.3m for the year ended 30 June 2014,
an increase of $4.1m.
The $8.4m expense recognized in the year ended 30 June 2015 is due to the remeasurement of contingent consideration
pertaining to the acquisition of assets from Osiris. This remeasurement expense is as a result of changes to the key
assumptions of the contingent consideration valuation such as market population, market penetration, product pricing and
developmental timelines. The net result of changes to the key assumptions was an increase in the valuation of contingent
consideration payable to Osiris on royalties from sales and on the achievement of certain pre-determined milestones as
we draw closer to potential product approval.
The $4.3m expense recognized in the year ended 30 June 2014 relates to foreign exchange losses due to movements
in exchange rates as the AUD appreciated against the USD during the year ended 30 June 2014.
Statement of cash flows
Net cash outflows in operating activities
Net cash outflows in investing activities
Net cash inflows in financing activities
Net decrease in cash and cash equivalents
Foreign exchange gains on the translation of foreign bank accounts
Decrease in cash and cash equivalents after foreign exchange
Net cash outflows in operating activities
30 June 2015
$’000
30 June 2014
$’000
Movement
$’000
(121,709)
(5,612)
59,413
(67,908)
15,656
(52,252)
(81,861)
(40,809)
2,430
(120,240)
1,325
(118,915)
(39,848)
35,197
56,983
52,332
14,331
66,663
Net cash outflows for operating activities were $121.7m for the year ended 30 June 2015, compared with $81.9m for
the year ended 30 June 2014, an increase of $39.8m. Outflows increased by $21.8m due to an increase in payments to
suppliers and employees for the advancement of our clinical programs and manufacturing commercialization costs for
our MPC and MSC programs, as they transition to late-stage development and our continued investment in associated
resources. Outflows increased by $5.7m due to payments for fair value adjustments to contingent consideration subsequent
to the business combination measurement period. Inflows decreased as interest receipts reduced by $9.1m due to a
decline in cash reserves and through the Group holding a higher proportion of cash reserves in USD compared with AUD in
the year ended 30 June 2015, when compared with the year ended 30 June 2014. Inflows decreased as receipts for the
research and development tax incentive reduced by $3.6m due to the receipts of both the FY2012 and FY2013 claims
occurring in the year ended 30 June 2014, while only the FY2014 claim was received in the year ended 30 June 2015.
Inflows increased by $0.4m due to receipts from other operating revenue items.
20
Net cash outflows in investing activities
Net cash outflows for investing activities were $5.6m for the year ended 30 June 2015, compared with $40.8m for the year
ended 30 June 2014, a decrease of $35.2m. $33.1m of the decrease was due to a reduction in payments for business
combinations. $2.1m decrease was due to payments for deposits on commencement of leases in the year 30 June 2014
for our New York and Melbourne offices.
Net cash inflows in financing activities
Net cash inflows for investing activities were $59.4m for the year ended 30 June 2015, compared with $2.4m for the
year ended 30 June 2014, an increase of $57.0m. $57.8m of the increase relates to the placement of shares in the year
ended 30 June 2015. Celgene Corporation, a global biopharmaceutical company engaged in the development and
commercialization of innovative therapies for the treatment of cancer and immune-inflammatory related diseases, bought
$58.5 million Mesoblast stock in a share placement agreement. This increase was offset by a $0.8m decrease in receipts
from the exercise of the employee share options.
Earnings per share
Basic losses per share
Diluted losses per share
Business Strategies and Prospects for Future Years
The Company is focused on five core strategic imperatives:
• Creating clinically differentiated products
• Bringing multiple, late-stage products to market
• Enabling manufacturing scale-up to meet demands
30 June 2015
Cents
30 June 2014
Cents
(37.20)
(37.20)
(25.34)
(25.34)
• Enhancing the likelihood of commercial success by building strategic partnerships; and
• Sustaining a culture of shared leadership and accountability.
In future years, we will continue to develop our late-stage programs through to market launch. We will continue to progress
our Tier 2 and pipeline portfolios to ensure the Company’s products continue to be replenished.
Business Risks
Mesoblast is deeply committed to ensuring the safety of its patients and staff, whilst it continues its development of our
MPC platform technology.
The Group is currently a loss-making entity in product development phase. The long-term financial success of the Group
will be measured ultimately on the basis of profitable operations. Key to becoming profitable is the successful development
and commercialization of our product portfolio, establishment of efficient manufacturing operations, achieving product
distribution capability, and overall, the ability to attract funding to support these activities.
The following specific risks have the potential to affect the Group’s achievement of the business goals detailed above.
This is not an exhaustive list. The Board and management continually review risks of the business and their potential impact.
Product risk
An inherent risk to companies operating in the biotechnology industry is the risk that products being developed are not
safe and effective and therefore will not gain approval for sale from various regulatory bodies. To date, the Group has not
encountered any safety concerns from the treatment of patients with our products and the Group continues to rigorously
test for both safety and efficacy in its clinical trials.
Manufacturing risk
Disruption to manufacturing operations could impact the Group’s ability to deliver clinical grade product required for clinical
trials and, in the future, MPC and MSC products for commercial sale. The Group has mitigated this risk through increasing
the balance of stock on hand and ensuring parallel production of products across approved manufacturing facilities
21
in various jurisdictions in addition to the enforcement of standard operating procedures and monitoring of the current
manufacturing process.
There is a risk that the Group may not be able to manufacture our products in quantities sufficient for development and,
if our products are approved, commercialization. To mitigate this risk, additional manufacturing processes are currently
being investigated to supplement and optimize the current process.
Commercialization risk
The speed and quality of our clinical trial execution are the primary drivers of our ability to transform into a commercial
stage company. In addition, the future profitability of our products depends largely upon the reasonable achievement of
various business assumptions, including product price (reimbursement), size of market, availability of raw materials in the
manufacturing process, and cost of goods sold.
These drivers and assumptions also underpin the carrying value of our in-process research and development on the
Group’s balance sheet, and are reviewed regularly when the Group tests for asset impairment. There is a risk that
these assumptions prove to be materially incorrect. Mesoblast seeks to mitigate this risk by developing highly efficient
manufacturing processes, eliminating scarce resources from manufacturing processes, conducting payor and market
research, and engaging with regulators and reimbursement agencies.
Partnering risk
Future product sales in certain indications are dependent on maintaining existing commercial relationships. In addition,
future product sales may also be dependent on the ability of the Group to attract new partners, who will in some cases,
be required to help development and distribute our products. The Group has ongoing discussions with a variety of potential
commercial partners and will proactively seek to broaden strategic alliances when the timing is right.
Funding risk
The Group does not currently earn revenues from product sales. Accordingly, the ability of the company to successfully
bring products to market ultimately relies on having access to continued sources of funding, including from partners and
investors. The Company ensures it conducts a rigorous annual budget process and has a rolling three-year funding forecast.
Key personnel risk
Execution of the Group’s corporate strategy could be impacted if the Group did not retain its present CEO and certain
members of staff. To mitigate this risk, the Board of Directors play an active role in directing the business of the
organization. In addition, the Group has significantly expanded its human capital in the last two years. As we get nearer
to commercialization the dependency on key specialists should lessen as individuals with broad industry expertise are
progressively brought into the company.
Intellectual property risk
Future product sales are impacted by the extent to which there is patent protection over the products. Patent coverage risk
includes the risk that competitive products do not infringe the Group’s intellectual property rights, and also the risk that our
products do not infringe on other parties’ products. The Group constantly monitors its patent estate and the intellectual
property competitive landscape, both internally and through the use of professional specialists.
Regulatory risk
The Group operates in a highly regulated industry. Pharmaceutical products are subject to strict regulations of regulatory
bodies in the U.S., Europe, Asia and Australia. In addition our operations may be subject to local laws and regulations,
including and not limited to taxation, environmental and anti-corruption laws. Non-compliance with laws and regulatory
standards and requirements could disrupt our operations and harm our operating results. The Group has quality assurance
processes in place both internally and through the use of external independent professional specialists.
Significant Changes in the State of Affairs
There were no significant changes in the state of affairs of the Group during the 2015 financial year.
Matters Subsequent to the End of the Financial Year
There are no events that have arisen after 30 June 2015 and prior to the signing of this financial report that would likely
have a material impact on the financial results presented.
22
Likely Developments and Expected Results of Operations
Our continued progress in clinical development brings our leading products closer to approval and commercial reality.
In addition to final development, we are now focusing on a Go-To-Market strategy for these products to maximise
commercial returns. These lead indications continue to be underpinned by our innovative core technologies and a
robust and growing intellectual property portfolio.
In addition our manufacturing capabilities with our strategic partner have been progressed over the past 12 months to meet
clinical and commercial product supply in line with our timing expectations.
Environmental Regulations
Mesoblast’s operations are not subject to any significant environmental regulations under either Commonwealth of
Australia or State/Territory legislation. The Board considers that adequate systems are in place to manage the Group’s
obligations and is not aware of any breach of environmental requirements as they relate to the Group.
Dividends
No dividends were paid during the course of the financial year. There are no dividends or distributions recommended
or declared for payment to members, but not yet paid, during the year.
Information on Directors
Directors of the Company in office at any time during or since the end of the year (unless specified) were:
Name
Position
William M. Burns
Non-Executive Director
Silviu Itescu
Brian Jamieson
Donal O’Dwyer
Eric Rose
Michael Spooner
Ben-Zion Weiner
Executive Director
Non-Executive Chairman
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
23
William M. Burns BA
Non-Executive Director
Silviu Itescu MBSS FRACP, FACP, FTSE
CEO (Executive Director)
Experience and expertise
Experience and expertise
Mr Burns has served on the Board of Directors since
2014. He has spent his entire management career at the
Beecham Group and F. Hoffmann-La Roche Ltd. Mr Burns
was Chief Executive Officer of Roche Pharmaceuticals
from 2001 to 2009, when he joined the Board of
Directors of F. Hoffmann-La Roche Ltd. until he retired in
2014. He has also served on the Board of Directors of
Chugai Pharmaceutical Co. and Genentech from 2002
to 2014, and Crucell from 2010 to 2011. Mr Burns is
also a member of the Oncology Advisory Board of the
Universities of Cologne/Bonn. He is the Chairman of the
Board of Directors of Biotie Therapies Corp. and is a
Non-Executive Director of Shire PLC. In October 2014,
Mr Burns was appointed a trustee of the Institute of
Cancer Research, London, UK.
Other current directorships of listed public companies
Chairman, Biotie Therapeutics (Finland) (since 2014)
Non-Executive Director, Shire (UK) (since 2010)
Former listed public company directorships in the
last 3 years
Director, Roche Holdings AG (2010-2014)
Director, Chugai Pharmaceuticals (2002-2014)
Special responsibilities
Member of the Science & Technology Committee
Dr Itescu has served on the Board of Directors since
the Company’s founding in 2004, was Executive
Director from 2007, and became Chief Executive
Officer and Managing Director in 2011. Prior to founding
Mesoblast in 2004, he established an international
reputation as a physician scientist in the fields of stem
cell biology, autoimmune diseases, organ transplantation,
and heart failure. Dr Itescu has been a faculty member
of Columbia University in New York, and the University of
Melbourne and Monash University in Australia. In 2013,
Dr Itescu received the inaugural Key Innovator Award from
the Vatican’s Pontifical Council for Culture for his leadership
in translational science and clinical medicine in relation
to adult stem cell therapy. In 2011, he was named
BioSpectrum Asia Person of the Year. Dr 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 life sciences companies.
Other current directorships of listed public companies
None
Former listed public company directorships in the
last 3 years
None
Special responsibilities
Chief Executive Officer
Member of the Science & Technology Committee
24
Information on Directors (continued)
Brian Jamieson FCA
Non-executive Chairman
Donal O’Dwyer BE, MBA
Non-executive Director
Experience and expertise
Experience and expertise
Mr Jamieson has served on the Board of Directors
as Chairman since 2007. He was Chief Executive of
Minter Ellison Melbourne and a partner of the Minter Ellison
Revenue Group from 2002 to 2005. Mr Jamieson retired
as Chief Executive of Minter Ellison Melbourne on
December 31, 2005. Prior to joining Minter Ellison, he
was Chief Executive Officer at KPMG Australia from
1998 to 2000, Managing Partner of KPMG Melbourne
and Southern Regions from 1993 to 1998 and
Chairman of KPMG Melbourne from 2001 to 2002.
Mr Jamieson was also a KPMG Board Member in Australia,
and a member of the USA Management Committee.
He is Chairman of Sigma Pharmaceuticals Limited and
a Non-Executive Director of the Tatts Group Limited.
Mr Jamieson is also a Director and Treasurer of the
Bionic Ear Institute. He is a fellow of the Institute of
Chartered Accountants in Australia and a Member
of the Institute of Company Directors.
Other current directorships of listed public companies
Chairman, Sigma Pharmaceuticals Limited (since 2005)
Non-Executive Director, Tatts Group Limited (since 2005)
Former listed public company directorships in the
last 3 years
Non-Executive Director, Tigers Realm Coal Limited
(2011-2014)
Mr O’Dwyer has served on the Board of Directors since
2004. He has over 25 years of 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. Prior to joining Cordis, he worked for 12
years with Baxter Healthcare, rising from plant manager
in Ireland to president of the Cardiovascular Group,
Europe, now Edwards Lifesciences. He is a qualified
civil engineer, has a MBA and is on the Board of
Directors of a number of life sciences companies including
Cochlear Limited, Atcor Medical Holdings Ltd and Fisher &
Paykel Healthcare Ltd.
Other current directorships of listed public companies
Non-Executive Director, Atcor Medical Holdings Limited
(since 2004)
Non-Executive Director, Cochlear Limited (since 2005)
Non-Executive Director, Fisher & Paykel Healthcare
(since 2013)
Former listed public company directorships in the
last 3 years
Non-Executive Director, Sunshine Heart (2004-2013)
Non-Executive Director, OZ Minerals Limited (2004-2015)
Special responsibilities
Special responsibilities
Chairman of the Board
Member of the Audit & Risk Committee
Member of the Nomination & Remuneration Committee
Chairman of the Nomination & Remuneration Committee
Member of the Audit & Risk Committee
25
Eric A. Rose MD
Non-executive Director
Michael Spooner BCOM ACA
Non-executive Director
Experience and expertise
Experience and expertise
Dr Rose has served on the Board of Directors since
2013. He is currently Chairman and Chief Executive
Officer of SIGA Technologies and Executive Vice President,
Life Sciences at MacAndrews & Forbes, Inc., the holding
company of Ronald O. Perelman. From 2008 through 2012,
Dr Rose served as the Edmond A. Guggenheim Professor
and Chairman of the Department of Health Evidence and
Policy at the Mount Sinai School of Medicine. From 1994
through 2007, he served as Chairman of the Department of
Surgery and Surgeon-in-Chief of the Columbia Presbyterian
Center of New York Presbyterian Hospital. From 1982
through 1992, Dr Rose led the Columbia Presbyterian heart
transplantation program in the United States. He currently
sits on the Board of Directors of ABIOMED.
Other current directorships of listed public companies
Chairman, SIGA Technologies (since 2007)
Non-Executive Director, ABIOMED, Inc. (2007-2012,
2014-present)
Former listed public company directorships in the
last 3 years
None
Special responsibilities
Mr Spooner has served on the Board of Directors since
2004. During this period he has filled various roles including
as Chairman from the date of the ASX public listing in
2004 until 2007, Chair of the Audit and Risk Committee
as well as a member of the Remuneration Committee.
Over the past several years Mr Spooner has served
on the Board of Directors in various capacities at
several Australian and international biotechnology
companies, including BiVacor Pty Ltd (2009-2013),
Advanced Surgical Design & Manufacture Limited
(2010-2011), Peplin, Inc. (2004-2009), Hawaii Biotech,
Inc. (2010-2012), Hunter Immunology Limited
(2007-2008), and Ventracor Limited (2001-2003).
Prior to returning to Australia in 2001, he spent much
of his career internationally where he served in various
roles including as a partner to PA Consulting Group, a
United Kingdom-based management consultancy and
a Principal Partner and Director of Consulting Services
with PricewaterhouseCoopers (Coopers & Lybrand) in
Hong Kong. In addition, Mr Spooner has owned and
operated several international companies providing
services and has consulted to a number of American
and Asian public companies.
Other current directorships of listed public companies
Chairman of the Science & Technology Committee
None
Former listed public company directorships in the
last 3 years
None
Special responsibilities
Chairman of the Audit & Risk Committee
Member of the Nomination & Remuneration Committee
26
Information on Directors (continued)
Ben-Zion Weiner BSc, MSc, PhD
Non-executive Director
Experience and expertise
Dr Weiner has served on our Board of Directors since
2012. In a 37-year career at Teva Pharmaceutical
Industries Ltd, he held various senior research and
development positions, including Senior Vice President
of Global Research and Development. Dr Weiner twice
received the Rothschild Prize for industrial innovation – for
the development of Copaxone for the treatment of multiple
sclerosis, and alpha D3 for kidney and bone disorders.
He is on the Board of Directors at Novaremed Ltd.,
the scientific advisory board at E-QURE Corp. and
Breed IT, Corp. and has served on the Board of
Directors at Geffen Biomed Investments Ltd (2010-2013),
XTL Biopharmaceuticals Limited (2012-2013) and Breed
IT, Corp.
Other current directorships of listed public companies
None
Former listed public company directorships in the
last 3 years
Director, Gefen Biomed Investments Ltd (2010-2014)
Director, XTL Biopharmaceuticals Ltd (2012-2014)
Director, BreedIT Ltd (2014)
Special responsibilities
Member of the Science & Technology Committee
27
Company Secretary
Charlie Harrison BA, LLB (HONS)
Mr Harrison joined Mesoblast as a legal counsel in 2013. He was previously a senior associate at the international law
firm Allens, working in their Hong Kong and Melbourne offices for nine years as a corporate lawyer. Mr Harrison has
an Arts/Law degree from the University of Melbourne. He was appointed Company Secretary in 2014.
Directors’ interests
The relevant interest(1) of each director in the share capital of the Company, as notified by the directors to the ASX in
accordance with section 205G(1) of the Corporations Act 2001, at the date of this report is as follows:
Director
William Burns
Silviu Itescu
Brian Jamieson
Donal O’Dwyer(2)
Eric Rose
Michael Spooner
Ben-Zion Weiner
Options over
Mesoblast Limited Mesoblast Limited
ordinary shares
ordinary shares
–
80,000
68,244,642
610,000
592,903
–
1,050,000
–
–
–
511,824
80,000
–
80,000
(1) As defined by section 608 of the Corporations Act 2001.
(2) Donal O’Dwyer exercised 287,903 options after 30 June 2015 (year-end) but prior to the date of this report.
Meetings of Directors
The number of meetings of the Group’s directors (including committee meetings of directors) held during the year ended
30 June 2015 and the numbers of meetings attended by each director were:
Board of directors
Audit & Risk
committee
Nomination &
Remuneration
committee
Science &
Technology
committee
Director
William Burns
Silviu Itescu
Brian Jamieson
Donal O’Dwyer
Eric Rose
Michael Spooner
Ben-Zion Weiner
A
12
12
12
12
12
12
12
B
11
12
12
12
10
12
10
A
–
–
12
12
–
12
–
B
–
–
12
12
–
12
–
A
–
–
5
5
–
5
–
B
–
–
5
5
–
5
–
A
3
3
–
–
3
–
3
B
3
3
–
–
3
–
3
A = Number of meetings held during the time the director held office or was a member of the committee.
B = Number of meetings attended by board/committee members.
– = Not a member of the relevant committee.
NB: Certain directors attended various committee meetings by invitation in addition to those shown above.
28
1. Remuneration Report
The Directors of the Company are pleased to present the 2014/15 Remuneration Report, which forms part of the Directors’
report and has been prepared in accordance with the relevant Corporations Act 2001 (Corporations Act) and accounting
standard requirements. The remuneration report has been audited as required by s308 (3C) of the Corporations Act 2001.
The remuneration report sets out remuneration information for the Company’s key management personnel (KMP) for FY15.
The notable change to the Company’s KMP reporting for FY15 is the inclusion of our Chief Financial Officer,
Paul Hodgkinson as other executive KMP.
1.1 Our Talent
Mesoblast is a pre-revenue company with headquarters and operations in Australia and significant clinical trial and
manufacturing operations in the United States and Singapore. Our principal activity is the research and development of
our Mesenchymal Lineage Adult Stem Cell (MLCs) technology platform characterized by distinct properties which enable
allogeneic or ‘off-the-shelf’ use. Given our business activity and current development stage, we generate losses each year
and are net users of cash.
We operate at the forefront of a highly specialized industry in which our people are the key to developing our proprietary
adult stem cell technologies. As we seek to attract and retain established leaders and emerging experts in an innovative
field, our remuneration framework is designed to be competitive worldwide and in particular within the United States
life sciences industry – where the majority of our employees are based. This remuneration framework also allows us
to meet both the expectations of our global shareholder base and the Australian regulatory framework by which the
Mesoblast Group is governed.
Employee profile
As at 30 June 2015, the Group has 115 (2014: 117) employees globally:
Employees by Education
Employees by Experience
Employees by Gender
Employees by Region
8
2
18
35
27
40
56
59
18
10
32
40
• PhD/MD
• Masters degree
• Bachelors degree
• Other
• Female
• Male
• Academia
• Corporate/Professional
• Other
• Pharma – Big Pharma
• Pharma – Specialty Biotech
• Regulatory/Agencies
9
26
• USA
• Australia
• Asia/EU
80
80 (70%) of our employees are based in the United States where the Group’s operational activities are concentrated.
Australia consists primarily of corporate headquarter activities with 26 (23%) employees, including the CEO and other
executive team members.
NEDs by Region
NEDs by Experience
Of the remaining employees, 8 (7%) are located in Singapore where our research and technology transfer activities
are growing and 1 is in Switzerland.
1
1
3
1
1
3
1
1
• Israel
• Switzerland
• USA
• Australia
• Big Pharma/Medical Tech
• Australian Capital Markets
• Professional Services
• Medical Doctor
Employees by Education
Employees by Experience
Employees by Gender
Employees by Region
40
56
59
8
2
18
35
27
18
10
32
40
• PhD/MD
• Masters degree
• Bachelors degree
• Other
Non-executive director profile
• Female
• Male
• Academia
• Corporate/Professional
• Other
• Pharma – Big Pharma
• Pharma – Specialty Biotech
• Regulatory/Agencies
9
26
• USA
• Australia
• Asia/EU
80
29
As at 30 June 2015, the Group has six non-executive Directors with diverse industry and regional experience, as the charts
below illustrate:
NEDs by Region
NEDs by Experience
1
1
1
1
1
1
3
• Big Pharma/Medical Tech
• Australian Capital Markets
• Professional Services
• Medical Doctor
3
• Israel
• Switzerland
• USA
• Australia
1.2 KMP
Mesoblast has evolved to a late stage biopharmaceutical company with five programs in active Phase 3 clinical studies
or Phase 3 ready. Throughout this evolution the CEO and our Board have set the strategy and direction of the company.
At 115 employees globally, the company has a fairly flat structure with 13 direct reports to the CEO, nine of whom form the
executive management team.
In June 2014, Paul Hodgkinson was appointed as Chief Financial Officer, reporting to the CEO. This appointment represents
a significant development for Mesoblast through the creation of an executive role responsible for guiding and directing
financial strategy, in conjunction with the Board and CEO and as such the Board designated him KMP with effect from
25 August 2014. Mr Hodgkinson has broad and high-level international pharmaceutical experience in all aspects of finance,
strategic planning, business development and licensing, manufacturing and supply chain, and procurement. Before joining
Mesoblast, Paul served as Chief Financial Officer and had full financial responsibility for the Novartis ANZ Group of
companies and divisions comprising Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics, Consumer and
Animal Health. Previously, he held a number of leadership roles with AstraZeneca in the United Kingdom, before being
appointed Chief Financial Officer for AstraZeneca Australia from 2006 to 2011.
Key management personnel, as defined in the Australian Accounting Standards Board 124 ‘Related Party Disclosures’
and the Corporations Act 2001, have authority and responsibility for planning, directing and controlling the activities of the
Company, directly or indirectly, and include any director (whether executive or otherwise).
30
With the above definition in mind, and recognizing the continuing role of the Board and CEO and CFO in guiding and
directing strategy, the Board has determined the key management personnel of the Group for FY 2015, as listed in
table below:
Name
Position
Non-executive directors
Change from last year
Brian Jamieson
Chair, Board of Directors
No change
Member, Nomination & Remuneration Committee
Member, Audit & Risk Committee
William Burns
Non-executive director
Member, Science & Technology Committee
Donal O’Dwyer
Non-executive director
Chair, Nomination & Remuneration Committee
Member, Audit & Risk Committee
Eric Rose
Non-executive director
Chair, Science & Technology Committee
Michael Spooner
Non-executive director
Chair, Audit & Risk Committee
Member, Nomination & Remuneration Committee
Changed committee
membership
26 August 2014.
No change
No change
No change
Ben-Zion Weiner
Non-executive director
No change
Member, Science & Technology Committee
Executive director
Silviu Itescu
CEO (executive director)
No change
Other Executive KMP
Paul Hodgkinson
Chief Financial Officer (CFO)
2. Remuneration Governance
Appointed as KMP
from 25 August 2014
2.1 Role of the Board and the Nomination & Remuneration Committee
The Board is responsible for Mesoblast’s remuneration strategy and approach. The Board established the Nomination
& Remuneration Committee (the Committee) as a committee of the Board. It is primarily responsible for making
recommendations to the Board on:
• Board appointments
• Non-executive director fees
• Executive remuneration framework
• Remuneration for executive directors, namely the CEO, and other key executives
• Short-term and long-term incentive awards
• Share ownership plans
The Committee’s objective is to ensure remuneration policies are fair and competitive and in line with similar industry
benchmarks whilst aligned with the objectives of the Company. The Committee seeks independent advice from
remuneration consultants as and when it deems necessary (see below).
31
Use of remuneration consultants
During FY15, the Nomination & Remuneration Committee engaged KPMG to provide the following remuneration advice
to assist the Board in decision making:
•
•
•
review and benchmarking in relation to the CEO’s remuneration;
review of FY14 Remuneration Report;
review of fee structure for overseas Non-executive directors;
• advice regarding transition of loan funded share plan for Australian participants; and
• disclosure advice for KMP.
The advice provided by KPMG does not constitute a ‘remuneration recommendation’ as defined in section 9B of the
Corporations Act 2001 as it relates to the provision of information and/or advice on the taxation, legal or accounting
implications of specific elements of the remuneration framework.
3. Non-Executive Director (NED) Remuneration
Our aim is to establish a Board comprised of global expertise in the biopharmaceutical industry and capital markets.
Therefore, our NED fees are based on the responsibilities and work involved with directing a company of Mesoblast’s
technological and geographical complexity, our financial position, regulatory and compliance context, and market practice.
In keeping with our aim to attract Directors with international experience, the Company sought, and obtained, shareholder
approval at our Annual General Meeting on 25 November 2014 for a grant of options to three relatively new non-executive
Directors. These grants are detailed in the tables in section 6.5.
3.1 NED fees and other benefits
NEDs receive fixed fees for their services, as approved by shareholders at the 2013 Annual General Meeting, not to exceed
a maximum fee pool of $1,250,000. Board and Committee fees are structured as outlined below which were adopted on
1 November 2013. This structure reflects advice provided by Towers Watson in October 2012 with reference to companies
of comparable size and complexity.
Fees (per annum) FY15
Board
Committee fees
Audit & Risk Committee
Nomination & Remuneration Committee
Science & Technology Committee
Chair
328,230
25,000
20,000
20,000
Member
128,250
12,500
10,000
10,000
NEDs do not receive performance-related remuneration and are not provided with retirement benefits other than statutory
superannuation. NEDs are reimbursed for costs directly related to conducting Mesoblast business. The key terms of
NED service are documented in a letter of appointment to the Board.
3.2 Performance review
The Board conducts periodic performance reviews of the Board and its operations as a whole. The last review was
conducted in FY14. This review encompassed feedback on the Chairman and individual NEDS as well as consideration
of Board succession planning, diversity and the breadth and sufficiency of skills represented on the Board.
32
4. Executive Remuneration
Mesoblast’s executive remuneration framework is designed to attract, reward and retain a highly specialised group of
individuals working at the top of their respective fields.
Mesoblast applies the following market and performance-based remuneration framework for all employees. This provides
cohesion across our global team through shared objectives and consistent communication.
Fixed Pay
Short-Term Incentive
Long-Term Incentive
Performance-based Remuneration
Description
Set according to each role’s
responsibilities, the incumbent’s
experience and qualifications,
their performance in the role and
regional market relativities.
Set at a target relative to fixed
pay and paid for individual
performance against annual
corporate and individual key
performance indicators (KPIs).
Executive KPIs are typically
milestone related as befitting a
pre-revenue company.
Considerations
Supplemented by statutory and
customary benefits relevant to
each region (eg, superannuation
in Australia; medical and
insurance in the US.)
STIs are typically set at a
smaller proportion of our total
target remuneration than LTIs to
conserve cash outflow.
Set at a target relative
to fixed pay based on
value at the time of
grant with consideration
to internal relativities.
Delivers value to the
participant through share
price growth. Only available
to select roles.
The Board exercises
discretion to adjust
LTI grants from the
target remuneration
mix if a decline in share
price would produce an
incongruous LTI quantum
(i.e. number of options).
Review
Reviewed annually for changes
in market relativities and the
individual’s performance and
growth in the role.
Annual outcomes are
assessed by the CEO (for
his direct reports) and the
Board (for the CEO) based on
Group performance against
KPIs.
Grants are reviewed
annually based on the
nature of the role, its
contribution to long-
term objectives and
individual performance.
Oversight
Individual outcomes are reviewed and approved first by the Nomination & Remuneration
Committee and then the Board.
Delivered as
Cash.
Cash.
Mesoblast equity
with a price premium
performance hurdle that
vests over three years.
4.1 Remuneration Mix
The CEO and CFO are designated as KMP due to the particular nature of their roles in planning, directing and controlling
the activities of the Company. Their target remuneration mix is as follows:
Base Salary
Short-Term Incentive
Long-Term Incentive
CEO
CFO
50% of Total Reward
50% of Total Reward
nil
40% of Total Reward
20% of Total Reward
40% of Total Reward
Performance-based Remuneration
33
The Board has customised the CEO’s remuneration mix in comparison with other executive KMP in recognition that
he continues to be Mesoblast’s single largest shareholder. The Board believes the CEO has sufficient exposure to the
Company’s share performance to align his interests in value creation. The Board reviews the CEO’s remuneration package
annually, including the remuneration mix.
The Nomination & Remuneration Committee retained KPMG to conduct a benchmarking study on CEO remuneration
in August 2014. The findings of this exercise show the CEO’s overall remuneration package resides between the 25th
percentile and the median of the comparison group. The comparison group included Australian-based companies with a
similar market capitalization to that of Mesoblast, of between $1bn to $1.5bn.
The CFO’s remuneration mix is a more typical executive remuneration package, reflecting a significant emphasis on LTI as
befitting a company in the development stage when conserving cash is a priority.
4.2 Performance-based Remuneration
Short-term Incentives (STIs)
To align the organisation around key shorter-term objectives that drive long-term shareholder value, the Board sets annual
key performance indicators (KPIs) for the CEO which also serve as the Company’s objectives. At the end of the financial
year the Board assesses the overall Company performance, and the CEO’s individual performance against these KPIs.
The achievement of these KPIs is assessed in the context of total corporate performance against budget which ensures
cost control is always part of the performance framework and is regularly measured and reported.
The Board approved KPIs for the CEO in the following performance categories for the financial year ended 30 June 2015:
Key Performance Indicator
Weighting %
Clinical trial management of Tier 1 and
Tier 2 studies – each with individual
enrolment and regulatory targets
(refer Review of Operations for further details)
Manufacturing achievements
• Advances in technology transfer
• Progress with commercial manufacturing capabilities
Financial performance
• company performance versus budget
• development of strategic and capital market initiatives
Organisational development
40%
25%
25%
10%
Achievement
Achieved
Substantially achieved
Substantially achieved
Achieved
The Board assessed the CEO’s performance on these FY15 KPIs as achieving 90% of his target STI. The CFO was
assessed as achieving 100% of his target STI. Other executives were assessed between 80% and 100% of their individual
STI targets.
The following table outlines a summary of the 2015 Short-Term Incentive Plan (STI)
What is the 2015 STI?
An incentive plan under which eligible employees are (subject to satisfaction of
specified performance measures) granted a cash amount, which is based on a
percentage of each participant’s fixed remuneration (determined according to role and
ability to influence the performance of the Group). Performance is assessed against a
combination of Group and individual measures.
When is the 2015 STI grant
paid to eligible employees?
The STI amount is paid to each participant who satisfies applicable performance
measures in August 2015, following assessment of performance against the
applicable measures during the 2014/15 performance period.
Who participates in the
2015 STI?
All employees hired on or before 31 March 2015 are eligible for consideration.
Employees hired during the year are recognised on a pro-rata basis.
34
Why does the Board consider
the 2015 STI an appropriate
incentive?
The STI is a globally recognised form of reward for management, aimed at ensuring
focus and alignment with Group goals and strategy. Based on both Group and
individual measures, and in conjunction with other factors, the Board believes that it
helps encourage and reward high performance.
What are the performance
conditions under the 2015 STI?
Individual performance is measured against the achievement of individual key
performance indicators, key corporate and budgetary milestones and achievement
of strategic goals all of which lead to long-term shareholder value creation.
What is the relationship
between Group performance
and allocation of STI?
At the end of the financial year our Board of Directors assesses our overall company
performance based on the achievement of our CEO’s KPIs. This assessment will
adjust how much of our bonus pool is eligible for allocation.
For example, if we achieve an 85% Company Performance assessment, then 85%
of the total bonus pool will be available for allocation to individual employees.
People Leaders evaluate individual performance contributions and make
recommendations of the bonus amount each employee should receive based on the
bonus pool they have available for allocation and with reference to individual target
bonus opportunities.
The assessment period is the financial year preceding the payment date of the STI
(i.e. 1 July to 30 June).
What is the period over
which Group performance
is assessed?
4.3 Long-term Incentives (LTIs)
In designing a LTI mechanism that is appropriate to our global team where 70% of our employees are based in the
United States, we seek to balance:
• Australian practice and governance expectations, where LTIs are expected to have performance hurdles other than
price and employment milestones alone;
• United States practices, where options are a widely distributed remuneration component, typically issued
without a price premium, performance hurdles or milestones, and which vest on a more regular basis (eg. rolling
monthly basis);
• A strong preference for a single global reward mechanism to maintain executive cohesion and teamwork; and
• Alignment with driving shareholder value.
In view of these factors we issue time based LTIs to executives at a price per share that is typically 10% higher than the five
day volume weighted average share price calculated at grant date. We believe this approach is appropriate at this stage
and that applying additional performance hurdles to our LTI programme would make it problematic for us to attract and
retain the people we need – particularly in the US – and would ultimately be negative for our company. This is an area we
continue to review and assess.
In Australia, most LTIs grants made prior to 1 July 2015 were made as limited recourse loan-funded shares of the
Company pursuant to the rules of the Loan-Funded Share Plan (LFSP). Changes to the tax treatment of employee share
schemes in Australia became effective on 1 July 2015. These changes alter the relevance of using a loan-funded share plan
for Australian participants. As a result Mesoblast returned to using a single plan, our Employee Share Option Plan (ESOP),
for all participants with effect from the offer made on 10 July 2015. Existing grants under the LFSP will generally remain on
foot until the grants vest and the loans have been repaid.
Outside Australia prior to 1 July 2015 and globally thereafter, LTIs consist of options over ordinary shares of the
Company under the rules of the ESOP. Both the ESOP and LFSP were approved by shareholders at the AGM held in
November 2013. Both plans operate in a similar manner, with the shares/options typically having a purchase/exercise price
premium applied and a three-year vesting schedule. Grants made prior to 1 July 2015 had a five year term. Recognising that
option grants in the US where the majority of our LTI participants reside typically have a ten year term, the grant made on
10 July 2015 was issued with a seven year term. The Board considers the appropriate term at the time each grant
is approved.
35
Executive LTI allocations are determined with consideration to the nature of the role within our organisation, market value of
LTI allocations for comparable roles, previous grants made and the remuneration mix described above where a modified
Black-Scholes calculation is used to determine the value of the option. If LTI valuations decline due to a decline in our share
price the Board has taken a view that this should not automatically drive an increase in LTI grants to maintain the desired
remuneration mix. In recent years LTI grants have remained stable in number of options/loan funded shares reflecting the
Board’s assessment that this grant size will deliver the desired value to the executives over time.
Loan-funded shares are issued with new equity, and the Company does not buy shares on-market under this plan in an
effort to conserve cash.
Summary of the key features of the ESOP and LFSP (LTI Plans):
Why does the Board consider
the LFSP/ESOP an appropriate
long-term incentive?
The LTI Plans are designed to reward participants for Group performance and to align
long-term interests of shareholders, participating employees and the Group, by linking
a significant proportion of at-risk remuneration to the Group’s future performance,
currently assessed over a three-year period from the date of grant of the shares.
In what circumstances are
LTI entitlements forfeited?
The LTI will be forfeited upon cessation of employment prior to the conclusion of
the performance period in circumstances where a participant breaches any term of
the Loan Agreement (in the case of LFSP) or is a bad leaver. Bad leaver is defined
as part of the Plan rules and covers serious misconduct. If the Board designate a
former employee as a Bad Leaver they forfeits all rights, entitlements and interests in
any unexercised Options, both vested and unvested. Otherwise a leaver may retain
vested loan funded shares or options subject to repayment of the loan or exercising
the option within 60 days of cessation of employment or within a longer period if so
determined by the Board.
What are the performance
conditions under the
LTI Scheme?
Shares and options are issued at a price per share that is typically 10% higher than
the five day volume weighted average share price calculated at grant date. In addition
participants have to remain in employment with the Company for the LTIs to vest.
Why did the Board choose
the above performance
conditions/ hurdles?
High volatility makes it difficult to set meaningful performance hurdles other than
price premiums, and applying such hurdles may have a severe impact on the
competitiveness of remuneration.
What is the relationship
between Group performance
and allocation of shares/
options?
Equity-based remuneration is an integral part of remuneration in the biotechnology
industry as they reward share price growth and seek to conserve cash. The Board
believes that share price growth is an appropriate measure of success as it is the
prime driver of investment in the biotechnology sector, and is simply and clearly
rewarded using equity-based remuneration.
What is the maximum number
of shares/options that may
be granted to a participant to
the LTI scheme?
The maximum number of shares or options that may be granted is determined by the
level of equity based remuneration applicable to each applicant.
When do the shares/
options vest?
Shares/options vest in three equal tranches, one year, two years and three years after
the date of grant, provided performance conditions are met.
Is the benefit of participation
in the LTI scheme affected by
changes in the share price?
Yes, participants in the both the ESOP and LFSP will be affected in the same way
as all other shareholders by changes in the Company’s share price. The value
participants receive through participation in the Plans will be reduced if the share price
falls during the performance period and will increase if the share price rises over the
performance period.
36
LFSP
What is the LFSP?
An incentive plan under which eligible employees are granted limited recourse, interest
free, loan-funded ordinary shares of the Company.
Who participates in the LSFP?
All eligible Australian based employees of the Company, who are in positions to
influence achievement of our long-term outcomes and where warranted by market
practice for attraction and retention.
What are the key features of
the LFSP?
Loan-funded shares are issued with a price per share that is typically 10% higher than
the five day volume weighted average share price calculated at grant date.
How are shares provided
to participants under the
Loan-Funded scheme?
ESOP
What is the ESOP?
The Loan-Funded shares are subject to a Loan Agreement between the participant
and the Company. Once all conditions are met and the participant no longer has any
outstanding obligations pursuant to the Loan Agreement, the loan funded shares revert
to being fully paid ordinary shares.
Shares issued in the LFSP are issued as new equity and Mesoblast does not buy
shares on-market under this plan in an effort to conserve cash.
An incentive plan under which eligible employees are granted options over ordinary
shares of the Company.
Who participates in the ESOP?
All eligible employees of the Company, who are in positions to influence achievement
of our long-term outcomes and where warranted by market practice for attraction
and retention.
What are the key features of
the ESOP?
Options are issued with an exercise price per share that is typically 10% higher than the
five day volume weighted average share price calculated at grant date. High volatility
makes it difficult to set meaningful performance hurdles and applying such hurdles may
have a severe impact on the competitiveness of remuneration.
How are shares provided to
participants under the ESOP?
Shares are issued to the participant upon the holder exercising their option and paying
the exercise price to the Company (once all vesting conditions are satisfied).
5. Employment Agreements
The employment of our CEO and CFO are formalised in employment agreements, the key terms of which are as follows:
Name
Term
Notice period
Termination benefit
CEO
(Silviu Itescu)
Initial term of 3 years commencing
1 April 2014, and continuing subject to
a 12 months’ notice period
12 months
12 months base salary
CFO
(Paul Hodgkinson)
This is an ongoing employment agreement
until notice is given by either party.
6 months
6 months base salary
On termination of employment, key management personnel are entitled to receive their statutory entitlements of accrued
annual and long service leave, together with any superannuation benefits.
There is no entitlement to a termination payment in the event of resignation or removal for misconduct.
The employment of the executive team is also formalized in employment contracts. Five members of the executive team
have employment contracts with initial terms ranging from 15 months to three years, with notice periods ranging from six to
twelve months. The remaining four members have continuous employment contracts with no fixed term and notice periods
ranging from ‘at will’ to twelve months. Two contracts have contractual CPI increases – there are no other contractual
increases in remuneration.
37
6. Key Management Personnel (KMP) Remuneration
6.1 Remuneration details
Details of the remuneration of the Company’s key management personnel are set out below:
2015
Short-term benefits
Post-
employment
benefits
Long-
term
benefits
Share-
based
payments
Other
Salary &
fees
$
Cash
Bonus(1)
$
Annual
Leave
$
Non-
monetary
benefits
$
Other
$
Super-
annuation
$
Long
service
leave
$
Termi-
nation
benefits
$
Options
$
Total
$
Name
Executive director
Silviu Itescu (CEO)
960,000
864,000
59,078
Other executive KMP
Paul Hodgkinson(2) (CFO) 367,233
212,500
7,968
Non-executive directors
William Burns
Brian Jamieson
Donal O’Dwyer
Michael Spooner
Ben-Zion Weiner
Eric Rose
Total
134,278
328,320
160,750
163,250
138,250
148,250
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
18,783
19,052
–
– 1,920,913
63,128
25,088
690
228,589
–
–
–
–
–
–
–
18,783
15,271
15,509
–
–
–
–
–
–
–
–
37,799
–
–
–
37,799
37,799
–
–
–
–
–
–
–
905,196
172,077
347,103
176,021
178,759
176,049
186,049
2,400,331 1,076,500
67,046
– 63,128
93,434
19,742
341,986
- 4,062,168
(1) STI bonus payable for performance in the year ended 30 June 2015, not paid as at 30 June 2015.
(2) Appointed as KMP on 25 August 2014. Paul Hodgkinson was paid a sign on bonus of $72,000 in July 2014 which has
been excluded from the table above as it predated his appointment to KMP.
2014
Short-term benefits
Post-
employment
benefits
Long-
term
benefits
Share-
based
payments
Other
Salary &
fees
$
Cash
Bonus(5)
$
Annual
Leave
$
Non-
monetary
benefits
$
Other
$
Super-
annuation
$
Long
service
leave
$
Termi-
nation
benefits
$
Options
$
Total
$
Name
Executive director
Silviu Itescu (CEO)
960,000 840,000(2) 38,493(3)
Non-executive directors
William Burns(1)
Brian Jamieson
Donal O’Dwyer
Michael Spooner
Ben-Zion Weiner
Eric Rose
Total
44,145
325,547
159,667
162,167
134,667
142,167
–
–
–
–
–
–
–
–
–
–
–
–
1,928,360
840,000
38,493
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17,775
23,173(4)
–
17,775
14,769
15,000
–
–
–
–
–
–
–
–
65,319
23,173
–
–
–
–
–
–
–
–
– 1,879,441
–
–
–
–
–
–
44,145
343,322
174,436
177,167
134,667
142,167
– 2,895,345
(1) William Burns joined the Board on 6 March 2014.
(2) STI payable for the year ended 30 June 2014. This represents 87.5% of target bonus, and therefore an amount
of $120,000 (12.5%) was forfeited.
(3) Annual leave has been amended from what was reported in 2014 to include annual leave of $38,493.
(4) Long service leave has been amended from what was reported in 2014 to include long service leave of $23,173.
(5) STI bonus payable for performance in the year ended 30 June 2014, not paid as at 30 June 2014.
38
6.2 Relative proportions of fixed vs variable remuneration expenses
The following table shows the relative proportions of remuneration that are linked to performance and those that are fixed,
based on the amounts disclosed as statutory remuneration expense above:
Table – Relative proportion of fixed vs variable remuneration expenses
Fixed remuneration
At risk – STI
At risk – LTI
Name
Silviu Itescu (CEO)
Paul Hodgkinson (CFO)
2015
%
55
55
2014
%
54
N/A
2015
%
45
22
2014
%
46
N/A
2015
%
0
23
2014
%
0
N/A
The amount of short-term incentives cash bonus awarded and forfeited for each KMP are set out in the table below.
There were no deferred shares granted, vested and forfeited during the 2015 financial year.
6.3 Performance based remuneration granted and forfeited during the year
The following table shows, for each KMP, how much of their STI cash bonus was awarded and how much was forfeited.
It also shows the value of options that were granted, exercised and forfeited during FY 2015 The number of options vested/
forfeited for each grant are disclosed in section 6.5 below.
Table – Performance based remuneration granted and forfeited during the year
2015
Name
Silviu Itescu (CEO)
Paul Hodgkinson (CFO)
Total STI bonus
Cash(1)
LTI Options
Total
opportunity
$
960,000
212,500
Awarded
%
Forfeited
%
Value
granted(2)
$
Value
exercised
$
Value
forfeited
$
90%
100%
10%
–
–
455,283
–
–
–
–
(1) No deferred shares are issued.
(2) The value at grant date calculated in accordance with AASB 2 Share-based Payment of options granted during the year
as part of remuneration.
6.4 Terms and conditions of the share-based payment arrangements
The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are
as follows:
Grant date
25/11/2014
Vesting date
Expiry date
Exercise price
Value per option
at grant date
% vested
one third – 25/11/2015
one third – 25/11/2016
one third – 25/11/2017
24/11/2019
$4.02
$1.30
25/03/2015(1)
25/03/2015
23/07/2019
$4.71
$0.92
–
100
(1) These options have vested and are held in escrow. As of 30 June 2015, none of the options have reached the end of the
escrow period, and therefore they may not be exercised until the escrow period concludes.
The number of options over ordinary shares in the company provided as remuneration to key management personnel is
shown in the following table in section 8(iv) below. The options carry no dividend or voting rights. See section 4.3 above for
the conditions that must be satisfied for the options to vest.
When exercisable, each option is convertible into one ordinary share of Mesoblast Limited. The exercise price of options
is determined by reference to the Company policy which is the volume weighted market price of a share sold on the
Australian Securities Exchange on the 5 trading days immediately before the board of directors’ approval date plus
39
generally a premium determined by the Company’s board of directors. The board of directors’ policy is not to issue
options at a discount to the market price.
6.5 Reconciliation of options and ordinary shares held by KMP
a. Options
The table below shows a reconciliation of options held by each key management personnel from the beginning to the end
of the 2015 financial year. All vested options at the start of the year were exercisable.
Balanced
at the
start of
the year
Granted as
compen-
sation
Vested
Exercised
Forfeited
Other
changes
Name
Vested
Number
%
Number %
Balance at the end of the year
Vested
and
exercisable
Vested
and
unexercisable Unvested
Silviu Itescu
(CEO)
–
William Burns
25/11/2014(1)
Brian Jamieson
–
–
–
80,000
–
–
–
–
–
–
30/11/2009
150,000
– 150,000 100
(150,000)
Donal O’Dwyer
07/12/2010
07/12/2010
07/12/2010
07/12/2010
07/12/2010
Michael Spooner
–
Ben–Zion Weiner
25/11/2014(1)
Eric Rose
25/11/2014(1)
Paul Hodgkinson(2)
25/03/2015
287,903
127,956
127,956
127,956
127,956
–
–
–
–
–
–
–
–
–
–
80,000
80,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
450,000 450,000 100
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
287,903
127,956
127,956
127,956
127,956
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
80,000
–
–
–
–
–
–
–
80,000
80,000
450,000
–
(1) Grants to Non-Executive Directors: At the Board’s recommendation, shareholders approved the issue of options to three
non-executive directors at the AGM on 25 November 2014.
(2) 300,000 of these options were originally granted on 8 August 2014 under the loan funded share plan. On 25 March 2015
Mesoblast changed the form of the arrangement from loan funded shares to options. There were no changes made to
the terms pertaining to the exercise price or the expiry date during this modification.
The amounts paid per ordinary share on the exercise of options at the dates of exercise were as follows:
Grant date
30/11/2009
30/11/2009
Exercise Date
Amount paid per share
27/10/2014
20/11/2014
$1.73
$1.73
40
b. Shareholdings
The table below shows a reconciliation of ordinary shares held by each KMP from the beginning to the end of the 2015
financial year in accordance with the Corporations Regulations (section 18).
Name
Silviu Itescu (CEO)
William Burns
Brian Jamieson
Donal O’Dwyer
Michael Spooner(1)
Ben-Zion Weiner
Eric Rose
Paul Hodgkinson
Balance at the
start of the year
68,244,642
–
460,000
305,000
1,081,335
–
–
–
Received during
the year on the
exercise of options
Other changes
during the year
Balances at the
end of the year
–
–
150,000
–
–
–
–
–
–
–
–
–
–
–
–
–
68,244,642
–
610,000
305,000
1,081,335
–
–
–
(1) Of this balance, Michael Spooner has a relevant interest (as defined by section 608 of the Corporations Act 2001) over
1,050,000 ordinary shares.
7. Relationship between performance and executive KMP remuneration
Mesoblast is pre-revenue and in development phase. When assessing company performance in light of remuneration,
traditional financial metrics, such as profitability, total shareholder return (TSR), short-term share price movements, and
earnings per share (EPS) are not meaningful, nor do they accurately reflect the performance of the company. Our long term
value creation occurs through progressive achievement of well-defined milestones that are critical for achieving product
approval and commercialization, in a timely fashion and within budget. Annually the Board prioritises the milestones for the
coming year as outlined in the discussion on STIs. These milestones form the CEO’s KPIs which establish the basis for all
STI payments.
The Group remains well-funded with $144.1m cash on hand as at 30 June 2015. To date the Group has not utilized any debt
financing and our sources of funding for the programs have predominantly been through capital raisings from institutional
and sophisticated investors, the signing of a key collaboration with Teva Pharmaceutical Industries, the signing of a share
placement agreement with Celgene Corporation and to a small extent government grants and research and development tax
credits. Mesoblast reached an agreement with Celgene Corporation in April 2015 in which Celgene purchased 15.3 million
ordinary shares in Mesoblast Limited for a consideration of A$58.5 million/USD45 million at a price of A$3.82 per share.
The table and chart below detail Company performance on a market capitalization basis, against executive key
management personnel at-risk compensation:
Share price (ASX:MSB)
– closing at 30 June
– high for the year
– low for the year
– share price volatility (annual)
Market capitalization at 30 June
– increase/(decrease) – $
– increase/(decrease) – %
Short-term incentives – % of target
paid to CEO
Short-term incentives – % of base
salary paid to CEO
Short-term incentives – % of target
paid to CFO
Short-term incentives – % of base
salary paid to CFO
2015
2014
2013
2012
2011
2010
$3.76
$5.88
$3.17
46%
$4.47
$6.80
$4.18
36%
$5.30
$7.49
$4.22
39%
$6.19
$10.04
$5.44
47%
$8.65
$9.95
$1.72
52%
$1,267m
($170m)
(12%)
$1,437m
($240m)
(14%)
$1,677m
($93m)
(5%)
$1,770m
($655m)
(27%)
$2,425m
$2,139m
748%
$1.85
$2.26
$0.78
53%
$286m
$173m
153%
90%
87.5%
85%
65%
100%
100%
90%
87.5%
85%
65%
42%
40%
100%
50%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
41
8. Voting and comments made at the Company’s 2014 Annual General Meeting (AGM)
Mesoblast Ltd received 98.9% of the proxy votes in favour of adopting the 2013/2014 remuneration report, and the same
resolution was passed on a show of hands at the meeting. Three individual proposals to issue options to three NEDs
were endorsed by 89% of votes and passed on a show of hands at the meeting.
End of Remuneration Report.
42
Share Options
Options granted as remuneration
The following table presents options that have been granted over unissued shares during or since the end of the year
ended 30 June 2014, to any of the Directors or any of the five most highly remunerated officers (excluding Directors) of the
company, as part of their remuneration. Included in these options are options granted as remuneration to officers who are
among the five highest remunerated officers of the company and the group (other than Directors), that are not designated
as key management personnel and hence are not disclosed in the remuneration report:
Name of Officer
Silviu Itescu
William Burns(1)
Eric Rose(1)
Ben-Zion Weiner(1)
Peter Howard(2,3)
Peter Howard(2,3)
Michael Schuster(2)
Michael Schuster(2)
Donna Skerrett(2)
Donna Skerrett(2)
Darin Weber(2)
Darin Weber(2)
Exercise price
Grant Date
under option
Number of shares
–
4.02
4.02
4.02
5.00
4.46
4.71
4.22
4.71
4.22
4.71
4.22
–
25/11/2014
25/11/2014
25/11/2014
25/03/2015
25/03/2015
05/09/2014
10/07/2015
05/09/2014
10/07/2015
05/09/2014
10/07/2015
–
80,000
80,000
80,000
850,000
600,000
200,000
200,000
200,000
200,000
200,000
200,000
(1) Non-executive directors.
(2) Five most highly paid officers, but not designated as key management personnel.
(3) On 25 March 2015, the Company repurchased and correspondingly cancelled 1,450,000 loan-funded shares that had
previously been granted to Mr Howard (including 600,000 that were issued on 5 September 2014). As compensation for
the repurchase and cancellation of these loan-funded shares, replacement share options were issued in accordance
with the Company’s ESOP. The changes to Mr Howard’s options were consistent with changes made to all options
issued to Australian based executives.
Shares under option
Unissued ordinary shares of Mesoblast Limited under option at the date of this Directors’ report are as follows:
Issue Date
22/09/2010
29/11/2010
22/12/2011
24/02/2012
09/07/2012
21/09/2012
25/01/2013
24/05/2013
03/09/2013
04/09/2013
19/11/2013
Exercise price
of options
AUD
Expiry date Number of shares
under option
of options
$2.64
$3.48
$7.99
$8.48
$6.69
$6.70
$6.29
$6.36
$5.92
$6.28
$6.20
21/09/2015
29/11/2015
30/06/2016
23/02/2017
08/07/2018
30/06/2017
24/01/2018
23/05/2018
09/02/2018
27/08/2018
10/10/2018
135,000
1,453,350
1,903,334
170,000
200,000
1,693,333
50,000
765,000
2,315,000
175,000
50,000
43
Expiry date Number of shares
under option
of options
16/12/2018
31/12/2018
06/04/2019
03/08/2019
23/07/2019
24/08/2019
30/06/2019
08/10/2019
24/11/2019
31/10/2019
16/02/2020
30/06/2018
25/01/2018
20/01/2019
25/01/2019
25/01/2018
25/01/2019
23/07/2019
30/06/2019
30/06/2019
23/07/2019
16/02/2020
16/02/2020
30/06/2022
26/10/18
26/10/19
25/04/17
02/05/17
145,000
650,000
15,000
50,000
215,000
75,000
2,855,000
210,000
240,000
50,000
60,000
650,000
235,000
135,000
300,000
165,000
200,000
300,000
400,000
600,000
150,000
20,000
400,000
4,800,000
21,830,017
154,064
447,848
127,956
127,956
857,824
22,687,841
Exercise price
of options
AUD
$6.25
$6.38
$5.80
$4.60
$4.71
$4.67
$4.71
$4.54
$4.02
$4.51
$4.73
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
$4.71
$4.71
$4.46
$4.71
$4.73
$4.30
$4.22
Exercise price
of options
USD
USD 0.305
USD 0.340
USD 0.444
USD 0.444
Issue Date
17/12/2013
24/02/2014
01/07/2014
04/08/2014
08/08/2014
25/08/2014
05/09/2014
09/10/2014
25/11/2014
12/12/2014
16/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
27/04/2015
12/05/2015
10/07/2015
Sub-total
07/07/2010
07/07/2010
07/07/2010
07/07/2010
Sub-total
Grand Total
No option holder has any right under the options to participate in any other share issues of the Group.
44
Shares issued on exercise of options during the year
Detail of shares or interests issued as a result of the exercise of options during or since the end of the financial year are:
Grant Date
30/11/2009
30/11/2009
29/11/2010
Total
Grant Date
07/07/2010
07/07/2010
07/07/2010
Total
Number of shares issued
Issue Price
per share
Amount unpaid
480,000
150,000
115,950
745,950
1.58
1.73
3.48
–
–
–
Number of shares issued
Issue Price
USD
Amount unpaid
per share
41,935
255,913
287,903
585,751
0.305
0.340
0.046
–
–
–
Indemnification of Officers
During the financial year, the Group paid premiums in respect of a contract insuring the directors and company secretary of
the Group, and all executive officers of the Group. 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 Group
The Corporations Act 2001 allows specified persons to bring, or intervene in, proceedings on behalf of the Group.
No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237
of the Corporations Act 2001.
Non-Audit Services
The Group 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.
The board of directors has considered the position and in accordance with advice received from the audit committee, is
satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors
imposed by the Corporations Act 2001. The directors are satisfied that the provision of the non-audit services as set out
below, did not compromise the auditor independence requirements of the Corporations Act 2001 because the services are
not deemed to undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for
Professional Accountants.
During both the current and prior financial years, no fees were paid or payable for non-audit services provided by the auditor
of the parent entity, its related practices and non-related audit firms.
45
Auditor’s Independence Declaration
A copy of the auditor’s independence declaration under Section 307C in relation to the audit for the year ended
30 June 2015 is included on page 46 of the annual report.
Rounding of Amounts
The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments
Commission, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ report have been
rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar.
Directors’ Resolution
This report is made in accordance with a resolution of the Directors.
Mr Brian Jamieson
Chairman
Dr Silviu Itescu
Chief Executive Officer
16 August 2015, Melbourne
46
Auditor’s Independence Declaration
As lead auditor for the audit of Mesoblast Limited for the year ended 30 June 2015, I declare that to
the best of my knowledge and belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Mesoblast Limited and the entities it controlled during the period.
Jon Roberts
Partner
PricewaterhouseCoopers
Melbourne
16 August 2015
PricewaterhouseCoopers, ABN 52 780 433 757
Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
47
Financial Statements
for the year ended 30 June 2015
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Notes to the Financial Statements
Directors’ Declaration
Independent Auditor’s Report
48
49
50
51
52
53
111
112
The financial statements cover the Group consisting of Mesoblast Limited (‘Mesoblast’ or the ‘Company’) and its subsidiaries,
a company limited by shares whose shares are publicly traded on the Australian Securities Exchange (ASX). A list of major
subsidiaries is included in Note 13.
The financial statements are presented in Australian dollars (‘AUD’), unless otherwise noted, including certain amounts that are
presented in U.S. dollars (‘USD’).
Mesoblast is incorporated and domiciled in Australia and has its registered office and principal place of business as follows:
Mesoblast Limited
Level 38, 55 Collins Street
Melbourne VIC 3000
The Group is primarily engaged in the development of regenerative medicine products. The Company’s primary proprietary
regenerative medicine technology platform is based on specialised cells known as mesenchymal lineage adult stem cells.
The financial statements were authorized for issue by the directors on 16 August 2015. The directors have the power
to amend and reissue the financial statements.
All press releases, financial reports and other information are available on our website: www.mesoblast.com
48
Consolidated Income Statement
Revenue from continuing operations
Other income
Expenses from continuing operations
Research and development
Manufacturing commercialization
Management and administration
Finance costs
Other expenses
Loss before income tax
Income tax expense
Loss attributable to the owners of Mesoblast Limited
Losses per share from continuing operations attributable
to the ordinary equity holders of the Group:
Basic – losses per share
Diluted – losses per share
Note
3(a)
3(b)
3(c)
4
20
20
30 June 2015
$’000
30 June 2014
$’000
23,748
18,800
42,548
(77,593)
(29,206)
(36,172)
(10,529)
(8,416)
25,980
11,119
37,099
(55,305)
(27,608)
(26,562)
(4,329)
(4,248)
(161,916)
(118,052)
(119,368)
–
(119,368)
Cents
(37.20)
(37.20)
(80,953)
(5)
(80,958)
Cents
(25.34)
(25.34)
The above consolidated income statement should be read in conjunction with the accompanying Notes.
Consolidated Statement of Comprehensive Income
49
Loss for the year
(119,368)
(80,958)
Note
30 June 2015
$’000
30 June 2014
$’000
Other comprehensive income/(loss)
Items that may be reclassified to profit and loss
Exchange differences on translation of foreign operations
7(b)
Income tax relating to these items
Other comprehensive income/(loss) for the period, net of tax
Total comprehensive loss attributable to the
owners of Mesoblast Limited
90,831
–
90,831
(6,620)
–
(6,620)
(28,537)
(87,578)
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying Notes.
50
Consolidated Statement of Changes in Equity
Issued
Capital
$’000
Note
Share
Option
Reserve
$’000
Foreign
Currency
Translation
Reserve
$’000
Retained
Earnings
$’000
Total
$’000
654,458
49,129
24,506
(97,827)
630,266
Balance as of 1 July 2013
Loss for the year
Other comprehensive loss
Total comprehensive loss
for the year
Transactions with owners in their
capacity as owners:
Contributions of equity net of
transaction costs
Transfer exercised options
Fair value of share-based payments
18
7(a)
–
–
–
19,611
19,611
3,018
–
–
–
–
–
–
(3,018)
9,419
–
(80,958)
(80,958)
(6,620)
–
(6,620)
(6,620)
(80,958)
(87,578)
–
–
–
–
–
–
–
–
19,611
19,611
–
9,419
Balance as of 30 June 2014
677,087
55,530
17,886
(178,785)
571,718
Loss for the year
Other comprehensive income
Total comprehensive income/(loss)
for the year
Transactions with owners in their
capacity as owners:
Contributions of equity net of
transaction costs
7(a)
Transfer exercised options
Fair value of share-based payments
18
Reclassification of modified options to liability
–
–
–
59,402
59,402
771
-
-
–
–
–
–
–
(771)
8,567
(1,791)
–
(119,368)
(119,368)
90,831
–
90,831
90,831
(119,368)
(28,537)
–
–
–
-
-
–
–
–
-
-
59,402
59,402
–
8,567
(1,791)
Balance as of 30 June 2015
737,260
61,535
108,717
(298,153)
609,359
The above consolidated statement of changes in equity should be read in conjunction with the accompanying Notes.
Consolidated Balance Sheet
51
Note
30 June 2015
$’000
30 June 2014
$’000
Assets
Current assets
Cash and cash equivalents
Trade and other receivables
Prepayments
Total current assets
Non-current assets
Property, plant and equipment
Available-for-sale financial assets
Other non-current assets
Intangible assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Deferred revenue
Derivative financial instruments
Provisions
Total current liabilities
Non-current liabilities
Deferred revenue
Deferred tax liability
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Issued capital
Reserves
Accumulated losses
Total equity
5(a)
5(b)
5(b)
6(a)
5(c)
5(d)
6(b)
5(e)
6(c)
10(a)
6(d)
6(c)
6(e)
6(d)
7(a)
7(b)
144,142
5,172
10,139
159,453
5,727
2,995
3,082
846,668
858,472
1,017,925
36,774
19,537
–
6,720
63,031
29,303
194,514
121,718
345,535
408,566
609,359
737,260
170,252
(298,153)
609,359
196,394
6,098
1,257
203,749
4,683
–
2,978
687,904
695,565
899,314
20,723
15,928
337
5,687
42,675
39,818
158,585
86,518
284,921
327,596
571,718
677,087
73,416
(178,785)
571,718
The above consolidated balance sheet should be read in conjunction with the accompanying Notes.
52
Consolidated Statement of Cash Flows
Cash flows from operating activities
Milestone payment received
Research and development tax incentive received
Note
30 June 2015
$’000
30 June 2014
$’000
2,366
5,768
–
9,340
Payments to suppliers and employees (inclusive of goods and services tax)
(128,092)
(106,310)
Payments for fair value adjustments to contingent consideration subsequent
to the business combination measurement period
Interest received
Rent received
Other income received
Income taxes (paid)/refunded
(5,720)
3,454
71
519
(75)
Net cash (outflows) in operating activities
8(b)
(121,709)
12(c)
Cash flows from investing activities
Payments for financial derivatives
Payments for business combination
Payments for licenses
Proceeds/(payments) for rental deposits
Investment in fixed assets
Receipts from repayments of loans from employees
Net cash (outflows) in investing activities
Cash flows from financing activities
Proceeds from issue of shares
Payments for share issue costs
Net cash inflows by financing activities
Net (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
FX gains on the translation of foreign bank accounts
Cash and cash equivalents at end of year
8(a)
(939)
(2,331)
(248)
374
(2,468)
–
(5,612)
59,999
(586)
59,413
(67,908)
196,394
15,656
144,142
The above consolidated statement of cash flows should be read in conjunction with the accompanying Notes.
–
12,578
–
–
2,531
(81,861)
(1,483)
(35,585)
(468)
(1,728)
(1,865)
320
(40,809)
2,476
(46)
2,430
(120,240)
315,309
1,325
196,394
Contents of the Notes to the consolidated financial statements
53
1. Significant changes in the current reporting period
How numbers are calculated
Income tax expense
2. Segment information
3. Revenue and expenses from continuing operations
4.
5. Financial assets and liabilities
6. Non-financial assets and liabilities
7. Equity
8. Cash flow information
Risk
9. Significant estimates, judgments and errors
10. Financial risk management
11. Capital management
Group structure
12. Business combinations
13. Interests in other entities
Unrecognized items
14. Contingent assets and contingent liabilities
15. Commitments
16. Events occurring after the reporting period
Other information
17. Related party transactions
18. Share-based payments
19. Remuneration of auditors
20. Earnings per share
21. Parent entity financial information
22. Summary of significant accounting policies
54
Mesoblast Limited (the ‘Company’) and its subsidiaries (the ‘Group’) are primarily engaged in the development of regenerative
medicine products. The Company’s primary proprietary regenerative medicine technology platform is based on specialised cells
known as mesenchymal lineage adult stem cells. The Company was formed in 2004 as an Australian company and has been listed
on the Australian Securities Exchange (the ‘ASX’) since 2004.
These financial statements are presented in Australian dollars (‘$’ or ‘AUD’), unless otherwise noted, including certain amounts
that are presented in U.S. dollars (‘USD’).
1. Significant changes in the current reporting period
The financial position and performance of the Group was not particularly affected by any significant changes in the year ended
30 June 2015.
The financial position and performance of the Group was particularly affected by the following transaction during the year ended
30 June 2014:
• The acquisition of the entire culture-expanded mesenchymal stem cell (‘MSC’) business of Osiris Therapeutics, Inc. on
11 October 2013 (‘Osiris’) (see Note 12) which resulted in a recognition of in-process research and development acquired
and goodwill (see Note 6(b)).
Notes to the Financial Statements 55
How numbers are calculated
Income tax expense
2. Segment information
3. Revenue and expenses from continuing operations
4.
5. Financial assets and liabilities
6. Non-financial assets and liabilities
7. Equity
8. Cash flow information
56
2. Segment information
Operating segments are identified on the basis of whether the allocation of resources and/or the assessment of performance
of a particular component of the Company’s activities are regularly reviewed by the Company’s chief operating decision maker
as a separate operating segment. By these criteria, the activities of the Company are considered to be one segment being the
development of adult stem cell technology platform for commercialization, and the segmental analysis is the same as the analysis
for the Company as a whole. The chief operating decision maker (Chief Executive Officer) reviews the consolidated income
statement, balance sheet, and statement of cash flows regularly to make decisions about the Company’s resources and to
assess overall performance.
3. Revenue and expenses from continuing operations
Note
6(c)
(a) Revenue from continuing operations
Commercialization revenue(1)
Milestone revenue(2)
Interest revenue
(b) Other income
Foreign exchange gains
Research and development tax incentive(3)
Other revenue
Rental income
Release of excess provision for services
6(d)
(c) Expenses from continuing operations
Clinical trial research and development
Manufacturing production and development
Employee benefits
Salaries and employee benefits
Defined contribution superannuation expenses
Share-based payment transactions(4)
Total employee benefits
Depreciation and amortization of non-current assets
Plant and equipment depreciation
Intellectual property amortization
Total depreciation and amortization of non-current assets
6(a)
6(b)
Other management and administration expenses
Overheads and administration
Consultancy
Legal, patent and other professional fees
Intellectual property expenses (excluding the amount amortized above)
Total other management and administration expenses
30 June 2015
$’000
30 June 2014
$’000
18,199
2,284
3,265
23,748
12,846
5,309
523
122
–
18,800
42,638
20,822
37,602
525
8,567
46,694
1,801
154
1,955
12,977
7,094
7,789
3,002
30,862
16,410
–
9,570
25,980
–
8,595
–
–
2,524
11,119
20,812
22,932
28,897
408
9,419
38,724
974
146
1,120
10,698
6,831
5,522
2,836
25,887
Notes to the Financial Statements
57
Note
30 June 2015
$’000
30 June 2014
$’000
–
8,416
8,416
10,529
10,529
161,916
3,980
268
4,248
4,329
4,329
118,052
6(d)(ii)
Other expenses
Foreign exchange losses
Remeasurement of contingent consideration
Total other expenses
Finance costs
Provisions: unwinding of discount
Total finance costs
Total expenses from continuing operations
(1) Commercialization revenue
In November 2010, the Group signed a development and commercialization agreement with Cephalon Inc., a major global
biopharmaceutical company.
The total upfront cash received under the development and commercialization agreement was USD 130,000k. For the years
ended 30 June 2015 and 2014, the Group has recognized revenue of $18,199k and $16,410k, respectively, for this payment on
the basis that the revenue will be earned through-out the life of the development of those products pertaining to that payment.
The Group continuously monitors and reviews the development timelines of the products with no changes being made in the
current year.
(2) Milestone revenue
For the year ended 30 June 2015, the Group recognized milestone revenue of $2,284k. This revenue was recognized on
achievement of a substantive milestone being the filing for marketing approval (Japan) for MSC product JR-031. No further
performance obligations are required of the Group in relation to this revenue.
(3) Research and development tax incentive
The Group’s research and development activities are eligible under an Australian Government tax incentive for eligible
expenditures from 1 July 2011. Management has assessed these activities and expenditures to determine which are likely to
be eligible under the incentive scheme. At each period end management estimates the refundable tax offset available to the
Group based on available information at the time. This estimate is also reviewed by external tax advisors. For the years ended
30 June 2015 and 2014, the Group has recognized income of $5,309k and $8,595k, respectively. See Note 22(e)(iii).
Of the $5,309k research and development tax incentive recorded in other income for the year ended 30 June 2015,
$588k relates to a favourable change in the original estimate of the research and development tax incentive income the
Group estimated it would receive from the Australian Government for the year ended 30 June 2014.
Of the $8,595k research and development tax incentive recorded in other income for the year ended 30 June 2014, $3,400k
relates to research and development tax incentive income the Group received from the Australian Government for the year
ended 30 June 2013 following a favourable change in the original estimate. The change in estimate was due to the fact that
research and development tax incentives were dependent upon the level of qualifying research and development expenditure
and as such we estimated amounts we deemed probable of collection in the year ended 30 June 2013, until we had better
information related to the implementation of the relevant regulations with the assistance of our tax advisors.
(4) Share-based payment transactions
For the years ended 30 June 2015 and 2014, share-based payment transactions have been reflected in the consolidated
Income Statement functional expense categories as follows: research and development $3,692k and $5,063k, respectively,
manufacturing commercialization $877k and $865k, respectively, and management and administration $3,998k and $3,491k,
respectively.
58
4. Income tax expense
(a) Reconciliation of income tax to prima facie tax payable
Loss from continuing operations before income tax
Tax benefit at the Australian tax rate of 30% (2014: 30%)
Tax effect of amounts which are not deductible/(exempt)
in calculating taxable income:
Share-based payments expense
Research and development tax concessions
Contingent consideration
Other sundry items
Current year tax benefit
Adjustments for current tax of prior periods
Differences in overseas tax rates
Tax benefit not recognized
USA City and State tax benefit/(charge)
USA City and State tax benefit – not recognized
Income tax expense attributable to loss before income tax
(b) Income tax expense
Current tax
Deferred tax
(c) Amounts that would be recognized directly in equity if brought to account
Aggregate current and deferred tax arising in the reporting period and not recognized
in net loss or other comprehensive income but which would have been directly
applied to equity had it been brought to account:
Current tax recorded in equity (if bought to account)
Deferred tax recorded in equity (if bought to account)
30 June 2015
$’000
30 June 2014
$’000
(119,368)
(35,811)
(80,953)
(24,286)
2,540
1,665
5,506
1,613
2,776
3,771
–
4,732
(24,487)
(13,007)
4,506
14,298
5,683
(401)
401
–
–
–
–
(178)
672
494
2,485
(1,489)
12,011
(2,836)
2,841
5
5
–
5
(157)
454
297
Notes to the Financial Statements
59
(d) Amounts recognized directly in equity
Aggregate current and deferred tax arising in the reporting period and not recognized
in net loss or other comprehensive income but debited/credited to equity:
Current tax recorded in equity
Deferred tax recorded in equity
(e) Deferred tax assets not brought to account
Unused tax losses
Potential tax benefit at local tax rates
Other temporary differences
Potential tax benefit at local tax rates
Total potential tax benefit at local tax rates
30 June 2015
$’000
30 June 2014
$’000
–
–
–
–
91,054
60,529
21,494
112,548
26,693
87,222
Temporary differences have been brought to account only to the extent that it is foreseeable that they are recoverable against future
tax liabilities.
(a) Significant estimates
The Group is subject to income taxes in Australia, Singapore, Switzerland, the United Kingdom and the United States of America.
Significant judgment is required in determining the worldwide provision for income taxes. There are certain transactions and
calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group
consulted professional tax advisers to estimate its tax liabilities based on the Group’s understanding of the tax law. Where the final
outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and
deferred income tax assets and liabilities in the period in which such determination is made.
The Group has recognized deferred tax assets to the extent that it is probable that the asset will be utilized either through the
application of carry back rules or the utilization of taxable temporary differences (deferred tax liabilities) relating to the same
taxation authority and the same subsidiary against which the unused tax losses can be utilized. As of 30 June 2015 and 2014,
the Group has recorded deferred tax assets of $Nil due to the Company’s plans to consolidate certain intellectual property assets
and therefore taxable temporary differences will not be available to offset deferred tax assets in the same jurisdictions.
60
5. Financial assets and liabilities
This note provides information about the Group’s financial instruments, including:
• an overview of all financial instruments held by the Group;
• specific information about each type of financial instrument;
• accounting policies; and
•
information used to determine the fair value of the instruments, including judgments and estimation uncertainty involved.
The Group holds the following financial instruments:
Financial assets
2015
Cash and cash equivalents
Trade and other receivables
Available-for-sale financial assets
Other non-current assets
2014
Cash and cash equivalents
Trade and other receivables
Other non-current assets
(1) Fair value through other comprehensive income.
(2) Fair value through profit or loss.
Financial liabilities
2015
Trade and other payables
Contingent consideration
Derivative financial instruments
2014
Trade and other payables
Contingent consideration
Derivative financial instruments
Notes
5(a)
5(b)
5(c)
5(d)
5(a)
5(b)
5(d)
Notes
5(e)
5(f)
10(a)
5(e)
5(f)
10(a)
Assets at
FVOCI(1)
$’000
Assets at
FVTPL(2)
$’000
Assets at
amortized
cost
$’000
Total
$’000
–
–
2,995
–
2,995
–
–
–
–
–
–
–
–
–
–
–
–
–
144,142
144,142
5,172
–
3,082
5,172
2,995
3,082
152,396
155,391
196,394
196,394
6,098
2,978
6,098
2,978
205,470
205,470
Liabilities at
FVOCI(1)
$’000
Liabilities at
FVTPL(2)
$’000
Liabilities at
amortized
cost
$’000
Total
$’000
36,774
119,647
–
–
36,774
119,647
–
–
–
119,647
36,774
156,421
–
20,723
86,249
337
–
–
20,723
86,249
337
86,586
20,723
107,309
–
–
–
–
–
–
–
–
(1) Fair value through other comprehensive income.
(2) Fair value through profit or loss.
The Group’s exposure to various risks associated with the financial instruments is discussed in Note 10. The maximum exposure
to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.
Notes to the Financial Statements
(a) Cash and cash equivalents
Cash at bank
Deposits at call(1)
61
30 June 2015
$’000
30 June 2014
$’000
27,507
116,635
144,142
3,827
192,567
196,394
(1) As of 30 June 2015 and 2014, interest-bearing deposits at call include an amount of $6.1m (2014: $6.1m) held as security
against future foreign exchange deals and is restricted for use.
(i) Classification as cash equivalents
Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition
and are repayable with 24 hours notice with no loss in interest. See Note 22(k) for the Group’s other accounting policies on cash
and cash equivalents.
(b) Trade and other receivables and prepayments
Income tax and tax incentives recoverable
Sundry debtors
Interest receivables
Other recoverable taxes (goods and services tax and value-added tax)
Other receivables
Trade and other receivables
Clinical trial research and development expenditure
Prepaid insurance and subscriptions
Other prepayments
Prepayments
30 June 2015
$’000
30 June 2014
$’000
4,812
177
110
73
–
5,172
4,525
826
4,788
10,139
5,254
11
296
132
405
6,098
533
442
282
1,257
(i) Classification as trade and other receivables
Interest receivables are amounts due at maturity of term deposits. All trade and other receivable balances are within their due dates
and none are considered to be impaired at both 30 June 2015 and 30 June 2014. The Group’s impairment and other accounting
policies for trade and other receivables are outlined in Notes 10(c) and 22(l) respectively.
(ii) Other receivables
These amounts generally arise from transactions outside the usual operating activities of the Group.
(iii) Fair values of trade and other receivables
Due to the short-term nature of the current receivables, their carrying amount is assumed to be the same as their fair value.
(iv) Impairment and risk exposure
Information about the impairment of trade and other receivables, their credit quality and the Group’s exposure to credit risk,
foreign currency risk and interest rate risk can be found in Note 10(b) and (c).
62
5. Financial assets and liabilities (continued)
(c) Available-for-sale financial assets
Available-for-sale financial assets include the following classes of financial assets:
Unlisted securities:
Equity securities
30 June 2015
$’000
30 June 2014
$’000
2,995
2,995
–
–
(i) Classification of financial assets as available-for-sale
Investments are designated as available-for-sale financial assets if they do not have fixed maturities and fixed or determinable
payments, and management intends to hold them for the medium to long-term. Financial assets that are not classified into any
of the other categories (at FVPL, loans and receivables or held-to-maturity investments) are also included in the available-for-
sale category.
The financial assets are presented as non-current assets unless they mature, or management intends to dispose of them within
12 months of the end of the reporting period.
(ii) Impairment indicators for available-for-sale financial assets
A security is considered to be impaired if there has been a significant or prolonged decline in the fair value below its cost. See Note
22(m)(v) for further details about the Group’s impairment policies for financial assets.
(iii) Amounts recognized in other comprehensive income
For the years ended 30 June 2015 and 2014, there were no gains/(losses) recognized in other comprehensive income.
(iv) Fair-value, impairment and risk exposure
Information about the methods and assumptions used in determining fair value is provided in Note 5(f) below. None of the available-
for-sale financial assets are either past due or impaired.
All available-for-sale financial assets are denominated in USD and presented in AUD.
(d) Other non-current assets
Bank guarantee
Letter of credit
30 June 2015
$’000
30 June 2014
$’000
960
2,122
3,082
960
2,018
2,978
(i) Classification of financial assets as other non-current assets
Bank guarantee
These funds are held in an account named Mesoblast Limited at National Australia Bank according to the terms of a Bank
Guarantee which is security for the sublease agreement for our occupancy of Level 38, 55 Collins Street, Melbourne, Victoria,
Australia. The Bank Guarantee is security for the full and faithful performance and observance by the subtenant of the terms,
covenants and conditions of the sublease. The Bank Guarantee continues in force until it is released by the lessor.
Letter of credit
These funds are held in an account named Mesoblast, Inc. at the Bank of America according to the terms of two irrevocable
standby letters of credit which are security for the sublease agreement for our occupancy of 505 Fifth Avenue, New York,
New York, United States of America. The letters of credit are security for the full and faithful performance and observance by the
subtenant of the terms, covenants and conditions of the sublease. The letters of credit are deemed to automatically extend without
amendment for a period of one year at each anniversary but will not automatically extend beyond the final expiration of 31 July 2021
(USD 1,186k) and 30 May 2021 (USD 443k).
(ii) Impairment and risk exposure
No other non-current assets are either past due or impaired.
Notes to the Financial Statements
(e) Trade and other payables
Trade payables and other payables
63
30 June 2015
$’000
30 June 2014
$’000
36,774
36,774
20,723
20,723
The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their short-term nature.
(f) Recognized fair value measurements
(i) Fair value hierarchy
The following table presents the Group’s financial assets and financial liabilities measured and recognized at fair value as of
30 June 2015 and 30 June 2014 on a recurring basis, categorized by level according to the significance of the inputs used in
making the measurements:
Notes
Level 1
$’000
Level 2
$’000
Level 3
$’000
As of 30 June 2015
Financial assets
Available-for-sale financial assets
Equity securities – biotech sector
Total financial assets
5(c)
Financial liabilities
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Contingent consideration
Total financial liabilities
10(a)
6(d)
–
–
–
–
–
–
–
–
–
–
2,995
2,995
–
119,647
119,647
Level 3
$’000
Total
$’000
2,995
2,995
–
119,647
119,647
Total
$’000
As of 30 June 2014
Financial liabilities
Notes
Level 1
$’000
Level 2
$’000
Financial liabilities at fair value through profit or loss
Derivative financial instruments
Contingent consideration
Total financial liabilities
10(a)
6(d)
–
–
–
337
–
337
–
86,249
86,249
337
86,249
86,586
There were no transfers between any of the levels for recurring fair value measurements during the year.
The Group’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.
Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and
available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used
for financial assets held by the Group is the current bid price. These instruments are included in level 1.
Level 2: The fair value of financial instruments that are not traded in an active market (for example, foreign exchange contracts) is
determined using valuation techniques which maximize the use of observable market data and rely as little as possible on entity-
specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.
Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
This is the case for provisions (contingent consideration) and equity securities (unlisted).
(ii) Valuation techniques used.
The Group used the following techniques to determine the fair value measurements:
64
5. Financial assets and liabilities (continued)
– Level 2: The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance
sheet date.
– Level 3: The fair value is determined using discounted cash flow analysis.
(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 instruments for the year ended 30 June 2015 and 30 June 2014:
Opening balance – 1 July 2013
Initial recognition
Charged/(credited) to consolidated income statement
Unwinding of discount(1)
Exchange difference
Closing balance – 30 June 2014
Opening balance – 1 July 2014
Amount used during the year
Allocated to goodwill
Remeasurement(2)(3)
Charged/(credited) to consolidated income statement
Unwinding of discount(1)
Remeasurement(3)
Exchange difference
Closing balance – 30 June 2015
Notes
12(b)
Contingent
consideration
provision
$’000
–
81,660
4,329
260
86,249
86,249
(8,051)
2,331
10,529
8,416
20,173
119,647
(1) The unwinding of the risk adjusted discount as the time period shortens between the valuation date and the potential settlement
date of the contingent consideration.
(2) $2,331k out of period adjustment to goodwill was recognized on finalisation of the MSC business combination of Osiris.
(3) The total amount of remeasurement of contingent consideration pertaining to the acquired MSC assets of Osiris was $10,747k.
Notes to the Financial Statements
65
(iv) Valuation inputs and relationship to fair value
The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair
value measurements:
Description
Contingent
consideration
provision
Fair value as at
30 June
2015
$’000
30 June
2014
$’000
Range of inputs
(weighted average)
Valuation
technique
Unobservable
Inputs*
30 June
2015
$’000
30 June
2014
$’000
Relationship of
unobservable
inputs to fair value
119,647
86,249 Discounted
cash flows
Risk adjusted
discount rate
11%-13%
(12.5%)
11%-13%
(12.5%)
A change in the
discount rate
by 0.5% would
increase/decrease
the fair value by 3%
2014: A change in
the discount rate
by 0.5% would
increase/decrease
the fair value by 3%
Expected unit
revenues
n/a
n/a A 10% increase
in the price
assumptions
adopted would
increase the fair
value by 8%
2014: A 10%
increase in the
price assumptions
adopted would
increase the fair
value by 5%
*There were no significant inter-relationships between unobservable inputs that materially affect fair values.
(v) Valuation processes
In connection with the Osiris acquisition, on 11 October 2013 (the ‘acquisition date’), an independent valuation of the contingent
consideration was carried out by an independent valuer.
For the year ended 30 June 2015, the Group has adopted a process to value contingent consideration internally. This valuation has
been completed by the Group’s internal valuation team and reviewed by the Chief Financial Officer (the ‘CFO’). The valuation team
is responsible for the valuation model. The valuation team also manages a process to continually refine the key assumptions within
the model. This is done with input from the relevant business units. The key assumptions in the model have been clearly defined
and the responsibility for refining those assumptions has been assigned to the most relevant business units. The remeasurement
charged to the consolidated income statement was a result of changes to key assumptions such as market population, market
penetration, product pricing and development timelines.
For the year ended 30 June 2014, an independent valuation was undertaken. The CFO and the internal valuation team reviewed the
independent valuation and determined there was no material change to the inputs supporting the fair value that was recorded at
the acquisition date. A key reason for this determination is that the independent valuation was completed during the financial year
ended 30 June 2014 and no significant events have occurred since it was completed that would lead to the valuation changing.
66
5. Financial assets and liabilities (continued)
The fair value of contingent consideration
Fair value of cash or stock payable, dependent on achievement
of future late-stage clinical or regulatory targets
Fair value of royalty payments from commercialization of the
intellectual property acquired
As of
30 June 2015
$’000
As of
30 June 2014
$’000
31,098
88,549
119,647
25,032
61,218
86,249
The main level 3 inputs used by the Group are evaluated as follows:
Risk adjusted discount rate: The discount rate used in the valuation has been determined based on required rates of returns of
listed companies in the biotechnology industry (having regards to their stage of development, their
size and number of projects) and the indicative rates of return required by suppliers of venture capital
for investments with similar technical and commercial risks.
Expected unit revenues:
Expected market sale price based on independent expert’s review of the most comparable products
currently available in the market place.
Notes to the Financial Statements
67
6. Non-financial assets and liabilities
This Note provides information about the Group’s non-financial assets and liabilities, including:
• specific information about each type of non-financial asset and non-financial liability
– property, plant and equipment (Note 6(a));
– intangible assets (Note 6(b));
– deferred revenue (Note 6(c));
– provisions (Note 6(d));
– deferred tax liability (Note 6(e));
• accounting policies; and
•
information about determining the fair value of the instruments, including judgments and estimation uncertainty involved.
(a) Property, plant and equipment
Year Ended 30 June 2014
Opening net book amount
Additions
Exchange differences
Depreciation charge
Closing net book value
As of 30 June 2014
Cost or fair value
Accumulated depreciation
Net book value
Year Ended 30 June 2015
Opening net book amount
Additions
Exchange differences
Depreciation charge
Closing net book value
As of 30 June 2015
Cost or fair value
Accumulated depreciation
Net book value
Plant and
equipment
$’000
Office
furniture and
equipment
$’000
Computer
hardware and
software
$’000
959
2,066
(14)
(306)
2,705
3,248
(543)
2,705
2,705
1,167
563
(990)
3,445
5,151
(1,706)
3,445
879
245
(15)
(128)
981
1,309
(328)
981
981
88
177
(172)
1,074
1,639
(565)
1,074
919
624
(6)
(540)
997
2,463
(1,466)
997
997
775
75
(639)
1,208
3,476
(2,268)
1,208
Total
$’000
2,757
2,935
(35)
(974)
4,683
7,020
(2,337)
4,683
4,683
2,030
815
(1,801)
5,727
10,266
(4,539)
5,727
(i) Depreciation methods and useful lives
Depreciation is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values,
over the estimated useful lives. The estimated useful lives are:
• Plant and equipment
• Office furniture and equipment
• Computer hardware and software
10-15 years
5-10 years
3-4 years
See Note 22(o) for the other accounting policies relevant to property, plant and equipment.
68
6. Non-financial assets and liabilities (continued)
(b) Intangible assets
Year ended 30 June 2014
Opening net book value
Additions(1)
Exchange differences
Amortization charge
Impairment charge
Closing net book value
As of 30 June 2014
Cost
Accumulated amortization
Accumulated impairment
Net book amount
Year ended 30 June 2015
Opening net book value
Additions(2)
Exchange differences
Amortization charge
Impairment charge
Closing net book value
As of 30 June 2015
Cost
Accumulated amortization
Accumulated impairment
Net book amount
Acquired
licenses to
patents
$’000
In-process
research and
development
acquired
$’000
1,282
963
(38)
(146)
–
418,865
132,485
(6,024)
–
–
Goodwill
$’000
127,687
14,748
(1,918)
–
–
Total
$’000
547,834
148,196
(7,980)
(146)
–
140,517
2,061
545,326
687,904
140,517
–
–
140,517
140,517
2,331
32,221
–
–
2,667
(606)
–
2,061
545,326
688,510
–
–
(606)
–
545,326
687,904
2,061
545,326
411
405
(154)
–
–
123,550
–
–
687,904
2,742
156,176
(154)
–
175,069
2,723
668,876
846,668
175,069
–
–
3,533
(810)
–
668,876
847,478
–
–
(810)
–
175,069
2,723
668,876
846,668
(1) The total additions of In-process research and development recorded in Note 12 is $134,099k which represents the total for the
years ended 30 June 2014 and 2013.
(2) An immaterial out of period adjustment to goodwill was recognized on finalisation of the MSC business combination of Osiris.
(i) Carrying value of in-process research and development acquired by product
Cardiovascular products
Intravenous products for metabolic diseases and inflammatory/immunologic conditions
Ophthalmic product
Bone marrow transplantation
Mesenchymal stem cells (MSC)
30 June 2015
$’000
30 June 2014
$’000
331,186
92,096
40,482
40,142
164,970
668,876
270,012
75,085
33,004
32,727
134,498
545,326
Notes to the Financial Statements
69
For all products the above balances are reported in AUD; however the underlying currency of the item recorded is USD. Apart from
the MSC product which was acquired during the year ended 30 June 2014, the year on year movement in each balance is due to
the movement between the AUD and USD exchange rate.
(ii) Amortization methods and useful lives
The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:
• Acquired licenses to patents
7-16 years
See Note 22(p) for the other accounting policies relevant to intangible assets and Note 22(j) for the Group’s policy
regarding impairments.
(iii) Significant estimate: Impairment of goodwill and assets with an indefinite useful life
The Group tests annually whether goodwill and its assets with indefinite useful lives have suffered any impairment in accordance
with its accounting policy stated in Note 22(j). The recoverable amounts of these assets and cash-generating units have been
determined based on fair value less costs to dispose calculations, which require the use of certain assumptions.
(iv) Impairment tests for goodwill and intangible assets with an indefinite useful life
In-process research and development acquired is considered to be an indefinite life intangible asset on the basis that it is
incomplete and cannot be used in its current form (see Note 22(p)(iii)). The carrying value of in-process research and development
(AUD 669m : USD 514m) is a separate asset which has been subject to impairment testing at the cash generating unit level, which
has been determined to be at the product level.
For the purpose of impairment testing, goodwill is monitored by management at the operating segment level. The Group is
managed as one operating segment, being the development of adult stem cell technology platform for commercialization.
The carrying value of goodwill has been allocated to the appropriate operating segment for the purpose of impairment testing.
The recoverable amount of both goodwill and in-process research and development was assessed as of 31 May 2015 based on
the fair value less costs to dispose.
(v) Key assumptions used for fair value less costs to dispose calculations
In determining the fair value less costs to dispose we have given consideration to the following indicators:
•
the valuation of the Company that was applicable to the recent (13 April 2015) equity placement undertaken with
Celgene Corporation (NASDAQ: CELG) through issuing of the Company’s securities on the Australian Securities Exchange;
•
the market capitalisation of the Company on the ASX (ASX:MSB) on the impairment testing date of 31 May 2015;
•
•
the valuation of the Company that was applicable to the 25 March 2013 capital raising undertaken through issuing of the
Company’s securities to investors on the Australian Securities Exchange;
the amount of time that has elapsed since the goodwill acquisition of MSC assets from Osiris in October 2013 and of certain
other products from Angioblast in December 2010;
• discounted expected future cash flows of programs; and
•
the scientific results and progress of the trials since acquisition.
Costs of disposal were assumed to be immaterial.
Discounted cash-flows used a real pre-tax discount rate range of 15.4% to 17.4%, and include estimated real cash inflows and
outflows for each program through to patent expiry, at which point a terminal value is assigned to the program. The assessment
showed the recoverable amount of goodwill and in-process research and development exceeds the carrying amounts, and
therefore there is no impairment.
In relation to cash outflows consideration has been given to cost of goods sold, selling costs and clinical trial schedules including
estimates of numbers of patients and per patient costs. Associated expenses such as regulatory fees and patent maintenance have
been included as well as any further preclinical development if applicable.
The assessment of goodwill showed the recoverable amount of the Group’s operating segment, including goodwill and in-process
research and development, exceeds the carrying amounts, and therefore there is no impairment.
There are no standard growth rates applied, other than our estimates of market penetration which increase initially, plateau and
then decline.
70
6. Non-financial assets and liabilities (continued)
The assessment of the recoverable amount of each product has been made in accordance with the discounted cash-flow
assumptions outlined above. The assessment showed that the recoverable amount of each product exceeds the carrying amount
and therefore there is no impairment.
(vi) Impact of possible changes in key assumptions
Due to the significant excess value of the recoverable amount over the carrying value, a reasonably possible change in the key
assumptions would not cause the carrying amount of the segment to exceed its recoverable amount.
Whilst we note there is no impairment the key sensitivities in the valuation remain the continued successful development of our
technology platform.
(c) Deferred revenue
Opening balance
Amount recognized as revenue in the year
Foreign exchange difference
Balance as of the end of the year
– To be recognized in the next twelve months (current deferred revenue)
– To be recognized beyond twelve months (non-current deferred revenue)
Balance as of the end of the year
(d) Provisions
30 June 2015
$’000
30 June 2014
$’000
55,746
(18,199)
11,293
48,840
19,537
29,303
48,840
72,793
(16,410)
(637)
55,746
15,928
39,818
55,746
Contingent consideration
Employee benefits
Other
Year ended 30 June
2015
2014
Current
$’000
Non-current
$’000
Total
$’000
Current
$’000
Non-current
$’000
Total
$’000
–
6,720
–
119,647
119,647
2,071
8,791
–
–
6,720
121,718
128,438
–
4,891
796
5,687
86,249
86,249
269
–
5,160
796
86,518
92,205
(i)
Information about individual provisions and significant estimates
Contingent consideration
The contingent consideration provision relates to the Group’s liability for certain milestones and royalty achievements pertaining to
the acquired MSC assets from Osiris Therapeutics Inc. Further disclosures can be found in Note 12 and Note 6(f)(iii).
Employee benefits
The provision for employee benefits relates to the Group’s liability for annual leave, short-term incentives and long service leave.
Employee benefits include accrued annual leave. As of 30 June 2015 and 2014, the entire amount of the accrual was $710k and
$590k, respectively, and is presented as current, since the Group does not have an unconditional right to defer settlement for any
of these obligations. However, based on past experience, the Group expects all employees to take the full amount of the accrued
leave or require payment within the next 12 months.
Other
During the ordinary course of business the Group occasionally has disputes with service providers. This provision allows for those
disputes in the event the disputed amounts may become due and payable. Further disclosure is considered to be prejudicial to
the Group.
Notes to the Financial Statements
(ii) Movements
Movements in each class of provision during the financial year, other than employee benefits, are set out below:
71
Carrying amount at start of the year – 1 July 2013
Initial recognition on business combination
12(b)
Amount used during the year
Charged/(credited) to consolidated income statement
Unwinding of discount(1)
Unused amount reversed
Foreign exchange difference
Carrying amount as of 30 June 2014
Contingent
consideration
$’000
Note
–
81,660
–
4,329
–
260
86,249
86,249
(8,051)
Carrying amount at start of period – 1 July 2014
Amount used during the year
Allocated to goodwill
Remeasurement(2)(3)
Charged/(credited) to consolidated income statement
Unwinding of discount(1)
Remeasurement(1)
Foreign Exchange difference
Carrying amount as of 30 June 2015
5(f)(iii)
2,331
10,529
8,416
20,173
119,647
Other
$’000
9,266
–
(5,922)
–
(2,524)
(24)
796
796
(914)
–
–
–
118
–
Total
$’000
9,266
81,660
(5,922)
4,329
(2,524)
236
87,045
87,045
(8,965)
2,331
10,529
8,416
20,291
119,647
(1) The unwinding of the risk adjusted discount as the time period shortens between the valuation date and the potential settlement
date of the contingent consideration.
(2) $2,331k out of period adjustment to goodwill was recognized on finalisation of the MSC business combination of Osiris.
(3) The total amount of remeasurement of contingent consideration pertaining to the acquired MSC assets of Osiris was $10,747k.
(e) Deferred tax balances
(i) Deferred tax liabilities
The balance comprises temporary differences attributable to:
Deferred tax liabilities related to intangible assets
Deferred tax liabilities expected to be settled within 12 months
Deferred tax liabilities expected to be settled after 12 months
Movements
As of 30 June 2013
Foreign exchange difference
Acquisition of in-process research and development
As of 30 June 2014
Foreign exchange difference
As of 30 June 2015
30 June 2015
$’000
30 June 2014
$’000
194,514
–
194,514
Intellectual Property
$’000
146,038
(2,201)
14,748
158,585
35,929
194,514
158,585
–
158,585
Total
$’000
146,038
(2,201)
14,748
158,585
35,929
194,514
72
7. Equity
(a) Contributed equity
Contributed equity
(i) Share capital
Ordinary shares
Less: Treasury Shares
Total Contributed Equity
2015
Shares
2014
Shares
2015
$’000
2014
$’000
336,997,729
321,640,094
737,260
(3,500,000)
(4,485,000)
–
333,497,729
317,155,094
737,260
(ii) Movements in ordinary share capital
Details
Shares No.
Issue price
Opening Balance as of 1 July 2013
316,468,901
Exercise of share options
Exercise of share options
Exercise of share options
Exercise of share options
Consideration for In-process research and development
acquired (Note 12)
Consideration for Acquired licenses to patents
Placement of shares under LSFP(1)
Placement of shares under LSFP(1)
Placement of shares under LSFP(1)
230,000
150,000
310,000
297,300
2,948,729
70,164
900,000
100,000
165,000
5,171,193
$1.58
$1.73
$2.64
$3.48
$5.69
$5.96
$5.92
$6.28
$6.70
Transaction costs arising on share issues
Contribution of equity (net of transaction costs)
Share options reserve transferred to equity on exercise of options
Movement for the year
Balance as of 30 June 2014
321,640,094
677,087
–
677,087
$’000
654,458
363
260
818
1,035
16,764
417
–
–
–
19,657
(46)
19,611
3,018
22,629
677,087
Notes to the Financial Statements
Details
Shares No.
Issue price
Opening balance – 1 July 2014
321,640,094
Exercise of share options
Exercise of share options
Exercise of share options
Exercise of share options
Exercise of share options
Placement of shares under LSFP(1)
Placement of shares under LSFP(1)
Placement of shares under LSFP(1)
Placement of shares under LSFP(1)
Placement of shares under a share placement agreement(2)
Share buy-back of LFSP(3)
Share buy-back of LFSP(3)
Share buy-back of LFSP(3)
Share buy-back of LFSP(3)
Share buy-back of LFSP(3)
Share buy-back of LFSP(3)
41,935
255,913
480,000
150,000
115,950
600,000
25,000
150,000
1,225,000
15,298,837
(600,000)
(700,000)
(500,000)
(135,000)
(400,000)
(650,000)
15,357,635
US $0.31
US $0.34
$1.58
$1.73
$3.48
$4.46
$4.54
$4.66
$4.71
$3.82
$4.46
$4.71
$5.92
$6.36
$6.70
$7.99
Transaction costs arising on share issues
Contribution of equity (net of transaction costs)
Share options reserve transferred to equity on exercise of options
Movement for the year
Balance as of 30 June 2015
336,997,729
73
$’000
677,087
14
111
758
260
404
–
–
–
–
58,442
–
–
–
–
–
–
59,988
(586)
59,402
771
60,173
737,260
(1) Initially these shares are issued and held in trust. Therefore there is no dollar movement recorded in ordinary share capital
at this time. If the shares are purchased in accordance with the conditions of the Loan Funded Share Plan (‘LFSP’) a dollar
movement will be recorded at that date.
(2) These shares were issued to Celgene Corporation (NASDAQ: CELG) under a placement agreement pursuant to which
Celgene purchased Mesoblast Limited securities and received a six-month right of refusal to certain disease fields.
(3) Repurchase of shares held in trust under LFSP by the Company. Therefore there is no dollar movement recorded in ordinary
share capital.
(iii) Ordinary shares
Ordinary shares participate in dividends and the proceeds on winding up of the Group 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. Ordinary shares have no par value and the Company does not have a limited amount of
authorized capital.
(iv) Employee share options
Information relating the Group’s employee share option plan, including details of shares issued under the scheme, is set out in
Note 18.
74
7. Equity (continued)
(b) Reserves
(i) Reserves
Share-based payments reserve
Foreign currency translation reserve
(ii) Reconciliation of reserves
Share-based payments reserve
Opening balance
Transfer to ordinary shares on exercise of options
Fair value of share-based payments
Reclassification of modified options to liability
Closing balance
Foreign currency translation reserve
Opening balance
Currency (loss)/gain on translation of foreign operation’s net assets
Closing balance
(iii) Nature and purpose of reserves
Share-based payment reserve
The share-based payments reserve is used to recognize:
– the grant date fair value of options issued but not exercised; and
– the grant date fair value of deferred shares granted but not yet vested.
30 June 2015
$’000
30 June 2014
$’000
61,535
108,717
170,252
55,530
(771)
8,567
(1,791)
61,535
17,866
90,831
108,717
55,530
17,886
73,416
49,129
(3,018)
9,419
–
55,530
24,506
(6,620)
17,886
Foreign currency translation reserve
Exchange differences arising on translation of a foreign controlled entity are recognized in other comprehensive income and
accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is
disposed of.
Notes to the Financial Statements
8. Cash flow information
(a) Reconciliation of cash and cash equivalents
Cash at bank
Deposit at call
(b) Reconciliation of net cash flows used in operations with loss after income tax
Loss for the year
Add/(deduct) net loss for non-cash items as follows:
Commercialization revenue
Depreciation and amortization
Foreign exchange (gains)/losses
Finance costs
Remeasurement of contingent consideration
Release of excess provision for services
Equity settled share-based payment
Change in operating assets and liabilities:
Decrease in trade and other receivables
(Increase) in prepayments
Decrease/(increase) in tax assets
(Decrease)/increase in trade creditors and accruals
(Decrease)/increase in provisions
Net cash outflows used in operations
75
30 June 2015
$’000
30 June 2014
$’000
27,507
116,635
144,142
3,827
192,567
196,394
(119,368)
(80,958)
(18,199)
1,955
(13,141)
10,529
2,639
–
8,567
252
(8,676)
459
12,012
1,262
(16,410)
1,120
4,016
4,329
–
(2,524)
9,419
2,911
(271)
3,281
(1,362)
(5,412)
(121,709)
(81,861)
76
Risk
9. Significant estimates, judgments and errors
10. Financial risk management
11. Capital management
Notes to the Financial Statements
77
9. Significant estimates, judgments and errors
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual
results. Management also needs to exercise judgment in applying the Group’s accounting policies.
This note provides an overview of the areas that involved a higher degree of judgment or complexity, and of items which are more
likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these
estimates and judgments is included in Notes 1 to 8 together with information about the basis of calculation for each affected line
item in the financial statements. In addition, this note also explains where there have been actual adjustments this year as a result
of an error and of changes to previous estimates.
(a) Significant estimates and judgments
The areas involving significant estimates or judgments are:
•
•
•
recognition of revenue (Note 3);
fair value of contingent liabilities and contingent purchase consideration in a business combination (Note 12 and Note 5(f));
fair value of goodwill and other intangible assets including in-process research and development (Note 6(b));
• useful life of intangible asset (Note 6(b));
• estimates of tax payable and current tax expense (Note 4(b));
• accrued research and development and manufacturing commercialization expenses (Note 5(e));
•
•
fair value of share-based payments (Note 18); and
fair value of available-for-sale financial assets (Note 5(f)).
Estimates and judgments are continually evaluated. They are based on historical experience and other factors, including
expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under
the circumstances.
10. Financial risk management
This note explains the Group’s exposure to financial risks and how these risks could affect the Group’s future financial performance.
Current year profit and loss information has been included where relevant to add further context.
Risk
Exposure arising from
Measurement
Management
Market risk – currency risk
Future commercial transactions
Recognized financial assets
and liabilities not denominated
in AUD
Cash flow forecasting
Sensitivity analysis
The future cash flows of each
currency are forecast and the
quantum of cash reserves
held for each currency are
managed in line with future
forecasted requirements.
Cross currency swaps are
undertaken as required.
Market risk – interest rate risk
Term deposits at fixed rates
Sensitivity analysis
Vary length of term deposits
Credit risk
Cash and cash equivalents,
trade receivables and
derivative financial instruments
Aging analysis
Credit ratings
Liquidity risk
Cash and cash equivalents
Rolling cash flow forecasts
Only transact with ‘A’ rated
banks
Future cash flows
requirements are forecasted
and capital raising strategies
are planned to ensure
sufficient cash balances
are maintained to meet the
Group’s future commitments.
78
10. Financial risk management (continued)
(a) Derivatives
Derivatives are only used for economic hedging purposes and not as trading or speculative instruments. The Group has the
following derivative financial instruments:
Current liabilities
Forward foreign exchange contracts – held for trading
30 June 2015
$’000
30 June 2014
$’000
–
–
337
337
(i) Classification of derivatives
Derivatives are classified as held for trading and accounted for at fair value through profit or loss. They are presented as current
assets or liabilities if they are expected to be settled within 12 months after the end of the reporting period.
(ii) Change in accounting policy
The Group has applied the new standard on AASB 13 Fair Value Measurement from 1 July, 2013. The adoption of the standard
has not affected the measurement of the fair value of certain derivative liabilities.
(iii) Fair value measurement
For information about the methods and assumptions used in determining the fair value of derivatives please refer to Note 5(f).
(b) Market risk
(i) Currency risk
The Group has certain clinical, regulatory and manufacturing activities which are being conducted internationally. The main currency
exposure to the Group is the clinical trial activities which are primarily occurring in the United States of America and manufacturing
activities occurring in Singapore. As a result of these activities, the Group has foreign currency amounts owing primarily in USD and
Singapore dollars (‘SGD’), as well as some smaller amounts in various other currencies as tabled below. These foreign currency
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 Group’s financial performance.
The Group manages the currency risk by evaluating the trend of the relevant foreign currency rates (‘FX rates’) to the AUD and
making decisions as to the levels to hold in each currency by assessing its future activities which will likely be incurred in those
currencies. The Group engages professional advice when considering forward foreign exchange contracts.
As of 30 June 2015, the Group held 64% of its cash in USD, and 36% in AUD. As of 30 June 2015, the Group did not hold any
financial derivative contracts.
As of 30 June 2014, the Group held 45% of its cash in USD, and 55% in AUD. 12% of the AUD balance is subject to forward
contracts to purchase USD at a predetermined rate in the future. After allowing for financial derivative contracts, the Group held
51% USD and 49% AUD. The Group utilized financial derivative contracts to take advantage of enhanced interest rates yields
available on AUD deposits when compared to USD deposits. The Group sells USD and buys AUD from the bank at a pre-agreed
FX rate and agrees to then sell those AUD and buy USD from the bank on maturity also at a pre-agreed rate. As these FX rates
are known at the outset there is no currency risk. It should be noted that trading in speculative derivatives is strictly prohibited in
accordance with the Group’s treasury and financial risk management policy.
The balances held at the end of the year that give rise to currency risk exposure are presented in the following table, together with
a sensitivity analysis which assesses the impact that a change of +/-20% in the exchange rate as of 30 June 2015 and 2014 would
have had on the Group’s reported net profits/(losses) and/or equity balance. The AUD: USD rate prevailing as of 30 June 2015 was
0.7680 (2014: 0.9240).
Notes to the Financial Statements
79
The Group’s exposure to foreign currency risk at the end of the reporting period was as follows:
As of 30 June 2015
Bank accounts
Bank accounts
Bank accounts
Trade and other receivables – CHF
Foreign currency
balance held
’000
USD 70,599
CHF 158
SGD 12
CHF 117
Trade payables & accruals – USD
(USD 22,899)
Trade payables & accruals – AUD(1)
Trade payables & accruals – SGD
Trade payables & accruals – GBP
Trade payables & accruals – EUR
Trade payables & accruals – CHF
Provisions – USD
Provisions – SGD
(AUD 149)
(SGD 208)
(GBP 60)
(EUR 184)
(CHF 111)
(USD 2,814)
(SGD 55)
Foreign currency
balance held
’000
USD 82,853
CHF 632
As of 30 June 2014
Bank accounts
Bank accounts
Forward exchange contracts
+20%
Profit/(loss)
AUD $’000
(15,321)
(37)
(2)
(27)
4,969
17
34
20
45
26
611
9
(9,656)
+20%
Profit/(loss)
AUD $’000
(14,659)
(125)
– Buy foreign currency (Note 10(a))
USD 76,000
(13,447)
Trade and other receivables – USD
Trade and other receivables – CHF
USD 990
CHF 3
Trade payables & accruals – USD
(USD 16,788)
Trade payables & accruals – AUD(1)
Trade payables & accruals – SGD
Trade payables & accruals – GBP
Trade payables & accruals – EUR
Trade payables & accruals – CHF
Trade payables & accruals – DKK
Provisions – USD
Provisions – SGD
(AUD 222)
(SGD 722)
(GBP 27)
(EUR 86)
(CHF 12)
(DKK 2)
(USD 3,144)
(SGD 34)
(175)
(1)
2,970
35
102
8
21
2
0
556
5
(24,708)
-20%
Profit/(loss)
AUD $’000
22,981
55
3
41
(7,454)
(26)
(50)
(31)
(67)
(39)
(916)
(13)
14,484
-20%
Profit/(loss)
AUD $’000
21,989
188
20,170
263
1
(4,455)
(52)
(153)
(12)
(31)
(4)
(0)
(834)
(7)
37,063
(1) These AUD balances are held by the foreign-based subsidiaries and are therefore subject to currency risk.
80
10. Financial risk management (continued)
(ii) Interest rate risk
The Group is not exposed to typical interest rate risk, being the impact of fixed versus floating interest rates on debt. The Group’s
exposure is to interest rate movements which impacts interest income earned on its deposits. The interest income derived from
these balances can fluctuate due to interest rate changes. This interest rate risk is managed by spreading the maturity date of our
deposits across various periods. The Group ensures that sufficient funds are available, in at call accounts, to meet the cash flow
requirements of the Group.
The deposits held which derive interest revenue are described in the table below, together with the maximum and minimum interest
rates being earned as of 30 June 2015. The effect on profit is shown if interest rates change by 10%, in either direction, is as follows:
AUD
Funds invested
Rate increase by 10%
Rate decrease by 10%
USD
Funds invested
Rate increase by 10%
Rate decrease by 10%
Low
2.85%
3.14%
2.57%
Low
0.30%
0.33%
0.27%
30 June 2015
High
AUD ’000
2.92%
3.21%
2.63%
High
0.30%
0.33%
0.27%
44,191
129
(129)
USD ’000
55,636
17
(17)
Low
3.41%
3.75%
3.07%
Low
0.04%
0.04%
0.04%
30 June 2014
High
AUD ’000
3.60%
3.96%
3.24%
High
0.27%
0.30%
0.24%
107,540
374
(374)
USD ’000
81,000
3
(3)
(iii) Price risk
Price risk is the risk that future cash flows derived from financial instruments will be altered as a result of a market price movement,
other than foreign currency rates and interest rates. The Group does not consider it has any exposure to price risk other than those
already described above.
(c) Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause financial loss to the
other party. As the Group is non–revenue generating it generally does not have trade receivables. The Group’s receivables are
tabled below.
Cash and cash equivalents
Cash and cash equivalents (Note 5(a)) – minimum A rated
144,142
196,394
30 June 2015
$’000
30 June 2014
$’000
Trade and other receivables
Receivable from the Australian Government (Goods and Services Tax)
Receivable from the Australian Government (Income Tax)
Receivable from the United States Government (Income Tax)
Receivable from the Swiss Government (Value-Added Tax)
Receivable from minimum A rated bank deposits (interest)
Receivable from other parties (non-rated)
70
4,720
92
3
110
177
128
5,180
74
4
296
416
Notes to the Financial Statements
81
(d) Liquidity risk
Liquidity risk is the risk that the Group will not be able to pay its debts as and when they fall due.
For the year ended 30 June 2015, the Group has incurred a total comprehensive loss after income tax of $28,537k (2014: 87,578k)
and net cash outflows from operations of $115,989k (2014: 81,861k). As at 30 June 2015, the Group held total cash and cash
equivalents of $144,142k. The Group is a development stage biotechnology company and as such expects to be utilizing cash
reserves until its research activities are commercialized. The Group has historically funded its research activities through raising
capital from shareholders and entering into licensing and partnership agreements, it is expected that similar funding will be
obtained to provide working capital as and when required.
The directors are satisfied that there is sufficient working capital to support the committed research activities over the coming
12 months and the Group has the ability to realize its assets and pay its liabilities and commitments in the normal course of
business. Accordingly, the directors have prepared the financial report on a going concern basis.
All financial liabilities, excluding contingent consideration, held by the Group as of 30 June 2015 and 30 June 2014 are non-interest
bearing and mature within 6 months. The total contractual cash flows associated with these liabilities equate to the carrying amount
disclosed within the financial statements.
11. Capital management
The Group’s objective when managing capital is to safeguard its ability to continue as a going concern, so that it can provide
returns for shareholders and benefits for other stakeholders. See Note 5(a) for the cash reserves of the Group as at the end
of the financial reporting period.
82
Group structure
12. Business combination
13. Interests in other entities
Notes to the Financial Statements 83
12. Business combination
(a) Summary of acquisition
On 11 October 2013, the Group acquired the culture-expanded mesenchymal stem cell (‘MSC’) business of Osiris Therapeutics Inc.
The acquisition is complementary in its nature with many commercial and strategic benefits. The potential benefits derived from
acquiring the late-phase MSC products include:
– near term market launch of a mesenchymal lineage product in major jurisdictions;
– broadened late-phase clinical programs in strategic areas of focus;
–
leveraged roll out of infrastructure, skills and expertise needed to commercialize mesenchymal precursor cell products;
– ownership of extensive long-term clinical data from over 1,500 patients treated with culture-expanded mesenchymal stem cells,
including safety, efficacy and repeat dosing data; and
– acquisition of new intellectual property which is highly complementary to the Group’s existing patent estate.
Details of the purchase consideration, the net assets acquired and goodwill are as follows:
Purchase consideration at fair value
Cash paid on closing
Cash payment made on the six month anniversary of the agreement (Fair Value)(1)
Securities allotment (2,948,729 shares were allotted)(2)
Contingent consideration (Note 6(d)(ii))(3)
Total purchase consideration
Net assets acquired at fair value
Property, plant and equipment
Intangible assets: in-process research and development
Deferred tax liability on intangible assets
Net identifiable assets acquired
add: Goodwill
Net assets acquired
Fair value at
11 October 2013
$’000
21,196
15,610
15,873
81,660
134,339
Fair value at
11 October 2013
$’000
240
134,099
(14,748)
119,591
14,748
134,339
(1) The cash payment due on the six month anniversary of the agreement of $15,610k has a USD denominated value of USD 15,000k.
(2) The Company’s securities were issued as consideration upon the transfer of assets on 18 December 2013, which had a value
of $16,717k on that date.
(3) At acquisition date contingent consideration of $81,660k was recorded as tabled above. Please refer to Note 6(d)(ii) for the
reconciliation of the subsequent movements of this contingent consideration provision.
All assets acquired and purchase consideration amounts are denominated in USD. The amounts presented above are in AUD and
have been translated at the rate applicable at the acquisition date (11 October 2013) being AUD 1 : USD 0.9450. The goodwill is
attributable to the deferred tax liability that is required to be recognized on the difference between the intangible asset’s book value
compared to its tax value.
No amount of goodwill is expected to be deducted for tax purposes.
The tax base of the asset assumes that the asset is held for use and is therefore $Nil resulting in a deferred tax liability calculated
at the tax rate of the jurisdiction where the underlying intangible assets are held.
Refer also to Note 6(b) for an immaterial out of period adjustment to goodwill on finalisation of the business combination.
84
12. Business combination (continued)
(b) Contingent consideration
In the event that certain pre-determined milestones and royalties are achieved additional consideration is payable. The fair value of
the contingent consideration is set out in the table below. The fair value estimates have been calculated on the basis of fair value
less cost to sell by using the income approach, with reference to both the excess earnings and relief from royalty methods as set
out below:
The fair value of contingent consideration
Fair value of cash or stock payable, dependent on achievement of future
late-stage clinical or regulatory targets(1)
Fair value of royalty payments from commercialization of the intellectual
property acquired(2)
Fair value at
11 October 2013
$’000
24,507
57,153
81,660
(1) The contingent consideration payable for each milestone is a fixed dollar amount and can be paid either in cash or through
the allotment of Mesoblast Ltd securities at the date of payment, at the discretion of the Mesoblast Group. The potential
undiscounted amount of the contingent consideration for milestones is a minimum of USD Nil and a maximum of USD 50m.
(2) The amount of the contingent consideration payable as royalties paid on sales achieved is variable. The contingent
consideration paid could range from zero dollars if no sale of product occurs, up to a maximum that is unlimited. This maximum
is calculated at a commercial arm’s length percentage of net sales. Royalty payments will cease after a 10 year commercial
sales period. Royalties are payable in cash after the conclusion of the period in which the sales were made.
(c) Purchase consideration – cash outflow
30 June 2015
$’000
30 June 2014
$’000
Cash consideration (fair value) owed pursuant to the asset purchase agreement
Securities allotment consideration owed (fair value) pursuant to the asset purchase agreement
less: amount paid during the prior full year ended
Cash outflow reported for the current reporting period(1)
35,269
2,331
(35,269)
2,331
36,806
–
(1,537)
35,269
(1) Included within cash flows from investing activities within the statements of cash flows.
(d) Revenue and profit contribution
The acquired business contributed revenues of $Nil and net loss of $5,951k to the Group for the period 11 October 2013 to
30 June 2014.
If the acquisition had occurred on 1 July 2013, consolidated revenue and loss for the year ended 30 June 2014 would have been
$25,980k and $82,313k respectively. These amounts have been calculated using the Osiris audited financial statements segment
information. This has been calculated based on expenditure incurred with external providers to develop programs acquired from
Osiris. There were no allocations of internal labour or other internal cost bases.
(e) Acquisition-related costs
Directly attributable acquisition-related costs of approximately $954k are included in management and administration expenses
in the consolidated income statement, and in the operating cash flows section in the consolidated statement of cash flows, for the
full-year ended 30 June 2014.
Notes to the Financial Statements
85
13. Interests in other entities
(a) Material subsidiaries
The Group’s principal subsidiaries as of 30 June 2015 are set out below. Unless otherwise stated, they have share capital consisting
solely of ordinary shares that are held directly by the Group, and the proportion of ownership interests held equals the voting rights
held by the Group. The country of incorporation or registration is also their principal place of business.
Name of entity
Country of incorporation
Class of shares
30 June 2015
30 June 2014
Equity holding
Mesoblast, Inc.
Mesoblast International Sàrl
(includes Mesoblast International
Sarl Singapore Branch)
USA
Switzerland
Mesoblast Australia Pty Ltd
Australia
Mesoblast UK Limited
United Kingdom
Ordinary
Ordinary
Ordinary
Ordinary
%
100
100
100
100
%
100
100
100
100
86
Unrecognized items
14. Contingent assets and contingent liabilities
15. Commitments
16. Events occurring after the reporting period
Notes to the Financial Statements 87
14. Contingent assets and contingent liabilities
(a) Contingent assets
The Group did not have any contingent assets outstanding as of 30 June 2015 and 2014.
(b) Contingent liabilities
(i) Central Adelaide Local Health Network Incorporated (‘CALHNI’) (formerly Medvet)
Mesoblast will be required to make a milestone payment to CALHNI of USD 250k on completion of Phase 3 clinical trials and
USD 350k on FDA marketing approval for products in the orthopedic field. The Group will pay CALHNI a commercial arm’s length
royalty based on net sales by the Group of licensed products in the orthopedic field each quarter.
Additionally, in regards to certain intellectual property assets originally assigned to Mesoblast Inc., the Group may be required
to pay consideration to CALHNI depending on the achievement of future milestones. They represent payments on successful
completion of subsequent clinical milestones in fields other than orthopedic. If all milestones were to be reached these payments
total USD 1,850k. In addition it stipulates the requirement for royalty payments as a percentage of sales of product in fields other
than orthopedic at a commercial arm’s length rate as well as minimum annual royalties after commercial sale of product scaling up
from USD 100k to USD 500k over 5 years.
Across all fields, if all milestones were reached, milestone payments would total USD 2,450k.
(ii) Other contingent liabilities
The Group has entered into a number of agreements with third parties pertaining to intellectual property. Contingent liabilities may
arise in the future if certain events or developments occur in relation to these agreements. At this time the Group has assessed
these contingent liabilities to be remote and specific disclosure is not required.
15. Commitments
(a) Capital commitments
The Group did not have any commitments for future capital expenditure outstanding as of 30 June 2015 and 2014.
(b) Lease commitments: Group as lessee
(i) Non-cancellable operating leases
The Group leases various offices under non-cancellable operating leases expiring within 1 to 6 years. The leases have varying
terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Excess office space is sub-let
to a third party also under a non-cancellable operating lease.
Total
$’000
18,380
18,380
Within
one year
$’000
3,375
3,375
Later than one
year but no later
than three years
$’000
Later than three
years but no later
than five years
$’000
9,698
9,698
5,307
5,307
Later than
five years
$’000
–
–
Operating leases
Total commitments
Lease commitments include amounts in USD and Singapore dollars which have been translated to AUD as of 30 June 2015 foreign
exchange rates published by the Reserve Bank of Australia.
(ii) Sub-lease payments
Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases are set
out below:
Total
$’000
926
926
Within
one year
$’000
210
210
Later than one
year but no later
than three years
$’000
Later than three
years but no later
than five years
$’000
629
629
87
87
Later than
five years
$’000
–
–
Operating leases
Total commitments
88
15. Commitments (continued)
(c) Purchase commitments
The Group has established a strategic alliance for clinical and long-term commercial production of Mesoblast’s off-the-shelf
(allogenic) adult stem cell products with Lonza Group (SWS: LONN).
As part of this agreement, Mesoblast has an option to trigger a process requiring Lonza Group to construct a purpose-built
manufacturing facility exclusively for Mesoblast’s marketed products. In return, Mesoblast will purchase agreed quantities of
marketed products from the facility.
16. Events occurring after the reporting period
There are no events that have occurred after 30 June 2015 and prior to the signing of this financial report that would likely
have a material impact on the financial results presented.
Notes to the Financial Statements 89
Other information
17. Related party transactions
18. Share-based payments
19. Remuneration of auditors
20. Earnings per share
21. Parent entity financial information
22. Summary of significant accounting policies
90
17. Related party transactions
(a) Parent entity
The parent entity within the Group is Mesoblast Limited.
(b) Subsidiaries
Details of interests in subsidiaries are disclosed in Note 13 to the financial statements.
(c) Key management personnel compensation
The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below:
Short-term employee benefits
Long-term employee benefits
Post-employment benefits
Share-based payments
30 June 2015
$
30 June 2014
$
3,607,006
2,806,853
19,742
93,434
341,986
23,173
65,319
–
4,062,168
2,895,345
Further disclosures regarding key management personnel compensation are contained within the remuneration report.
(d) Transactions with other related parties
Accounts receivable from, accounts payable to and loans from subsidiaries as at the end of the financial year have been eliminated
on consolidation of the Group.
(e) Terms and conditions
All other transactions were made on normal commercial terms and conditions and at market rates, except that there are no fixed
terms for the repayment of loans between the parties.
Outstanding balances are unsecured and are repayable in cash.
18. Share-based payments
The Company has adopted an Employee Share Option Plan (‘ESOP’) and a Loan Funded Share Plan (‘LFSP’) (together, ‘the Plans’)
to foster an ownership culture within the Company and to motivate senior management and consultants to achieve performance
targets. Selected directors, employees and consultants may be eligible to participate in the Plans at the absolute discretion of the
board of directors, and in the case of directors, upon approval by shareholders.
Grant policy
In accordance with the Company’s current policy, options and loan funded shares are typically issued in three equal tranches.
For issues granted prior to 1 July 2015 the length of time from grant date to expiry date was typically 5 years, the grant made on
10 July 2015 was issued with a seven year term. The first 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 for options is determined by reference to the Company policy which is generally the volume weighted market
price of a share sold on the ASX on the 5 trading days immediately before the grant date. In the case of options issued to staff
(performance based) the board of directors add a 10% premium, options issued to directors, which are not performance based,
are issued with no premium. A one off issue of options to non-Australian based directors was made during the year. The board of
directors’ policy is not to issue options at a discount to the market price. The same approach is used to determine the purchase
price to acquire a loan-funded share for the purposes of the LFSP.
The aggregate number of options which may be issued pursuant to the ESOP must not exceed 10,000,000 with respect to
US incentive stock options, and with respect to Australian residents, that limit imposed under ASIC Class Order [CO 14/1000].
Notes to the Financial Statements
91
In addition the LFSP has the following characteristics:
On grant date, the Company issues new equity (rather than purchasing shares on market), and the loan funded shares are placed
in a trust which holds the shares on behalf of the employee. The trustee issues a limited recourse, interest free, loan to the employee
which is equal to the number of shares multiplied by the price. A limited-recourse loan means that the repayment amount will be the
lesser of the outstanding loan value (the loan value less any amounts that may have already been repaid) and the market value of the
shares that are subject to the loan. The price is the amount the employee must pay for each loan funded share if exercised.
The trustee continues to hold the shares on behalf of the employee until the employee chooses to settle the loan pertaining to the
shares and all vesting conditions have been satisfied, at which point ownership of the shares is fully transferred to the employee.
Any dividends paid by the Company, while the shares are held by the trustee, are applied as a repayment of the loan at the after-tax
value of the dividend.
(a) Reconciliation of outstanding share-based payments
Year ended 30 June 2015
Series
10
11
13
14
15/LF1
16/LF2
17/LF3
18/LF4
19/LF5
20/LF6
21/LF7
22/LF8
23a
23b
LF9.4
LF9.7
24
24a (i)
24a (ii)
25
Grant
Date
Expiry
Date
Exercise
Price
Opening
Balance
Granted
No.
(during
the year)
30/11/2009
30/11/2014
30/11/2009
30/11/2014
22/09/2010
21/09/2015
$1.73
$1.58
$2.64
150,000
480,000
135,000
29/11/2010
29/11/2015
$3.48
1,569,300
22/12/2011
30/06/2016
$7.99
4,243,334
24/02/2012
23/02/2017
09/07/2012
08/07/2018
$8.48
$6.69
340,000
250,000
21/09/2012-
29/10/2012
30/06/2017
$6.70
2,653,333
25/01/2013-
29/01/2013
24/01/2018-
28/01/2008
$6.29
100,000
24/05/2013
23/05/2018
$6.36
1,000,000
03/09/2013
30/06/2018
$5.92
3,290,000
04/09/2013
27/08/2018
26/11/2013
10/10/2018
30/11/2013
29/11/2018
11/12/2013
30/06/2017
03/09/2013
30/06/2018
17/12/2013
16/12/2018
10/02/2014
09/02/2019
17/02/2014
16/02/2019
15/07/2014
06/04/2019
25a (i&ii)
01/01/2014
31/12/2018
25b
25c
12/12/2014
31/10/2019
21/09/2014
02/09/2014
26/LF11
24/07/2014
23/07/2019
27/LF12
05/09/2014
30/06/2019
27(i)
28/07/2014
27/07/2019
$6.28
$6.20
$6.79
$6.70
$5.92
$6.25
$6.41
$6.33
$5.80
$6.38
$4.51
$5.43
$4.71
$4.71
$4.54
325,000
50,000
200,000
165,000
200,000
180,000
100,000
25,000
–
15,000
650,000
–
–
–
–
50,000
60,000
575,000
– 3,960,000
–
100,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Exercised
No.
(during
the year)
(150,000)
(480,000)
–
(115,950)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Lapsed/
Cancelled
No. (during
the year)
Closing
Balance
Vested and
exercisable
No. (end
of year)
–
–
–
–
–
–
–
–
135,000
135,000
1453,350
1,453,350
(830,000)
3,413,334
3,413,334
–
–
340,000
340,000
250,000
166,665
(376,666)
2,276,667
1,863,337
–
100,000
66,668
(135,000)
865,000
576,676
(548,333)
2,741,667
1,206,671
(50,000)
275,000
–
50,000
91,668
16,666
(200,000)
(165,000)
(200,000)
–
–
–
–
–
–
(31,667)
148,333
51,666
(100,000)
(25,000)
–
–
–
–
–
–
–
(60,000)
15,000
5,000
650,000
650,000
50,000
–
(360,000)
215,000
(580,000)
3,380,000
(100,000)
–
–
–
–
–
–
92
18. Share-based payments (continued)
(a) Reconciliation of outstanding share-based payments (continued)
Year ended 30 June 2015 (continued)
28/LF13
09/10/2014
08/10/2019
Series
27 (ii)
27 (iii)
27 (iv)
LF12a
29
30a(1)
30b(1)
30c(1)
30d(1)
30e(1)
30f(1)
30g(1)
30h(1)
30i(1)
30j
LF14
31
31a
31b
INC
INC
INC
INC
INC
Grant
Date
Expiry
Date
Exercise
Price
Opening
Balance
Granted
No.
(during
the year)
Exercised
No.
(during
the year)
Lapsed/
Cancelled
No. (during
the year)
Closing
Balance
Vested and
exercisable
No. (end
of year)
04/08/2014
03/08/2019
11/08/2014
10/08/2019
25/08/2014
24/08/2019
05/09/2014
30/06/2019
25/11/2014
24/11/2019
25/03/2015
30/06/2018
25/03/2015
25/01/2018
25/03/2015
25/01/2019
25/03/2015
30/06/2019
25/03/2015
23/07/2019
25/03/2015
23/07/2019
25/03/2015
20/01/2019
25/03/2015
25/01/2018
25/03/2015
25/01/2019
25/03/2015
30/06/2019
6/01/2015
16/12/2019
16/03/2015
16/02/2020
27/04/2015
16/02/2020
12/05/2015
16/02/2020
$4.60
$4.43
$4.67
$4.46
$4.54
$4.02
$5.00
$5.00
$5.00
$5.00
$5.00
$5.00
$4.71
$4.71
$4.46
$4.71
$4.66
$4.73
$4.73
$4.30
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7/12/2010
7/07/2015
USD 0.046
287,903
7/12/2010
26/10/2018
USD 0.305
195,999
7/12/2010
26/10/2019
USD 0.340
703,761
7/12/2010
25/04/2017
USD 0.444
127,956
7/12/2010
2/05/2017
USD 0.444
127,956
50,000
100,000
75,000
600,000
235,000
240,000
650,000
235,000
135,000
300,000
165,000
200,000
300,000
400,000
600,000
150,000
150,000
60,000
20,000
400,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(41,935)
(255,913)
–
–
–
50,000
(100,000)
–
–
75,000
(600,000)
–
–
–
–
–
–
–
235,000
240,000
650,000
650,000
235,000
156,666
135,000
135,000
300,000
100,000
165,000
165,000
200,000
133,334
300,000
400,000
–
–
600,000
200,000
150,000
150,000
60,000
20,000
400,000
–
–
–
–
–
287,903
287,903
154,064
154,064
447,848
447,848
127,956
127,956
127,956
127,956
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
30 June 2015
17,549,542 9,825,000 (1,043,798)
(4,461,666) 21,869,078
12,722,428
Weighted average share purchase price
$5.82
$4.69
$1.49
$5.91
$5.49
$5.78
(1) 30a to 30i were granted as a remuneration for the repurchase and cancellation of 2,985,000 LFSP during the year ended
30 June 2015 (see Note 18(b)).
Notes to the Financial Statements 93
Year ended 30 June 2014
Series
Grant
Date
Expiry
Date
Exercise
Price
Opening
Balance
Granted
No.
(during
the year)
Exercised
No.
(during
the year)
Lapsed/
Cancelled
No. (during
the year)
Closing
Balance
Vested and
exercisable
No. (end
of year)
8
10
11
13
14
15/LF1
16/LF2
17/LF3
18/LF4
19/LF5
20/LF6
21/LF7
22/LF8
23a
23b
24
24a (i)
24a (ii)
LF9.4
LF9.7
INC
INC
INC
INC
INC
7/07/2008
30/06/2013
30/11/2009
30/11/2014
30/11/2009
30/11/2014
22/09/2010
21/09/2015
$1.00
$1.73
$1.58
$2.64
180,000
300,000
710,000
445,000
29/11/2010
29/11/2015
$3.48
1,866,600
22/12/2011
30/06/2016
$7.99
4,560,000(1)
24/02/2012
23/02/2017
9/07/2012
8/07/2018
$8.48
$6.69
340,000
250,000
21/09/2012-
29/10/2012
30/06/2017
$6.70
2,915,000(1)
25/01/2013-
29/01/2013
24/01/2018-
28/01/2008
$6.29
100,000
24/05/2013
23/05/2018
$6.36
1,000,000
–
–
–
–
–
–
–
–
–
–
–
3/09/2013
30/06/2018
4/09/2013
27/08/2018
26/11/2013
10/10/2018
30/11/2013
29/11/2018
17/12/2013
16/12/2018
10/02/2014
9/02/2019
17/02/2014
16/02/2019
11/12/2013
30/06/2017
3/09/2013
30/06/2018
$5.92
$6.28
$6.20
$6.79
$6.25
$6.41
$6.33
$6.38
$6.70
$5.92
–
–
–
–
–
–
–
–
–
–
3,490,000
325,000
50,000
200,000
190,000
100,000
25,000
650,000
165,000
200,000
7/12/2010
7/07/2015 USD 0.046
287,903
7/12/2010
26/10/2018 USD 0.305
195,999
7/12/2010
26/10/2019 USD 0.340
703,761
7/12/2010
25/04/2017 USD 0.444
127,956
7/12/2010
2/05/2017 USD 0.444
127,956
–
–
–
–
–
–
(180,000)
–
–
(150,000)
(230,000)
(310,000)
(297,300)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
150,000
150,000
480,000
480,000
135,000
135,000
1,569,300
1,569,300
(316,666)
4,243,334
3,543,339
–
–
340,000
226,668
250,000
83,331
(261,667)
2,653,333
1,275,002
–
100,000
33,334
–
1,000,000
378,338
(200,000)
3,290,000
325,001
–
–
–
325,000
50,000
200,000
(10,000)
180,000
–
–
–
–
–
–
–
–
–
–
100,000
25,000
650,000
165,000
110,000
200,000
66,667
287,903
287,903
195,999
195,999
703,761
703,761
127,956
127,956
127,956
127,956
–
–
–
–
–
–
–
25a (i&ii)
1/01/2014
31/12/2018
30 June 2014
14,110,175
5,395,000
(987,300)
(968,333) 17,549,242
9,819,555
Weighted average share purchase price
$5.46
$6.08
$2.51
$5.90
$5.82
$5.32
(1) The opening balance for 15/LF1 and 18/LF4 has been restated to increase the balance by 100,000 and 45,000 loan funded
shares respectively. These shares were forfeited by participants in accordance with the terms of the loan funded share plan and
are now the property of the Employee Share Trust.
The weighted average share price at the date of exercise of options exercised during the year ended 30 June 2015 and 2014 was
$4.06 and $5.83, respectively.
The weighted average remaining contractual life of share options and loan funded shares outstanding as of 30 June 2015 and 2014
was 2.43 years and 2.96 years, respectively.
94
18. Share-based payments (continued)
(b) Existing share-based payment arrangements
General terms and conditions attached to share-based payments
Share options pursuant to the employee share option plan and shares pursuant to loan funded share plan are granted in three
equal tranches. For issues granted prior to 1 July 2015 the length of time from grant date to expiry date was typically 5 years, the
grant made on 10 July 2015 was issued with a seven year term. Vesting occurs progressively over the life of the option/share with
the first tranche vesting one year from grant date, the second tranche two years from grant date, and the third tranche three years
from grant date. On cessation of employment the Company’s board of directors determines if a leaver is a bad leaver or not. If a
participant is deemed a bad leaver, all rights, entitlements and interests in any unexercised options or shares (pursuant to the loan
funded share plan) held by the participant will be forfeited and will lapse immediately. If a leaver is not a bad leaver they may retain
vested options and shares (pursuant to the loan funded share plan), however, they must be exercised within 60 days of cessation
of employment (or within a longer period if so determined by the Company’s board of directors), after which time they will lapse.
Unvested options will normally be forfeited and lapse. This policy applies to all issues shown in the above table with the exception
of the following:
Series
10
Options granted to the Chairman were approved by shareholders at the Annual General Meeting held on 30 November 2010.
The options were granted in four equal tranches vesting on the achievement of certain milestones, being the date on which:
• Mesoblast signs a commercial partnering contract, e.g. a commercial license to one of its products
(vested 7 December 2010);
• Mesoblast receives IND clearance from the FDA for its first clinical trial for Intervertebral Disc Repair
(vested 17 March 2011);
• Mesoblast completes patient enrolment for its first clinical trial under IND for Intervertebral Disc Repair
(vested 12 October 2012);
• Mesoblast obtains a license from the Therapeutics Goods Administration (TGA) for the manufacture
(vested 20 July 2010).
All the remaining options under series 10 were exercised during the year.
25a(i&ii) Options were granted in two equal tranches and vested on the date that the option holder had direct involvement
(to the reasonable satisfaction of the Company’s board of directors) in the Company achieving certain confidential
commercial objectives.
INC.
31b
As part of the acquisition of Mesoblast, Inc., Mesoblast, Inc. options were converted to options of the Company
at a conversion ratio of 63.978. The Mesoblast, Inc. option exercise price per option was adjusted using the same
conversion ratio. All options vested on acquisition date (7 December 2010), and will expire according to their original
expiry dates (with the exception of options held by directors which were limited to an expiry date not exceeding four
years from acquisition).
Options were granted in two equal tranches and will vest on the date that the option holder has direct involvement
(to the reasonable satisfaction of the Company’s board of directors) in the Company achieving certain confidential
commercial objectives.
Modifications to share-based payment arrangements
During the year ended 30 June 2015, the Company repurchased an aggregate amount of $17.7m of loans under LFSP and
correspondingly cancelled 2,985,000 of the Company’s ordinary shares held in trust for certain employees of the Company.
As remuneration for the repurchase of loans and cancellation of these ordinary shares under LFSP, the Company granted options
to purchase 2,985,000 of the Company’s ordinary shares at exercise prices ranging from $4.46 to $5.00 under ESOP 30a to 30i.
As of 25 March 2015 (the ‘modification date’), the total incremental fair value granted as a result of these modifications was $769k.
Notes to the Financial Statements 95
(c) Fair values of share-based payments
The weighted average fair value of share options and loan funded shares granted during the years ended 30 June 2015 and 2014
was $1.22 and $1.71, respectively.
The fair value of all shared-based payments made has been calculated using the Black-Scholes model. This model requires the
following inputs:
Share price at grant date
The share price underpinning the exercise price has been used as the share price at grant date for valuation purposes. This price
is generally the volume weighted average share price for the 5 trading days leading up to grant date.
Exercise price
The exercise price is a known value that is contained in the agreements.
Share price volatility
The model requires the Company’s share price volatility to be measured. In estimating the expected volatility of the underlying
shares our objective is to approximate the expectations that would be reflected in a current market or negotiated exchange price
for the option or loan funded share.
Share price date from 1 January, 2012 through to the end of each applicable financial year has been used to calculate share
price volatility.
Life of the option/share
The life is generally the time period from grant date through to expiry. Certain assumptions have been made regarding ‘early
exercise’ i.e. options exercised ahead of the expiry date, with respect to option series 14 and later. These assumptions have been
based on historical trends for option exercises within the Company and take into consideration exercise trends that are also evident
as a result of local taxation laws.
Dividend yield
The Company has yet to pay a dividend so it has been assumed the dividend yield on the shares underlying the options will be 0%.
Risk free interest rate
This has been sourced from the Reserve Bank of Australia historical interest rate tables for government bonds.
96
18. Share-based payments (continued)
Model inputs
The model inputs for the valuations of options approved and issued during the year ended 30 June 2015 are as follows:
Series
25
25b
25c
26/LF11
27/LF12
27(i)
27(ii)
27(iii)
27(iv)
LF12a
28/LF13
29
30a
30b
30c
30d
30e
30f
30g
30h
30i
30j
LF14
31
31a
31b
Financial
year of
grant
Exercise/Loan
Price per share
$
Share price
at grant date
$
Expected
share price
volatility
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
2015
5.80
4.51
5.43
4.71
4.71
4.54
4.60
4.43
4.67
4.46
4.54
4.02
5.00
5.00
5.00
5.00
5.00
5.00
4.71
4.71
4.46
4.71
4.66
4.73
4.73
4.30
4.48
4.33
4.89
4.04
5.49
4.13
4.19
4.03
4.24
5.49
4.11
4.02
3.96
3.96
3.96
3.96
3.96
3.96
3.96
3.96
3.96
3.96
4.33
3.86
3.56
3.72
38.09%
38.40%
38.38%
37.89%
38.44%
38.44%
38.44%
38.44%
38.44%
38.36%
38.33%
38.09%
38.70%
38.70%
38.70%
38.70%
38.70%
38.70%
38.70%
38.70%
38.70%
38.70%
38.58%
38.92%
40.98%
40.82%
Life
3.5 yrs
3.7 yrs
3.7 yrs
3.7 yrs
3.5 yrs
3.7 yrs
3.7 yrs
3.7 yrs
3.7 yrs
3.5 yrs
3.7 yrs
3.7 yrs
2.4 yrs
2.1 yrs
2.8 yrs
2.8 yrs
2.1 yrs
2.8 yrs
3.2 yrs
3.2 yrs
3.2 yrs
3.2 yrs
3.7 yrs
3.6 yrs
3.6 yrs
3.5 yrs
Dividend
yield
Risk-free
interest rate
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
2.99%
2.45%
3.19%
2.80%-2.94%
3.12%
3.12%
3.12%
3.12%
3.12%
2.81%
2.86%
2.71%
1.87%
1.87%
1.87%
1.87%
1.87%
1.87%
1.87%
1.87%
1.87%
1.87%
2.27%
1.99%
2.02%
2.42%
The closing share market price of an ordinary share of Mesoblast Limited on the Australian Securities Exchange as of 30 June 2015
was $3.76.
Notes to the Financial Statements
97
The model inputs for the valuations of options approved and issued during the year ended 30 June 2014 are as follows:
Series
15/LF1
18/LF4
21/LF7
22
LF8
LF9.4
LF9.7
23a
23b
24
24a.(i)
24a.(ii)
25a.(i)
25a.(ii)
Financial
year of
grant
Exercise/Loan
Price per share
$
Share price
at grant date
$
Expected
share price
volatility
Dividend
yield
Risk-free
interest rate
Life
2014
2013/2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
7.99
6.70
5.92
6.28
5.92
6.70
5.92
6.20
6.20
6.25
6.41
6.33
6.38
6.38
7.00-7.48
5.83-7.14
5.56
5.49
6.28
5.88
5.88
6.04
6.79
5.58
5.75
5.76
5.84
5.84
51.48%
48.49%
38.80%
38.79%
38.79%
38.79%
38.79%
38.74%
38.73%
38.80%
38.37%
38.20%
38.04%
38.04%
0.6-4.5 yrs
4.75 yrs
3.6 yrs
3.7 yrs
3.7 yrs
2.6 yrs
3.4 yrs
3.6 yrs
3.7 yrs
3.7 yrs
3.7 yrs
3.7 yrs
3.6 yrs
4.9 yrs
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
3.18%
2.78%
3.31%
3.37%
3.37%
3.47%
3.47%
3.45%
3.44%
3.38%
3.44%
3.45%
3.43%
3.43%
The closing share market price of an ordinary share of Mesoblast Limited on the Australian Securities Exchange as of 30 June 2014
was $4.47.
19. Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices
and non-related audit firms:
(a) PricewaterhouseCoopers Australia
(i) Audit and other assurance services
Audit and review of financial reports
Other assurance services
Total remuneration of PricewaterhouseCoopers Australia
(b) Network firms of PricewaterhouseCoopers Australia
(i) Audit and other assurance services
Audit and review of financial reports
Total remuneration of Network firms of PricewaterhouseCoopers Australia
Total auditors’ remuneration
30 June 2015
$
30 June 2014
$
335,068
1,236,766
1,571,834
112,119
112,119
1,683,953
326,009
–
326,009
110,393
110,393
436,402
98
20. Losses per share
(a) Basic losses per share
From continuing operations attributable to the ordinary equity holders of the Company
Total basic losses per share attributable to the ordinary equity holders of the Company
(b) Diluted losses per share
From continuing operations attributable to the ordinary equity holders of the Company
Total basic losses per share attributable to the ordinary equity holders of the Company
(c) Reconciliation of losses used in calculating earnings per share
Basic losses per share
Losses attributable to the ordinary equity holders of the Company used in calculating
basic losses per share:
From continuing operations
Diluted losses per share
30 June 2015
Cents
30 June 2014
Cents
(37.20)
(37.20)
(37.20)
(37.20)
(25.34)
(25.34)
(25.34)
(25.34)
$’000
$’000
(119,368)
(80,958)
$’000
$’000
Losses from continuing operations attributable to the ordinary equity holders
of the Company:
Used in calculating basic losses per share
(119,368)
(80,958)
Losses attributable to the ordinary equity holders of the Company used in calculating
diluted losses per share
(119,368)
(80,958)
Weighted average number of ordinary shares used as the denominator
in calculating basic losses per share
Weighted average number of ordinary shares and potential ordinary
shares used in calculating diluted losses per share
30 June 2015
Number
30 June 2014
Number
320,867,433
319,450,496
320,867,433
319,450,496
Options granted to employees (see Note 18) are considered to be potential ordinary shares. These securities have been excluded
from the determination of basic losses per shares. They have also been excluded from the calculation of diluted losses per share
because they are anti-dilutive for the years ended 30 June 2015 and 2014. Shares that may be paid as contingent consideration
(see Note 12(b)) have also been excluded from basic losses per share. They have also been excluded from the calculation of
diluted losses per share because they are anti-dilutive for the years ended 30 June 2015 and 2014.
Notes to the Financial Statements
99
21. Parent entity financial information
(a) Summary financial information
The individual financial statements for the parent entity show the following aggregate amounts:
Balance Sheet
Current assets
Total Assets
Current liabilities
Total Liabilities
Shareholders’ Equity
Issued capital
Reserves
Share options reserve
Accumulated losses
Losses for the period
Total comprehensive losses for the period
(b) Contingent liabilities of the parent entity
30 June 2015
$’000
30 June 2014
$’000
143,347
766,013
12,473
24,474
204,661
713,138
7,456
8,132
737,260
677,087
47,853
(43,574)
741,539
(29,645)
(29,645)
41,848
(13,929)
705,006
(1,747)
(1,747)
Mesoblast Limited will be required to make a milestone payment to CALHNI of USD 250k on completion of Phase III (human) clinical
trials and USD 350k on FDA marketing approval for products in the orthopedic field. The Company will pay CALHNI a commercial
arm’s length royalty based on net sales by the Company of licensed products in the orthopedic field each quarter.
100
22. Summary of significant accounting policies
This note provides the principal accounting policies adopted in the preparation of these consolidated financial statements as
set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial
statements are for the consolidated entity consisting of Mesoblast Limited and its subsidiaries.
(a) Basis of preparation
The general purpose financial statements of Mesoblast Limited and its subsidiaries have been prepared in accordance
with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the
Corporations Act 2001. Mesoblast Limited is a for-profit entity for the purpose of preparing the financial statements.
(i) Compliance with IFRS
The consolidated financial statements of Mesoblast Limited and its subsidiaries also comply with International Financial
Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’).
(ii) Historical cost convention
These financial statements have been prepared under the historical cost convention, as modified by the revaluation of
available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit
or loss, certain classes of property, plant and equipment and investment property.
(iii) Changes to comparative figures
Comparative figures, are, where appropriate, reclassified to be comparable with figures presented in the current financial year.
(iv) New and amended standards adopted by the Group
The Group has applied the following standards and amendments for first time for their annual reporting period commencing
1 July 2014.
The adoption of the below standards, amendments and interpretation did not result in any changes in accounting policies or
adjustments to the amounts recognized in the financial statements. They also do not significantly affect the disclosures in the
Notes to the financial statements.
Title
Key requirements
AASB 2013-2
Offsetting Financial
Assets and Financial
Liabilities
The amendments clarify the offsetting rules in AASB 132 Financial
Instruments: Presentation and explain when offsetting can be applied.
In particular, they clarify that the right of set-off must be available today
(i.e. not contingent on a future event) and must be legally enforceable
in the normal course of business as well as in the event of default,
insolvency or bankruptcy.
Effective Date
Annual reporting periods
commencing on or after
1 January 2014
Annual reporting periods
commencing on or after
1 January 2014
AASB 2013-3
Amendments to
AASB 136 –
Recoverable Amount
Disclosures for
Non-Financial Assets
The AASB has made amendments to the disclosures required by
AASB 136 Impairment of Assets which:
• remove the requirement to disclose the recoverable amount of all
cash generating units (CGU) that contain goodwill or identifiable
assets with indefinite lives if there has been no impairment; this
disclosure was introduced with AASB 13 and will become applicable
from 1 January 2013 unless the entity adopts the amendments made
by AASB 2013-3 early.
• require disclosure of the recoverable amount of an asset or CGU
when an impairment loss has been recognized or reversed.
• require detailed disclosure of how the fair value less costs of disposal
has been measured when an impairment loss has been recognized
or reversed.
Notes to the Financial Statements 101
Annual reporting periods
commencing on or after
1 July 2014
AASB 2014-1 Part A:
Annual improvements
2010-2012 and 2011-
2013 cycles
In June 2014, the AASB has made the following amendments:
• AASB 2 – clarifies the definition of ‘vesting condition’ and now
distinguishes between ‘performance condition’ and ‘service condition’
• AASB 3 – clarifies that an obligation to pay contingent consideration
is classified as financial liability or equity under the principles in
AASB 132 and that all non-equity contingent consideration (financial
and non-financial) is measured at fair value at each reporting date.
• AASB 8 – requires disclosure of the judgments made by management
in aggregating operating segments and clarifies that a reconciliation
of segment assets must only be disclosed if segment assets
are reported.
• AASB 13 confirms that short-term receivables and payables can
continue to be measured at invoice amounts if the impact of
discounting is immaterial.
• AASB 13 – clarifies that the portfolio exception in AASB 13 (measuring
the fair value of a group of financial assets and financial liabilities
on a net basis) applies to all contracts within the scope of AASB
139 or AASB 9.
ASX Corporate
Governance
Principles and
Recommendations
The ASX has released the third edition of its Corporate Governance
Principles and Recommendations. The main changes are:
• There is a greater focus on risk management, including risk
committees, the internal audit function and exposure to environmental
and sustainability risk.
Annual reporting periods
commencing on or after
1 July 2014
• Certain recommendations have been revised to allow entities to
demonstrate their compliance with the spirit of the recommendation
through alternative governance practices instead of the previous
‘if not, why not’ approach’.
• Entities will be able to post the corporate governance statement on
their web site instead of including it in the annual report.
• Entities must lodge a statement with the ASX confirming their
compliance with the corporate governance requirements of the
Listing Rules.
• Listed entities are expected to regularly assess the independence
of directors with a tenure of more than 10 years.
• There is more guidance on effective gender diversity policies.
102
22. Summary of significant accounting policies (continued)
(v) New accounting standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2015 reporting
period. The Group has not elected to apply any pronouncements before their operative date in the annual reporting period
beginning 1 July 2014.
Initial application of the following Standard is not expected to affect any of the amounts recognized or disclosures made in
the current financial report, but may have a material impact on future transactions made in relation to the Group. The Group is
assessing the impact of the new standard on its revenue recognition policy. The Group is assessing the impact of the new standard
on its revenue recognition policy. The Group intends to apply the new standard from 1 July 2018.
Title
Key requirements
AASB 15 Revenue
from Contracts with
Customers
AASB 15 provides a single, principles based five-step model to be
applied to all contracts with customers.
The five steps in the model are as follows:
• Identify the contract with the customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations
in the contracts
• Recognize revenue when (or as) the entity satisfies a
performance obligation.
Guidance is provided on topics such as the point in which revenue
is recognized, accounting for variable consideration, costs of fulfilling
and obtaining a contract and various related matters. New disclosures
about revenue are also introduced.
Effective Date
Annual reporting periods
commencing on or after
1 January 2018
Earlier application
is permitted.
(b) Principles of consolidation
(i) Subsidiaries
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Mesoblast Limited (‘Company’ or
‘Parent Entity’) as of 30 June 2015 and the results of all subsidiaries for the year then ended. Mesoblast Limited and its subsidiaries
together are referred to in this financial report as the Group or the consolidated entity.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the
Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power to direct the activities of the entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from
the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group.
Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated.
Unrealized losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred.
Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by
the Group.
(ii) Employee share trust
The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance
of the relationship is that the trust is controlled by the Group.
(c) Segment reporting
The Group predominately operates in one segment as set out in Note 2.
(d) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in AUD,
which is Mesoblast Limited’s functional and presentation currency.
Notes to the Financial Statements 103
(ii) Translations and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the transaction at
period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in net loss, except
when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or attributable to part of the
net investment in a foreign operation.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when
the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair
value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value
through profit or loss are recognized in net loss as part of the fair value gain or loss and translation differences on non-monetary
assets such as equities classified as available for sale financial assets are recognized in other comprehensive income.
(iii) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that
have a functional currency different from the presentation currency are translated into the presentation currency as follows:
• assets and liabilities for the balance sheets presented are translated at the closing rate at the date of that balance sheets;
•
income and expenses for the statements of comprehensive income are translated at average exchange rates (unless this is
not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income
and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognized in other
comprehensive income.
(iv) Other
On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and
other financial instruments designated as hedges of such investments, are recognized in other comprehensive income. When a
foreign operation is sol or any borrowings forming part of the net investment are repaid, the associated exchange differences are
reclassified to net loss, as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entities and translated at the closing rate.
(e) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns,
trade allowances, rebates and amounts collected on behalf of third parties.
The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits
will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The Group bases
its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of
each arrangement.
Revenue is recognized for the major business activities as follows:
(i) Commercialization revenue
Development and commercialization revenue generally includes non-refundable up-front license and collaboration fees, milestone
payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones, as well
as royalties on product sales of licensed products, if and when such product sales occur, and revenue from the supply of products.
Development and commercialization revenue was $18,199k and $16,410k for the years ended 30 June 2015 and 2014, respectively.
Where such arrangements can be divided into separately identifiable components (each component constituting a separate
earnings process), the arrangement consideration is allocated to the different components based on their relative fair values
and recognized over the respective performance period in accordance with AASB 118 Revenue. Where the components of the
arrangement cannot be divided into separate units, the individual deliverables are combined as a single unit of accounting and
the total arrangement consideration is recognized over the estimated collaboration period. Such analysis requires considerable
estimates and judgments to be made by the Group, including the relative fair values of the various elements included in such
agreements and the estimated length of the respective performance periods.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in our consolidated balance
sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as
deferred revenue, current portion. Amounts not expected to be recognized as revenue within the 12 months following the balance
sheet date are classified as deferred revenue, non-current portion.
104
22. Summary of significant accounting policies (continued)
Cephalon arrangement
In December 2010, the Group entered into a development and commercialization agreement (the ‘DCA’) with Cephalon, Inc., now a
wholly-owned subsidiary of Teva Pharmaceutical Industries Ltd (collectively ‘Teva’), which allows for Teva to obtain world-wide rights
to commercialize specific products based on the Group’s proprietary adult stem cell technology platform. As part of the DCA, the
Group received USD 130,000k as a non-refundable up-front payment.
Further payments up to USD 1.7b may be received on achievement of certain regulatory milestones with respect to each product
Teva may choose to capitalize. The milestones are based on approvals in specific indications of product candidates in certain
major jurisdictions. The Group would also be entitled to receive future royalty payments for supply of commercialized product as
escalating double digit percentage of net sales of certain product candidates. No such payments have been received.
The Group analyzed the arrangement to determine whether the components which include a license, participation in a joint steering
committee, a development program, and manufacturing and supply services, can be separated or must be treated as a single
transaction in assessing revenue recognition criteria.
As the Group’s obligations in relation to the steering committee and the development program are substantive and cannot be
readily separated from the initial license transfer, the Group has not accounted for the license as a separate component. As the
Group cannot readily estimate the costs required to complete the development program, due to significant uncertainties as
development is the joint responsibility of the Group and Teva, revenue has been recognized on a straight line basis over the
estimated development term of the main product, being MPC-150-IM. If the Group shortens or lengthens the development
period then the amount of revenues recognized would change.
For the years ended 30 June 2015 and 2014, the Group recognized $18,199k and $16,410k of revenue respectively being the
amortization of the initial payment over the estimated development program term. The Group has a policy of reviewing the
estimated development program term on a quarterly basis. The estimated development program term is refined with reference
to the Joint Steering Committee’s expectation of the timeline to complete development. The Group extended the estimated
development program timeline in the year ended 30 June 2013 following the Joint Steering Committee’s approval of the program
protocol and associated development timelines. No revenue has been recognized for any future development milestones or
royalties specified in the DCA as we cannot reliably estimate whether we would become entitled to such payments.
JCR arrangement
In October 2013, the Group acquired all of Osiris’ business and assets. These assets included assumption of a collaboration
agreement with JCR, a research and development oriented pharmaceutical company in Japan.
Under the JCR Agreement, JCR is responsible for all development and manufacturing costs including sales and marketing
expenses. With respect to the field of the treatment of hematological malignancies by the use of hematopoietic stem cells derived
from peripheral blood, cord blood or bone marrow, the Group is entitled to payments when JCR reaches certain development and
commercial milestones and to escalating double-digit royalties. These royalties are subject to possible renegotiation downward in
the event of competition from non-infringing products in Japan. With respect to the field of developing assays that use liver cells
for non-clinical drug screening and evaluation, the Group is entitled to a double digit profit share. Revenue recognized under this
model is limited to the amount of cash received or for which the Group is entitled, as JCR has the right to terminate the agreement
at any time. Royalty revenue is recognized upon the sale of the related products provided the Group has no remaining performance
obligations under the arrangement.
For the years ended 30 June 2015 and 2014, the Group recognized $2,284k and $Nil of commercialization revenue, respectively.
This revenue was recognized on achievement of a substantive milestone being the filing for marketing approval in Japan for
MSC product JR-031. No further performance obligations are required of the Group in relation to this income.
(ii) 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 financial asset to that asset’s
net carrying amount.
(iii) Research and development tax incentive
The Australian Government replaced the research and development tax concession with the research and development tax
incentive from 1 July 2011. The provisions provide refundable or non-refundable tax offsets.
The research and development tax incentive applies to expenditure incurred and the use of depreciating assets in an income year
commencing on or after 1 July 2011. A refundable tax offset is available to eligible companies with an annual aggregate turnover of
less than $20 million. Eligible companies can receive a refundable tax offset of 45% of their research and development spending.
Up to 30 June 2013 the rate of the refundable tax offset is 45%, after that date the rate is 43.5%.
Notes to the Financial Statements 105
The Group’s research and development activities are eligible under an Australian government tax incentive for eligible expenditure
from 1 July 2011. Management has assessed these activities and expenditure to determine which are likely to be eligible under
the incentive scheme. At each period end management estimates and recognizes the refundable tax offset available to the
Group based on available information at the time.
(f) Research and development undertaken internally
The Group currently does not have any capitalized development costs. Research expenditure is recognized as an expense as
incurred. Costs incurred on development projects, which consist of preclinical and clinical trials, manufacturing development, and
general research, are recognized as intangible assets when it is probable that the project will, after considering its commercial and
technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably.
The expenditure capitalized comprises all directly attributable costs, including costs of materials, services, direct labour and
an appropriate proportion of overheads. Other development costs that do not meet these criteria are expensed as incurred.
Development costs previously recognized as expenses, are not recognized as an asset in a subsequent period, and will remain
expensed. Capitalized development costs are recorded as intangible assets and amortized from the point at which the asset is
ready for use on a straight-line basis over its useful life.
(g) Income tax
The income tax expense or benefit for the period is the tax payable on the current period’s taxable income based on the
applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary
differences and to unused tax losses.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of
the reporting period in the countries where the Group’s subsidiaries and associates operate and generate taxable income.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation
is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the
tax authorities.
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 amounts in the consolidated financial statements. However, the deferred income tax is not
accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at
the time of the transaction affects neither accounting, nor taxable profit or loss. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the
related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred tax assets are recognized for deductible temporary differences and unused tax losses only if it is probable that future
taxable amounts will be available to utilize those temporary differences and losses.
Deferred tax liabilities and assets are not recognized for temporary differences between the carrying amount and tax bases of
investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences
and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities
and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where
the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the
liability simultaneously.
Current and deferred tax is recognized in net loss, except to the extent that it relates to items recognized in other comprehensive
income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
(h) Leases
Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified
as operating leases (Note 15). Payments made under operating leases (net of any incentives received from the lessor) are charged
to profit or loss on a straight-line basis over the period of the lease.
Lease income from operating leases where the Group is sub-leasing to a third party is recognized in income on a straight-line basis
over the lease term.
(i) Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments
or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the
assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes
106
22. Summary of significant accounting policies (continued)
the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre-existing
equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the
acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any noncontrolling interest in the acquiree either at
fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets.
The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the
net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets
of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognized directly in net loss
as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present
value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar
borrowing could be obtained from an independent financier under comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are
subsequently remeasured to fair value with changes in fair value recognized in profit or loss.
(j) Impairment of assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for
impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are
tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to dispose and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely
independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets (other than
goodwill) that have suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period.
(k) Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held
at call with financial institutions, other short-term and highly liquid investments with original maturities of three months or less that
are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
(l) 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 statement of comprehensive
income. All trade receivables and other receivables are recognized at the value of the amounts receivable, as they are due for
settlement within 60 days and therefore do not require remeasurement.
(m) Investments and other financial assets
(i) Classification
The Group classifies its financial assets in the following categories:
• financial assets at fair value through profit or loss,
• available-for-sale financial assets,
•
loans and receivables, and
• held-to-maturity investments.
The classification depends on the purpose for which the investments were acquired. Management determines the classification
of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at the
end of each reporting period. See Note 5 for details about each type of financial asset.
(ii) Reclassification.
The Group may choose to reclassify a non-derivative trading financial asset out of the held for trading category if the financial asset
is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to
be reclassified out of the held for trading category only in rare circumstances arising from a single event that is unusual and highly
Notes to the Financial Statements 107
unlikely to recur in the near term. In addition, the Group may choose to reclassify financial assets that would meet the definition of
loans and receivables out of the held for trading or available-for-sale categories if the Group has the intention and ability to hold
these financial assets for the foreseeable future or until maturity at the date of reclassification
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortized cost
as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made.
Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined
at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively.
(iii) Recognition and derecognition.
Regular way purchases and sales of financial assets are recognized on trade-date, the date on which the Group commits to
purchase or sell the asset. Financial assets are derecognized when the rights to receive cash flows from the financial assets have
expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognized in other comprehensive
income are reclassified to profit or loss as gains and losses from investment securities.
(iv) Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value
through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of
financial assets carried at fair value through profit or loss are expensed in profit or loss.
Loans and receivables and held-to-maturity investments are subsequently carried at amortized cost using the effective interest
method. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair
value. Gains or losses arising from changes in the fair value are recognized as follows:
•
for ‘financial assets at fair value through profit or loss’ – in profit or loss within other income or other expenses
•
for available for sale financial assets that are monetary securities denominated in a foreign currency – translation differences
related to changes in the amortized cost of the security are recognized in profit or loss and other changes in the carrying
amount are recognized in other comprehensive income
•
for other monetary and non-monetary securities classified as available for sale in other comprehensive income.
Dividends on financial assets at fair value through profit or loss and available-for-sale equity instruments are recognized in profit
or loss as part of revenue from continuing operations when the Group’s right to receive payments is established.
Interest income from financial assets at fair value through profit or loss is included in the net gains/(losses). Interest on available-
for-sale securities calculated using the effective interest method is recognized in the income statement as part of revenue from
continuing operations.
Details on how the fair value of financial instruments is determined are disclosed in Note 5(f).
(v) Impairment
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of
financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if
there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset
(a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of
financial assets that can be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or
prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired.
Assets carried at amortized cost
For loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the
present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in profit
or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is
the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on
the basis of an instrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event
occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously
recognized impairment loss is recognized in profit or loss.
108
22. Summary of significant accounting policies (continued)
Assets classified as available-for-sale
If there is objective evidence of impairment for available-for-sale financial assets, the cumulative loss –measured as the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in
profit or loss – is removed from equity and recognized in profit or loss.
Impairment losses on equity instruments that were recognized in profit or loss are not reversed through profit or loss in a
subsequent period.
If the fair value of a debt instrument classified as available-for-sale increases in a subsequent period and the increase can be
objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed
through profit or loss
(n) Derivatives
Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured
to their fair value at the end of each reporting period.
(i) Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does
not qualify for hedge accounting are recognized immediately in profit or loss and are included in other income or other expenses.
(o) Property, plant and equipment
Plant and equipment are stated at historical cost less accumulated depreciation and impairment. Cost includes expenditure that
is directly attributable to the acquisition of the item.
Subsequent cost are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is
probable that future economic benefits associates with the item will flow to the Group and the cost of the item can be measured
reliably. All other repairs and maintenance are charged to profit and loss during the reporting period in which they are incurred.
Property, plant and equipment, other than freehold land, are depreciated over their estimated useful lives using the straight line
method (see Note 6(a)).
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than
its estimated recoverable amount.
Gains and losses on disposal of plant and equipment are taken into account in determining the profit for the year.
(p) Intangible assets
(i) Goodwill
Goodwill is measured as described in Note 22(i) – Business combinations. Goodwill on acquisition of subsidiaries is included
in intangible assets (Note 6(b)). Goodwill is not amortized but it is tested for impairment annually or more frequently if events
or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash
generating units or groups of cash generating units that are expected to benefit from the business combination in which the
goodwill arose, identified according to operating segments (Note 2).
(ii) Trademarks and licenses
Trademarks and licenses have a finite useful life and are carried at cost less accumulated amortization and impairment losses.
(iii) In-process research and development acquired
In-process research and development that has been acquired as part of a business acquisition is considered to be an indefinite
life intangible asset on the basis that it is incomplete and cannot be used in its current form. Indefinite life intangible assets are not
amortized but rather are tested for impairment annually at 31 May of each year, or whenever events or circumstances present an
indication of impairment.
In-process research and development will continue to be tested for impairment until the related research and development efforts
are either completed or abandoned. Upon completion of the related research and development efforts, management determines
the remaining useful life of the intangible assets and amortizes them accordingly. In order for management to determine the
Notes to the Financial Statements 109
remaining useful life of the asset, management would consider the expected flow of future economic benefits to the entity with
reference to the product life cycle, competitive landscape, obsolescence, market demand, any remaining patent useful life and
various other relevant factors.
In the case of abandonment, the related research and development efforts are considered impaired and the asset is fully expensed.
(q) 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 to 60 days of recognition.
(r) Provisions
Provisions are recognized when the Group has a present legal obligation as a result of a past event, it is probable that the
Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present
obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to
the passage of time is recognized as interest expense.
Provisions are recorded on acquisition of a subsidiary, to the extent they relate to a subsidiary’s contingent liabilities, if it relates to
a past event, regardless of whether it is probable the amount will be paid.
(s) Employee benefits
A liability is recognized for benefits accruing to employees in respect of wages and salaries, bonuses, annual leave and long
service leave.
Liabilities recognized in respect of employee benefits which are expected to be settled within 12 months after the end of the period
in which the employees render the related services are measured at their nominal values using the remuneration rates expected to
apply at the time of settlement.
Liabilities recognized in respect of employee benefits which are not expected to be settled within 12 months after the end of the
period in which the employees render the related services are measured as the present value of the estimated future cash outflows
to be made by the Group in respect of services provided by employees up to reporting date.
The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer
settlement for at least twelve months after the reporting period, regardless of when the actual settlement is expected to occur.
Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or when an
employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier
of the following dates: when the Group can no longer withdraw the offer of those benefits and when the entity recognizes costs for
a restructuring that is within the scope of AASB 137 and involves the payment of termination benefits.
(t) Share-based payments
Share-based payments are provided to eligible employees, directors and consultants via the Employee Share Option Plan (‘ESOP’)
and the Australian Loan Funded Share Plan (‘LFSP’). The terms and conditions of the LFSP are in substance the same as the
employee share options and therefore they are accounted for on the same basis.
Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of the
equity instrument at grant date. Fair value is measured using 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. It does not make any allowance for the impact of any service and non-market performance vesting conditions.
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 management’s estimate of shares that will eventually vest, with a corresponding increase in equity.
At the end of each period, the entity revises its estimates of the number of shared-based payments that are expected to vest based
on the non-market vesting conditions. It recognizes the impact of the revision to original estimates, if any, in profit or loss, with a
corresponding adjustment to equity.
110
22. Summary of significant accounting policies (continued)
(u) Contributed equity
Ordinary shares are classified as equity.
Transaction costs arising on the issue of equity instruments are recognized 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.
(v) Loss per share
(i) Basic losses per share
Basic losses per share is calculated by dividing:
•
the loss attributable to equity holders of the Group, excluding any costs of servicing equity other than ordinary shares;
• by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in
ordinary shares issued during the year.
(ii) Diluted losses per share
Diluted losses per share adjusts the figures used in the determination of basic earnings per share to take into account
•
the after income tax effect of interest and other financing 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.
(w) Goods and services tax (‘GST’)
Revenues, expenses and assets are recognized 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 recognized 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 flows are included in the statement of cash flow on a gross basis. The GST component of cash flows arising from investing
and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows.
(x) Comparative figures
Comparatives have been reclassified where necessary so as to be consistent with the figures presented in the current year.
(y) Rounding of amounts
The company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission,
relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off
in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar.
(z) Parent entity financial information
The financial information for the parent entity, Mesoblast Limited, disclosed in Note 21 has been prepared on the same basis
as the consolidated financial statements, except as set out below.
(i) Investments in subsidiaries, associates and joint venture entities
Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements
of Mesoblast Limited.
Notes to the Financial Statements 111
Directors’ Declaration
In accordance with a resolution of directors of Mesoblast Limited,
In the directors’ opinion:
(a) the financial statements and notes set out on pages 47 to 110 are in accordance with the Corporations Act 2001, including:
(i) Complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting
requirements, and
(ii) Giving a true and fair view of the consolidated entity’s financial position as of 30 June 2015 and of its performance for the
financial year ended on that date, and
(b) There are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due
and payable.
Note 22(a)(i) ‘Basis of preparation’ confirms that the financial statements also comply with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of
the Corporations Act 2001.
This declaration is made in accordance with a resolution of the directors.
Mr Brian Jamieson
Director
Dr Silviu Itescu
Chief Executive Officer
16 August 2015, Melbourne
112
Independent auditor’s report to the members of Mesoblast
Limited
Report on the financial report
We have audited the accompanying financial report of Mesoblast Limited (the company), which
comprises the consolidated balance sheet as at 30 June 2015, the consolidated income statement and
consolidated statement of comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year ended on that date, a summary of significant
accounting policies, other explanatory notes and the directors’ declaration for Mesoblast Limited
Group (the consolidated entity). The consolidated entity comprises the company and the entities it
controlled at year’s end or from time to time during the financial year.
Directors’ responsibility for the financial report
The directors of the company are responsible for the preparation of the financial report that gives a
true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001
and for such internal control as the directors determine is necessary to enable the preparation of the
financial report that is free from material misstatement, whether due to fraud or error. In Note 22(a),
the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial
Statements, that the financial statements comply 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. Those 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 consolidated
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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Independence
In conducting our audit, we have complied with the independence requirements of the Corporations
Act 2001.
PricewaterhouseCoopers, ABN 52 780 433 757
Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
113
Auditor’s opinion
In our opinion:
(a)
the financial report of Mesoblast Limited is in accordance with the Corporations Act 2001,
including:
(i)
(ii)
giving a true and fair view of the consolidated entity's financial position as at 30 June
2015 and of its performance for the year ended on that date; and
complying with Australian Accounting Standards (including the Australian Accounting
Interpretations) and the Corporations Regulations 2001.
(b)
the financial report and notes also comply with International Financial Reporting Standards as
disclosed in Note 22(a).
Report on the Remuneration Report
We have audited the remuneration report included in pages 28 to 41 of the directors’ report for the
year ended 30 June 2015. The directors of the company are responsible for the preparation and
presentation of the remuneration report in accordance with section 300A of the Corporations Act
2001. Our responsibility is to express an opinion on the remuneration report, based on our audit
conducted in accordance with Australian Auditing Standards.
Auditor’s opinion
In our opinion, the remuneration report of Mesoblast Limited for the year ended 30 June 2015
complies with section 300A of the Corporations Act 2001.
PricewaterhouseCoopers
Jon Roberts
Partner
Melbourne
16 August 2015
114
Shareholder Information
A. Substantial Shareholder
Holders of substantial holdings of ordinary shares in the Company and the number of shares in which they and their associates
have a relevant interest as at 31 August 2015:
Shareholder
Number of ordinary shares held
Professor Silviu Itescu
Cephalon, Inc.
M&G Investment Group
The Capital Group Companies, Inc.
Thorney Opportunities Ltd
68,244,642
55,785,806
38,717,697
26,600,000
19,004,000
B. Distribution of Equity Securities and Voting Rights
Distribution of holders of equity securities as at 31 August 2015:
Ordinary shares (i)
Options* (ii)
Number of holders
3,512
3,198
763
638
77
8,188
603
1
37
45
83
Shareholder
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total number of holders of equity securities
Number of holders of less than a marketable parcel
of 151 shares ($3.32 per share)
*There are 22,812,841 Options on issue as at 31 August 2015.
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 on vote and upon a poll each
share shall have on vote.
ii. Options
No voting rights.
115
C. Twenty Largest Holders of Quoted Securities
The names of the 20 largest shareholders of each class of equity security as at 31 August 2015 are listed below:
Rank Shareholder
No. of shares held
% of total shares
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
HSBC Custody Nominees (Australia) Ltd
Professor Silviu Itescu
Cephalon, Inc.
National Nominees Limited
Celgene Alpine Investment Company III, LLC
J P Morgan Nominees Australia Limited
Dalit Pty Ltd
Mesoblast Australia Pty Ltd*
BNP Paribas Noms Pty Ltd
Citicorp Nominees Pty Limited
Adelaide Health Services, Inc.
JGM Investment Group Pty Ltd
UBS Nominees Pty Ltd
Osiris Therapeutics, Inc.
Avister Pty Ltd
National Nominees Limited
Tigcorp Nominees Pty Ltd
Michael Spooner
CS Fourth Nominees Pty Ltd
Finarg1 Services Company Ltd
98,954,258
67,751,838
55,785,806
20,382,834
15,298,837
10,052,566
4,468,839
3,500,000
2,229,920
2,043,060
1,953,000
1,881,200
1,757,986
1,391,178
1,198,354
1,130,750
1,060,000
868,272
720,619
597,800
29.34%
20.09%
16.54%
6.04%
4.54%
2.98%
1.32%
1.04%
0.66%
0.61%
0.58%
0.56%
0.52%
0.41%
0.36%
0.34%
0.31%
0.26%
0.21%
0.18%
*As trustee for the Mesoblast Limited Employee Share Trust, held on behalf of employees who participate in the Company’s loan funded
share plan.
293,027,117
86.88%
D. Securities under escrow
As at 31 August 2015, there are 15,298,837 ordinary shares in the Company subject to escrow. The escrow period
on these 15,298,837 ordinary shares will expire on 15 April 2016.
E. On-Market Buy-Back
There is no current on-market buy-back of the Company’s ordinary shares.
116
Corporate Directory
Directors
Share Registry
Link Market Services Limited
Level 1
333 Collins Street
Melbourne VIC 3000
Telephone +61 1300 554 474
Facsimile +61 2 9287 0303
www.linkmarketservices.com.au
Auditors
PricewaterhouseCoopers
Freshwater Place
Level 19, 2 Southbank Boulevard
Southbank VIC 3006
Telephone +61 3 8603 1000
Facsimile +61 3 8603 1999
Brian Jamieson (Chairman)
Silviu Itescu
Michael Spooner
Donal O’Dwyer
Ben-Zion Weiner
Eric Rose
William Burns
Company Secretary
Charles Harrison
Registered Office
Level 38
55 Collins Street
Melbourne VIC 3000
Telephone +61 3 9639 6036
Facsimile +61 3 9639 6030
Country of Incorporation
Australia
Listing
Australian Securities Exchange
(ASX Code: MSB)
Website
www.mesoblast.com
www.mesoblast.com