ANNUAL
REPORT
2018
A WORLD LEADER
IN DEVELOPING
INNOVATIVE CELLULAR
MEDICINES
CONTENTS
MESSAGE FROM THE CHAIRMAN AND CHIEF EXECUTIVE
FORM 20-F
1
3
SHAREHOLDER INFORMATION 220
CORPORATE DIRECTORY 222
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 2018 has been approved by
the Board and is available on our website at http://www.mesoblast.com/company/corporate-governance
MESSAGE FROM THE CHAIRMAN
AND CHIEF EXECUTIVE
Dr Silviu Itescu
Chief Executive
Brian Jamieson
Chairman
Dear shareholders,
2018 has been a year of great achievement and progress
for Mesoblast with multiple key milestones having been met.
We look forward to the coming year and the series of clinical,
regulatory and commercial inflection points before us.
Our proprietary disruptive technology platform and intellectual
property have supported, respectively, the first allogeneic
stem cell therapy products approved in Japan and Europe.
In addition, they underpin our three Phase 3 assets in the
United States, the first of which, for steroid refractory acute
Graft Versus Host Disease (aGVHD), has already successfully
completed its Phase 3 trial.
In Japan, revenues from sales of TEMCELL®1 HS Inj. for
aGVHD by our licensee JCR Pharmaceuticals significantly
increased during the past year. The high degree of product
adoption in the Japan market is extremely encouraging and
bodes well for our launch plans for our product candidate
remestemcel-L in the treatment of aGVHD in the United States.
In Europe, Takeda Pharmaceutical’s product Alofisel®2, for the
local treatment of fistulae, was the first allogeneic stem cell
therapy to receive central marketing authorization approval
from the European Commission. We have received a significant
upfront payment and expect additional payments as well as
future royalties on sales of Alofisel by Takeda Pharmaceuticals,
to whom we have granted exclusive access to certain of our
patents to support global commercialization of this product.
This transaction highlights the strength of our extensive
intellectual property portfolio covering mesenchymal lineage
cells. When consistent with our strategic objectives, we will
continue to consider providing third parties with commercial
access to our valuable patent portfolio.
In the United States, our goal is for our product candidate
remestemcel-L for aGVHD to be the first approved industrially
manufactured allogeneic cell therapy. On the basis of the
successful Phase 3 trial in 55 children with steroid refractory
aGVHD, with strong survival outcomes through six months,
we intend to meet with the United States Food and Drug
Administration (FDA) to have a pre-Biologics License
Application meeting and be in a position in 2019 to file for
marketing authorization of this product candidate in the United
States. Remestemcel-L has a fast track designation which
should facilitate an expedited review by the FDA.
The strength of our GVHD program and its probability for
success underpinned our ability to establish credit facilities
with NovaQuest Capital and Hercules Inc during the year.
These facilities provided non-dilutive financing to the
Company and have materially strengthened our financial
position.
Our second Phase 3 program in the United States involves
our product candidate MPC-150-IM, which is being developed
for the significant unmet need in patients with advanced and
end-stage chronic heart failure (CHF). Our Phase 3 trial in
patients with moderate to advanced CHF is ongoing, with
more than 85% of the anticipated 600 patients enrolled to
date. This trial has successfully passed a futility analysis of
the trial’s efficacy endpoint, as well as multiple reviews by the
Data Monitoring Committee. A complementary Phase 2b trial
of MPC-150-IM in patients with end-stage CHF as adjunct to
left ventricular assist device (LVAD) implantation, conducted
by the United States National Institutes of Health (NIH)-funded
Cardiothoracic Surgical Trials Network (CTSN), has completed
enrollment, with the twelve month follow-up results to be
presented as a late-breaking presentation at the 2018 Scientific
Sessions of the American Heart Association in November 2018.
In light of prior clinical data showing the potential for this
product candidate to impact on clinically meaningful outcomes
in this patient population at high risk of morbidity and mortality,
MPC-150-IM received Regenerative Medicine Advanced
Therapy (RMAT) designation for the treatment of end-stage
heart failure patients implanted with LVADs. Pursuant to the
RMAT designation, we are in active discussions with the FDA
regarding the regulatory pathway for MPC-150-IM in this
patient population.
1 TEMCELL® HS Inj. is the registered trademark of JCR Pharmaceuticals Co. Ltd.
2 Alofisel® is the registered trademark of Takeda Pharmaceuticals.
MESOBLAST LIMITED 2018 ANNUAL REPORT 1
Most recently we entered into a strategic partnership for our
heart failure and heart attack product candidates in China
with Tasly Pharmaceutical Group. Tasly is one of the largest
pharmaceutical companies in China, the world’s fastest
growing biopharmaceutical and healthcare market, and its
powerful combination of clinical, regulatory and manufacturing
expertise, together with one of the largest commercial footprints
in cardiology in China, makes it the ideal partner for Mesoblast
and opens up the China market to our cardiovascular franchise.
This is an example of Mesoblast’s corporate strategy to enter
into value-accretive regional and global alliances with leading
companies in the field, to leverage existing expertise and
commercial channels.
Our third Phase 3 program in the United States is for our
product candidate MPC-06-ID in the treatment of chronic low
back pain due to degenerative disc disease. This disease
accounts for approximately 50% of opioid prescriptions and is
a major contributor to the high annual death rate associated
with the ongoing opioid epidemic. Enrollment in the 404-patient
Phase 3 trial was completed earlier this year. If the Phase 3
results confirm the earlier beneficial and sustained effects seen
in Phase 2 from a single injection of MPC-06-ID on pain and
function in these patients, we have the potential to make a
major impact on this public health emergency by providing
an effective non-opioid alternative.
As we move towards product commercialization, we have
put in place a formal program to substantially broaden and
complement the makeup of the Board. During the year, we
welcomed two new United States-based Directors to the
Board. Joseph R. Swedish has served as Executive Chairman,
President and CEO of Anthem Inc., a Fortune 33 company
and America’s leading health benefits provider. Shawn
Cline Tomasello has more than 30 years’ experience in the
pharmaceutical and biotechnology industries, including as
Chief Commercial Officer at Kite Pharma and Pharmacyclics,
Inc, respectively acquired by Gilead Sciences and AbbVie, Inc,
and President of the Americas, Hematology and Oncology at
Celgene Corporation. The substantial commercial experience
of both these new directors will be invaluable to the Mesoblast
team as we transition to a commercial-stage company.
Dr Ben-Zion Weiner retired as a Non-Executive Director this
year after five years’ service. We acknowledge the significant
contributions he made to our company, especially in relation
to our research and development pipeline and best clinical
trials practice.
We thank the hard working management team and employees
at Mesoblast whose combined dedication, experience and
expertise have contributed to this year of major achievement.
On behalf of the Board, we would like to record our deep
gratitude of the continued support and encouragement
from our institutional and retail shareholders, including your
participation in our 2017 rights issue.
Sincerely,
Dr Silviu Itescu
Chief Executive
Brian Jamieson
Chairman
Mesoblast Board of Directors
Front row, left to right: Silviu Itescu, Shawn Cline Tomasello, Joe Swedish and Bill Burns
Back row: Eric Rose, Michael Spooner, Donal O’Dwyer and Brian Jamieson
2 MESOBLAST LIMITED 2018 ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number 001-37626
MESOBLAST LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
AUSTRALIA
(Jurisdiction of incorporation or organization)
Level 38, 55 Collins Street
Melbourne, VIC, 3000, Australia
Telephone: +61 (3) 9639 6036
(Address of principal executive offices)
Silviu Itescu
Chief Executive Officer
Telephone: +61 (3) 9639 6036; Fax: +61 (3) 9639 6030
Level 38, 55 Collins Street
Melbourne, VIC, 3000, Australia
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act. None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Title of each class
American Depositary Shares, each representing five
Ordinary Shares*
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
482,639,654 Ordinary Shares
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
U.S. GAAP
International Financial Reporting Standards as issued by the International
Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes No
Table of Contents
INTRODUCTION AND USE OF CERTAIN TERMS ...............................................................................................................
FORWARD-LOOKING STATEMENTS....................................................................................................................................
PART I..........................................................................................................................................................................................
Item 1.
Identity of Directors, Senior Management.....................................................................................................
Item 2. Offer Statistics and Expected Timetable........................................................................................................
Item 3. Key Information.............................................................................................................................................
3.A Selected Financial Data..................................................................................................................................
3.B Capitalization and Indebtedness ....................................................................................................................
3.C Reasons for the offer and use of proceeds .....................................................................................................
3.D Risk Factors ...................................................................................................................................................
Item 4.
Information on the Company .........................................................................................................................
4.A History and Development of Mesoblast ........................................................................................................
4.B Business Overview.........................................................................................................................................
4.C Organizational Structure ................................................................................................................................
4.D Property, Plants and Equipment.....................................................................................................................
Item 4A. Unresolved Staff Comments ..........................................................................................................................
Item 5. Operating and Financial Review and Prospects.............................................................................................
5.A Operating Results...........................................................................................................................................
5.B Liquidity and Capital Resources....................................................................................................................
5.C Research and Development, Patents and Licenses ........................................................................................
5.D Trend Information..........................................................................................................................................
5.E Off-Balance Sheet Arrangements ..................................................................................................................
5.F Contractual Obligations and Commitments...................................................................................................
Item 6. Directors, Senior Management and Employees.............................................................................................
6.A Directors and Senior Management.................................................................................................................
6.B Compensation ................................................................................................................................................
6.C Board Practices ..............................................................................................................................................
6.D Employees......................................................................................................................................................
6.E Share Ownership............................................................................................................................................
Item 7. Major Shareholders and Related Party Transactions .....................................................................................
7.A Major Shareholders........................................................................................................................................
7.B Related Party Transactions ............................................................................................................................
7.C Interests of Experts and Counsel....................................................................................................................
Item 8. Financial Information.....................................................................................................................................
8.A Consolidated Statements and Other Financial Information ...........................................................................
8.B Significant Changes .......................................................................................................................................
Item 9. The Offer and Listing.....................................................................................................................................
9.A Offer and Listing Details ...............................................................................................................................
9.B Plan of Distribution........................................................................................................................................
9.C Markets ..........................................................................................................................................................
9.D Selling Shareholders ......................................................................................................................................
9.E Dilution ..........................................................................................................................................................
9.F Expenses of the Issue .....................................................................................................................................
2
2
4
4
4
4
4
6
6
6
39
39
42
65
65
65
65
65
86
89
89
90
90
91
93
99
119
121
122
123
123
124
124
124
124
124
125
125
126
126
126
126
126
Item 10. Additional Information ..................................................................................................................................
10.A Share Capital..................................................................................................................................................
10.B Memorandum and Articles of Association ....................................................................................................
10.C Material Contracts..........................................................................................................................................
10.D Exchange Controls .........................................................................................................................................
10.E Taxation .........................................................................................................................................................
10.F Dividends and Paying Agents........................................................................................................................
10.G Statement by Experts .....................................................................................................................................
10.H Documents on Display...................................................................................................................................
10.I Subsidiary Information ..................................................................................................................................
Item 11. Quantitative and Qualitative Disclosures about Market Risk........................................................................
Item 12. Description of Securities Other than Equity Securities .................................................................................
12.A Debt Securities ...............................................................................................................................................
12.B Warrants and Rights.......................................................................................................................................
12.C Other Securities..............................................................................................................................................
12.D American Depositary Shares..........................................................................................................................
PART II ........................................................................................................................................................................................
Item 13. Defaults, Dividend Arrearages and Delinquencies........................................................................................
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds ...........................................
Item 15. Controls and Procedures ................................................................................................................................
Item 16A. Audit Committee Financial Expert ................................................................................................................
Item 16B. Code of Ethics................................................................................................................................................
Item 16C. Principal Accountant Fees and Services ........................................................................................................
Item 16D. Exemptions from the Listing Standards for Audit Committees.....................................................................
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers........................................................
127
127
127
131
133
134
141
141
141
142
142
142
142
142
142
143
144
144
144
144
144
144
145
145
145
Item 16F. Change in Registrant’s Certifying Accountant ..............................................................................................
145
Item 16G. Corporate Governance ...................................................................................................................................
Item 16H. Mine Safety Disclosure..................................................................................................................................
PART III .......................................................................................................................................................................................
Item 17. Financial Statements ......................................................................................................................................
Item 18. Financial Statements ......................................................................................................................................
Item 19. Exhibits ..........................................................................................................................................................
SIGNATURES .............................................................................................................................................................................
145
146
146
146
146
217
219
INTRODUCTION AND USE OF CERTAIN TERMS
Mesoblast Limited and its consolidated subsidiaries publish consolidated financial statements expressed in U.S. dollars, unless
otherwise indicated. This Annual Report on Form 20-F is presented in U.S. dollars, unless otherwise indicated. Our consolidated
financial statements found in Item 18 of this annual report on Form 20-F are prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board and Australian equivalents to International Financial
Reporting Standards as issued by the Australian Accounting Standards Board.
Except where the context requires otherwise and for purposes of this Form 20-F only:
•
•
•
•
•
•
•
•
•
“ADSs” refers to our American depositary shares, each of which represents ordinary shares, and “ADRs” refers to the
American depositary receipts that evidence our ADSs.
“Mesoblast,” “we,” “us” or “our” refer to Mesoblast Limited and its subsidiaries.
“A$” or “Australian dollar” refers to the legal currency of Australia.
“IFRS” refers to the International Financial Reporting Standards as issued by the International Accounting Standards
Board, or IASB.
“AIFRS” refers to the Australian equivalents to International Financial Reporting Standards as issued by the Australian
Accounting Standards Board, or AASB.
“U.S. GAAP” refers to the Generally Accepted Accounting Principles in the United States.
“FDA” refers to the United States Food and Drug Administration.
“US$” or “U.S. dollars” refers to the legal currency of the United States.
“U.S.” or “United States” refers to the United States of America.
Australian Disclosure Requirements
Our ordinary shares are primarily quoted on the Australian Securities Exchange (“ASX”) in addition to our listing of our ADSs on the
Nasdaq Global Select Market. As part of our ASX listing, we are required to comply with various disclosure requirements as set out
under the Australian Corporations Act 2001 and the ASX Listing Rules. Information furnished under the sub-heading “Australian
Disclosure Requirements” is intended to comply with ASX listing and Corporations Act 2001 disclosure requirements and is not
intended to fulfill information required by this Annual Report on Form 20-F.
FORWARD-LOOKING STATEMENTS
This Form 20-F includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our current expectations,
assumptions, estimates and projections about the Company, our industry, economic conditions in the markets in which we operate, and
certain other matters. These statements include, among other things, the discussions of our business strategy and expectations
concerning our market position, future operations, margins, profitability, liquidity and capital resources. These statements are subject
to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or
achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,”
“target,” “likely,” “will,” “would,” “could,” “should”, “may”, “goal,” “objective” and similar expressions or phrases identify forward-
looking statements. We have based these forward-looking statements largely on our current expectations and future events and
financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
Forward- looking statements include, but are not limited to, statements about:
•
•
•
the initiation, timing, progress and results of our preclinical and clinical studies, and our research and development
programs;
our ability to advance product candidates into, enroll and successfully complete, clinical studies, including multi-national
clinical trials;
our ability to advance our manufacturing capabilities;
2
•
•
•
•
•
•
•
•
•
•
•
•
the timing or likelihood of regulatory filings and approvals, manufacturing activities and product marketing activities, if
any;
the commercialization of our product candidates, if approved;
regulatory or public perceptions and market acceptance surrounding the use of stem-cell based therapies;
the potential for our product candidates, if any are approved, to be withdrawn from the market due to patient adverse
events or deaths;
the potential benefits of strategic collaboration agreements and our ability to enter into and maintain established strategic
collaborations;
our ability to establish and maintain intellectual property on our product candidates and our ability to successfully defend
these in cases of alleged infringement;
the scope of protection we are able to establish and maintain for intellectual property rights covering our product
candidates and technology;
estimates of our expenses, future revenues, capital requirements and our needs for additional financing;
our financial performance;
developments relating to our competitors and our industry;
the pricing and reimbursement of our product candidates, if approved; and
other risks and uncertainties, including those listed under the caption “Risk Factors”.
You should read thoroughly this Form 20-F and the documents that we refer to herein with the understanding that our actual
future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by
these cautionary statements. Other sections of this Form 20-F include additional factors which could adversely impact our business
and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not
possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
This Form 20-F also contains third-party data relating to the biopharmaceutical market that includes projections based on a
number of assumptions. The biopharmaceutical market may not grow at the rates projected by market data, or at all. The failure of this
market to grow at the projected rates may have a material adverse effect on our business and the market price of our ordinary shares
and ADSs. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may
differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in
this Form 20-F relate only to events or information as of the date on which the statements are made in this Form 20-F. We undertake
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
3
PART I
Item 1.
Identity of Directors, Senior Management
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
Not applicable.
Item 3.
Key Information
3.A
Selected Financial Data
The following selected consolidated financial data presented below has been extracted from our consolidated financial
statements prepared in accordance with IFRS as issued by the IASB. Our consolidated financial statements for the years ended June
30, 2018, 2017 and 2016 are included in “Item 18. Financial Statements” in this Form 20-F.
The summary consolidated financial data should be read in conjunction with “Item 5. Operating and Financial Review and
Prospects” and our consolidated financial statements and related notes thereto. Historical results are not necessarily indicative of
results to be expected in the future.
(in U.S. dollars, in thousands except per share information)
Consolidated Income Statement Data:
Revenue:
2018
2017
2016
2015
2014
Year ended June 30,
Commercialization revenue
Milestone revenue
Interest revenue
Total revenue
$
$
3,641
13,334
366
17,341
1,444 $
500
468
2,412
37,969 $
3,500
1,079
42,548
15,004 $
2,000
2,757
19,761
Research & development
Manufacturing commercialization
Management and administration
Fair value remeasurement of contingent
consideration(1)
Other operating income and expenses
Finance costs
Impairment of intangible assets
Loss before income tax
Income tax benefit/(expense)
Loss attributable to the owners of Mesoblast
Limited
(65,927)
(5,508)
(21,907)
(58,914)
(12,065)
(23,007)
(50,013)
(29,763)
(22,500)
(62,649)
(23,783)
(29,540)
10,541
(130)
28,112
(15,336)
1,312
(1,829)
—
(65,977)
30,687
1,489
—
—
(90,215)
13,400
2,714
—
(61,919)
(90,821)
86,694
15,303
—
—
(96,244)
—
$
(35,290)
$
(76,815) $
(4,127) $
(96,244) $
(75,534)
Losses per share from continuing operations attributable to the
ordinary equity holders:
Basic - losses per share(2)
Diluted - losses per share(2)
Cents
Cents
Cents
Cents
Cents
(7.58)
(7.58)
(19.25)
(19.25)
(1.13)
(1.13)
(29.71)
(29.71)
(23.42)
(23.42)
(1) For the year ended June 30, 2017, the Group identified an opportunity to enhance the presentation of the fair value
remeasurement of contingent consideration and associated unwinding of the discount rate recorded within finance costs in the
Consolidated Income Statement. The Group considered that the change in contingent consideration is primarily due to changes in
assumptions about the settlement of the contingent consideration and these line items in the Consolidated Income Statement
should therefore be reported in aggregate, to provide more relevant information to the users of the financial statements. This
change in presentation has been retrospectively applied to the years ended June 30, 2016, 2015 and 2014.
4
15,004
—
8,386
23,390
(50,929)
(25,434)
(24,403)
(4,327)
6,173
—
—
(75,530)
(4)
(2) For the year ended June 30, 2018, the Group adjusted its losses per share calculations to reflect the bonus element in the fully
underwritten institutional and retail entitlement offer to existing eligible shareholders which occurred in September 2017. This
change has been retrospectively applied to the years ended June 30, 2017, 2016, 2015 and 2014.
(in U.S. dollars, in thousands except per share information)
Consolidated Balance Sheet Data:
Cash and cash equivalents
Total current assets
Total assets
Total current liabilities
Total liabilities
Total net assets
Equity:
Issued capital (482,639,654; 428,221,398;
381,363,137; 336,997,729 and 321, 640,094
ordinary shares (no par value) issued as of June 30,
2018, 2017, 2016, 2015, and 2014, respectively)
Reserves
(Accumulated loss)/retained earnings
Total equity
(in U.S. dollars, in thousands)
Cash Flow Data:
Net cash (outflows) in operating activities
Net cash (outflows)/inflows in investing activities
Net cash inflows in financing activities
Net (decrease) in cash and cash equivalents
Exchange Rate
2018
2017
2016
2015
2014
As of June 30,
37,763
101,071
692,443
24,003
146,435
546,008
45,761
63,609
655,686
36,670
138,920
516,766
80,937
88,823
684,018
29,415
155,857
528,161
110,701
122,460
781,766
48,407
313,779
467,987
185,003
191,931
847,153
40,199
308,594
538,559
889,481
36,719
(380,192)
546,008
830,425
31,243
(344,902)
516,766
770,272
25,976
(268,087)
528,161
709,191
22,756
(263,960)
467,987
662,722
43,553
(167,716)
538,559
2018
2017
2016
2015
2014
Year ended June 30,
(75,012)
(1,153)
68,613
(7,552)
(95,471)
142
60,005
(35,324)
(87,996)
(1,727)
62,066
(27,657)
(101,036)
(5,064)
45,852
(60,248)
(74,906)
(38,202)
2,196
(110,912)
The Company publishes its consolidated financial statements expressed in U.S. dollars. Mesoblast Limited, the parent entity
of the Group, has a functional currency of Australian dollars. For the convenience of the reader, this Annual Report contains
translations of certain Australian dollar amounts into U.S. dollars at specified rates. These translations should not be construed as
representations that the Australian dollar amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars
at the rate indicated. Unless otherwise stated, the translations of Australian dollars into U.S. dollars have been made at the rate of
US$0.7391 = A$1.00,
of Australia
as
(http://www.rba.gov.au/statistics/tables/) on June 29, 2018.
the Reserve Bank
exchange
foreign
issued
daily
rate
the
by
Exchange rates for the six months to July 2018 A$1.00 per US$:
Most recent six months:
Month ended February 28, 2018
Month ended March 31, 2018
Month ended April 30, 2018
Month ended May 31, 2018
Month ended June 30, 2018
Month ended July 31, 2018
High
Low
0.8044
0.7876
0.7804
0.7588
0.7664
0.7467
0.7779
0.7665
0.7545
0.7435
0.7353
0.7360
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Exchange rates for the last five fiscal years A$1.00 per US$:
Annual:
Fiscal year ended
June 30, 2014
June 30, 2015
June 30, 2016
June 30, 2017
June 30, 2018
Average Rate(1)
0.9148
0.8288
0.7272
0.7542
0.7736
(1) Determined by calculating the average rate of the exchange rates on the last trading day of each month during the period.
3.B
Capitalization and Indebtedness
Not applicable.
3.C
Reasons for the offer and use of proceeds
Not applicable.
3.D Risk Factors
You should carefully consider the risks described below and all other information contained in this Annual Report on Form 20-F
before making an investment decision. If any of the following risks actually occur, our business, financial condition and results of
operations could be materially and adversely affected. In that event, the trading price of our ordinary shares and ADSs could decline,
and you may lose part or all of your investment. This Annual Report on Form 20-F also contains forward-looking information that
involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements
as a result of many factors, including the risks described below and elsewhere in this Annual Report on Form 20-F.
Risks Related to Our Financial Position and Capital Requirements
We have incurred operating losses since our inception and anticipate that we will continue to incur substantial operating losses for
the foreseeable future. We may never achieve or sustain profitability.
We are a clinical-stage biotechnology company and we have not yet generated significant revenues. We have incurred net losses
during most of our fiscal periods since our inception. Our net loss for the year ended June 30, 2018 was $35.3 million. As of June 30,
2018, we have an accumulated deficit of $380.2 million since our inception. We do not know whether or when we will become
profitable. Our losses have resulted principally from costs incurred in clinical development and manufacturing activities.
We anticipate that our expenses will increase in the future as we move toward commercialization, including the scaling up of
our manufacturing activities and our establishment of infrastructure and logistics necessary to support a potential product launch.
Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To achieve and
maintain profitability, we must successfully develop our product candidates, obtain regulatory approval, and manufacture, market and
sell those products for which we obtain regulatory approval. If we obtain regulatory approval to market a product candidate, our future
revenue will depend upon the size of any markets in which our product candidates may receive approval, and our ability to achieve
sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in
those markets. We may not succeed in these activities, and we may never generate revenue from product sales that is significant
enough to achieve profitability. Our failure to become or remain profitable would depress our market value and could impair our
ability to raise capital, expand our business, discover or develop other product candidates or continue our operations. A decline in the
value of our company could cause you to lose part or all of your investment.
We have never generated any revenue from product sales and may never be profitable.
Our ability to generate revenue and achieve profitability depends on our ability, either alone or with strategic collaboration
partners, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our product
candidates. We do not anticipate generating revenues from product sales for the foreseeable future (other than licensing revenue from
sales of TEMCELL® HS. Inj. (“TEMCELL”), a registered trademark of JCR Pharmaceuticals Co., Ltd. (“JCR”), by JCR in Japan,
and, royalty revenue from net sales of Alifosel®, previously known as Cx601, an adipose-derived mesenchymal stem cell product
developed by TiGenix NV, now a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”)) and approved
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for marketing in the EU, and we may never generate product sales. Our ability to generate future revenues from product sales depends
heavily on our success in a number of areas, including:
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completing research and preclinical and clinical development of our product candidates;
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in
amount and quality) products and services to support clinical development and the market demand for our product
candidates, if approved;
launching and commercializing product candidates for which we obtain regulatory and marketing approval, either by
collaborating with a partner or, if launched independently, by establishing a sales force, marketing and distribution
capabilities and necessary supporting infrastructure including capabilities and systems necessary to ensure compliance
with legal and regulatory requirements relating to interactions with healthcare providers;
obtaining market acceptance of our product candidates and stem cell therapy as a viable treatment option;
addressing any competing technological and market developments;
obtaining and sustaining an adequate level of reimbursement from payors;
identifying and validating new stem cell therapy product candidates;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets, know-
how and trademarks;
attracting, hiring and retaining qualified personnel; and
implementing additional internal systems and infrastructure, as needed.
Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring
significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations
if we are required by the FDA, the European Medicines Agency (“EMA”), or other regulatory agencies, to perform clinical and other
studies in addition to those that we currently anticipate. We may not become profitable and may need to obtain additional funding to
continue operations.
We require substantial additional financing to achieve our goals, and our failure to obtain this necessary capital when needed
could force us to delay, limit, reduce or terminate our product development or commercialization efforts.
Our operations have consumed substantial amounts of cash since inception. As of June 30, 2018, our cash and cash equivalents
were $37.8 million. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future in
connection with our planned research, development and product commercialization efforts. In addition, we will require additional
financing to achieve our goals and our failure to do so could adversely affect our commercialization efforts. We anticipate that our
expenses will increase if and as we:
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continue the research and clinical development of our product candidates, including MPC-150-IM (Class II-IV Chronic
Heart Failure (“CHF”)), MPC-06-ID (Chronic Low Back Pain (“CLBP”)), MSC-100-IV (acute Graft versus Host Disease
(“aGVHD”)) and MPC-300-IV (inflammatory conditions) product candidates;
seek to identify, assess, acquire, and/or develop other and combination product candidates and technologies;
seek regulatory and marketing approvals in multiple jurisdictions for our product candidates that successfully complete
clinical studies;
establish collaborations with third parties for the development and commercialization of our product candidates, or
otherwise build and maintain a sales, marketing and distribution infrastructure to commercialize any products for which
we may obtain marketing approval;
further develop and implement our proprietary manufacturing processes in both planar technology and our bioreactor
programs and expand our manufacturing capabilities and resources for commercial production;
seek coverage and reimbursement from third-party payors, including government and private payors for future products;
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make milestone or other payments under our agreements pursuant to which we have licensed or acquired rights to
intellectual property and technology;
seek to maintain, protect and expand our intellectual property portfolio;
seek to attract and retain skilled personnel; and
develop the compliance and other infrastructure necessary to support product commercialization and distribution.
If we were to experience any delays or encounter issues with any of the above, including clinical holds, failed studies,
inconclusive or complex results, safety or efficacy issues, or other regulatory challenges that require longer follow-up of existing
studies, additional studies, or additional supportive studies in order to pursue marketing approval, it could further increase the costs
associated with the above. Further, the net operating losses we incur may fluctuate significantly from quarter to quarter and year to
year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest
may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a
shareholder or as a holder of the ADSs. Debt financing, if available, may involve agreements that include covenants limiting or
restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If
we raise additional funds through collaborations, strategic collaborations or partnerships, or marketing, distribution or licensing
arrangements with third parties, we may be required to do so at an earlier stage than would otherwise be ideal and/or may have to limit
valuable rights to our intellectual property, technologies, product candidates or future revenue streams, or grant licenses or other rights
on terms that are not favorable to us. Furthermore, any additional fundraising efforts may divert our management from their day-to-
day activities, which may adversely affect our ability to develop and commercialize our product candidates.
As described in Note 1(i) of our accompanying financial statements, our continuing viability and our ability to continue as a
going concern and meet our debts and commitments as they fall due are dependent upon the strategic alliance with Tasly
Pharmaceutical Group (“Tasly”), non-dilutive funding in the form of commercial partnering transactions or equity-based financing to
fund future operations, together with maintaining implemented cost containment and deferment strategies.
Management and the directors believe that we will be successful in the above matters and, accordingly, have prepared the
financial report on a going concern basis, notwithstanding that there is a material uncertainty that may cast significant doubt on our
ability to continue as a going concern and that we may be unable to realize our assets and liabilities in the normal course of business.
Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to
obtain adequate funding or partnerships in the future, we may not be able to continue as a going concern, and our shareholders and
holders of the ADSs may lose some or all of their investment in us.
The terms of our loan facilities with Hercules Capital, Inc. (“Hercules”) and NovaQuest Capital Management, L.L.C.
(“NovaQuest”) could restrict our operations, particularly our ability to respond to changes in our business or to take specified
actions.
On March 6, 2018, we entered into a loan and security agreement with Hercules, for a $75.0 million non-dilutive, four-year
credit facility. We drew the first tranche of $35.0 million at closing. On June 29, 2018, we entered into a loan and security agreement
with NovaQuest for a $40.0 million non-dilutive, eight-year term credit facility, repayable from net sales of our allogeneic product
candidate MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding
Asia. We drew the first tranche of $30.0 million on closing. Our loan facilities with Hercules and NovaQuest contain a number of
restrictive covenants that impose operating restrictions on us, which may restrict our ability to respond to changes in our business or
take specified actions. Our ability to comply with the various covenants under the agreements may be affected by events beyond our
control, and we may not be able to continue to meet the covenants. Upon the occurrence of an event of default, Hercules or NovaQuest
could elect to declare all amounts outstanding under the loan facility to be immediately due and payable and terminate all
commitments to extend further credit. If Hercules or NovaQuest accelerates the repayment, if any, we may not have sufficient funds to
repay our existing debt. If we were unable to repay those amounts, Hercules or NovaQuest could proceed against the collateral granted
to it to secure such indebtedness. We have pledged substantially all of our assets as collateral under the loan facility with Hercules,
and a portion of our assets relating to the aGVHD product candidate as collateral under the loan facility with NovaQuest.
We are subject to risks associated with currency fluctuations, and changes in foreign currency exchange rates could impact our
results of operations.
Historically, a substantial portion of our operating expenses has been denominated in U.S. dollars and our main currency
requirements are U.S. dollars, Australian dollars and Singapore dollars. Approximately 92% of our cash and cash equivalents as of
June 30, 2018 were denominated in U.S. dollars and 8% were denominated in Australian dollars. Because we have multiple functional
currencies across different jurisdictions, changes in the exchange rate between these currencies and the foreign currencies of the
8
transactions recorded in our accounts could materially impact our reported results of operations and distort period-to-period
comparisons. For example, a portion of our research and clinical trials are undertaken in Australia. As such, payment will be made in
Australian dollar currency, and may exceed the budgeted expenditure if there are adverse currency fluctuations against the U.S. dollar.
More specifically, if we decide to convert our Australian dollars into U.S. dollars for any business purpose, appreciation of the
U.S. dollar against the Australian dollar would have a negative effect on the U.S. dollar amount available to us. Appreciation or
depreciation in the value of the Australian dollar relative to the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or results of operations. As a result of such foreign currency
fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.
Risks Related to Clinical Development and Regulatory Review and Approval of Our Product Candidates
Our product candidates are based on our novel mesenchymal lineage adult stem cells (“MLC”) technology, which makes it
difficult to accurately and reliably predict the time and cost of product development and subsequently obtaining regulatory
approval. At the moment, no industrially manufactured, non-hematopoietic, allogeneic stem cell products have been approved in
the United States.
Other than with respect to sales of TEMCELL by our licensee JCR in Japan, we have not commercially marketed, distributed or
sold any products, either ourselves or through a licensee. The success of our business depends on our ability to develop and
commercialize our lead product candidates. We have concentrated our product research and development efforts on our MLC
platform, a novel type of stem cell therapy. Our future success depends on the successful development of this therapeutic approach.
There can be no assurance that any development problems we experience in the future related to our MLC platform will not cause
significant delays or unanticipated costs, or that such development problems can be solved. We may also experience delays in
developing sustainable, reproducible and scalable manufacturing processes or transferring these processes to collaborators, which may
prevent us from completing our clinical studies or commercializing our products on a timely or profitable basis, if at all.
In addition, the clinical study requirements of the FDA, the EMA and other regulatory agencies and the criteria these regulators
use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and
intended use and market of the potential product candidates. The regulatory approval process for novel product candidates such as
ours can be more expensive and take longer than other, better known or extensively studied pharmaceutical or other product
candidates to develop. In addition, adverse developments in clinical trials of cell therapy products conducted by others may cause the
FDA or other regulatory bodies to change the requirements for approval of any of our product candidates. At the moment, no
industrially manufactured, non-hematopoietic, allogeneic stem cell products have been approved in the United States, which makes it
difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in either
the United States or elsewhere.
We may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory agencies.
Other than with respect to TEMCELL which is sold by our licensee in Japan, we have not obtained any regulatory approvals for
a product, either ourselves or through a licensee. We must conduct extensive testing of our product candidates to demonstrate their
safety and efficacy, including both preclinical animal testing and evaluation in human clinical trials, before we can obtain regulatory
approval to market and sell them. Conducting such testing is a lengthy, time-consuming, and expensive process and there is a high rate
of failure. Our current and completed preclinical and clinical results for our product candidates are not necessarily predictive of the
results of our ongoing or future clinical trials. Promising results in preclinical studies of a product candidate may not be predictive of
similar results in humans during clinical trials, and successful results from early human clinical trials of a product candidate may not
be replicated in later and larger human clinical trials or in clinical trials for different indications. If the results of our or our
collaborators’ ongoing or future clinical trials are negative or inconclusive with respect to the efficacy of our product candidates or if
these trials do not meet the clinical endpoints with statistical significance or if there are safety concerns or adverse events associated
with our product candidates, we or our collaborators may be prevented or delayed in obtaining marketing approval for our product
candidates. Even if ongoing or future clinical studies meet the clinical endpoints with statistical significance, the FDA or other
regulatory agencies may still find the data insufficient to support marketing approval based on other factors.
We may encounter substantial delays in our clinical studies.
We cannot guarantee that any preclinical testing or clinical trials will be conducted as planned or completed on schedule, if at
all. As a result, we may not achieve our expected clinical milestones. A failure can occur at any stage of testing. Events that may
prevent successful or timely commencement, enrollment or completion of clinical development include:
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problems which may arise as a result of our transition of the Phase 3 CHF trial from Teva Pharmaceutical Industries Ltd;
delays in raising, or inability to raise, sufficient capital to fund the planned trials;
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delays by us or our collaborators in reaching a consensus with regulatory agencies on trial design;
changes in trial design;
inability to identify, recruit and train suitable clinical investigators;
inability to add new clinical trial sites;
delays in reaching agreement on acceptable terms for the performance of the trials with prospective contract research
organizations (“CROs”), and clinical trial sites;
delays in obtaining required Institutional Review Board (“IRB”), approval at each clinical trial site;
delays in recruiting suitable clinical sites and patients (i.e., subjects) to participate in clinical trials and delays in accruing
medical events necessary to complete any events-driven trial;
imposition of a clinical hold by regulatory agencies for any reason, including negative clinical results, safety concerns or
as a result of an inspection of manufacturing or clinical operations or trial sites;
failure by CROs, other third parties or us or our collaborators to adhere to clinical trial requirements;
failure to perform in accordance with the FDA’s current Good Clinical Practices (“cGCP”), or applicable regulatory
guidelines in other countries;
delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
delays caused by patients not completing participation in a trial or not returning for post-treatment follow-up;
delays caused by clinical trial sites not completing a trial;
failure to demonstrate adequate efficacy;
occurrence of serious adverse events in clinical trials that are associated with the product candidates and that are viewed to
outweigh its potential benefits;
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols; or
disagreements between us and the FDA or other regulatory agencies regarding a clinical trial design, protocol
amendments, or interpreting the data from our clinical trials.
Delays, including delays caused by the above factors, can be costly and could negatively affect our or our collaborators’ ability
to complete clinical trials for our product candidates. If we or our collaborators are not able to successfully complete clinical trials or
are not able to do so in a timely and cost-effective manner, we will not be able to obtain regulatory approval and/or will not be able to
commercialize our product candidates and our commercial partnering opportunities will be harmed.
We may find it difficult to enroll patients in our clinical trials, which could delay or prevent development of our product
candidates.
Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. The timing
of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates as well as
completion of required follow-up periods. In general, if patients are unwilling to participate in our stem cell therapy trials because of
negative publicity from adverse events in the biotechnology or stem cell industries or for other reasons, including competitive clinical
trials for similar patient populations, the timeline for recruiting patients, conducting trials and obtaining regulatory approval for our
product candidates may be delayed. As a result, we or our collaborators generally will have to run multi-site and potentially multi-
national trials, which can be time consuming, expensive and require close coordination and supervision. If we have difficulty enrolling
a sufficient number of patients or otherwise conducting clinical trials as planned, we or our collaborators may need to delay, limit or
terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business.
If there are delays in accumulating the required number of trial subjects or, in trials where clinical events are a primary endpoint,
there may be delays in completing the trial. These delays could result in increased costs, delays in advancing development of our
product candidates, including delays in testing the effectiveness, or even termination of the clinical trials altogether.
Patient enrollment and completion of clinical trials are affected by factors including:
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size of the patient population, particularly in orphan diseases;
severity of the disease under investigation;
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design of the trial protocol;
eligibility criteria for the particular trial;
perceived risks and benefits of the product candidate being tested;
proximity and availability of clinical trial sites for prospective patients;
availability of competing therapies and clinical trials;
efforts to facilitate timely enrollment in clinical trials;
patient referral practices of physicians;
ability to monitor patients adequately during and after treatment; and
the degree of treatment effect in event-driven trials.
Once enrolled, patients may choose to discontinue their participation at any time during the trial, for any reason. Participants
also may be terminated from the study at the initiative of the investigator, for example if they experience serious adverse clinical
events or do not follow the study directions. If we are unable to maintain an adequate number of patients in our clinical trials, we may
be required to delay or terminate an ongoing clinical trial, which would have an adverse effect on our business.
We may conduct multinational clinical trials, which present additional and unique risks.
We plan to seek initial marketing approval for our product candidates in the United States and in select non-U.S. jurisdictions
such as Europe, Japan and Canada. Conducting trials on a multinational basis requires collaboration with foreign medical institutions
and healthcare providers. Our ability to successfully initiate, enroll and complete a clinical trial in multiple countries is subject to
numerous risks unique to conducting business internationally, including:
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difficulty in establishing or managing relationships with physicians and CROs;
standards within different jurisdictions for conducting clinical trials and resulting patients;
our inability to locate qualified local consultants, physicians and partners;
the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements,
including the regulation of pharmaceutical and biotechnology products and treatments; and
differing genotypes, average body weights and other patient profiles within and across countries from our donor profile
may impact the optimal dosing or may otherwise impact the results of our clinical trials.
Serious adverse events or other safety risks could require us to abandon development and preclude, delay or limit approval of our
product candidates, or limit the scope of any approved indication or market acceptance.
Participants in clinical trials of our investigational stem cell products may experience adverse reactions or other undesirable side
effects. While some of these can be anticipated, others may be unexpected. We cannot predict the frequency, duration, or severity of
adverse reactions or undesirable side effects that may occur during clinical investigation of our product candidates. If any of our
product candidates, prior to or after any approval for commercial sale, cause adverse events or are associated with other safety risks, a
number of potentially significant negative consequences could result, including:
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regulatory authorities may suspend (e.g., through a clinical hold) or terminate clinical trials;
regulatory authorities may deny regulatory approval of our product candidates;
regulators may restrict the indications or patient populations for which a product candidate is approved;
regulatory authorities may require certain labeling statements, such as warnings or contraindications or limitations on the
indications for use, and/or impose restrictions on distribution in the form of a risk evaluation and mitigation strategy
(“REMS”), in connection with approval, if any;
regulatory authorities may withdraw their approval, require more onerous labeling statements or impose a more restrictive
REMS than any product that is approved;
we may be required to change the way the product is administered or conduct additional clinical trials;
patient recruitment into our clinical trials may suffer;
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our relationships with our collaborators may suffer;
we could be required to provide compensation to subjects for their injuries, e.g., if we are sued and found to be liable or if
required by the laws of the relevant jurisdiction or by the policies of the clinical site; or
our reputation may suffer.
There can be no assurance that adverse events associated with our product candidates will not be observed, even where no prior
adverse events have occurred. As is typical in clinical development, we have a program of ongoing toxicology studies in animals for
our other clinical-stage product candidates and cannot provide assurance that the findings from such studies or any ongoing or future
clinical trials will not adversely affect our clinical development activities.
We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to
participants or if preliminary data demonstrate that our product candidates are unlikely to receive regulatory approval or unlikely to be
successfully commercialized. In addition, regulatory agencies, IRBs or data safety monitoring boards may at any time recommend the
temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they
believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an
unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial for any of our product
candidates, the commercial prospects for that product as well as our other product candidates may be harmed and our ability to
generate product revenue from these product candidates may be delayed or eliminated. Furthermore, any of these events could prevent
us or our collaborators from achieving or maintaining market acceptance of the affected product and could substantially increase the
costs of commercializing our product candidates and impair our ability to generate revenue from the commercialization of these
product candidates either by us or by our collaborators.
Several of our product candidates are being evaluated for the treatment of patients who are extremely ill, and patient deaths that
occur in our clinical trials could negatively impact our business even if they are not shown to be related to our product candidates.
We are developing MPC-150-IM, which will focus on Class II-IV CHF, and MSC-100-IV, which will focus on steroid-
refractory aGVHD. The patients who receive our product candidates are very ill due to their underlying diseases.
Generally, patients remain at high risk following their treatment with our product candidates and may more easily acquire
infections or other common complications during the treatment period, which can be serious and life threatening. As a result, it is
likely that we will observe severe adverse outcomes during our Phase 3 and other trials for these product candidates, including patient
death. If a significant number of study subject deaths were to occur, regardless of whether such deaths are attributable to our product
candidates, our ability to obtain regulatory approval for the applicable product candidate may be adversely impacted and our business
could be materially harmed.
The requirements to obtain regulatory approval of the FDA and regulators in other jurisdictions can be costly, time-consuming,
and unpredictable. If we or our collaborators are unable to obtain timely regulatory approval for our product candidates, our
business may be substantially harmed.
The regulatory approval process is expensive and the time and resources required to obtain approval from the FDA or other
regulatory authorities in other jurisdictions to sell any product candidate is uncertain and approval may take years. Whether regulatory
approval will be granted is unpredictable and depends upon numerous factors, including the discretion of the regulatory authorities.
For example, governing legislation, approval policies, regulations, regulatory policies, or the type and amount of preclinical and
clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary
among jurisdictions. It is possible that none of our existing or future product candidates will ever obtain regulatory approval (other
than TEMCELL which is sold under license in Japan), even if we expend substantial time and resources seeking such approval.
Further, regulatory requirements governing stem cell therapy products in particular have changed and may continue to change in
the future. For example, in December 2016, the 21st Century Cures Act (“Cures Act”) was signed into law in the United States. This
new law is designed to advance medical innovation, and includes a number of provisions that may impact our product development
programs. For example, the Cures Act establishes a new “regenerative medicine advanced therapy” designation (“RMAT”), and
creates a pathway for increased interaction with FDA for the development of products which obtain designations. As this is a new law,
it is not clear yet what impact it will have on the operation of our business. Although the FDA issued draft guidances for comment in
November 2017, it remains unclear how and when the FDA will finalize these and fully implement the Cures Act.
Any regulatory review committees and advisory groups and any contemplated new guidelines may lengthen the regulatory
review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and
interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval
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limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory and advisory
groups, and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of our
product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a product
candidate to market could decrease our ability to generate sufficient revenue to maintain our business.
Our product candidates could fail to receive regulatory approval for many reasons, including the following:
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we may be unable to successfully complete our ongoing and future clinical trials of product candidates;
we may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is
safe, pure, and potent for any or all of a product candidate’s proposed indications;
we may be unable to demonstrate that a product candidate’s benefits outweigh the risk associated with the product
candidate;
the FDA or other regulatory authorities may disagree with the design or implementation of our clinical trials;
the results of clinical trials may not meet the level of statistical significance required by the FDA or other regulatory
authorities for approval;
the FDA or other regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical
trials;
a decision by the FDA, other regulatory authorities or us to suspend or terminate a clinical trial at any time;
the data collected from clinical trials of our product candidates may be inconclusive or may not be sufficient to support the
submission of a Biologics License Application (“BLA”), or other submission or to obtain regulatory approval in the
United States or elsewhere;
the inability to obtain sufficient quantities of the product candidates required for clinical trials;
our third party manufacturers of supplies needed for manufacturing product candidates may fail to satisfy FDA or other
regulatory requirements and may not pass inspections that may be required by FDA or other regulatory authorities;
the failure to comply with applicable regulatory requirements following approval of any of our product candidates may
result in the refusal by the FDA or similar foreign regulatory agency to approve a pending BLA or supplement to a BLA
submitted by us for other indications or new product candidates; and
the approval policies or regulations of the FDA or other regulatory authorities outside of the United States may
significantly change in a manner rendering our clinical data insufficient for approval.
We or our collaborators may gain regulatory approval for any of our product candidates in some but not all of the territories
available and any future approvals may be for some but not all of the target indications, limiting their commercial potential.
Regulatory requirements and timing of product approvals vary from country to country and some jurisdictions may require additional
testing beyond what is required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in
other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in
other countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA
approval. In addition, regulatory approval does not specify pricing or reimbursement which may not match our expectations based on
the results of our clinical data.
Our drug candidates may not benefit from an expedited approval path for cellular medicines designated as Regenerative Medicine
Advanced Therapies (RMATs) under the 21st Century Cures Act.
On December 21, 2017, the FDA granted RMAT designation for our novel MPC therapy in the treatment of heart failure
patients with left ventricular systolic dysfunction and left ventricular assist devices (LVADs). While the Cures Act offers several
potential benefits to drugs designated as RMATs, including eligibility for increased agency support and advice during development,
priority review on filing, a potential pathway for accelerated approval based on surrogate or intermediate endpoints, and the potential
to use patient registry data and other sources of real world evidence for post approval confirmatory studies, there is no assurance that
any of these potential benefits will either apply to any or all of our drug candidates or, if applicable, accelerate marketing approval.
RMAT designation does not change the evidentiary standards of safety and effectiveness needed for marketing approval.
Furthermore, there is no certainty as to whether any of our product candidates that have not yet received RMAT designation
under the Cures Act will receive such designation under the Cures Act. Designation as an RMAT is within the discretion of the FDA.
Accordingly, even if we believe one of our products or product candidates meets the criteria for RMAT designation, the FDA may
disagree. Additionally, for any product candidate that receives RMAT designation, we may not experience a faster development,
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review or approval process compared to conventional FDA procedures. The FDA may withdraw RMAT designation if it believes that
the product no longer meets the qualifying criteria for designation.
Even if we obtain regulatory approval for a product candidate, our products will be subject to ongoing regulatory scrutiny.
Any of our product candidates that are approved in the United States or in other jurisdictions will continue to be subject to
ongoing regulatory requirements relating to the quality, identity, strength, purity, safety, efficacy, testing, manufacturing, marketing,
advertising, promotion, distribution, sale, storage, packaging, pricing, import or export, record-keeping and submission of safety and
other post-market information for all approved product candidates. In the United States, this includes both federal and state
requirements. In particular, as a condition of approval of a BLA, the FDA may require a REMS, to ensure that the benefits of the drug
outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals and elements to
assure safe use (“ETASU”). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing,
dispensing only under certain circumstances, special monitoring, and the use of patient registries. Moreover, regulatory approval may
require substantial post-approval (Phase 4) testing and surveillance to monitor the drug’s safety or efficacy. Delays in the REMS
approval process could result in delays in the BLA approval process. In addition, as part of the REMS, the FDA could require
significant restrictions, such as restrictions on the prescription, distribution and patient use of the product, which could significantly
impact our ability to effectively commercialize our product candidates, and dramatically reduce their market potential thereby
adversely impacting our business, results of operations and financial condition. Post-approval study requirements could add additional
burdens, and failure to timely complete such studies, or adverse findings from those studies, could adversely affect our ability to
continue marketing the product.
Any failure to comply with ongoing regulatory requirements, as well as post-approval discovery of previously unknown
problems, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, may
significantly and adversely affect our ability to generate revenue from our product candidates, and may result in, among other things:
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restrictions on the marketing or manufacturing of the product candidates, withdrawal of the product candidates from the
market, or voluntary or mandatory product recalls;
suspension or withdrawal of regulatory approval;
costly regulatory inspections;
fines, warning letters, or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our
collaborators, or suspension or revocation of BLAs;
restrictions on our operations;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties by FDA or other regulatory bodies.
If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our business and our operating results
will be adversely affected.
The FDA’s policies, or that of the applicable regulatory bodies in other jurisdictions, may change, and additional government
regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the
likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the
United States or abroad. If we or our collaborators are not able to maintain regulatory compliance, are slow or unable to adopt new
requirements or policies, or effect changes to existing requirements, we or our collaborators may no longer be able to lawfully market
our product, and we may not achieve or sustain profitability, which would adversely affect our business.
Ethical and other concerns surrounding the use of embryonic stem cell-based therapy may negatively affect regulatory approval or
public perception of our non-embryonic stem cell product candidates, which could reduce demand for our products or depress our
share price.
The use of embryonic stem cells (“ESCs”), for research and therapy has been the subject of considerable public debate, with
many people voicing ethical, legal and social concerns related to their collection and use. Our cells are not ESCs, which have been the
predominant focus of this public debate and concern in the United States and elsewhere. However, the distinction between ESCs and
non-ESCs, such as our MLCs, is frequently misunderstood by the public. Negative public attitudes toward stem cell therapy could also
result in greater governmental regulation of stem cell therapies, which could harm our business. The use of these cells could give rise
to ethical and social commentary adverse to us, which could harm the market demand for new products and depress the price of our
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ordinary shares and ADSs. Ongoing lack of understanding of the difference between ESCs and non-ESCs could negatively impact the
public’s perception of our company and product candidates and could negatively impact us.
Additional government-imposed restrictions on, or concerns regarding possible government regulation of, the use of stem cells
in research, development and commercialization could also cause an adverse effect on us by harming our ability to establish important
partnerships or collaborations, delaying or preventing the development of certain product candidates, and causing a decrease in the
price of our ordinary shares and ADSs, or by otherwise making it more difficult for us to raise additional capital. For example,
concerns regarding such possible regulation could impact our ability to attract collaborators and investors. Also, existing and potential
government regulation of stem cells may lead researchers to leave the field of stem cell research altogether in order to assure that their
careers will not be impeded by restrictions on their work. This may make it difficult for us to find and retain qualified scientific
personnel.
Fast track designation by the FDA may not lead to a faster development or regulatory review or approval process, and it does not
increase the likelihood that any of our product candidates will receive marketing approval in the United States.
If a drug is intended for the treatment of a serious or life-threatening condition or disease and the applicable nonclinical or
clinical data demonstrate the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA fast
track designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product
candidate is eligible for this designation, we cannot assure that the FDA would decide to grant it. Our MSC-100-IV product candidate
has received fast track designation for the treatment of aGVHD by the FDA. We may in the future seek fast track designation for other
of our product candidates as appropriate in the United States. For any product candidate that receives fast track designation, we may
not experience a faster development, review or approval process compared to conventional FDA procedures. The FDA may withdraw
fast track designation if it believes that the designation is no longer supported by data from our clinical development program.
Orphan drug designation may not ensure that we will enjoy market exclusivity in a particular market, and if we fail to obtain or
maintain orphan drug designation or other regulatory exclusivity for some of our product candidates, our competitive position
would be harmed.
A product candidate that receives orphan drug designation can benefit from potential commercial benefits following approval.
Under the Orphan Drug Act, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or
condition, defined as affecting (1) a patient population of fewer than 200,000 in the United States, (2) a patient population greater than
200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales
in the United States, or (3) an “orphan subset” of a patient population greater than 200,000 in the United States. In the European Union
(“EU”), the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of
products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting
not more than 10,000 persons in the EU. Currently, this designation provides market exclusivity in the U.S. and the European Union
for seven years and ten years, respectively, if a product is the first such product approved for such orphan indication. This market
exclusivity does not, however, pertain to indications other than those for which the drug was specifically designated in the approval,
nor does it prevent other types of drugs from receiving orphan designations or approvals in these same indications. Further, even after
an orphan drug is approved, the FDA can subsequently approve a drug with similar chemical structure for the same condition if the
FDA concludes that the new drug is clinically superior to the orphan product or a market shortage occurs. In the EU, orphan
exclusivity may be reduced to six years if the drug no longer satisfies the original designation criteria or can be lost altogether if the
marketing authorization holder consents to a second orphan drug application or cannot supply enough drug, or when a second
applicant demonstrates its drug is “clinically superior” to the original orphan drug.
Our MSC-100-IV product candidate has received orphan drug designation for the treatment of aGVHD by the FDA. If we seek
orphan drug designations for other product candidates in other indications, we may fail to receive such orphan drug designations and,
even if we succeed, such orphan drug designations may fail to result in or maintain orphan drug exclusivity upon approval, which
would harm our competitive position.
Breakthrough therapy designation by the FDA may not lead to a faster development or regulatory review or approval process, and
it does not increase the likelihood that any of our product candidates will receive marketing approval in the United States.
We have in the past and may in the future apply for breakthrough therapy designation for our product candidates, as appropriate,
in the United States. A breakthrough therapy is defined as a product that is intended, alone or in combination with one or more other
drugs, to treat a serious or life-threatening disease or condition, and for which preliminary clinical evidence indicates substantial
improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed
early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction and
communication between the FDA and the applicant can help to identify the most efficient path for clinical development while
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minimizing the number of patients placed in ineffective control regimens. Products designated as breakthrough therapies by the FDA
may, in some cases, also be eligible for accelerated approval.
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe one of our products
or product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree. In any event, the receipt of
a breakthrough therapy designation for a product or product candidate may not result in a faster development process, review or
approval compared to products considered for approval under conventional FDA procedures and does not assure ultimate approval by
the FDA. We have in the past been denied breakthrough designation for certain of our product candidates. In addition, even if one or
more of our products or product candidates does qualify as a breakthrough therapy, the FDA may later decide that the products no
longer meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
We may be required to participate in FDA Advisory Committee proceedings for some or all of our product candidates which may
raise unanticipated safety and other concerns about our product candidates in a public forum.
It is likely that we will have to participate in FDA Advisory Committee proceedings for our aGVHD product candidate as
well as potentially other product candidates. FDA Advisory Committees are convened to conduct public hearings on matters of
importance that come before FDA, to review the issues involved, and to provide advice and recommendations to the Agency. New
product candidates may be referred for review by Advisory Committees whether FDA has identified issues or concerns in respect of
such candidates or not. Advisory Committee input and recommendations may be used at the discretion of the FDA. Advisory
Committee proceedings are in part conducted publicly. While the recommendations made by Advisory Committees in respect of
marketing applications for any product are not dispositive, such determinations and recommendations are often influential, and may be
made available publicly and to the advantage of our competitors. In addition, it is possible that safety findings and recommendations
as well as other concerns and considerations raised by Advisory Committee members, who constitute a multi-disciplinary group of
experts (including representatives/advocates from the consumer sector), may impact FDA’s review of our product candidate
submissions or labeling unfavorably. Furthermore, commentary from Advisory Committee proceedings can figure into future product
and other litigation.
We may face competition from biosimilars due to changes in the regulatory environment.
We may face competition from biosimilars due to the changing regulatory environment. In the United States, the Biologics Price
Competition and Innovation Act of 2009 created an abbreviated approval pathway for biological products that are demonstrated to be
“highly similar,” or biosimilar, to or “interchangeable” with an FDA-approved innovator (original) biological product. This pathway
could allow competitors to reference data from innovator biological products already approved after 12 years from the time of
approval. For several years the annual budget requests of President Obama’s administration included proposals to cut this 12-year
period of exclusivity down to seven years. Those proposals were not adopted by Congress. Under President Trump’s administration, it
is unclear if a similar change will be pursued in the future. In Europe, the European Commission has granted marketing authorizations
for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past
few years. In Europe, a competitor may reference data from biological products already approved, but will not be able to get on the
market until ten years after the time of approval. This 10-year period will be extended to 11 years if, during the first eight of those 10
years, the marketing authorization holder obtains an approval for one or more new therapeutic indications that bring significant
clinical benefits compared with existing therapies. In addition, companies may be developing biosimilars in other countries that could
compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing our products, our products
may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences.
Risks Related to Collaborators
We rely on third parties to conduct our nonclinical and clinical studies and perform other tasks for us. If these third parties do not
successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may not be
able to obtain regulatory approval for or commercialize our product candidates in a timely and cost-effective manner or at all, and
our business could be substantially harmed.
We have relied upon and plan to continue to rely upon third-party entities, including CROs, academic institutions, hospitals and
other third-party collaborators, to monitor, support, conduct and/or oversee preclinical and clinical studies of our current and future
product candidates. We rely on these parties for execution of our nonclinical and clinical studies, and control only certain aspects of
their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable
protocol, legal, regulatory, and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities.
If we or any of these third-parties fail to comply with the applicable protocol, legal, regulatory, and scientific standards, the clinical
data generated in our clinical studies may be deemed unreliable and the FDA, EMA or comparable foreign regulatory authorities may
require us to perform additional clinical studies before approving our marketing applications.
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If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative
parties or do so on commercially reasonable terms. In addition, these parties are not our employees, and except for remedies available
to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our
on-going nonclinical and clinical programs. If third parties do not successfully carry out their contractual duties or obligations or meet
expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to
adhere to our protocols, regulatory requirements, or for other reasons, our clinical studies may be extended, delayed, or terminated and
we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. Third parties may also
generate higher costs than anticipated. As a result, our results of operations and the commercial prospects for our product candidates
would be harmed, our costs could increase, and our ability to generate revenue could be delayed.
Switching or adding additional third parties involves additional cost and requires management time and focus. In addition, there
is a natural transition period when a new third party commences work. As a result, delays occur, which can materially impact our
ability to meet our desired clinical development timelines. Though we carefully manage our relationships with these third parties,
there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will
not have a material adverse impact on our business, financial condition, and prospects.
Our existing product development and/or commercialization arrangements, and any that we may enter into in the future, may not
be successful, which could adversely affect our ability to develop and commercialize our product candidates.
We are a party to, and continue to seek additional, collaboration arrangements with biopharmaceutical companies for the
development and/or commercialization of our current and future product candidates. We may enter into new arrangements on a
selective basis depending on the merits of retaining certain development and commercialization rights for ourselves as compared to
entering into selective collaboration arrangements with leading pharmaceutical or biotechnology companies for each product
candidate, both in the United States and internationally. To the extent that we decide to enter into collaboration agreements, we will
face significant competition in seeking appropriate collaborators. Any failure to meet our clinical milestones with respect to an
unpartnered product candidate would make finding a collaborator more difficult. Moreover, collaboration arrangements are complex,
costly and time consuming to negotiate, document and implement, and we cannot guarantee that we can successfully maintain such
relationships or that the terms of such arrangements will be favorable to us. If we fail to establish and implement collaboration or other
alternative arrangements, the value of our business and operating results will be adversely affected.
We may not be successful in our efforts to establish, implement and maintain collaborations or other alternative arrangements if
we choose to enter into such arrangements. The terms of any collaboration or other arrangements that we may establish may not be
favorable to us. The management of collaborations may take significant time and resources that distract our management from other
matters.
Our ability to successfully collaborate with any future collaborators may be impaired by multiple factors including:
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a collaborator may shift its priorities and resources away from our programs due to a change in business strategies, or a
merger, acquisition, sale or downsizing of its company or business unit;
a collaborator may cease development in therapeutic areas which are the subject of our strategic alliances;
a collaborator may change the success criteria for a particular program or product candidate thereby delaying or ceasing
development of such program or candidate;
a significant delay in initiation of certain development activities by a collaborator will also delay payments tied to such
activities, thereby impacting our ability to fund our own activities;
a collaborator could develop a product that competes, either directly or indirectly, with our current or future products, if
any;
a collaborator with commercialization obligations may not commit sufficient financial or human resources to the
marketing, distribution or sale of a product;
a collaborator with manufacturing responsibilities may encounter regulatory, resource or quality issues and be unable to
meet demand requirements;
a collaborator may exercise its rights under the agreement to terminate our collaboration;
a dispute may arise between us and a collaborator concerning the research or development of a product candidate or
commercialization of a product resulting in a delay in milestones, royalty payments or termination of a program and
possibly resulting in costly litigation or arbitration which may divert management attention and resources;
the results of our clinical trials may not match our collaborators’ expectations, even if statistically significant;
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a collaborator may not adequately protect or enforce the intellectual property rights associated with a product or product
candidate; and
a collaborator may use our proprietary information or intellectual property in such a way as to invite litigation from a third
party.
Any such activities by our current or future collaborators could adversely affect us financially and could harm our business
reputation.
Risks Related to Our Manufacturing and Supply Chain
We have no experience manufacturing our product candidates at a commercial scale. We may not be able to manufacture our
product candidates in quantities sufficient for development and commercialization if our product candidates are approved, or for
any future commercial demand for our product candidates.
We have manufactured clinical quantities of our MLC product candidates in manufacturing facilities, owned by Lonza
Walkersville, Inc. and Lonza Bioscience Singapore Pte. Ltd. (collectively referred to as “Lonza”). We do not have any direct
experience in manufacturing commercial quantities of any of our product candidates. The production of any biopharmaceutical,
particularly stem cells, involves complex processes and protocols. We cannot provide assurance that such production efforts will
enable us to manufacture our product candidates in the quantities and with the quality needed for clinical trials and any resulting
commercialization. If we are unable to do so, our clinical trials and commercialization efforts, if any, may not proceed in a timely
fashion and our business will be adversely affected. If any of our product candidates are approved for commercialization and
marketing, we may be required to manufacture the product in large quantities to meet demand. Producing product in commercial
quantities requires developing and adhering to complex manufacturing processes that are different from the manufacture of a product
in smaller quantities for clinical trials, including adherence to additional and more demanding regulatory standards. Although we
believe that we have developed processes and protocols that will enable us to consistently manufacture commercial-scale quantities of
product, we cannot provide assurance that such processes and protocols will enable us to manufacture our product candidates in
quantities that may be required for commercialization of the product with yields and at costs that will be commercially attractive. If we
are unable to establish or maintain commercial manufacture of the product or are unable to do so at costs that we currently anticipate,
our business will be adversely affected.
Further, we have made significant advances in the development of 3-dimensional (“3D”) bioreactor based production for MLCs,
the goal of which is to allow us to produce our products at commercial scale. There is no guarantee that we will successfully complete
this process or meet all applicable regulatory requirements. This may be due to multiple factors, including the failure to produce
sufficient quantities and the inability to produce cells that are equivalent in physical and therapeutic properties as compared to the
products produced using our current two-dimensional, or 2D, manufacturing processes. In the event our transition to 3D
manufacturing is unsuccessful, we may not be able to produce our products in a cost-efficient manner and our business may be
adversely affected.
We rely on Lonza as our sole supplier and manufacturer of certain of our product candidates. Our business could be harmed if
Lonza fails to provide us with sufficient quantities of these product candidates or fails to do so at acceptable quality levels or prices.
We do not currently have, nor do we plan to acquire, the infrastructure or capability internally to manufacture our MLC product
candidates for use in the conduct of our clinical trials, and we currently lack the internal resources and the capability to manufacture
any of our product candidates on a clinical or commercial scale. As a result, we currently depend on Lonza to manufacture our MLC
product candidates. Relying on Lonza as our sole source to manufacture our MLC product candidates entails risks, and Lonza may:
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cease or reduce production or deliveries, raise prices or renegotiate terms;
be unable to meet any product specifications and quality requirements consistently;
delay or be unable to procure or expand sufficient manufacturing capacity, which may harm our reputation or frustrate our
customers;
not have the capacity sufficient to support the scale-up of manufacturing for our product candidates;
have manufacturing and product quality issues related to scale-up of manufacturing;
experience costs and validation of new equipment facilities requirement for scale-up that it will pass on to us;
fail to comply with cGMP and similar international standards;
lose its manufacturing facility in Singapore, stored inventory or laboratory facilities through fire or other causes, or other
loss of materials necessary to manufacture our product candidates;
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experience disruptions to its operations by conditions unrelated to our business or operations, including the bankruptcy or
interruptions of its suppliers;
experience carrier disruptions or increased costs that it will pass on to us;
fail to secure adequate supplies of essential ingredients in our manufacturing process;
experience failure of third parties involved in the transportation, storage or distribution of our products, including the
failure to deliver supplies it uses for the manufacture of our product candidates under specified storage conditions and in a
timely manner; and
appropriate or misuse our trade secrets and other proprietary information.
Any of these events could lead to delays in the development of our product candidates, including delays in our clinical trials, or
failure to obtain regulatory approval for our product candidates, or it could impact our ability to successfully commercialize our
current product candidates or any future products. Some of these events could be the basis for FDA or other regulatory action,
including injunction, recall, seizure or total or partial suspension of production.
In addition, the lead time needed to establish a relationship with a new manufacturer can be lengthy, and we may experience
delays in meeting demand in the event we must switch to a new manufacturer. We are expanding our manufacturing collaborations in
order to meet future demand and to provide back-up manufacturing options, which also involves risk and requires significant time and
resources. Our future collaborators may need to expand their facilities or alter the facilities to meet future demand and changes in
regulations. These activities may lead to delays, interruptions to supply, or may prove to be more costly than anticipated. Any
problems in our manufacturing process could have a material adverse effect on our business, results of operations and financial
condition.
We may not be able to manufacture or commercialize our product candidates in a profitable manner.
We intend to implement a business model under which we control the manufacture and supply of our product candidates,
including but not exclusively, through our product suppliers, including Lonza. We and the suppliers of our product candidates,
including Lonza, have no experience manufacturing our product candidates at commercial scale. Accordingly, there can be no
assurance as to whether we and our suppliers will be able to scale-up the manufacturing processes and implement technological
improvements in a manner that will allow the manufacture of our product candidates in a cost effective manner. Our collaborators’
inability to sell our product candidates at a price that exceeds our cost of manufacture by an amount that is profitable for us will have a
material adverse result on the results of our operations and our financial condition.
Our or our collaborators’ ability to identify, test and verify new donor tissue in order to create new master cell banks involves many
risks.
The initial stage of manufacturing involves obtaining MLC-containing bone marrow from donors, for which we currently rely
on Lonza. MLCs are isolated from each donor’s bone marrow, and expanded to create a master cell bank. Each individual master cell
bank comes from a single donor. A single master cell bank can source many production runs, which in turn can produce up to
thousands of doses of a given product, depending on the dose level. The process of identifying new donor tissue, testing and verifying
its validity in order to create new master cell banks and validating such cell bank with the FDA and other regulatory agencies is time
consuming, costly and prone to the many risks involved with creating living cell products. There could be consistency or quality
control issues with any new master cell bank. Although we believe we and our collaborators have the necessary know-how and
processes to enable us to create master cell banks with consistent quality and within the timeframe necessary to meet projected
demand and we have begun doing so, we cannot be certain that we or our collaborators will be able to successfully do so, and any
failure or delays in creating new master cell banks will have a material adverse impact on our business, results of operations, financial
conditions and growth prospects and could result in our inability to continue operations.
We and our collaborators depend on a limited number of suppliers for our product candidates’ materials, equipment or supplies
and components required to manufacture our product candidates. The loss of these suppliers, or their failure to provide quality
supplies on a timely basis, could cause delays in our current and future capacity and adversely affect our business.
We and our collaborators depend on a limited number of suppliers for the materials, equipment and components required to
manufacture our product candidates and the product candidates themselves. We rely exclusively on Lonza to supply certain of our
product candidates. In addition, we rely on additional third parties to provide various “devices” or “carriers” for some of our programs
(e.g., the catheter for use with MPC-150-IM, and the hyaluronic acid used for disc repair). The main consumable used in our
manufacturing process is our media, which currently is sourced from fetal bovine serum (“FBS”). This material comes from limited
sources, and as a result is expensive. Consequently, we or our collaborators may not be able to obtain sufficient quantities of our
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product candidates or other critical materials equipment and components in the future, at affordable prices or at all. A delay or
interruption by our suppliers may also harm our business, and operating results. In addition, the lead time needed to establish a
relationship with a new supplier can be lengthy, and we or our collaborators may experience delays in meeting demand in the event
we must switch to a new supplier. The time and effort to qualify for and, in some cases, obtain regulatory approval for a new supplier
could result in additional costs, diversion of resources or reduced manufacturing yields, any of which would negatively impact our
operating results. Our and our collaborators’ dependence on single-source suppliers exposes us to numerous risks, including the
following:
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our or our collaborators’ suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms;
we or our collaborators may be unable to locate suitable replacement suppliers on acceptable terms or on a timely basis, or
at all; and
delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors
for future needs.
We and our collaborators and Lonza are subject to significant regulation with respect to manufacturing our product candidates.
The Lonza manufacturing facilities on which we rely may not continue to meet regulatory requirements or may not be able to meet
supply demands.
All entities involved in the preparation of therapeutics for clinical studies or commercial sale, including our existing
manufacturers, including Lonza, are subject to extensive regulation. Components of a finished therapeutic product approved for
commercial sale or used in late-stage clinical studies must be manufactured in accordance with current Good Manufacturing Practice
and other international regulatory requirements. These regulations govern manufacturing processes and procedures (including record
keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and
products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to inadvertent
changes in the properties or stability of our product candidates. We, our collaborators, or suppliers must supply all necessary
documentation in support of a BLA on a timely basis and must adhere to current Good Laboratory Practice and current Good
Manufacturing Practice regulations enforced by the FDA and other regulatory agencies through their facilities inspection program.
Lonza and other suppliers have never produced a commercially approved cellular therapeutic product and therefore have not yet
obtained the requisite regulatory authority approvals to do so.
Before we can begin commercial manufacture of our products for sale in the United States, we must obtain FDA regulatory
approval for the product, in addition to the approval of the processes and quality systems associated with the manufacturing of such
product, which requires a successful FDA inspection of the facility handling the manufacturing of our product, including Lonza’s
manufacturing facilities. The novel nature of our product candidates creates significant challenges in regards to manufacturing. For
example, the U.S. federal and state governments and other jurisdictions impose restrictions on the acquisition and use of tissue,
including those incorporated in federal Good Tissue Practice regulations. We may not be able to identify or develop sources for the
cells necessary for our product candidates that comply with these laws and regulations. Further, we may be required to conduct
additional clinical trials using 3D manufacturing processes before we receive regulatory approval.
In addition, the regulatory authorities may, at any time before or after product approval, audit or inspect a manufacturing facility
involved with the preparation of our product candidates or raw materials or the associated quality systems for compliance with the
regulations applicable to the activities being conducted. Although we oversee each contract manufacturer involved in the production
of our product candidates, we cannot control the manufacturing process of, and are dependent on, Lonza for compliance with the
regulatory requirements. If Lonza is unable to comply with manufacturing regulations, we may be subject to fines, unanticipated
compliance expenses, recall or seizure of any approved products, total or partial suspension of production and/or enforcement actions,
including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our business, results of
operations and financial condition. If Lonza fails to maintain regulatory compliance, the FDA or other applicable regulatory authority
can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or
biologic product, withdrawal of an approval, or suspension of production. As a result, our business, financial condition, and results of
operations may be materially harmed.
We will rely on third parties to perform many necessary services for the commercialization of our product candidates, including
services related to the distribution, storage and transportation of our products.
We will rely upon third parties for certain storage, distribution and other logistical services. In accordance with certain laws,
regulations and specifications, our product candidates must be stored and transported at extremely low temperatures within a certain
range. If these environmental conditions deviate, our product candidates’ remaining shelf-lives could be impaired or their efficacy and
safety could become adversely affected, making them no longer suitable for use. If any of the third parties that we intend to rely upon
in our storage, distribution and other logistical services process fail to comply with applicable laws and regulations, fail to meet
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expected deadlines, or otherwise do not carry out their contractual duties to us, or encounter physical damage or natural disaster at
their facilities, our ability to deliver product to meet commercial demand may be significantly impaired.
Product recalls or inventory losses caused by unforeseen events may adversely affect our operating results and financial condition.
Our product candidates are manufactured, stored and distributed using technically complex processes requiring specialized
facilities, highly specific raw materials and other production constraints. The complexity of these processes, as well as strict company
and government standards for the manufacture, storage and distribution of our product candidates, subjects us to risks. For example,
during the manufacturing process we have from time to time experienced several different types of issues that have led to a rejection
of various batches. Historically, the most common reasons for batch rejections include major process deviations during the production
of a specific batch and failure of manufactured product to meet one or more specifications. While product candidate batches released
for the use in clinical trials or for commercialization undergo sample testing, some latent defects may only be identified following
product release. In addition, process deviations or unanticipated effects of approved process changes may result in these product
candidates not complying with stability requirements or specifications. The occurrence or suspected occurrence of production and
distribution difficulties can lead to lost inventories, and in some cases product recalls, with consequential reputational damage and the
risk of product liability. The investigation and remediation of any identified problems can cause production delays, substantial
expense, lost sales and delays of new product launches. In the event our production efforts require a recall or result in an inventory
loss, our operating results and financial condition may be adversely affected.
Risks Related to Commercialization of Our Product Candidates
Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved,
among physicians, patients and healthcare payors.
Even when product development is successful and regulatory approval has been obtained, our ability to generate significant
revenue depends on the acceptance of our products by physicians, payors and patients. Many potential market participants have
limited knowledge of, or experience with, stem cell-based products, so gaining market acceptance and overcoming any safety or
efficacy concerns may be more challenging than for more traditional therapies. Our efforts to educate the medical community and
third-party payors on the benefits of our product candidates may require significant resources and may never be successful. Such
efforts to educate the marketplace may require more or different resources than are required by the conventional therapies marketed by
our competitors. We cannot assure you that our products will achieve the expected market acceptance and revenue if and when they
obtain the requisite regulatory approvals. Alternatively, even if we obtain regulatory approval, that approval may be for indications or
patient populations that are not as broad as intended or desired or may require labeling that includes significant use or distribution
restrictions or safety warnings. The market acceptance of each of our product candidates will depend on a number of factors,
including:
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the efficacy and safety of the product candidate, as demonstrated in clinical trials;
the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the
product, including any warnings or contraindications that may be required on the label;
acceptance by physicians and patients of the product as a safe and effective treatment;
the cost, safety and efficacy of treatment in relation to alternative treatments;
the continued projected growth of markets for our various indications;
relative convenience and ease of administration;
the prevalence and severity of adverse side effects;
the effectiveness of our, and our collaborators’, sales and marketing efforts; and
sufficient third-party insurance and other payor (e.g., governmental) coverage and reimbursement.
Market acceptance is critical to our ability to generate significant revenue. Any product candidate, if approved and
commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to
the extent that we expect, we may not be able to generate significant revenue and our business would suffer.
If, in the future, we are unable to establish our own sales, marketing and distribution capabilities or enter into licensing or
collaboration agreements for these purposes, we may not be successful in independently commercializing any future products.
We have no sales and marketing infrastructure and, as a company, have limited sales, marketing or distribution experience.
Commercializing our product candidates, if such product candidates obtain regulatory approval, would require significant sales,
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distribution and marketing capabilities. Where and when appropriate, we may elect to utilize contract sales forces or distribution
collaborators to assist in the commercialization of our product candidates. If we enter into arrangements with third parties to perform
sales, marketing and distribution/price reporting services for our product candidates, the resulting revenue or the profitability from this
revenue to us may be lower than if we had sold, marketed and distributed that product ourselves. In addition, we may not be successful
in entering into arrangements with third parties to sell, market and distribute any future products or may be unable to do so on terms
that are favorable to us. We may have little control over such third parties, and any of these third parties may fail to devote the
necessary resources and attention to sell, market and distribute our current or any future products effectively.
To the extent we are unable to engage third parties to assist us with these functions, we will have to invest significant amounts
of financial and management resources, some of which will need to be committed prior to any confirmation that any of our proprietary
product candidates will be approved. For any future products for which we decide to perform sales, marketing and distribution
functions ourselves, we could face a number of additional risks, including:
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our inability to recruit and retain adequate numbers of effective sales and marketing personnel or to develop alternative
sales channels;
the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any
future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage
relative to companies with more diversified product lines; and
unforeseen costs and expenses associated with creating and maintaining an independent sales and marketing organization.
We face substantial competition, which may result in others discovering, developing or commercializing products before, or more
successfully, than we do.
The biopharmaceutical industry is highly competitive and subject to rapid change. The industry continues to expand and evolve
as an increasing number of competitors and potential competitors enter the market. Many of our potential competitors have
significantly greater development, financial, manufacturing, marketing, technical and human resources than we do. Large
pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting
patients and in manufacturing pharmaceutical products. Recent and potential future merger and acquisition activity in the
biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our
competitors. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel
compounds that could make our product candidates obsolete. As a result of all of these factors, our competitors may succeed in
obtaining patent protection and/or FDA approval or discovering, developing and commercializing our product candidates or
competitors to our product candidates before we do. Specialized, smaller or early-stage companies may also prove to be significant
competitors, particularly those with a focus and expertise in the stem cell industry and/or those with collaboration arrangements and
other third party payors. In addition, any new product that competes with an approved product must demonstrate compelling
advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful.
If we are not able to compete effectively against potential competitors, our business will not grow and our financial condition and
results of operations will suffer.
Our marketed products may be used by physicians for indications that are not approved by the FDA. If the FDA finds that we
marketed our products in a manner that promoted off-label use, we may be subject to civil or criminal penalties.
Under the Federal Food, Drug and Cosmetic Act (“FDCA”), and other laws, if any of our product candidates are approved by
the FDA, we would be prohibited from promoting our products for off-label uses. This means, for example, that we would not be able
to make claims about the use of our marketed products outside of their approved indications, and we would not be able to proactively
discuss or provide information on off-label uses of such products, with very specific and limited exceptions. The FDA does not,
however, prohibit physicians from prescribing products for off-label uses in the practice of medicine. Should the FDA determine that
our activities constituted the promotion of off-label use, the FDA could issue a warning or untitled letter or, through the Department of
Justice, bring an action for seizure or injunction, and could seek to impose fines and penalties on us and our executives. In addition,
failure to follow FDA rules and guidelines relating to promotion and advertising can result in, among other things, the FDA’s refusal
to approve a product, the suspension or withdrawal of an approved product from the market, product recalls, fines, disgorgement of
money, operating restrictions, injunctions or criminal prosecutions, and also may figure into civil litigation against us.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For
example, in 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act,
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or collectively, the Affordable Care Act, was passed. The Affordable Care Act is a sweeping law intended to broaden access to health
insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for healthcare and the health insurance industry, impose new taxes and fees on the healthcare industry and impose
additional health policy reforms. There have been a number of judicial and congressional challenges to certain aspects of the
Affordable Care Act, and we expect that with the recent change in the administration the Affordable Care Act may be repealed or
significantly amended. We can provide no assurance that the Affordable Care Act, as currently enacted or as amended in the future,
will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative or
administrative changes relating to healthcare reform will affect our business.
Currently, the outcome of potential reforms and changes to government negotiation/regulation to healthcare costs are
unknown. If there are changes in policy limit reimbursements that we are able to receive through federal programs, it could negatively
impact reimbursement levels from those payors and private payors, and our business, revenues or profitability could be adversely
affected.
If we or our collaborators fail to obtain and sustain an adequate level of reimbursement for our products by third-party payors,
sales and profitability would be adversely affected.
Our and our collaborators’ ability to commercialize any products successfully will depend, in part, on the extent to which
coverage and reimbursement for our products and related treatments will be available from government healthcare programs, private
health insurers, managed care plans, and other organizations. Additionally, even if there is a commercially viable market, if the level
of third-party reimbursement is below our expectations, our revenue and profitability could be materially and adversely affected.
Third-party payors, such as government programs, including Medicare in the United States, or private healthcare insurers,
carefully review and increasingly question the coverage of, and challenge the prices charged for medical products and services, and
many third-party payors limit coverage of or reimbursement for newly approved healthcare products. Reimbursement rates from
private health insurance companies vary depending on the company, the insurance plan and other factors, including the third-party
payor’s determination that use of a product is:
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a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.
A current trend in the U.S. healthcare industry as well as in other countries around the world is toward cost containment. Large
public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting
increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. In particular, third-party
payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for any product, which
could result in product revenue and profitability being lower than anticipated.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more
limited than the purposes for which the drug is approved by the FDA or other regulatory authorities. Moreover, eligibility for coverage
and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research,
development, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also be
insufficient to cover our and any collaborator’s costs and may not be made permanent. Reimbursement rates may vary according to
the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs
and may be incorporated into existing payments for other services. Our inability to promptly obtain coverage and profitable payment
rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect
on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
Furthermore, reimbursement systems in international markets vary significantly by country and by region, and reimbursement
approvals must be obtained on a country-by-country basis. Our existing or future collaborators, if any, may elect to reduce the price of
our products in order to increase the likelihood of obtaining reimbursement approvals which could adversely affect our revenues and
profits. In many countries, including for example in Japan, products cannot be commercially launched until reimbursement is
approved. Further, the negotiation process in some countries can exceed 12 months. In addition, pricing and reimbursement decisions
in certain countries can be affected by decisions taken in other countries, which can lead to mandatory price reductions and/or
additional reimbursement restrictions across a number of other countries, which may thereby adversely affect our sales and
profitability. In the event that countries impose prices which are not sufficient to allow us or our collaborators to generate a profit, our
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collaborators may refuse to launch the product in such countries or withdraw the product from the market, which would adversely
affect sales and profitability.
Due to the novel nature of our stem cell therapy and the potential for our product candidates to offer therapeutic benefit in a single
administration, we face uncertainty related to pricing and reimbursement for these product candidates.
Our target patient populations for some of our product candidates may be relatively small, and as a result, the pricing and
reimbursement of our product candidates, if approved, must be adequate to support commercial infrastructure. If we are unable to
obtain adequate levels of reimbursement, our ability to successfully market and sell our product candidates will be adversely affected.
Due to the novel nature of our stem cell therapy, the manner and level at which reimbursement is provided for services related to our
product candidates (e.g., for administration of our product to patients) is uncertain. Inadequate reimbursement for such services may
lead to physician resistance and adversely affect our ability to market or sell our products. Further, if the results of our clinical trials do
not clearly demonstrate the efficacy of our product candidates in a manner that is meaningful to prescribers and payors, our pricing
and reimbursement may be adversely affected.
Price controls may be imposed in foreign markets, which may adversely affect our future profitability.
In some countries, particularly EU member states, Japan, Australia and Canada, the pricing of prescription drugs is subject to
governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of
marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and
reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further
complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used
by various EU member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further
reduce prices. In some countries, we or our collaborators may be required to conduct a clinical trial or other studies that compare the
cost-effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing
approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement
levels within the country of publication and other countries. If reimbursement of our products is unavailable or limited in scope or
amount, or if pricing is set at unsatisfactory levels, our business, revenues or profitability could be adversely affected.
If the market opportunities for our product candidates are smaller than we believe they are, our revenues may be adversely affected
and our business may suffer. Because the target patient populations of certain of our product candidates are small, we must be
able to successfully identify patients and achieve a significant market share to maintain profitability and growth.
Our projections of the number of people with diseases targeted by our product candidates are based on estimates. These
estimates may prove to be incorrect and new studies may change the estimated incidence or prevalence of these diseases. The number
of patients in the United States, Europe and elsewhere may turn out to be lower than expected, may not be otherwise amenable to
treatment with our products, or new patients may become increasingly difficult to identify or gain access to, all of which would
adversely affect our results of operations and our business.
We are exposed to risks related to our licensees and our international operations, and failure to manage these risks may adversely
affect our operating results and financial condition.
We and our subsidiaries operate out of Australia, the United States, Singapore, the United Kingdom and Switzerland. We have
licensees, with rights to commercialize products based on our MSC technology, including JCR in Japan. Our primary manufacturing
collaborator, Lonza, serves us primarily out of their facilities in Singapore, and through contractual relationships with third parties, has
access to storage facilities in the U.S., Europe, Australia and Singapore. As a result, a significant portion of our operations are
conducted by and/or rely on entities outside the markets in which certain of our trials take place, our suppliers are sourced, our product
candidates are developed, and, if any such product candidates obtain regulatory approval, our products may be sold. Accordingly, we
import a substantial number of products and/or materials into such markets. We may be denied access to our customers, suppliers or
other collaborators or denied the ability to ship products from any of these sites as a result of a closing of the borders of the countries
in which we operate, or in which these operations are located, due to economic, legislative, political and military conditions in such
countries. For example, on June 23, 2016, the electorate in the United Kingdom, or UK, voted in favor of leaving the European Union
(EU) (commonly referred to as “Brexit”). Thereafter, on March 29, 2017, the country formally notified the EU of its intention to
withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the UK from the EU will take effect either on the effective
date of the withdrawal agreement or, in the absence of agreement, two years after the UK provides a notice of withdrawal pursuant to
the EU Treaty. The United Kingdom's vote to leave the European Union creates an uncertain political and economic environment in
the United Kingdom and potentially across other European Union member states, which may last for a number of months or years. If
any of our product candidates are approved for commercialization, we may enter into agreements with third parties to market them on
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a worldwide basis or in more limited geographical regions. We expect that we will be subject to additional risks related to entering
into international business relationships, including:
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unexpected changes in tariffs, trade barriers and regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
logistics and regulations associated with shipping cell samples and other perishable items, including infrastructure
conditions and transportation delays;
potential import and export issues and other trade barriers and restrictions with the U.S. Customs and Border Protection
and similar bodies in other jurisdictions;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
workforce uncertainty in countries where labor unrest is more common than in the United States;
reduced protection for intellectual property rights in some countries and practical difficulties of enforcing intellectual
property and contract rights abroad;
changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing
requirements, trade embargoes and other trade barriers;
tariffs imposed by the U.S. on goods from other countries, including the recently implemented tariffs and additional tariff
that have been proposed by the U.S. government on various imports from China and the EU and by the governments of
these jurisdictions on certain U.S. goods, and any other possible tariffs that may be imposed on products such as ours, the
scope and duration of which, if implemented, remains uncertain;
deterioration of political relations between the U.K. and the EU, which could have a material adverse effect on our sales
and operations in these countries;
changes in social, political and economic conditions or in laws, regulations and policies governing foreign trade,
manufacturing, development and investment both domestically as well as in the other countries and jurisdictions into
which we sell our products;
fluctuations in currency exchange rates and the related effect on our results of operations;
increased financial accounting and reporting burdens and complexities;
potential increases on tariffs or restrictions on trade generally;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including
earthquakes, typhoons, floods and fires.
Use of animal-derived materials could harm our product development and commercialization efforts.
Some of the manufacturing materials and/or components that we use in, and which are critical to, implementation of our
technology involve the use of animal-derived products, including FBS. Suppliers or regulatory changes may limit or restrict the
availability of such materials for clinical and commercial use. While FBS is commonly used in the production of various marketed
biopharmaceuticals, the suppliers of FBS that meet our strict quality standards are limited in number and region. As such, to the extent
that any such suppliers or regions face an interruption in supply (for example, if there is a new occurrence of so-called “mad cow
disease”), it may lead to a restricted supply of the serum currently required for our product manufacturing processes. Any restrictions
on these materials would impose a potential competitive disadvantage for our products or prevent our ability to manufacture our cell
products. The FDA has issued regulations for controls over bovine material in animal feed. These regulations do not appear to affect
our ability to purchase the manufacturing materials we currently use. However, the FDA may propose new regulations that could
affect our operations. Our inability to develop or obtain alternative compounds would harm our product development and
commercialization efforts. There are certain limitations in the supply of certain animal-derived materials, which may lead to delays in
our ability to complete clinical trials or eventually to meet the anticipated market demand for our cell products.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit
commercialization of our product candidates.
We face an inherent risk of product liability as a result of the human clinical use of our product candidates and will face an even
greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is
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found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may
include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence,
strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot
successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit
commercialization of our product candidates. Even a successful defense would require significant financial and management
resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for our products, even if such products are approved;
injury to our reputation;
withdrawal of clinical trial participants;
costs to defend the related litigations;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals, or labeling, marketing or promotional restrictions;
increased cost of liability insurance;
loss of revenue;
the inability to commercialize our product candidates; and
a decline in our ordinary share price.
Failure to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of products we develop. Additionally, our insurance policies have
various exclusions, and we may be subject to a product liability claim for which we have no coverage or reduced coverage. Any claim
that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by
our insurance or that is in excess of the limits of our insurance coverage. We will have to pay any amounts awarded by a court or
negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be
able to obtain, sufficient capital to pay such amounts.
Risks Related to Our Intellectual Property
We may not be able to protect our proprietary technology in the marketplace.
Our success will depend, in part, on our ability to obtain patents, protect our trade secrets and operate without infringing on the
proprietary rights of others. We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect
the intellectual property of our product candidates. Patents might not be issued or granted with respect to our patent applications that
are currently pending, and issued or granted patents might later be found to be invalid or unenforceable, be interpreted in a manner
that does not adequately protect our current product or any future products, or fail to otherwise provide us with any competitive
advantage. As such, we do not know the degree of future protection that we will have on our proprietary products and technology, if
any, and a failure to obtain adequate intellectual property protection with respect to our product candidates and proprietary technology
could have a material adverse impact on our business.
Filing, prosecuting and defending patents throughout the world would be prohibitively expensive, so our policy is to patent
technology in jurisdictions with significant or otherwise relevant commercial opportunities or activities. However, patent protection
may not be available for some of the products or technology we are developing. If we must spend significant time and money
protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other
proprietary rights held by others, our business, results of operations and financial condition may be harmed.
The patent positions of biopharmaceutical products are complex and uncertain.
The scope and extent of patent protection for our product candidates are particularly uncertain. To date, our principal product
candidates have been based on specific subpopulations of known and naturally occurring adult stem cells. We anticipate that the
products we develop in the future will continue to include or be based on the same or other naturally occurring stem cells or
derivatives or products thereof. Although we have sought and expect to continue to seek patent protection for our product candidates,
their methods of use and methods of manufacture, any or all of them may not be subject to effective patent protection. Publication of
information related to our product candidates by us or others may prevent us from obtaining or enforcing patents relating to these
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products and product candidates. Furthermore, others may independently develop similar products, may duplicate our products, or
may design around our patent rights. In addition, any of our issued patents may be declared invalid. If we fail to adequately protect our
intellectual property, we may face competition from companies who attempt to create a generic product to compete with our product
candidates. We may also face competition from companies who develop a substantially similar product to our other product
candidates that may not be covered by any of our patents.
Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively
expensive, and our intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. In
addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in
the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or
from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our
technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export
otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the U.S. These
products may compete with our current or future products, if any, and our patents or other intellectual property rights may not be
effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign
jurisdictions. The legal systems of certain countries do not favor the enforcement of patents, trade secrets and other intellectual
property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement
of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent
rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business,
could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could
provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies
awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the
world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We maintain certain of our proprietary know-how and technological advances as trade secrets, especially where we do not
believe patent protection is appropriate or obtainable, including, but not exclusively, with respect to certain aspects of the
manufacturing of our products. However, trade secrets are difficult to protect. We take a number of measures to protect our trade
secrets including, limiting disclosure, physical security and confidentiality and non-disclosure agreements. We enter into
confidentiality agreements with our employees, consultants, outside scientific collaborators, contract manufacturing partners,
sponsored researchers and other advisors and third parties to protect our trade secrets and other proprietary information. These
agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary
information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights.
Failure to obtain or maintain trade secret protection, or failure to adequately protect our intellectual property could enable competitors
to develop generic products or use our proprietary information to develop other products that compete with our products or cause
additional, material adverse effects upon our business, results of operations and financial condition.
We may be forced to litigate to enforce or defend our intellectual property rights, and/or the intellectual property rights of our
licensors.
We may be forced to litigate to enforce or defend our intellectual property rights against infringement by competitors, and to
protect our trade secrets against unauthorized use. In so doing, we may place our intellectual property at risk of being invalidated,
unenforceable, or limited or narrowed in scope and may no longer be used to prevent the manufacture and sale of competitive product.
Further, an adverse result in any litigation or other proceedings before government agencies such as the United States Patent and
Trademark Office (“USPTO”), may place pending applications at risk of non-issuance. Further, interference proceedings, derivation
proceedings, entitlement proceedings, ex parte reexamination, inter partes reexamination, inter partes review, post-grant review, and
opposition proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be used to challenge
inventorship, ownership, claim scope, or validity of our patent applications. Furthermore, because of the substantial amount of
discovery required in connection with intellectual property litigation, there is a risk that some of our confidential and proprietary
information could be compromised by disclosure during this type of litigation.
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Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normal
responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur
significant expenses, and could distract our technical and/or management personnel from their normal responsibilities. In addition,
there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities
analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our ADSs
and ordinary shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available
for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other
resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of litigation
proceedings more effectively than we can because of their greater financial resources and personnel. In addition, the uncertainties
associated with litigation could have a material adverse effect on our ability to raise the funds necessary to conduct our clinical trials,
continue our internal research programs, in-license needed technology or enter into strategic collaborations that would help us bring
our product candidates to market. As a result, uncertainties resulting from the initiation and continuation of patent litigation or other
proceedings could have a material adverse effect on our ability to compete in the marketplace.
U.S. patent reform legislation and court decisions could increase the uncertainties and costs surrounding the prosecution of our
patent applications and the enforcement or defense of our issued U.S. patents.
Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and
costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other
requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled
to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under
the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first
inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent
application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed
invention. Under the current patent laws, a third party that files a patent application in the USPTO before us for a particular invention
could therefore be awarded a patent covering such invention even if we had made that invention before it was made by such third
party. This requires us to be cognizant of the time from invention to filing of a patent application.
The America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted
and may also affect patent litigation and proceedings. These include allowing third party submissions of prior art to the USPTO during
patent prosecution and additional procedures for attacking the validity of a patent through USPTO administered post-grant
proceedings, including post-grant review, inter partes review, and derivation proceedings. Because a lower evidentiary standard
applies in USPTO proceedings compared to the evidentiary standards applied in United States federal courts in actions seeking to
invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a
claim invalid even though the same evidence would be insufficient to invalidate the claim if challenged in a district court action.
Accordingly, a third party may attempt to use available USPTO procedures to invalidate our patent claims that would not otherwise
have been invalidated if first challenged by the third party in a district court action. The new post-grant review (PGR) proceedings
added as of September 2012 by the America Invents Act, which are similar to European “opposition” proceedings and provide third-
party petitioners with the ability to challenge the validity of a patent on more expansive grounds than those permitted in other USTPO
proceedings, allow for validity to be examined by the USPTO based not only on prior art patents and publications, but also on prior
invalidating public use and sales, the presence of non-statutory subject matter in the patent claims and inadequate written description
or lack of enablement. Discovery for PGR proceedings is accordingly likely to be expansive given that the issues addressed in PGR
are more comprehensive than those addressed in other USPTO proceedings. Therefore, the America Invents Act and its
implementation could increase the uncertainties and costs surrounding the prosecution of our owned or in-licensed patent applications
and the enforcement or defense of our owned or in-licensed issued patents, all of which could have a material adverse effect on our
business, financial condition, results of operations, and prospects.
As compared to intellectual property-reliant companies generally, the patent positions of companies in the development and
commercialization of biologics and pharmaceuticals are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the
scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. These
rulings have created uncertainty with respect to the validity and enforceability of patents, even once obtained. Depending on future
actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in
unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our
intellectual property in the future.
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If third parties claim that intellectual property used by us infringes upon their intellectual property, commercialization of our
product candidates and our operating profits could be adversely affected.
There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual
property rights in the biopharmaceutical industry. We may, from time to time, be notified of claims that we are infringing upon
patents, trademarks, copyrights, or other intellectual property rights owned by third parties, and we cannot provide assurances that
other companies will not, in the future, pursue such infringement claims against us or any third-party proprietary technologies we have
licensed. Any such claims could also be expensive and time consuming to defend and divert management’s attention and resources,
and could delay or prevent us from commercializing our product candidates. Our competitive position could suffer as a result.
Although we have reviewed certain third-party patents and patent filings that we believe may be relevant to our product candidates,
we have not conducted a freedom-to-operate search or analysis for our product candidates, and we may not be aware of patents or
pending or future patent applications that, if issued, would block us from commercializing our product candidates. Thus, we cannot
guarantee that our product candidates, or our commercialization thereof, do not and will not infringe any third party’s intellectual
property.
If we do not obtain patent term extension in the United States under the Hatch-Waxman Act and in foreign countries under
similar legislation, thereby potentially extending the term of our marketing exclusivity of our product candidates, our business may
be materially harmed.
Depending on the timing, duration and specifics of FDA marketing approval of our product candidates, if any, one of the U.S.
patents covering each of such approved product(s) or the use thereof may be eligible for up to five years of patent term restoration
under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum of one patent to be extended per FDA approved product.
Patent term extension also may be available in certain foreign countries upon regulatory approval of our product candidates, including
by the EMA in the EU or the PMDA in Japan. Nevertheless, we may not be granted patent term extension either in the United States
or in any foreign country because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of
relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the term of extension, as well as the scope of patent
protection during any such extension, afforded by the governmental authority could be less than we request. In addition, if a patent we
wish to extend is owned by another party and licensed to us, we may need to obtain approval and cooperation from our licensor to
request the extension.
If we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the
period during which we will have the right to exclusively market our product will be shortened and our competitors may obtain
approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.
Risks Related to Our Business and Industry
If we fail to attract and keep senior management and key scientific and regulatory affairs personnel, we may be unable to
successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.
We are highly dependent on members of our executive management, particularly Silviu Itescu, our Chief Executive Officer.
Dr. Itescu was an early pioneer in the study and clinical development of stem cell therapeutics and is globally recognized in the field
of regenerative medicine. The loss of the services of Dr. Itescu or any other member of the executive management team could impede
the achievement of our research, development and commercialization objectives. We do not maintain “key person” insurance for any
of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, manufacturing, regulatory affairs, sales and marketing personnel will also
be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among
numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of
scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including
scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our
consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory
contracts with other entities that may limit their availability to us.
Our employees, principal investigators, consultants and collaboration partners may engage in misconduct or other improper
activities, including noncompliance with laws and regulatory standards and requirements and insider trading.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include failures to comply
with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to
comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to
disclose unauthorized activities to us. In particular, sales, marketing and business arrangements (including arrangements with
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healthcare providers, opinion leaders, research institutions, distributors and payors) in the healthcare industry are subject to extensive
laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict
or prohibit a wide range of activity relating to pricing, discounting, marketing and promotion, sales commissions, customer incentive
programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the
course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation, or, given we are a listed
company in Australia and the United States, breach of insider trading laws. It is not always possible to identify and deter employee
misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged
risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in
compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant
fines or other sanctions.
We may acquire other companies or assets which could divert our management’s attention, result in additional dilution to our
shareholders and otherwise disrupt our operations and harm our operating results.
We have in the past and may in the future seek to acquire businesses, products or technologies that we believe could
complement or expand our product offerings, enhance our technical capabilities or otherwise offer growth opportunities. For example,
we acquired MSC assets from Osiris Therapeutics, Inc. (“Osiris”) in 2013. The pursuit of potential acquisitions may divert the
attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions,
whether or not they are consummated. If we acquire additional businesses, we may not be able to integrate the acquired personnel,
operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not
achieve the anticipated benefits from the acquired business due to a number of factors, including:
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incurrence of acquisition-related costs;
diversion of management’s attention from other business concerns;
unanticipated costs or liabilities associated with the acquisition;
harm to our existing business relationships with collaborators as a result of the acquisition;
harm to our brand and reputation;
the potential loss of key employees;
use of resources that are needed in other parts of our business; and
use of substantial portions of our available cash to consummate the acquisition.
In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results
arising from the impairment assessment process. Acquisitions may also result in dilutive issuances of equity securities or the
incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our
expectations, our business, results of operations and financial condition may be adversely affected.
We and our collaborators must comply with environmental laws and regulations, and failure to comply with these laws and
regulations could expose us to significant liabilities.
We and our collaborators are subject to various federal, state and local environmental laws, rules and regulations, including
those relating to the discharge of materials into the air, water and ground, the manufacture, storage, handling, use, transportation and
disposal of hazardous and biological materials, and the health and safety of employees with respect to laboratory activities required for
the development of products and technologies. In the event of contamination or injury, or failure to comply with environmental,
occupational health and safety and export control laws and regulations, it could cause an interruption of our commercialization efforts,
research and development efforts, or business operations, and we could be held liable for any resulting damages and any such liability
could exceed our assets and resources.
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We work with outside scientists and their institutions in developing product candidates. These scientists may have other
commitments or conflicts of interest, which could limit our access to their expertise and harm our ability to leverage our discovery
platform.
We work with scientific advisors and collaborators at academic research institutions in connection with our product
development. These scientific advisors serve as our link to the specific pools of trial participants we are targeting in that these advisors
may:
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identify individuals as potential candidates for study;
obtain their consent to participate in our research;
perform medical examinations and gather medical histories;
conduct the initial analysis of suitability of the individuals to participate in our research based on the foregoing; and
collect data and biological samples from trial participants periodically in accordance with our study protocols.
These scientists and collaborators are not our employees, rather they serve as either independent contractors or the primary
investigators under research collaboration agreements that we have with their sponsoring academic or research institution. Such
scientists and collaborators may have other commitments that would limit their availability to us. Although our scientific advisors
generally agree not to do competing work, if an actual or potential conflict of interest between their work for us and their work for
another entity arises, we may lose their services. It is also possible that some of our valuable proprietary knowledge may become
publicly known through these scientific advisors if they breach their confidentiality agreements with us, which would cause
competitive harm to our business.
If our ability to use cumulative carry forward net operating losses is or becomes subject to certain limitations or if certain tax
incentive credits from which we benefit expire or no longer apply to us, our business, results of operations and financial condition
may be adversely affected.
We are an Australian company subject to taxation in Australia and other jurisdictions. As of June 30, 2018, our cumulative
operating losses have a total potential tax benefit of $97.4 million at local tax rates (excluding other temporary differences). These
losses may be available for use once we are in a tax profitable position. These losses were incurred in different jurisdictions and can
only be offset against profits earned in the relevant jurisdictions. Tax losses are able to be carried forward at their nominal amount
indefinitely in Australia and in Singapore, and for up to 20 years in the U.S. as long as certain conditions are met; however, new tax
reform legislation in the United States allows for indefinite carryforward of any net operating loss arising in a tax year ending after
June 30, 2018, subject to certain conditions. In order to use these tax losses, it is necessary to satisfy certain tests and, as a result, we
cannot assure you that the tax losses will be available to offset profits if and when we earn them. Utilization of our net operating loss
and research and development credit carryforwards in the U.S. may be subject to substantial annual limitation due to ownership
change limitations that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986. In addition, U.S. tax
reform introduced a limitation on the amount of net operating losses arising in taxable years beginning after December 31, 2017, that a
corporation may deduct in a single tax year equal to the lesser of the available net operating loss carryover or 80 percent of a
taxpayer’s pre-net operating loss deduction taxable income. With respect to carryforward net operating losses in the U.S. that are
subject to the 20-year carry-forward limit, our carry forward net operating losses first start to expire in 2032. In addition, we are
eligible for certain research and development tax incentive refundable credits in Australia that may increase our available cash flow.
The Australian federal government's Research and Development Tax Incentive grant is available for eligible research and
development purposes based on the filing of an annual application. We currently project to benefit from these incentives in future
taxable years. We recognized income of $1.8 million and $1.5 million, respectively, from the Research and Development Tax
Incentive program for the years ended June 30, 2018 and 2017. To the extent our research and development expenditures are deemed
to be “ineligible,” then our grants would decrease.
There can be no assurances that we will continue to benefit from these incentives or that such tax incentive credit programs will
not be revoked or modified in any way in the future. The Australian government may in the future decide to modify the requirements
of, reduce the amounts of the research and development tax incentive credits available under, or discontinue its research and
development tax incentive program. For instance, the Australian government undertook a review of its Research and Development
Tax Incentive program in 2016 and in the May 2018 Federal budget announced its intention to pass certain recommendations of the
review panel into law to reduce the research and development tax incentive credits available in certain circumstances. One of the
changes announced in May 2018 was to reduce the amount of the research and development tax incentive credits available by capping
the annual refundable tax offset amount at A$4.0 million for companies with an annual aggregate turnover of less than A$20.0
million, such as us, however, refundable tax offsets related to spend incurred on clinical trials conducted in Australia would not be
capped. If the Research and Development Tax program incentives are revoked or modified, or if we no longer qualify as a small-
medium business under the A$20.0 million turnover test or we are no longer eligible for such incentives due to other circumstances,
our business, results of operations and financial condition may be adversely affected.
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Taxing authorities could reallocate our taxable income within our subsidiaries, which could increase our consolidated tax liability.
We conduct operations in multiple tax jurisdictions and the tax laws of those jurisdictions generally require that the transfer
prices between affiliated companies in different jurisdictions be the same as those between unrelated companies dealing at arms’
length, and that such prices are supported by contemporaneous documentation. While we believe that we operate in compliance with
applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax
authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length
transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer
prices, which could result in a higher tax liability to us, and possibly interest and penalties, and could adversely affect our business,
results of operations and financial condition.
The pharmaceutical industry is highly regulated and pharmaceutical companies are subject to various federal and state fraud and
abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act.
Healthcare fraud and abuse regulations are complex and can be subject to varying interpretations as to whether or not a statute
has been violated. The laws that may affect our ability to operate include:
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the federal Anti-Kickback Statute which prohibits, among other things, the knowing and willful payment of remuneration
to induce or reward patient referrals or the generation of business involving any item or service which may be payable by
the federal health care programs (e.g., drugs, supplies, or health care services for Medicare or Medicaid patients);
the federal False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or
causing to be presented, claims for payment for government funds (e.g., payment from Medicare or Medicaid) or
knowingly making, using, or causing to be made or used a false record or statement, material to a false or fraudulent claim
for government funds;
the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health
Information Technology for Economic and Clinical Health Act (“HITECH”), and its implementing regulations, imposes
certain requirements relating to the privacy, security and transmission of individually identifiable health information.
Among other things, HIPAA imposes civil and criminal liability for the wrongful access or disclosure of protected health
information;
the federal Physician Payments Sunshine Act, created under Section 6002 of the Patient Protection and Affordable Care
Act (“ACA”), as amended, requires certain manufacturers of drugs, devices, biologics and medical supplies for which
payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to
report information related to certain payments or other transfers of value made or distributed to physicians and teaching
hospitals, or to entities or individuals at the request of, or designated on behalf of, those physicians and teaching hospitals
and to report annually certain ownership and investment interests held by physicians and their immediate family members;
the FDCA, which, among other things, regulates the testing, development, approval, manufacture, promotion and
distribution of drugs, devices and biologics. The FDCA prohibits manufacturers from selling or distributing “adulterated”
or “misbranded” products. A drug product may be deemed misbranded if, among other things, (i) the product labeling is
false or misleading, fails to contain requisite information or does not bear adequate directions for use; (ii) the product is
manufactured at an unregistered facility; or (iii) the product lacks the requisite FDA clearance or approval;
the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits corrupt payments, gifts or transfers of value to non-
U.S. officials; and
non-U.S. and U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws
which may apply to items or services reimbursed by any third-party payor, including commercial insurers.
Any failure to comply with these laws, or the regulations adopted thereunder, could result in administrative, civil, and/or
criminal penalties, and could result in a material adverse effect on our reputation, business, results of operations and financial
condition.
The federal fraud and abuse laws have been interpreted to apply to arrangements between pharmaceutical manufacturers and a
variety of health care professionals. Although the federal Anti-Kickback Statute has several statutory exemptions and regulatory safe
harbors protecting certain common activities from prosecution, all elements of the potentially applicable exemption or safe harbor
must be met in order for the arrangement to be protected, and prosecutors have interpreted the federal healthcare fraud statutes to
attack a wide range of conduct by pharmaceutical companies. In addition, most states have statutes or regulations similar to the federal
anti-kickback and federal false claims laws, which apply to items and services covered by Medicaid and other state programs, or, in
several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state
laws.
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Further, the ACA, among other things, amended the intent standard under the Anti-Kickback Statute such that a person or entity
no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In
addition, the ACA makes clear that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim under the federal False Claims Act. Any violations of these laws, or any action against us for
violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business,
results of operations and financial condition.
A failure to adequately protect private health information could result in severe harm to our reputation and subject us to
significant liabilities, each of which could have a material adverse effect on our business.
Throughout the clinical trial process, we may obtain the private health information of our trial subjects. There are a number of
state, federal and international laws protecting the privacy and security of health information and personal data. As part of the
American Recovery and Reinvestment Act 2009 (“ARRA”), Congress amended the privacy and security provisions of HIPAA. HIPAA
imposes limitations on the use and disclosure of an individual’s healthcare information by healthcare providers conducting certain
electronic transactions, healthcare clearinghouses, and health insurance plans, collectively referred to as covered entities. The HIPAA
amendments also impose compliance obligations and corresponding penalties for non-compliance on certain individuals and entities
that provide services to or perform certain functions on behalf of healthcare providers and other covered entities involving the use or
disclosure of individually identifiable health information, collectively referred to as business associates. ARRA also made significant
increases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement
authority to state attorneys general. The amendments also create notification requirements to federal regulators, and in some cases
local and national media, for individuals whose health information has been inappropriately accessed or disclosed. Notification is not
required under HIPAA if the health information that is improperly used or disclosed is deemed secured in accordance with certain
encryption or other standards developed by the U.S. Department of Health and Human Services, or HHS. Most states have laws
requiring notification of affected individuals and state regulators in the event of a breach of personal information, which is a broader
class of information than the health information protected by HIPAA. Many state laws impose significant data security requirements,
such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of the U.S.
implicate local and national data protection standards, impose additional compliance requirements and generate additional risks of
enforcement for non-compliance. The EU’s General Data Protection Regulation (“GDPR”), Canada’s Personal Information
Protection and Electronic Documents Act and other data protection, privacy and similar national, state/provincial and local laws and
regulations may also restrict the access, use and disclosure of patient health information abroad. We may be required to expend
significant capital and other resources to ensure ongoing compliance with applicable privacy and data security laws, to protect against
security breaches and hackers or to alleviate problems caused by such breaches.
Our operations are subject to anti-corruption laws, including Australian bribery laws, the United Kingdom Bribery Act, and the
FCPA and other anti-corruption laws that apply in countries where we do business.
Anti-corruption laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other
prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage.
Although we believe that we have adequate policies and enforcement mechanisms to ensure legal and regulatory compliance with the
FCPA, the U.K. Bribery Act 2010 and other similar regulations, we participate in collaborations and relationships with third parties,
and it is possible that any of our employees, subcontractors, agents or partners may violate any such legal and regulatory requirements,
which may expose us to criminal or civil enforcement actions, including penalties and suspension or disqualification from U.S. federal
procurement contracting. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our
international operations might be subject or the manner in which existing laws might be administered or interpreted.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws or
other laws including trade related laws. If we are not in compliance with these laws, we may be subject to criminal and civil penalties,
disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business,
financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of these laws by
respective government bodies could also have an adverse impact on our reputation, our business, results of operations and financial
condition.
We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting
regime and cause us to incur additional legal, accounting and other expenses.
In order to maintain our current status as a foreign private issuer, either (1) a majority of our ordinary shares must be either
directly or indirectly owned of record by non-residents of the United States or (2) (a) a majority of our executive officers or directors
must not be U.S. citizens or residents, (b) more than 50 percent of our assets cannot be located in the United States and (c) our
business must be administered principally outside the United States. If we lost this status, we would be required to comply with the
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Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the
requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in
accordance with various SEC rules and Nasdaq listing standards. Further, we would be required to comply with United States
generally accepted accounting principles, as opposed to IFRS, in the preparation and issuance of our financial statements for historical
and current periods. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the
reporting requirements applicable to a U.S. domestic issuer may be higher than the cost we would incur as a foreign private issuer. As
a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs.
If we fail to maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable
regulations could be impaired.
Section 404(a) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), requires that our management assess and report
annually on the effectiveness of our internal controls over financial reporting and identify any material weaknesses in our internal
controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and
internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources,
including accounting-related costs and significant management oversight.
If either we are unable to conclude that we have effective internal controls over financial reporting or our independent auditors
are unwilling or unable to provide us with an unqualified report on the effectiveness of our internal controls over financial reporting as
required by Section 404(b) of the Sarbanes-Oxley Act, investors may lose confidence in our operating results, the price of the ADSs
could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the
requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to remain listed on Nasdaq Global Select Market.
We have incurred and will continue to incur significant increased costs as a result of operating as a company whose ADSs are
publicly traded in the United States, and our management will continue to be required to devote substantial time to new compliance
initiatives.
As a company whose ADSs are publicly traded in the United States, we have incurred and will continue to incur significant
legal, accounting, insurance and other expenses. The Sarbanes-Oxley Act, Dodd-Frank Wall Street Reform and Consumer Protection
Act and related rules implemented by the SEC and Nasdaq, have imposed various requirements on public companies including
requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need
to continue to devote a substantial amount of time to these compliance initiatives, and we will need to add additional personnel and
build our internal compliance infrastructure. Moreover, these rules and regulations have increased and will continue to increase our
legal and financial compliance costs and will make some activities more time-consuming and costly. These laws and regulations could
also make it more difficult and expensive for us to attract and retain qualified persons to serve on our board of directors, our board
committees or as our senior management. Furthermore, if we are unable to satisfy our obligations as a public company, we could be
subject to delisting of the ADSs, fines, sanctions and other regulatory action and potentially civil litigation.
We have never declared or paid dividends on our ordinary shares, and we do not anticipate paying dividends in the foreseeable
future. Therefore, you must rely on price-appreciation of our ordinary shares or ADSs for a return on your investment.
We have never declared or paid cash dividends on our ordinary shares. For the foreseeable future, we currently intend to retain
all available funds and any future earnings to support our operations and to finance the growth and development of our business. Any
future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with
applicable laws and covenants under the loan facilities with Hercules and NovaQuest or other current or future credit facilities, which
may restrict or limit our ability to pay dividends, and will depend on our financial condition, operating results, capital requirements,
general business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying any cash
dividends on our ordinary shares in the foreseeable future. As a result, a return on your investment in our ordinary shares or ADSs will
likely only occur if our ordinary share or ADS price appreciates. There is no guarantee that our ordinary shares or ADSs will
appreciate in value in the future.
Australian takeover laws may discourage takeover offers being made for us or may discourage the acquisition of a significant
position in our ordinary shares or ADSs.
We are incorporated in Australia and are subject to the takeover laws of Australia. Among other things, we are subject to the
Australian Corporations Act 2001 (the “Corporations Act”). Subject to a range of exceptions, the Corporations Act prohibits the
acquisition of a direct or indirect interest in our issued voting shares if the acquisition of that interest will lead to a person’s voting
power in us increasing to more than 20%, or increasing from a starting point that is above 20% and below 90%. Australian takeover
laws may discourage takeover offers being made for us or may discourage the acquisition of a significant position in our ordinary
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shares. This may have the ancillary effect of entrenching our board of directors and may deprive or limit our shareholders’ opportunity
to sell their ordinary shares or ADSs and may further restrict the ability of our shareholders to obtain a premium from such
transactions.
Risks Related to Our Trading Markets
The market price and trading volume of our ordinary shares and ADSs may be volatile and may be affected by economic
conditions beyond our control.
The market price of our ordinary shares and ADSs may be highly volatile and subject to wide fluctuations. In addition, the
trading volume of our ordinary shares and ADSs may fluctuate and cause significant price variations to occur. We cannot assure you
that the market price of our ordinary shares and ADSs will not fluctuate or significantly decline in the future.
Some specific factors that could negatively affect the price of our ordinary shares and ADSs or result in fluctuations in their
price and trading volume include:
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results of clinical trials of our product candidates;
results of clinical trials of our competitors’ products;
regulatory actions with respect to our products or our competitors’ products;
actual or anticipated fluctuations in our quarterly operating results or those of our competitors;
publication of research reports by securities analysts about us or our competitors in the industry;
our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give
to the market;
fluctuations of exchange rates between the U.S. dollar and the Australian dollar;
additions to or departures of our key management personnel;
issuances by us of debt or equity securities;
litigation or investigations involving our company, including: shareholder litigation; investigations or audits by regulators
into the operations of our company; or proceedings initiated by our competitors or clients;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic
investments or changes in business strategy;
the passage of legislation or other regulatory developments affecting us or our industry;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
changes in trading volume of ADSs on the Nasdaq Global Select Market and of our ordinary shares on the ASX;
sales or perceived potential sales of the ADSs or ordinary shares by us, our directors, senior management or our
shareholders in the future;
short selling or other market manipulation activities;
announcement or expectation of additional financing efforts;
terrorist acts, acts of war or periods of widespread civil unrest;
natural disasters and other calamities;
changes in market conditions for biopharmaceutical companies; and
conditions in the U.S. or Australian financial markets or changes in general economic conditions.
The dual listing of our ordinary shares and the ADSs may adversely affect the liquidity and value of these securities.
Our ADSs are listed on the Nasdaq and our ordinary shares are listed on the ASX. We cannot predict the effect of this dual
listing on the value of our ordinary shares and ADSs. However, the dual listing of our ordinary shares and ADSs may dilute the
liquidity of these securities in one or both markets and may adversely affect the development of an active trading market for the ADSs
in the United States. The price of the ADSs could also be adversely affected by trading in our ordinary shares on the ASX, and vice
versa.
35
If securities or industry analysts do not publish research reports about our business, or if they issue an adverse opinion about our
business, the market price and trading volume of our ordinary shares and/or ADSs could decline.
The trading market for our ordinary shares and ADSs will be influenced by the research and reports that securities or industry
analysts publish about us or our business. Securities and industry analysts may discontinue research on our company, to the extent
such coverage currently exists, or in other cases, may never publish research on our company. If too few securities or industry analysts
commence coverage of our company, the trading price for our ordinary shares and ADSs would likely be negatively impacted. If one
or more of the analysts who cover us downgrade our ordinary shares or ADSs or publish inaccurate or unfavorable research about our
business, the market price of our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, demand for our ordinary shares and/or ADSs could decrease, which might cause our price and trading
volume to decline.
Risks Related to Ownership of Our ADSs
An active trading market for the ADSs may not develop in the United States.
Our ADSs are listed in the United States on the Nasdaq under the symbol “MESO.” However, we cannot assure you that an
active public market in the United States for the ADSs will develop on that exchange, or if developed, that this market will be
sustained. In the past, following periods of volatility in the market price of a company’s securities, shareholders often instituted
securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior
management and, if adversely determined, could have a material adverse effect on our results of operations and financial condition.
We currently report our financial results under IFRS, which differs in certain significant respect from U.S. GAAP.
Currently we report our financial statements under IFRS. There have been and there may in the future be certain significant
differences between IFRS and U.S. GAAP, including differences related to revenue recognition, intangible assets, share-based
compensation expense, income tax and earnings per share. As a result, our financial information and reported earnings for historical or
future periods could be significantly different if they were prepared in accordance with U.S. GAAP. In addition, we do not intend to
provide a reconciliation between IFRS and U.S. GAAP unless it is required under applicable law. As a result, you may not be able to
meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.
As a foreign private issuer, we are permitted and expect to follow certain home country corporate governance practices in lieu of
certain Nasdaq requirements applicable to domestic issuers and we are permitted to file less information with the Securities and
Exchange Commission than a company that is not a foreign private issuer. This may afford less protection to holders of our ADSs.
As a “foreign private issuer,” as defined in Rule 405 under the Securities Exchange Act of 1933, as amended (the “Securities
Act”), whose ADSs will be listed on the Nasdaq Global Select Market, we will be permitted to, and plan to, follow certain home
country corporate governance practices in lieu of certain Nasdaq Global Select Market requirements. For example, we may follow
home country practice with regard to certain corporate governance requirements, such as the composition of the board of directors and
quorum requirements applicable to shareholders’ meetings. This difference may result in a board that is more difficult to remove and
less shareholder approvals required generally. In addition, we may follow home country practice instead of the Nasdaq Global Select
Market requirement to hold executive sessions and to obtain shareholder approval prior to the issuance of securities in connection with
certain acquisitions or private placements of securities. The above differences may result in less shareholder oversight and requisite
approvals for certain acquisition or financing related decisions. Further, we may follow home country practice instead of the Nasdaq
Global Select Market requirement to obtain shareholder approval prior to the establishment or amendment of certain share option,
purchase or other compensation plans. This difference may result in less shareholder oversight and requisite approvals for certain
company compensation related decisions. A foreign private issuer must disclose in its annual reports filed with the Securities and
Exchange Commission, or SEC, and the Nasdaq Global Select Market, the requirements with which it does not comply followed by a
description of its applicable home country practice. The Australian home country practices described above may afford less protection
to holders of the ADSs than that provided under the Nasdaq Global Select Market rules.
Further, as a foreign private issuer, we are exempt from certain rules under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that impose disclosure requirements as well as procedural requirements for proxy solicitations under Section 14
of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing”
profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial
statements with the SEC as frequently or as promptly as a company that files as a domestic issuer whose securities are registered under
the Exchange Act, nor are we generally required to comply with the SEC’s Regulation FD, which restricts the selective disclosure of
material non-public information. Accordingly, the information may not be disseminated in as timely a manner, or there may be less
information publicly available concerning us generally than there is for a company that files as a domestic issuer.
36
ADS holders may be subject to additional risks related to holding ADSs rather than ordinary shares.
ADS holders do not hold ordinary shares directly and, as such, are subject to, among others, the following additional risks.
•
•
•
As an ADS holder, we will not treat you as one of our shareholders and you will not be able to exercise shareholder rights,
except through the American depositary receipt, or ADR, depositary as permitted by the deposit agreement.
Distributions on the ordinary shares represented by your ADSs will be paid to the ADR depositary, and before the ADR
depositary makes a distribution to you on behalf of your ADSs, any withholding taxes that must be paid will be deducted.
Additionally, if the exchange rate fluctuates during a time when the ADR depositary cannot convert the foreign currency,
you may lose some or all of the value of the distribution.
We and the ADR depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a
manner that could prejudice ADS holders.
ADS holders must act through the ADR depositary to exercise your voting rights and, as a result, you may be unable to exercise
your voting rights on a timely basis.
As a holder of ADSs (and not the ordinary shares underlying your ADSs), we will not treat you as one of our shareholders, and
you will not be able to exercise shareholder rights. The ADR depositary will be the holder of the ordinary shares underlying your
ADSs, and ADS holders will be able to exercise voting rights with respect to the ordinary shares represented by the ADSs only in
accordance with the deposit agreement relating to the ADSs. There are practical limitations on the ability of ADS holders to exercise
their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our
ordinary shares will receive notice of shareholders’ meetings by mail or email and will be able to exercise their voting rights by either
attending the shareholders meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from
us. Instead, in accordance with the deposit agreement, we will provide notice to the ADR depositary of any such shareholders meeting
and details concerning the matters to be voted upon. As soon as practicable after receiving notice from us of any such meeting, the
ADR depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions
may be given by ADS holders. To exercise their voting rights, ADS holders must then instruct the ADR depositary as to voting the
ordinary shares represented by their ADSs. Due to these procedural steps involving the ADR depositary, the process for exercising
voting rights may take longer for ADS holders than for holders of ordinary shares. The ordinary shares represented by ADSs for which
the ADR depositary fails to receive timely voting instructions will not be voted. Under Australian law and our Constitution, any
resolution to be considered at a meeting of the shareholders shall be decided on a show of hands unless a poll is demanded by the
shareholders at or before the declaration of the result of the show of hands. Under voting by a show of hands, multiple “yes” votes by
ADS holders will only count as one “yes” vote and will be negated by a single “no” vote, unless a poll is demanded.
If we are or become classified as a passive foreign investment company, our U.S. securityholders may suffer adverse tax
consequences.
Based upon an analysis of our income and assets for the taxable year ended June 30, 2018, we do not believe we were a passive
foreign investment company (a "PFIC") for our most recent tax year. In general, if at least 75% of our gross income for any taxable
year consists of passive income or at least 50% of the average quarterly value of assets is attributable to assets that produce passive
income or are held for the production of passive income, including cash, then we will be classified as a PFIC for U.S. federal income
tax purposes. Passive income for this purpose generally includes dividends, interest, certain royalties and rents, and gains from
commodities and securities transactions. Passive assets for this purpose generally includes assets held for the production of passive
income. Accordingly, passive assets generally include any cash, cash equivalents and cash invested in short-term, interest bearing,
debt instruments or bank deposits that are readily convertible into cash. Since PFIC status depends upon the composition of our
income and assets and the market value of our assets from time to time, and as the determination of PFIC status must be made
annually at the end of each taxable year, there can be no assurance that we will not be considered a PFIC for any future taxable year.
Investors should be aware that our gross income for purposes of the PFIC income test depends on the receipt of Australian research
and development tax incentive credits and other active revenue, and there can be no assurances that such tax incentive credit programs
will not be revoked or modified, that we will continue to conduct our operations in the manner necessary to be eligible for such
incentives or that we will receive other gross income that is not considered passive for purposes of the PFIC income test. If we were a
PFIC for any taxable year during a U.S. investor’s holding period for the ordinary shares or ADSs, we would ordinarily continue to be
treated as a PFIC for each subsequent year during which the U.S. investor owned the ordinary shares or ADSs. If we were treated as a
PFIC, U.S. investors would be subject to special punitive tax rules with respect to any "excess distribution" received from us and any
gain realized from a sale or other disposition (including a pledge) of the ordinary shares or ADSs unless a U.S. investor made a timely
"qualified electing fund" or "mark-to-market" election. For a more detailed discussion of the U.S. tax consequences to U.S. investors
if we were classified as a PFIC, see Item 10.E- "Taxation — Certain Material U.S. Federal Income Tax Considerations to U.S.
Holders — Passive Foreign Investment Company".
37
Changes in foreign currency exchange rates could impact amounts you receive as a result of any dividend or distribution we
declare on our ordinary shares.
Any significant change in the value of the Australian dollar may impact amounts you receive in U.S. dollars as a result of any
dividend or distribution we declare on our ordinary shares as a holder of our ADSs. More specifically, any dividends that we pay on
our ordinary shares will be in Australian dollars. The depositary for the ADSs has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses,
including any such fees or expenses incurred to convert any such Australian dollars into U.S. dollars. You will receive these
distributions in U.S. dollars in proportion to the number of our ordinary shares your ADSs represent. Depreciation of the U.S. dollar
against the Australian dollar would have a negative effect on any such distribution payable to you.
You may not receive distributions on our ordinary shares represented by the ADSs or any value for such distribution if it is illegal
or impractical to make them available to holders of ADSs.
While we do not anticipate paying any dividends on our ordinary shares in the foreseeable future, if such a dividend is declared,
the depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our
ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to
the number of our ordinary shares your ADSs represent. However, in accordance with the limitations set forth in the deposit
agreement, it may be unlawful or impractical to make a distribution available to holders of ADSs. We have no obligation to take any
other action to permit the distribution of the ADSs, ordinary shares, rights or anything else to holders of the ADSs. This means that
you may not receive the distributions we make on our ordinary shares or any value from them if it is unlawful or impractical to make
them available to you. These restrictions may have a material adverse effect on the value of your ADSs.
You may be subject to limitations on transfers of your ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from
time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to
deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we
or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under
any provision of the deposit agreement, or for any other reason.
U.S. investors may have difficulty enforcing civil liabilities against our company, our directors or members of our senior
management.
Several of our officers and directors are non-residents of the United States, and a substantial portion of the assets of such
persons are located outside the United States. As a result, it may be impossible to serve process on such persons in the United States or
to enforce judgments obtained in U.S. courts against them based on civil liability provisions of the securities laws of the United States.
Even if you are successful in bringing such an action, there is doubt as to whether Australian courts would enforce certain civil
liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In
addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in Australia or
elsewhere outside the U.S. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not
seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any
judgment in Australia will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United
States and Australia do not currently have a treaty or statute providing for recognition and enforcement of the judgments of the other
country (other than arbitration awards) in civil and commercial matters.
As a result, our public shareholders and holders of the ADSs may have more difficulty in protecting their interests through
actions against us, our management, our directors than would shareholders of a corporation incorporated in a jurisdiction in the United
States.
Our Constitution and Australian laws and regulations applicable to us may adversely affect our ability to take actions that could be
beneficial to our shareholders.
As an Australian company we are subject to different corporate requirements than a corporation organized under the laws of the
United States. Our Constitution, as well as the Corporations Act, sets forth various rights and obligations that apply to us as an
Australian company and which may not apply to a U.S. corporation. These requirements may operate differently than those of many
U.S. companies.
38
Item 4.
Information on the Company
4.A
History and Development of Mesoblast
Mesoblast Limited
Mesoblast Limited was incorporated on June 8, 2004 as a public company in Australia under the Corporations Act 2001 with an
indefinite duration. On December 16, 2004 we became listed on the Australian Securities Exchange (the “ASX”). On November 13,
2015, we became listed on the Nasdaq Global Select Market (“Nasdaq”) and from this date we have been dual-listed in Australia and
the U.S.. Our registered office is located at the following address:
Mesoblast Ltd
Level 38
55 Collins Street
Melbourne VIC 3000
Australia
Telephone: +61 3 9639 6036
Web: www.mesoblast.com
Our agent for service of process in the United States is Mesoblast Inc., 505 Fifth Avenue, Level 3, New York, NY 10017.
For a list of our significant subsidiaries, see Exhibit 8.1 to this Annual Report.
Important Corporate Developments
Fiscal year 2018 to date of annual report
July
Entered into a strategic alliance with Tasly Pharmaceutical Group (“Tasly”) for the development, manufacture and
commercialization in China of MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for
the treatment or prevention of acute myocardial infarction. Tasly will receive exclusive rights and will fund all
development, manufacturing and commercialization activities in China for MPC-150-IM and MPC-25-IC. Mesoblast will
receive $40.0 million on closing, $25.0 million on product regulatory approvals in China, double-digit escalating royalties
on net product sales and is eligible to receive six escalating milestone payments upon the product candidates reaching
certain sales thresholds in China. Tasly and Mesoblast plan to leverage each other’s clinical trial results to support their
respective regulatory submissions. The transaction is subject to filing with the State Administration of Foreign Exchange.
Shawn Cline Tomasello appointed Non-executive Director bringing substantial commercial and transactional experience
to the Board. She was Chief Commercial Officer at Kite Pharma, where she played a pivotal role in the company’s
acquisition in 2017 by Gilead Sciences for $11.9 billion and was previously Chief Commercial Officer at Pharmacyclics,
Inc., which was acquired in 2015 by AbbVie, Inc. for $21.0 billion.
In July, we announced that on June 29, 2018, we entered into a $50.0 million financing facility with NovaQuest Capital
Management, L.L.C. (“NovaQuest”) for the continued development and commercialization of remestemcel-L (MSC-100-
IV) for children with steroid refractory acute Graft versus Host Disease (aGVHD). NovaQuest was formed in 2000 as a
strategic investment unit within Quintiles (now IQVIA), the world’s largest clinical research organization. On closing,
Mesoblast drew $30.0 million and issued $10.0 million in ordinary shares. Prior to maturity in July 2026, the loan is only
repayable from net sales of remestemcel-L. Interest payments will be deferred until after the first ex Asia commercial sale
of remestemcel-L. The financing is subordinated to the senior creditor, Hercules.
June
Key Day 100 survival outcomes of MSC-100-IV (remestemcel-L), in children with steroid refractory aGVHD presented at
the 2018 annual meeting of the International Society for Stem Cell Research (ISSCR in Melbourne. Top line Day 100
results demonstrated 87% survival rate for Day 28 responders to remestemcel-L treatment (33/38), and an overall survival
rate of 75% (41/55). The multi-infusion regimen of remestemcel-L was well tolerated.
Joseph R. Swedish joined Mesoblast’s Board of Directors bringing than two decades of healthcare leadership experience
as the CEO for major U.S. healthcare organizations, including as Executive Chairman, President and CEO of Anthem
Inc., a Fortune 33 company and the leading health benefits provider in the U.S. He replaced Dr Ben-Zion Weiner.
May
Josh Muntner appointed Chief Financial Officer, based in New York, bringing substantial U.S. corporate finance,
transactional and capital markets experience to Mesoblast.
39
Entered into partnership with Cartherics Pty Ltd (“Cartherics”) to develop allogeneic off-the-shelf CAR-T cells armed
with multiple targeting receptors for use in solid cancers. Mesoblast and Cartherics will jointly own the intellectual
property produced using their combined technologies.
April
The independent Data Monitoring Committee for the Phase 3 trial evaluating MPC-150-IM in moderate to advanced
chronic heart failure conducted a scheduled review of available data from 465 randomized patients and recommended
continuation of the trial without modification.
March Enrollment completed in the Phase 3 trial evaluating a single intra-discal injection of product candidate MPC-06-ID in
patients with chronic low back pain due to degenerative disc disease. The 2:1 randomized, placebo-controlled Phase 3 trial
enrolled 404 patients across 48 centers in the United States and Australia.
Entered into a $75.0 million non-dilutive, four-year credit facility with Hercules, a leading specialty finance company,
drawing the first tranche of $35.0 million on closing. An additional $15.0 million may be drawn on or before Q4 CY2018,
and a further $25.0 million may be drawn on or before Q3 CY2019, as certain milestones are met.
February Phase 3 trial of remestemcel-L in children with steroid refractory aGVHD successfully met the primary endpoint of Day 28
overall response rate. In the 55 children enrolled in the open-label trial conducted across 32 sites in the U.S., the Day 28
OR rate was 69%, a statistically significant increase compared to the protocol-defined historical control rate of 45%
(p=0.0003). Among patients who received at least one treatment infusion and were followed up for 100 days (n=50), the
mortality rate was 22%, in contrast to Day 100 mortality rates as high as 70% in patients who fail to respond to initial
steroid therapy. The treatment regimen of remestemcel-L was well tolerated.
These Phase 3 study results of remestemcel-L were presented at the tandem annual scientific meetings of the Center for
International Blood & Marrow Transplant Research and the American Society of Blood and Marrow Transplantation held
in Salt Lake City from February 21-25, 2018.
December FDA granted Regenerative Medicine Advanced Therapy (RMAT) designation for MPC-150-IM in the treatment of heart
failure patients with left ventricular systolic dysfunction and left ventricular assist devices (LVADs). The RMAT
designation under the 21st Century Cures Act aims to expedite the development of regenerative medicine therapies
intended for the treatment of serious diseases and life-threatening conditions.
Completed enrollment of Phase 3 trial of remestemcel-L in children with aGVHD.
TiGenix NV, now a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), was granted
exclusive worldwide access to certain of Mesoblast’s patents to support global commercialization of its adipose-derived
mesenchymal stem cell product Alofisel®, previously known as Cx601, for the local treatment of fistulae. As
consideration, Mesoblast will receive up to €20.0 million in payments, as well as single digit royalties on net sales of
Alofisel®.
Frost & Sullivan named Mesoblast the 2017 Global Technology Leader in the Cell Therapy Industry.
Results from the randomized, placebo-controlled Phase 2 trial of MPC-300-IV over 52 weeks in patients with biologic
refractory rheumatoid arthritis (RA) presented at the 2017 American College of Rheumatology Annual Meeting in San
Diego
September A multi-center team of researchers led by Icahn School of Medicine at Mount Sinai Hospital, New York, completed
enrollment of a 159-patient Phase 2b trial evaluating MPC-150-IM for the treatment of end-stage heart failure in patients
with left ventricular systolic dysfunction and LVADs.
Completion of a fully underwritten 1 for 12 pro-rata accelerated non-renounceable entitlement offer raising approximately
A$50.7 million with proceeds to fund Phase 3 clinical programs, commercial manufacturing and ongoing operations.
August
Announced plans to achieve an accelerated market entry of product candidate MPC-150-IM in the treatment of patients
with the most advanced stages of chronic heart failure, defined as New York Heart Association stages Class III and Class
IV.
Results of the Phase 2a trial of MPC-75-IA for prevention of radiographic and clinical features of knee osteoarthritis after
traumatic injury published in Arthritis Research & Therapy. The results showed a single intra-articular injection of MPC-
75-IA reduced cartilage loss and bone changes by six months, and improved pain and function for over two years, when
compared to controls.
Fiscal year 2017
June
Results from Phase 2 trial in patients with biologic refractory RA were selected by peer review and presented at the
European League Against Rheumatism (EULAR) Annual European Congress of Rheumatology.
40
April
Phase 3 trial of product candidate MPC-150-IM in patients with moderate to advanced chronic heart failure was
successful in the pre-specified interim futility analysis of the efficacy endpoint in the trial's first 270 patients. The trial’s
Independent Data Monitoring Committee formally recommended that the trial should continue as planned
Received A$3.7 million from the Australian Government for Research & Development activities conducted during the
2016 fiscal year.
FDA cleared the commencement of a 24-patient trial sponsored and funded by the Boston Children’s Hospital and
combining Mesoblast's mesenchymal precursor cells (MPCs) with corrective heart surgery in children under the age of 5
with hypoplastic left heart syndrome.
March
Successfully completed a fully underwritten institutional placement of 26.25 million new shares for gross proceeds of
approximately $40.0 million.
Results from the Phase 2 trial in patients with chronic low back pain due to intervertebral disc degeneration showed that a
single intra-discal injection of 6 million MPCs resulted in meaningful improvements in both pain and function that were
durable for at least 36 months.
FDA granted a Fast Track designation for the use of MSC-100-IV to achieve improved overall response rate in children
with steroid refractory acute graft versus host disease.
February
39-week data from the Phase 2 trial in patients with RA resistant to anti-Tumor Necrosis Factor agents showed that a
single intravenous infusion of the product candidate MPC-300-IV was well tolerated and demonstrated a durable
improvement in clinical symptoms, physical function, and disease activity relative to placebo over this period of follow-
up.
Results of a new study published in the peer-reviewed journal Stem Cell Research & Therapy showed that a single
intravenous infusion of 150 million of the Company’s proprietary allogeneic “off-the-shelf” STRO-3 immunoselected
MPCs significantly improved clinical disease severity, reduced joint cartilage erosions, and improved synovial
inflammation and histopathology in a large animal model of early RA.
December Entered into an equity purchase agreement with Mallinckrodt Pharmaceuticals to exclusively negotiate a commercial and
development partnership for MPC-06-ID in the treatment or prevention of moderate/severe chronic low back pain due to
disc degeneration and MSC-100-IV in the treatment of aGVHD. As consideration, Mallinckrodt purchased approximately
20.04 million of Mesoblast’s ordinary shares for gross proceeds of approximately A$29.6 million.
MD Anderson Cancer Center and the United States National Institutes of Health (NIH) agreed to fund a clinical trial
combining MPC-based expansion and ex-vivo fucosylation of hematopoietic stem cells for cord blood transplantation in
cancer patients.
November Phase 3 trial of product candidate MSC-100-IV used as front-line therapy in children with steroid-resistant aGVHD was
successful in a pre-specified interim futility analysis.
October
Received the Frost & Sullivan Asia Pacific 2016 Cell Therapy Company of the Year Award.
Results from the Phase 2 trial of product candidate, MPC-300-IV, in patients with diabetic kidney disease published in the
peer-reviewed journal EBioMedicine.
September Mr William (Bill) A. Burns, former Chief Executive Officer (CEO) of Roche Pharmaceuticals, appointed Vice Chairman
of Mesoblast.
August
Intellectual property portfolio covering the use of its MPCs in the treatment of rheumatic diseases, including RA,
strengthened by the granting of a key patent by the United States Patent and Trademark Office.
Results from Phase 2 trial in biologic refractory RA showed that a single intravenous infusion of product candidate, MPC-
300-IV, was well tolerated and demonstrated a dose-related improvement in clinical symptoms, physical function and
disease activity relative to placebo through the 12 week primary endpoint.
24 month results from phase 2 trial of chronic low back pain product candidate MPC-06-ID presented at the 24th Annual
Scientific Meeting of the Spine Intervention Society and received the 2016 Best Basic Science Abstract award.
July
Announced plans for an early interim analysis on its Phase 3 chronic heart failure trial, projections for annualized cash
burn and the establishment of an equity facility to provide up to A$120.0 million funding at the Company’s discretion for
up to three years.
41
4.B
Business Overview
Mesoblast’s leadership in the development and commercialization of allogeneic cellular medicines is based on its disruptive
technology platform, proprietary manufacturing processes and multiple Phase 3 assets.
Our off-the-shelf product candidates target advanced stages of diseases with high, unmet medical needs.
Three product candidates are being evaluated in Phase 3 clinical trials for approval by the United States Food and Drug
Administration (FDA):
• MSC-100-IV (remestemcel-L) for steroid refractory acute graft versus host disease;
• MPC-150-IM for advanced heart failure; and
• MPC-06-ID for chronic low back pain due to degenerative disc disease.
We also have a promising emerging pipeline of products for follow-on indications.
Two allogeneic mesenchymal stem cell products commercialized by Mesoblast licensees have been approved in Japan and
Europe, with both licensees the first to receive full regulatory approval for an allogeneic cellular medicine in these major markets.
Mesoblast’s goal is for MSC-100-IV to be the first commercially available allogeneic mesenchymal stem cell product in the
United States.
Disruptive Technology Platform
Mesoblast is developing immuno-selected, culture expanded cellular medicines based on mesenchymal precursor cells (MPCs)
and their progeny, mesenchymal stem cells (MSCs). These rare mesenchymal lineage cells (approximately 1:100,000 of bone marrow
cells) are found around blood vessels and are central to blood vessel maintenance, repair and regeneration. Preclinical studies have
shown that these cells respond to signals associated with tissue damage, secreting mediators that promote tissue repair and modulate
immune responses.
Mesoblast’s immuno-selection process provides a homogeneous population of MPCs, which are at the apex of the mesenchymal
lineage hierarchy, with receptors that appear to respond to activating inflammation and damaged-tissue signals. This enables targeting
of multiple pathways that may result in therapeutic benefits in a number of complex and intractable diseases.
A key feature of Mesoblast’s mesenchymal lineage cells is that they are allogeneic and immune tolerant. They are intended to be
administered without the need for donor–recipient matching or recipient immune suppression, and therefore are often referred to as
‘off-the-shelf’ medicines.
Mesenchymal Lineage Stem Cells
Mesenchymal lineage cells are present around blood vessels in all tissues where they can respond effectively to various signals
associated with tissue damage. This response includes the secretion of a variety of biomolecules, including growth factors, cytokines,
chemokines and immunomodulatory biomolecules that affect various reparative mechanisms associated with the maintenance of tissue
health. Based on biologic evidence, the potential beneficial effects of these biomolecules on damaged tissues are believed to include:
•
•
•
Blood vessel function and regeneration: Mesenchymal lineage cells play a central role in the maintenance, repair and
regeneration of blood vessels. This is achieved in large part through the secretion of growth factors which act on
neighboring endothelial cells to promote blood vessel regeneration and function.
Tissue repair: Mesenchymal lineage cells represent a key cellular constituent of stem cell niches in multiple adult tissues
such as the bone marrow, heart and brain where they facilitate endogenous tissue repair by multiple mechanisms,
including promotion of survival and function of mature cells within a given tissue or of the endogenous stem cells with
which they are associated in niches within these tissues. This is achieved by secretion of a broad repertoire of bioactive
molecules, including chemokines, growth factors and enzymes, which promote survival and proliferation together with
remodeling of the extracellular matrix of the tissue.
Immunomodulation: Located at the interface between the circulation and the tissues, mesenchymal lineage cells play a
physiological role in modulating immune responses via their ability to alter the effector functions of extravasated white
blood cells by up-regulation of a battery of secreted immunomodulatory proteins.
Our technology platform enables development of a diverse range of products derived from the mesenchymal cell lineage in adult
tissues. MPCs constitute the earliest known cell type in the MLC lineage in vivo.
42
MPCs can be isolated using monoclonal antibodies and culture-expanded using methods that enable efficient expansion without
differentiation. MSCs are defined biologically in culture following density gradient separation from other tissue cell types and
following culture by plastic adherence. MSCs presumably represent culture-expanded in vitro progeny of the undifferentiated MPCs
present in vivo. The functional characteristics of each cell type enable product development for specific indications.
Allogeneic, Off-the-Shelf, Commercially Scalable Products
Our proprietary mesenchymal lineage cell-based products have distinct biological characteristics enabling their use for
allogeneic purposes.
Immune Privilege: Mesenchymal lineage cells are immune privileged, in that they do not express specific cell surface co-
stimulatory molecules that initiate immune allogeneic responses.
Expansion: We have developed proprietary methods that enable the large scale expansion of our cells while maintaining their
ability to produce the key biomolecules associated with tissue health and repair. This allows us to produce a cellular product intended
to demonstrate consistent and well-defined characterization and activity.
In contrast, autologous stem cell products, which are produced from the patient’s own stem cells, require individual product
regulatory testing and do not benefit from manufacturing economies of scale. Moreover, autologous therapies may be vulnerable to
significant patient-to-patient variability.
Revenue Generating Products and Late-Stage Assets
Each of Mesoblast’s product candidates has distinct technical characteristics, target indications, individual reimbursement
strategy, commercialization potential, and unique partnering opportunities.
Products Commercialized by Licensees
Mesoblast’s licensee in Japan, JCR Pharmaceuticals Co. Ltd., is marketing its mesenchymal stem cell-based product in Japan
for the treatment of acute GVHD in children and adults. TEMCELL® HS. Inj., a registered product of JCR Pharmaceuticals Co Ltd.,
was the first allogeneic cellular medicine to receive full regulatory approval in Japan. Mesoblast receives royalty income on sales of
TEMCELL® HS Inj in Japan.
exclusive
In 2017, Mesoblast granted TiGenix NV, now a wholly owned subsidiary of Takeda Pharmaceutical Company Limited
commercialization of Alofisel®,
(“Takeda”),
previously known as Cx601, the first allogeneic mesenchymal stem cell therapy to receive central marketing authorization (MA)
approval from the European Commission. Mesoblast will receive royalty income on Takeda’s worldwide sales of Alofisel® in the
local treatment of perianal fistulae.
support global
its patents
certain of
access
to
to
Prioritized Portfolio of Advanced Product Candidates
We have prioritized our therapeutic programs into tiers based on stage of development, largest market opportunities and
nearest term revenue potential. Tier 1 programs represent our lead programs where we focus the majority of our time and resources.
These product candidates are discussed in detail below. Tier 2 programs are continually evaluated, and we may advance these
programs into Tier 1 depending on merit of clinical data generated, market opportunity or collaboration opportunity. Additional
product candidates may advance into Tier 1 and Tier 2 going forward.
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Prioritized Portfolio of Clinically Distinct and Advanced Product Candidates
PLATFORM
PRODUCT CANDIDATE
THERAPEUTIC AREA
PRE-CLINICAL/
PRE-IND
PHASE 2
PHASE 3
APPROVAL
COMMERCIAL RIGHTS
MSC
MPC
Remestemcel-L
(MSC-100-IV)
Acute GVHD
Revascor
(MPC-150-IM)
Advanced HF (Class II & III)
End-Stage HF (Class III & IV)3
MPC
MPC-06-ID
Chronic Low Back Pain
MPC
MPC-300-IV
Rheumatoid Arthritis
Diabetic Nephropathy
Includes MSC-100-IV (Crohn’s disease – biologic refractory), MPC-25-IC (Acute Cardiac Ischemia),
MPC-25-Osteo (Spinal Fusion) and MPC-75-IA (Knee Osteoarthritis)
1
R
E
T
I
2
R
E
T
I
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N
D
E
V
E
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3. Study funded by the United States National Institutes of Health (NIH) and the Canadian Health Research Institute; conducted by the NIH-funded Cardiothoracic Surgical Trials Network.
This chart is figurative and does not purport to show individual trial progress within a clinical program.
Our Tier 1 Phase 3 clinical trial evaluating MPC-150-IM for moderate to advanced chronic heart failure is actively recruiting
across North America. Our Tier 1 Phase 3 clinical trial evaluating MPC-06-ID for chronic low back pain completed enrollment in
March 2018. The Tier 1 Phase 3 trial of MSC-100-IV for acute graft versus host disease in children has successfully met the Day 28
primary endpoint after completing enrollment in December 2017.
Tier 1 Programs
MSC-100-IV for the Treatment of acute Graft versus Host Disease (aGVHD)
Overview
MSC-100-IV is our intravenously delivered product candidate for the treatment of acute steroid-refractory graft versus host
disease, or SR-aGVHD, following allogeneic bone marrow transplant. Available data from clinical dose ranging studies identified an
effective dose to be 2 million MSCs/kg, body weight, to be administered repeatedly for at least four weeks after diagnosis of aGVHD.
For the U.S. market, the unit packaging is 25 million cells per vial for intravenous infusion.
In a bone marrow transplant, donor cells can attack the recipient, causing aGVHD. The donor T-cell mediated inflammatory
response involves secretion of TNF-alpha and IFN-gamma, resulting in activation of pro-inflammatory T-cells and tissue damage in
the skin, gut and liver which can be fatal.
MSC-100-IV was developed to counteract the inflammatory processes by down-regulating the production of pro-inflammatory
cytokines, increasing production of anti-inflammatory cytokines, and enabling recruitment of endogenous anti-inflammatory cells to
involved tissues.
Currently there are no approved therapies for patients with acute graft versus host disease (SR-aGVHD) in the U.S.
MSC-100-IV has been used for the treatment of aGVHD in children in the U.S., Canada and several European countries under
an expanded access program. This program enrolled more than 240 patients suffering from SR-aGVHD.
Market Opportunity
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 ~20% of all cases in the pediatric population. Nearly 50%
of all allogeneic BMT patients develop aGVHD. Liver or gastrointestinal involvement occur in up to 40% of all patients with aGVHD
and are associated with the greatest risk of death, with mortality rates of up to 85%.
The aGVHD market requires a small, targeted commercial footprint. The target market for aGVHD will primarily be board-
certified physicians in hematology/oncology who perform hematopoietic stem cell transplants. In the U.S., there are approximately 75
centers that perform pediatric transplants, with 50% of all transplants occurring at approximately 15 centers. Similarly, there are
approximately 110 centers that perform adult transplants with half of those transplants occurring at approximately 20 centers.
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Current Status and Anticipated Milestones
A single-arm, open-label Phase 3 study of 55 pediatric patients with SR-aGVHD treated with our MSC product candidate has
completed enrollment. The patients were enrolled in 32 sites across the United States, with 89% of patients suffering from the most
severe form, grade C/D aGVHD.
In February this year, this trial met its primary endpoint of Day 28 overall response rate (69% versus 45% historical control rate,
p=0.0003). Subsequent top line Day 100 results demonstrated 87% survival rate for Day 28 responders to remestemcel-L treatment
(33/38), and an overall survival rate of 75% (41/55). The multi-infusion regimen of remestemcel-L was well tolerated.
Based on interactions with the FDA, Mesoblast believes that successful results from the completed Phase 3 trial, together with
Day 180 safety, survival and quality of life parameters in these patients, may provide sufficient clinical evidence to support a BLA
filing in the United States, where there are currently no approved products for SR aGVHD. We are currently undertaking pre-BLA and
pre-launch activities in regards to this product candidate and intend to pursue a pediatric approval.
MPC-150-IM for the Treatment of Advanced and End-Stage Chronic Heart Failure (CHF) Due to Left Ventricular Dysfunction
Overview
MPC-150-IM is being evaluated for the treatment of advanced CHF. MPC-150-IM consists of 150 million MPCs administered
by direct cardiac injection in patients suffering from moderate/severe or end-stage CHF and progressive loss of heart function
following damage to the heart muscle caused by a heart attack, coronary artery disease, hypertension, genetic factors, or other causes.
MPCs release a range of factors when triggered by specific receptor-ligand interactions within damaged tissue. Based on
preclinical data, it is believed that the factors released from the MPCs induce functional cardiac recovery by simultaneous activation
of multiple pathways, including induction of endogenous vascular network formation, reduction in harmful inflammation, reduction in
cardiac fibrosis, and regeneration of heart muscle through activation of intrinsic tissue precursors.
Our unit dose of 150 million cells was based on multiple preclinical large animal studies in ischemic and non-ischemic heart
failure models which identified an optimal cell dose above 110 million. A completed Phase 2 dose- ranging study in patients with
moderate to advanced chronic heart failure of either ischemic or non-ischemic etiology identified the 150 million dose as the most
effective for both improvement in left ventricular volumes and remodeling and in prevention of heart failure related hospitalizations or
cardiac death.
Two trials of our MPC-150-IM investigational agent are ongoing, our Phase 3 trial in patients with New York Heart Association
(NYHA) Class II/III moderate to advanced CHF, and a Phase 2b trial in patients with end-stage CHF implanted with a left ventricular
assist device (LVAD). The latter 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 National Institute of Neurological Disorders and Stroke, and the Canadian Institutes for Health Research are also
supporting this trial.
Market Opportunity
CHF is a chronic 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.
In 2016, more than 15 million patients in the seven major global pharmaceutical markets are estimated to have been diagnosed
with CHF. The American Heart Association estimated in 2017 that prevalence is expected to grow 46% by 2030 in the U.S., affecting
more than 8 million Americans. CHF causes severe economic, social, and personal costs. In the U.S., it is estimated that CHF results
in direct costs of $60.2 billion annually when identified as a primary diagnosis and $115.0 billion as part of a disease milieu.
CHF is classified in relation to the severity of the symptoms experienced by the patient. The most commonly used classification
system for functional severity of heart failure, established by the NYHA, is:
•
•
•
•
Class I (mild): patients experience none or very mild symptoms with ordinary physical activity
Class II (mild): patients experience fatigue and shortness of breath during moderate physical activity
Class III (moderate): patients experience shortness of breath during even light physical activity
Class IV or end-stage (severe): patients are exhausted even at rest
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Risk for recurrent heart failure-related hospitalizations and terminal cardiac events increases progressively with increases in left
ventricular volumes, reduction in left ventricular ejection fraction, and progression in NYHA functional class. About 40% of all heart
failure patients have a low ejection fraction (<35-40%), NYHA Class II, III or IV CHF, and are at considerable risk of repeated
hospitalizations and death despite maximal drug therapy.
Patients with advanced or Class III/IV CHF continue to represent the greatest unmet medical need despite recent advances in
new therapeutic agents for heart failure. In contemporary studies, Class III/IV heart failure patients, characterized by heart failure
hospitalizations in the previous 12 months, severely impaired baseline cardiac function, increased systolic and diastolic volumes, and
elevated B-type natriuretic peptide (BNP) levels, have been reported to have a 50% incidence of terminal cardiac events or
cardiovascular hospitalization for decompensated heart failure over a median period of 16.6 months.
The definitive method of treating end-stage disease currently is a heart transplant or implanting a mechanical assist device.
Although there are many patients awaiting a heart transplant, due to limited supply there were only 3,191 heart transplants performed
in the U.S. in 2016.
Results from our Phase 2 trials in patients with Class II/III CHF and in patients with end-stage CHF requiring mechanical assist
devices have shown that our MPCs appear to have the potential to positively impact patients with the advanced forms of CHF due to
diminished left ventricular systolic function. We believe that targeting advanced heart failure patients with the most unmet need can
provide us with the most effective Phase 3 program, the most efficient path to market, and the opportunity for the most attractive
pricing.
Completed Phase 2 Trial in NYHA Class II/III CHF Patients
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 compared to control in 60 patients with chronic 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.
Endomyocardial injections of MPCs in patients with chronic heart failure were feasible and safe. The incidence of adverse
events was similar across all groups, and there was no clinically significant immune response in any patients who received MPCs.
The 150 million cell dose showed the greatest effect on left ventricular remodeling and functional capacity and a threshold
benefit for reducing heart failure-related major adverse cardiovascular events (HF-MACE) long-term.
Completed Pilot Phase 2a Trial in Patients with End-Stage Heart Failure Requiring Mechanical Support
A multi-center, randomized, double-blind, sham-procedure controlled trial conducted by a team of researchers within the NIH-
funded CTSN evaluated 30 patients 2:1 randomized to epicardial injection of 25 million MPCs or medium (control) during LVAD
implantation for either bridge-to-transplant or destination therapy.
The results of this trial were presented at the American Heart Association Scientific Sessions 2013 and published in Circulation
in June 2014.
This trial has demonstrated feasibility and safety, and suggested that a single low-dose MPC injection improved cardiac function
and had an early benefit on survival.
Current Status and Anticipated Milestones
A Phase 2b trial of MPC-150-IM in 159 patients with end-stage heart failure and an implantable LVAD has completed
enrollment, with top-line results for the trial's primary endpoint expected before the end of 2018.
The trial is a prospective, multi-center, double-blind, placebo controlled, 2:1 randomized (MPC to placebo), single-dose cohort
trial to evaluate the safety and efficacy of injecting a dose of 150 million MPCs into the native myocardium of LVAD recipients.
Patients with advanced CHF, implanted with an FDA-approved LVAD as bridge-to-transplant or destination therapy, are eligible to
participate in the trial. All patients will be followed until 12 months post randomization.
The primary efficacy endpoint of the study is the number of temporary weans from LVAD tolerated over the 6 months post-
randomization, indicating strengthening of the native heart muscle. Additional efficacy endpoints include patient survival, adverse
events and rehospitalization rates over 12 months.
46
In December 2017, the FDA granted Regenerative Medicine Advanced Therapy (RMAT) designation for MPC-150-IM in the
treatment of chronic heart failure patients with left ventricular systolic dysfunction and LVADs. The RMAT designation under the
21st Century Cures Act aims to expedite the development of regenerative medicine therapies intended for the treatment of serious
diseases and life-threatening conditions.
Program for Class II/III CHF patients
We are conducting a multicenter, double-blinded, 1:1 randomized, sham-procedure-controlled Phase 3 trial of MPC-150-IM in
up to 600 Class II/III CHF patients. The trial is actively enrolling patients across North America with NYHA Class II/III disease at
high risk of repeated heart failure hospitalizations or a Terminal Cardiac Event (cardiac death, LVAD placement, heart transplant or
insertion of an artificial heart). The enrollment criteria for this trial includes a prior decompensated heart failure event
(e.g. hospitalization) within the previous nine months and/or very high level of NT-proBNP, a protein used in diagnosis and screening
of CHF. These inclusion criteria are expected to result in enrichment for patients with substantial left ventricular contractile
abnormality, advanced chronic heart failure due to LV systolic dysfunction and higher risk of recurrent decompensated heart failure
hospitalizations and TCEs. This target patient population was shown to respond effectively to treatment with MPC-150-IM in our
previous Phase 2 trial.
This events-driven Phase 3 trial is expected to complete enrollment by the end of 2018. The trial’s primary efficacy endpoint is a
comparison of recurrent non-fatal HF-MACE between either MPC-treated patients or sham-treated controls.
MPC-06-ID for the Treatment of Chronic Low Back Pain (CLBP)
Overview
MPC-06-ID is our proprietary Phase 3 product candidate being evaluated for the treatment of patients with CLBP caused by
degenerative disc disease (DDD). MPC-06-ID consists of a unit dose of 6 million MPCs administered by syringe directly into a
damaged disc.
In CLBP, damage to the disc is the result of a combination of factors related to aging, genetics, and micro- injuries, which
compromises the disc’s capacity to act as a fluid-filled cushion between vertebrae and to provide anatomical stability. Damage to the
disc also results in an inflammatory response with ingrowth of nerves which results in chronic pain. This combination of anatomic
instability and nerve ingrowth results in CLBP and functional disability.
With respect to mechanisms of action in CLBP, extensive pre-clinical studies have established that MLCs have anti-
inflammatory effects and secrete multiple paracrine factors that stimulate new proteoglycan and collagen synthesis by chondrocytes in
vitro and by resident cells in the nucleus and annulus in vivo.
Market Opportunity
In 2016, over 7 million people in the U.S. alone were estimated to suffer from CLBP caused by DDD, of which 3.2 million
patients have moderate disease. After failure of conservative measures (medication, injections, epidural steroid physical therapy etc.),
there is a need for treatments that both reduce pain and improve function over a sustained period of time. When disc degeneration has
progressed to a point that pain and loss of function can no longer be managed by conservative means, major invasive surgery such as
spinal fusion is the most commonly offered option.
All therapies for progressive, severe and debilitating pain due to degenerating intervertebral discs treat the symptoms of the
disease. However, they are not disease modifying and 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 $100.0 billion and $200.0 billion
annually with two thirds of 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 CLBP is a therapy
that has the ability to impact the chronic pain and disability associated with the condition.
Completed Phase 2 Clinical Trial
The primary objective of our Phase 2 study comparing two doses and two controls in 100 patients was to evaluate the safety of
MPCs in CLBP. Secondary objectives were to evaluate efficacy parameters such as radiographic, low back pain, function/disability,
medication usage, work status and quality of life improvement measures. Patients were evaluated at 1, 3, 6 and 12 months after
treatment with longer term follow-up evaluations continuing at 24 and 36 months.
47
Eligible subjects were at least 18 years of age with chronic lumbar back pain for 6 months or greater duration due to moderate
DDD with one painful lumbar vertebral level between L1 and S1. Subjects had to have failed at least 3 months of non-operative
management with exposure to physical therapy. 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 HA, and compared to saline (placebo control) or
HA alone (vehicle control) injection, using a pre-specified Per Protocol (“PP”) population analysis. 100 subjects across 15 sites were
randomized with 20 receiving saline, 20 receiving HA, 30 receiving MPC-06-ID with HA, and 30 receiving 18 million MPCs with
HA. The mean duration of DDD in these patients was approximately 6 years. Baseline pain, function scores, and radiographic scores
were similar among all groups.
In July 2016, 24-month results from the Phase 2 trial were presented at the 24th Annual Scientific Meeting of the Spine
Intervention Society and received the 2016 Best Basic Science Abstract award at the meeting.
Data and analyses of the 36-month Phase 2 trial support the Phase 3 trial of MPC-06-ID for CLBP and the rationale for MPC
dose selection, use of saline control, and the trial's endpoints.
Current Status and Anticipated Milestones
The Phase 3 clinical trial for CLBP completed enrollment in March 2018 with 404 patients enrolled across 48 centers in the
United States and Australia randomized 2:1 to receive either 6 million MPCs or saline control. The trial's primary endpoint of Overall
Treatment Success (using a composite of 50% improvement in lower back pain and 15 point improvement in function at both 12 and
24 months with no treatment or surgical interventions at the treated level through 24 months) is an acceptable endpoint, as per
guidance from the FDA.
MPC-300-IV for the treatment of Biologic-Refractory Rheumatoid Arthritis and Diabetic Nephropathy
The diverse and potent anti-inflammatory properties of MPCs are the foundation for their usefulness in immune-mediated
diseases such as rheumatoid arthritis and diabetic kidney disease (or diabetic nephropathy), 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. We have conducted studies in patients with biologic-refractory rheumatoid arthritis and diabetic
nephropathy using our other Tier 1 product candidate MPC-300-IV.
In November 2017, we announced 52-week data from a trial in 48 patients who had failed biologics for rheumatoid arthritis. A
single intravenous infusion of MPC-300-IV was well tolerated and demonstrated improvement in clinical symptoms, physical function
and reduced disease activity relative to placebo. We believe the safety and efficacy results from the Phase 2 trial support further
development of this product candidate as a potential first-line treatment option in rheumatoid arthritis patients who have previously
received a prior anti-TNF or other biologic agent.
In October 2016, we announced that results from our Phase 2 trial of MPC-300-IV, in 24 patients with diabetic kidney disease
were published in the peer-reviewed journal EBioMedicine. The paper, entitled ‘Allogeneic Mesenchymal Precursor Cells (MPC) in
Diabetic Nephropathy: A Randomized, Placebo Controlled, Dose Escalation Study’, concluded that a single intravenous infusion of
MPC-300-IV was well tolerated and had positive effects on renal function at the 12-week primary endpoint in a Phase 2 trial in adult
patients with type 2 diabetic nephropathy. This trial was conducted in Australia.
Tier 2 Programs
In addition, we have conducted preclinical and clinical research with our Tier 2 candidate products in acute cardiac ischemia,
Crohn’s disease, spinal fusion and prevention of knee osteoarthritis after an anterior cruciate ligament repair.
Enrollment has completed in our Phase 2 trial for MPC-25-IC for the treatment of acute myocardial infarction (AMI). This trial
was a prospective, randomized, placebo-controlled, double blind clinical trial that will analyze the effect of intracoronary infusion of
MPCs in 106 patients with a first-time acute ST-elevation myocardial infarction. The therapy was initiated directly following
revascularization of the left anterior descending artery, along with standard therapies for AMI. After successful revascularization, the
patients were 1:1:1 randomized to receive 12.5 or 25 million MPC or placebo via intracoronary infusion. The primary endpoint of
safety was evaluated at 30 days. The secondary efficacy endpoint is defined as reduction in the left ventricular end-systolic volume at
6 months. Additional efficacy parameters from cardiac magnetic resonance and echocardiography will also be evaluated at this time
point. Occurrence of MACE events will be evaluated over 24 months with full trial results released following this period.
Complementary 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
48
mesenchymal lineage cell technology platform. The aim of this activity is to maintain our technology leadership position in the
regenerative medicine space, while simultaneously expanding our targeted disease applications and managing the life-cycle of our
current lead programs.
Our complementary technologies and additional product candidates include other types of mesenchymal lineage cells, cell
surface modification technologies, pay-loading technology and protein and gene technologies.
Manufacturing and Supply Chain
Our manufacturing strategy for our cellular product candidates focuses on the following important factors:(i) clear product
delineation to protect pricing and partner markets by creating distinct products using discrete manufacturing processes, culture
conditions, formulations, routes of administration, and/or dose regimens; (ii) establishing proprietary commercial scale-up and supply
to meet increasing demand; (iii) implementing efficiencies and yield improvement measures to reduce cost-of-goods; (iv) maintaining
regulatory compliance with best practices; and (v) establishing and maintaining multiple manufacturing sites for product supply risk
mitigation.
The stem cell manufacturing and distribution process generally involves five major steps.
•
•
•
•
•
Procure bone marrow—acquire bone marrow from healthy adults with specific FDA-defined criteria, which is
accompanied by significant laboratory testing to establish the usability of the donated tissues.
Create master cell banks—isolate MLCs from the donated bone marrow and perform a preliminary expansion to create
master cell banks. Each individual master cell bank comes from a single donor.
Expand to therapeutic quantities—expand master cell banks to produce therapeutic quantities, a process that can yield
thousands of doses per master cell bank, with the ultimate number depending on the dose for the respective product
candidate being produced.
Formulate, package and cryopreserve.
Distribute—with the exception of procurement and creation of master cell banks, our manufacturing is currently
conducted in Lonza’s Singapore facility, and products will be cryopreserved, then shipped to storage sites in the U.S. and
other jurisdictions via cryoshippers. Those distribution centers then send the products on to treatment centers in
cryoshippers. Treatment centers will either move the products into their own freezers, or receive the cryoshipper in “real
time” and product stays in the cryoshipper until thawed for patient use within a well-defined window. We intend to
continue utilizing this approach in the future, except that we intend to establish distribution relationships in various
regions.
To date our product candidates have been manufactured in two-dimensional, or 2D, planar, 10-layer cell factories, using media
containing fetal bovine serum, or FBS.
The relatively small patient numbers and orphan drug designation for MSC-100-IV for aGVHD lead us to believe that 2D
manufacturing will be adequate to meet demand for this product candidate if fully approved. We also believe that 2D manufacturing
process and facilities are commercially feasible for Phase 3 trial supply and the initial launch of MPC-06-ID for CLBP.
However, to build up commercial supply for certain of our product candidates long-term, we are developing manufacturing
processes using three-dimensional, or 3D, bioreactors with greater capacity to improve efficiency and yields, with resulting lower-cost
of goods. We intend to evaluate products produced in 3D bioreactors in pre-clinical and potentially clinical studies, which may serve
as FDA required comparability studies to 2D if successful. We are also focusing on the introduction of FBS-free media which has the
potential to result in efficiency and yield improvements to the current 2D process which may prove sufficient for commercial
production of some of our final products. We intend to conduct comparability studies to illustrate that products produced with this
media are equivalent to those produced using FBS based media. While we remain confident in our ability to deliver successful
outcomes from each of these activities, any unexpected issues or challenges faced in doing so could delay our programs or prevent us
from continuing our programs.
Our manufacturing activities to date have met stringent criteria set by international regulatory agencies, including the U.S. FDA.
By using well-characterized cell populations, our manufacturing processes promote reproducibility and batch-to-batch consistency for
our allogeneic cell product candidates. We have developed robust quality assurance procedures and lot release assays to support this
reproducibility and consistency.
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Intellectual Property
We have a large patent portfolio of issued and pending claims covering compositions of matter, uses for our MLC cell-based
technologies and other proprietary regenerative product candidates and technologies, as well as for elements of our manufacturing
processes, with approximately 770 patents and patent applications across 71 patent families as of August 2018.
One of our major objectives is to continue to protect and expand our extensive estate of patent rights and trade secrets, which we
believe enables us to deliver commercial advantages and long-term protection for our product candidates based on our proprietary
technologies, and support our corporate strategy to target large, mature and emerging healthcare markets for our exploratory
therapeutic product candidates.
More specifically, our patent estate includes issued patent and patent applications in major markets, including, but not limited to,
the United States, Europe, Japan and China. The patents that we have obtained, and continue to apply for, cover MLC technologies
and product candidates derived from these technologies, irrespective of the tissue source, including bone marrow, adipose, placenta,
umbilical cord and dental pulp.
These patents cover, among other technology areas, a variety of MLCs (including MPCs and MSCs), and the use of MLC for
expansion of hematopoietic stem cells, or HSCs. Among the indication-specific issued or pending patents covering product candidates
derived from our MLCs are those which are directed to our Tier 1 product candidates: CLBP, CHF, aGVHD and chronic
inflammatory conditions such as rheumatoid arthritis (“RA”) and diabetic kidney disease (“DKD”). We also have issued and pending
patents covering our Tier 2 and pipeline indications, including inflammatory bowel disease (e.g., Crohn’s disease), neurologic
diseases, eye diseases and orthopedic diseases.
Our patent portfolio also includes issued and pending coverage of proprietary manufacturing processes that are being used with
our current two-dimensional manufacturing platform as well as the 3D bioreactor manufacturing processes currently under
development. These cell manufacturing patents cover isolation, expansion, purification, scale up, culture conditions, aggregates
minimization, cryopreservation, release testing and potency assays. In addition, we maintain as a trade secret, among other things, our
proprietary FBS-free media used in our 3D bioreactor manufacturing processes.
We maintain trade secrets covering a significant body of know-how and proprietary information relating to our core product
candidates and technologies. We protect our confidential know-how and trade secrets in a number of ways, including requiring all
employees and third parties that have access to our confidential information to sign non-disclosure agreements, limiting access to
confidential information on a need-to-know basis, maintaining our confidential information on secure computers, and providing our
contract manufacturers with certain key ingredients for our manufacturing process.
In addition, in many major jurisdictions there are other means that may be available to us by which we would be able to extend
the period during which we have commercial exclusivity for our product candidates, which include, but are not limited to the
exclusive right to reference our data, orphan drug exclusivity and patent term extensions.
As part of our strategy, we seek patent protection for our product candidates and technologies in major jurisdictions including
the United States, Europe, Japan, China, and Australia and file independent and/or counterpart patents and patent applications in other
jurisdictions globally that we deem appropriate under the circumstances, including India, Canada, Hong Kong, Israel, Korea and
Singapore. As of August 2018, our patent portfolio includes the following patents and patent applications in the following major
jurisdictions: 79 granted U.S. patents and 46 pending U.S. patent applications; 50 granted Japanese patents and 34 pending Japanese
patent applications; 24 granted Chinese patents and 25 pending Chinese patent applications; 40 granted European patents and 41
pending European patent applications; and 55 granted Australian patents and 20 pending Australian patent applications.
Our policy is to patent the technology, inventions and improvements that we consider important to the development of our
business, only in those cases in which we believe that the costs of obtaining patent protection is justified by the commercial potential
of the technology and associated product candidates, and typically only in those jurisdictions that we believe present significant
commercial opportunities to us. In those cases where we choose neither to seek patent protection nor protect the inventions as trade
secrets, we may publish the inventions so that it defensively becomes prior art in order for us to secure a freedom to operate position
and to prevent third parties from patenting the invention.
We also seek to protect as trade secrets our proprietary and confidential know-how and technologies that are either not
patentable or where we deem it inadvisable to seek patent protection. To this end, we generally require all third parties with whom we
share confidential information and our employees, consultants and advisors to enter into confidentiality agreements prohibiting the
disclosure of confidential information. These agreements with our employees and consultants engaged in the development of our
technologies require disclosure and assignment to us of the ideas, developments, discoveries and inventions, and associated
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intellectual property rights, important to our business. Additionally, these confidentiality agreements, among others, require that our
employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s proprietary technology.
License and Collaboration Agreements
All of our revenue relates to up-front, royalty and milestone payments recognized under the license and collaboration
agreements below. For further information on the categorical revenue breakdown during the last three fiscal years, see “Item 18.
Financial Statements – Note 3”.
JCR Pharmaceuticals Co., Ltd.—Hematological Malignancies and Hepatocytes Collaboration in Japan
In October 2013, we acquired all of Osiris Therapeutics, Inc.’s business and assets related to culture expanded MSCs. These
assets included assumption of a collaboration agreement with JCR (“JCR Agreement”), which will continue in existence until the later
of 15 years from the first commercial sale of any product covered by the agreement and expiration of the last Osiris patent covering
any such product. JCR is a research and development oriented pharmaceutical company in Japan. Under the JCR Agreement, JCR has
the right to develop our MSCs in two fields for the Japanese market: exclusive in conjunction with the treatment of hematological
malignancies by the use of HSCs derived from peripheral blood, cord blood or bone marrow, or the First JCR Field; and non-exclusive
for developing assays that use liver cells for non-clinical drug screening and evaluation, or the Second JCR Field. Under the JCR
Agreement, JCR obtained rights in Japan to our MSCs, for the treatment of aGVHD. JCR also has a right of first negotiation to obtain
rights to commercialize MSC- based products for additional orphan designations in Japan. We retain all rights to those products
outside of Japan.
JCR received full approval in September 2015 for its MSC-based product for the treatment of children and adults with acute
GVHD, TEMCELL® Hs. Inj.. TEMCELL is the first culture-expanded allogeneic stem cell product to be approved in Japan. It was
launched in Japan in February 2016.
Under the JCR Agreement, JCR is responsible for all development and manufacturing costs including sales and marketing
expenses. With respect to the First JCR Field, we are entitled to future payments of up to $1.0 million in the aggregate when JCR
reaches certain commercial milestones and to escalating double-digit royalties in the twenties. These royalties are subject to possible
renegotiation downward in the event of competition from non-infringing products in Japan. With respect to the Second JCR Field, we
are entitled to a double digit profit share in the fifties.
Intellectual property is licensed both ways under the JCR Agreement, with JCR receiving exclusive and non-exclusive rights as
described above from us and granting us non-exclusive, royalty-free rights (excluding in the First JCR Field and Second JCR Field in
Japan) under the intellectual property arising out of JCR’s development or commercialization of MSC-based products licensed in
Japan.
JCR has the right to terminate the JCR Agreement for any reason, and we have a limited right to terminate the JCR Agreement,
including a right to terminate in the event of an uncured material breach by JCR. In the event of a termination of the JCR Agreement
other than for our breach, JCR must provide us with its owned product registrations and technical data related to MSC-based products
licensed in Japan and all licenses of our intellectual property rights will revert to us.
Lonza—Manufacturing Collaboration
In September 2011, we entered into a manufacturing services agreement, or MSA, with Lonza Walkersville, Inc. and Lonza
Bioscience Singapore Pte. Ltd., collectively referred to as Lonza, a global leader in biopharmaceutical manufacturing. Under the
MSA, we pay Lonza on a fee for service basis to provide us with manufacturing process development capabilities for our product
candidates, including formulation development, establishment and maintenance of master cell banks, records preparation, process
validation, manufacturing and other services.
We have agreed to order a certain percentage of our clinical requirements and commercial requirements for MPC products from
Lonza. Lonza has agreed not to manufacture or supply commercially biosimilar versions of any of our product candidates to any third
party, during the term of the MSA, subject to our meeting certain thresholds for sales of our products.
We can trigger a process requiring Lonza to construct a purpose-built manufacturing facility exclusively for our product
candidates. In return if we exercise this option, we will purchase agreed quantities of our product candidates from this facility. We also
have a right to buy out this manufacturing facility at a pre-agreed price two years after the facility receives regulatory approval.
The MSA will expire on the later of December 31, 2020 or the three year anniversary of the date of the first commercial sale of
product supplied under the MSA, unless it is sooner terminated. We have the option of extending the MSA for an additional 10 years,
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followed by the option to extend for successive three-year periods subject to Lonza’s reasonable consent. We may terminate the MSA
with two years prior written notice, and Lonza may terminate with five years prior written notice. The MSA may also terminate for
other reasons, including if the manufacture or development of a product is suspended or abandoned due to the results of clinical trials
or guidance from a regulatory authority. In the event we request that Lonza construct the manufacturing facility described above,
neither we nor Lonza may terminate before the third anniversary of the date the facility receives regulatory approval to manufacture
our product candidates, except in certain limited circumstances. Upon expiration or termination of the MSA, we have the right to
require Lonza to transfer certain technologies and lease the Singapore facility or the portion of such facility where our product
candidates are manufactured, subject to good faith negotiations.
We currently rely, and expect to continue to rely, on Lonza for the manufacture of our product candidates for preclinical and
clinical testing, as well as for commercial manufacture of our product candidates if marketing approval is obtained.
Singapore Economic Development Board (EDB)—Singapore Operations
In May 2014, the Economic Development Board of Singapore, or EDB, granted us certain financial incentives tied to revenues
generated by our Singapore operations, among other things. These incentives include two separate 15-year periods (each broken into
five-year increments) of potential incentives, one related primarily to non-manufacturing activities and the other related to
manufacturing activities. We will be eligible for these incentives if we meet certain investment or activity thresholds in Singapore,
including employment levels, amounts of business or manufacturing related expenses, and the performance of various services
including business development, planning, manufacturing, intellectual property management, marketing and distribution.
For example, in order to obtain full financial benefits from the EDB for our manufacturing-related incentives, we must
manufacture at least 50% of the global volume of our first three commercial products in Singapore (subject to certain exceptions), and
we would be required to construct and operate a manufacturing facility in Singapore, and hire and maintain a specified number of
professionals (including supply chain personnel) in connection with the operation of that facility. The activities under our MSA with
Lonza could be used to fulfill all or part of the requirements to obtain the EDB financial incentives.
Central Adelaide Local Health Network Incorporated—Mesenchymal Precursor Cell Intellectual Property
In October 2004, we, through our wholly-owned subsidiary, Angioblast Systems Inc., now Mesoblast, Inc., acquired certain
intellectual property relating to our MPCs, or Medvet IP, pursuant to an Intellectual Property Assignment Deed, or IP Deed, with
Medvet Science Pty Ltd, or Medvet. Medvet’s rights under the IP Deed were transferred to Central Adelaide Local Health Network
Incorporated, or CALHNI, in November 2011. In connection with our use of the Medvet IP, we are obligated to pay CALHNI, as
successor in interest to Medvet, (i) certain aggregated milestone payments of up to $2.5 million and single-digit royalties on net sales
of products covered by the Medvet IP, for cardiac muscle and blood vessel applications and bone and cartilage regeneration and repair
applications, subject to minimum annual royalties beginning in the first year of commercial sale of those products and (ii) and single-
digit royalties on net sales of the specified products for applications outside the specified fields. Additionally, we are obligated to pay
CALHNI a double-digit percentage in the teens of any revenue that we receive in exchange for a grant of a sublicense to the Medvet
IP in the specified fields. Under the IP Deed, we also granted to Medvet a non-exclusive, royalty-free license to the Medvet IP for
non-commercial, internal research and academic research.
Pursuant to the IP Deed, we were assigned the rights in three U.S. patents or patent applications (including all substitutions,
continuations, continuations-in-part, divisional, supplementary protection certificates, renewals, all letters patent granted thereon, and
all reissues, reexaminations, extensions, confirmations, revalidations, registrations and patents of addition and foreign equivalents
thereof) and all future intellectual property rights, including improvements, that might arise from research conducted at CALHNI
related to mesenchymal precursor cells and methods of isolating, culturing and expanding mesenchymal precursor cells and their use
in any therapeutic area. We also acquired all related materials, information and know-how.
Osiris Acquisition—Continuing Obligations
In October 2013, we and Osiris entered into a purchase agreement, as amended, or the Osiris Purchase Agreement, under which
we acquired all of Osiris’ business and assets related to culture expanded MSCs. Pursuant to the Osiris Purchase Agreement, we also
agreed to make certain milestone and royalty payments to Osiris pertaining to MSC-100-IV for the treatment of aGVHD and Crohn’s
disease. Each milestone payment is for a fixed dollar amount and may be paid in cash or our ordinary shares or ADSs, at our option.
The maximum amount of future milestone payments we may be required to make to Osiris is $40.0 million. Any ordinary shares or
ADSs we issue as consideration for a milestone payment will be subject to a contractual one year holding period, which may be
waived in our discretion. In the event that the price of our ordinary shares or ADSs decreases between the issue date and the expiration
of any applicable holding period, we will be required to make an additional payment to Osiris equal to the reduction in the share price
multiplied by the amount of issued shares under that milestone payment. This additional payment can be made either wholly in cash or
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50% in cash and 50% in our ordinary shares, in our discretion. We have also agreed to pay varying earnout amounts as a percentage of
annual net sales of acquired products, ranging from low single-digit to 10% of annual sales in excess of $750.0 million. These royalty
payments will cease after the earlier of a ten year commercial sales period and the first sale of a competing product.
Tasly Pharmaceutical Group — Cardiovascular Alliance for China
In July 2018, we entered into a Development and Commercialization Agreement as well as an Investment Agreement with
Tasly Pharmaceutical Group (“Tasly”).
The Development and Commercialization Agreement provides Tasly with exclusive rights to develop, manufacture and
commercialize in China MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or
prevention of acute myocardial infarction. Tasly will fund all development, manufacturing and commercialization activities in China
for MPC-150-IM and MPC-25-IC. On closing, we will receive a $20.0 million upfront technology access fee. Further, we will receive
$25.0 million upon product regulatory approvals in China. Mesoblast will receive double-digit escalating royalties on net product
sales. Mesoblast is eligible to receive six escalating milestone payments upon the product candidates reaching certain sales thresholds
in China.
Tasly can terminate the Development and Commercialization Agreement with a specified amount of notice, on the later of (a)
third anniversary of the agreement coming into effect and (b) receipt of marketing approval in China for each of MPC-150-IM or
MPC-25-IC. Mesoblast has termination rights with respect to certain patent challenges by Tasly and if certain competing activities are
undertaken by Tasly. Either party may terminate the agreement on material breach of the agreement if such breach is not cured within
the specified cure period or if certain events related to bankruptcy of the other party occur.
The Investment Agreement provides for a $20.0 million equity purchase in Mesoblast Limited by Tasly at A$1.86 per share,
representing a 20% premium to a blended volume weighted average price calculated over three months, one month and one day
around the date the Investment Agreement was signed.
The closing of both the Development and Commercialization Agreement and the Investment Agreement with Tasly is subject
to filing with the State Administration of Foreign Exchange.
TiGenix NV – patent license for treatment of fistulae
In December 2017, we entered into a Patent License Agreement with TiGenix NV (“TiGenix”), now a wholly owned
subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), which granted Takeda exclusive access to certain of our patents
to support global commercialization of the adipose-derived mesenchymal stem cell product Alofisel®, previously known as Cx601, a
product candidate of Takeda, for the local treatment of fistulae. The agreement includes the right for Takeda to grant sub-licenses to
affiliates and third parties.
As part of the agreement, we received $5.9 million (€5.0 million) as a non-refundable up-front payment. We are entitled to
further payments of €5.0 million within 12 months of the patent license agreement date, and up to €10.0 million when Takeda reaches
certain product regulatory milestones. Additionally, we will receive single digit royalties on net sales of Alofisel®.
The agreement will continue in full force in each country (other than the United States) until the date upon which the last issued
claim of any licensed patent covering Alofisel® expires in such country (currently expected to be 2029) or, with respect to the United
States, until the later of (i) the date upon which the last issued claim of any licensed patent covering Alofisel® in the United States
expires (currently expected to be around 2031) or (ii) the expiration of the regulatory exclusivity period in the United States with an
agreed maximum term.
Either we or Takeda may terminate the agreement for any material breach that is not cured within 90 days after notice thereof.
We also have the right to terminate the agreement, with a written notice in the event that Takeda file a petition in bankruptcy or
insolvency or Takeda makes an assignment of substantially all of its assets for the benefit of its creditors.
Takeda have the right to terminate their obligation to pay royalties for net sales in a specific country if it is of the opinion that
there is no issued claim of any licensed patent covering Alofisel® in such country, subject to referral of the matter to the joint
oversight/cooperation committee established under the agreement if we disagree.
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Competition
The biotechnology and pharmaceutical industries are highly competitive and are characterized by rapidly advancing
technologies and a strong emphasis on proprietary products. Any product candidates that we and our collaborators successfully
develop and commercialize will compete with existing products and new products that may become available in the future.
A number of our potential competitors, particularly large biopharmaceutical companies, have significantly greater financial
resources and general expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining
regulatory approvals and marketing approved products than we do. Our market has been characterized by significant consolidation by
pharmaceutical and biotechnology companies, which is likely to result in even more resources being concentrated among a smaller
number of our potential competitors.
Government Regulation
We are developing cellular therapy product candidates. These products are subject to extensive legislation. Governmental
authorities around the world, including the FDA, are charged with the administration and enforcement of numerous laws and
regulations that impact all aspects of the development, production, importing, testing, approval, labeling, promotion, advertising, and
sale of products such as ours. Such governmental authorities are also charged with administering what is often a lengthy and technical
review and approval process before candidate therapies such as ours may be marketed for any use. Authorization or approval for
marketing must generally be obtained from the local health authorities in each country in which the product is to be sold. Approval
and authorization procedures may differ from country to country, as may the requirements for maintaining approvals. It is typical
however for these procedures to require evidence of rigorous testing and documentation regarding the candidate therapy, which may
include significant non-clinical and clinical evaluations. Extensive controls and requirements apply to the non-clinical and clinical
development of our therapeutic candidates. Those requirements and their enforcement and implementation by local regulatory
authorities around the world significantly impact whether a product candidate can be developed into a marketable product, and notably
impact the cost, resources and timing for any such development. Changes in regulatory requirements and differences in requirements
from country to country may also increase the costs of bringing new technologies such as ours to market and maintaining approvals, if
obtained.
To obtain marketing approval of a new product, an extensive dossier of evidence establishing the safety, efficacy and quality of
the product must be submitted for review by regulatory authorities. Dossier form and substance, while often similar may have notable
differences in different countries. Submission of an application to regulators does not guarantee approval to market that product,
despite the fact that criteria for approval in many countries may be quite similar. Some regulatory authorities may require additional
data and analyses, and may have standards that apply that are more stringent than others for review of the submitted dossier and
content. Additionally, the review process, risk tolerance, and openness to new technologies may vary from country to country.
Obtaining marketing approval can take several months to several years, depending on the country, the quality of the data, the
efficiencies and procedures of the reviewing regulatory authority and their familiarity with the product technology. Some countries,
like the US, may have accelerated approval processes for certain categories of products, for example products which represent a
breakthrough in the field, or which meet certain thresholds and have obtained certain designations of particular interest. Nevertheless,
ultimate availability to patients may be affected, even post approval, by requirements in some countries to negotiate selling prices and
reimbursement terms with government regulators or other payors.
Maintaining marketing approval may require the conduct of additional post-approval studies in some situations, and the
continued capture, monitoring and assessment of safety and other information about the product, as well as adherence to requirements
to ensure the purity and integrity of manufactured product. The process for obtaining and maintaining regulatory authorizations and
approvals to market our products and the subsequent compliance with appropriate federal, state, local and foreign laws and regulations
require the expenditure of substantial time and the commitment of significant financial and other resources, and we may not be able to
obtain the required regulatory approvals.
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Product Development Process
All of our product candidates are regulated as biological products by the Center for Biologics Evaluation and Research in the
FDA. In the United States, biological products are subject to federal regulation under the federal Food, Drug, and Cosmetic Act
(“FDCA”), the Public Health Service (“PHS”) Act, and other federal, state, local and foreign statutes and regulations. Both the FDCA
and the PHS Act, as applicable, and their corresponding regulations govern, among other things, the testing, manufacturing, safety,
efficacy, labeling, packaging, storage, record keeping, distribution, import, export, reporting, advertising and other promotional
practices involving drugs and biological products. Before clinical testing of a new drug or biological product may commence, the
sponsor of the clinical study must submit an application for investigational new drug (“IND”) application to FDA, which must
include, among other information, the proposed clinical study protocol(s). To obtain marketing authorization once clinical testing has
concluded, a Biologics License Application (“BLA”) must be submitted for FDA approval.
The process required by the FDA before a biological product may be marketed in the U.S. generally involves the following:
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completion of nonclinical laboratory studies, meaning in vivo or in vitro experiments in which an investigational product
is studied prospectively in a test system under laboratory conditions to determine its safety, must be conducted according
to cGLP (good laboratory practice) regulations, as well as, in the case of nonclinical laboratory studies involving animal
test systems, in accordance with applicable requirements for the humane use of laboratory animals and other applicable
regulations;
submission to the FDA of an application for an IND, which must become effective before human clinical studies may
begin;
performance of adequate and well-controlled human clinical studies according to the FDA’s cGCPs (good clinical
practices) and all other applicable regulatory requirements for the protection of human research subjects and their health
information, to establish the safety, purity and potency of the proposed product for its intended use and to ensure the
product has an appropriate risk-benefit profile;
development and demonstration of a manufacturing process that can produce product of consistent and adequate quality;
submission to the FDA of a BLA for marketing approval demonstrating the quality, safety, and efficacy of the product
which must be supported by substantial evidence from adequate and well-controlled clinical investigations as well as
demonstration of mode of action through non-clinical studies, evidence to support appropriate manufacturing capabilities
and controls, and evidence of the stability of the product in the form it is intended to be provided;
negotiation with FDA of proposed product labeling (and determination of appropriate risk mitigation strategies and
programs, if any required), as well as participation in any required advisory committee proceedings;
satisfactory completion of an FDA inspection of all manufacturing, testing and distribution facilities where the product is
produced, tested or stored and distributed, to assess compliance with cGMP (good manufacturing practices) to assure that
the facilities, methods and controls for production are adequate to preserve the product’s identity, strength, purity and
potency;
potential FDA inspection of nonclinical facilities and likely inspection of select clinical study sites that generated the data
in support of the BLA; and
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FDA review and approval of the BLA.
Human testing of a biological product candidate is preceded by preclinical testing, including nonclinical laboratory studies in
which the product candidate is studied prospectively in a test system under laboratory conditions to determine its safety. A test system
may include any animal, plant, microorganism, or subparts thereof to which the test or control article is administered or added for
study.
The clinical study sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical
data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. Some preclinical testing
may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the
FDA places the clinical study covered by the IND on a clinical hold within that 30-day time period. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the clinical study can begin. The FDA may also impose clinical holds on a
product candidate at any time during clinical studies due to safety concerns or non-compliance. If the FDA imposes a clinical hold,
studies may not recommence unless FDA removes the clinical hold and then only under terms authorized by the FDA. Accordingly,
we cannot be sure that submission of an IND will result in the FDA allowing clinical studies to begin, or that, once begun, issues will
not arise that suspend or terminate such studies.
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Clinical studies involve the administration of the product candidate to subjects under the supervision of qualified independent
investigators, generally physicians or other qualified scientists and medical personnel who are not employed by or under the study
sponsor’s control. Clinical studies are conducted under protocols detailing, among other things, the objectives of the clinical study,
dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety, including stopping
rules that assure a clinical study will be stopped if certain adverse events, or AEs, should occur. Each new protocol and certain
amendments to the protocol must be submitted to the FDA. Clinical studies must be conducted in accordance with the FDA’s cGCP
regulations and guidance, and monitored to ensure compliance with applicable regulatory requirements. These include the requirement
that written informed consent is obtained from all subjects who participate in the study. Further, each clinical study must be reviewed
and approved by an independent Institutional Review Board, or IRB, at or servicing each institution at which the clinical study will be
conducted. An IRB is charged with protecting the welfare and rights of study participants and considers such items as whether the
risks to individuals participating in the clinical studies are minimized and are reasonable in relation to anticipated benefits. The IRB
also approves the form and content of the informed consent document that must be signed by each clinical study subject or his or her
legal representative and must monitor the clinical study until completed. Throughout the study, certain information about certain
serious adverse events must be reported to the IRB, in some cases on an expedited basis, and to FDA (as well as to regulators in other
countries in which studies of the product are also being conducted).
Human clinical studies are typically conducted in three sequential phases that may in some cases overlap or be combined:
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Phase 1. The product candidate is initially introduced into a small number of human subjects. In the case of cellular
therapy products, the initial human testing is conducted in patients with the disease or condition targeted by the biological
product candidate. Phase 1 studies are intended to determine the metabolism and pharmacologic actions (including
adverse reactions), the side effects associated with increasing doses, immunogenicity, and, if possible, to gain early
evidence of effectiveness. The information obtained in Phase 1 should be sufficient to permit the design of well-
controlled, scientifically valid Phase 2 studies.
Phase 2. Controlled clinical studies are conducted in a larger number of human subjects to evaluate the effectiveness of
the drug for a particular indication or indications in patients with the disease or condition under study. Phase 2 studies are
intended to assess side effects and risks, and to examine exposure–response relationships, and to further explore
pharmacologic actions and immunogenicity associated with the drug. These studies also provide helpful information for
the design of phase 3 studies.
Phase 3. Assuming preliminary evidence suggesting effectiveness has been obtained in phase 2 (generally considered to
be “proof of concept”), controlled studies are conducted in a larger group of subjects to gather additional information
about effectiveness and safety in order to evaluate the overall benefit-risk relationship of the drug and to provide an
adequate basis for physician labeling.
Post-approval clinical studies, sometimes referred to as Phase 4 clinical studies, may be conducted after initial marketing
approval. In some cases FDA may require a Phase 4 study to be performed as a condition of product approval. Sponsors also can
voluntarily conduct Phase 4 studies to gain additional experience from the treatment of patients in the intended therapeutic indication,
particularly for long-term safety follow-up or in select populations. FDA regulations extend to all phases of clinical development, and
apply to sponsors and investigators of clinical studies. FDA oversight includes inspection of the sites and investigators involved in
conducting the studies.
Concurrent with clinical studies, companies usually complete additional animal studies, and must also develop additional
information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product in
commercial quantities in accordance with cGMP requirements.
To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes the
importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be
capable of consistently producing quality batches of the product candidate and, among other things; the sponsor must develop methods
for testing the identity, purity and potency of the final biological product. All such testing and controls requires the application of
significant human and financial resources.
Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the
biological product candidate does not undergo unacceptable deterioration over its shelf life.
U.S. Review and Approval Processes
After the completion of clinical studies of a product candidate, FDA approval of a BLA must be obtained before commercial
marketing of the biological product. The BLA must include results of product development, laboratory and animal studies, human
studies, information on the manufacture and composition of the product, proposed labeling and other relevant information. In addition,
under the Pediatric Research Equity Act (“PREA”), a BLA or supplement to a BLA must contain data to assess the safety and
effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and to support dosing and
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administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for
submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any biological product
for an indication for which orphan designation has been granted. The testing and approval processes require substantial time and effort
and there can be no assurance that the FDA will accept the BLA for filing and, even if filed, that any approval will be granted on a
timely basis, if at all.
Under the Prescription Drug User Fee Act (“PDUFA”), as amended, each BLA must be accompanied by a substantial user fee.
PDUFA also imposes an annual product fee for biologics and an annual establishment fee on facilities used to manufacture
prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for
the first application filed by a small business.
Additionally, an application fee is not assessed on BLAs for products designated as orphan drugs, unless the product also
includes a non-orphan indication.
Within 60 days following submission of the application, the FDA reviews the BLA submitted to determine if it is substantially
complete before the agency accepts it for filing. The FDA may refuse to file any marketing application that it deems incomplete or not
properly reviewable at the time of submission and may request additional information. In this event, the BLA must be resubmitted
with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the
submission is accepted for filing, the FDA begins an in-depth substantive review of the BLA. The FDA reviews the application to
determine, among other things, whether the proposed product is safe and effective, for its intended use, and has an acceptable purity
profile, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, safety,
potency and purity. The FDA may refer applications for novel products or products that present difficult questions of safety or
efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a
recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the
recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the
product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to
assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS;
the FDA will not approve the application without a REMS, if required.
Before approving a BLA, the FDA will typically inspect the facilities at which the product is manufactured. The FDA will not
approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements
and adequate to assure consistent production of the product within required specifications. Additionally, before approving a BLA, the
FDA will typically inspect one or more clinical sites to assure that the clinical studies were conducted in compliance with IND study
and cGCP requirements. To assure cGMP and cGCP compliance, an applicant must incur significant expenditure of time, money and
effort in the areas of training, record keeping, production, and quality control.
Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the BLA does not satisfy
its regulatory criteria for approval and deny approval. Data obtained from clinical studies are not always conclusive and the FDA may
interpret data differently than we interpret the same data. If the agency decides not to approve the marketing application, it will issue a
complete response letter describing specific deficiencies in the application identified by the FDA. Additionally, the complete response
letter may recommend actions that the applicant might take to place the application in a condition for approval. Such recommended
actions could include the conduct of additional studies. If a complete response letter is issued, the applicant may either resubmit the
BLA, addressing all of the deficiencies identified in the letter, or withdraw the application.
If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the
indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require
that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and
conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of
any approval. In addition, the FDA may require post-approval clinical studies, to further assess a product’s safety and effectiveness,
and testing and surveillance programs to monitor the safety of approved products that have been commercialized.
One of the performance goals agreed to by the FDA under the PDUFA is to complete its review of 90% of standard BLAs
within 10 months from filing and 90% of priority BLAs within six months from filing, whereupon a review decision is to be made.
The FDA does not always meet its PDUFA goal dates and its review goals are subject to change from time to time. The review
process and the PDUFA goal date may be extended by three months if the FDA requests or the application sponsor otherwise provides
additional information or clarification regarding information already provided in the submission within the last three months before
the PDUFA goal date.
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Post-Approval Requirements
Maintaining substantial compliance with applicable federal, state, and local statutes and regulations requires the expenditure of
substantial time and the commitment of substantial human and financial resources. Rigorous and extensive FDA regulation of
biological products continues after approval, particularly with respect to cGMP. We will rely, and expect to continue to rely, on third
parties for the production of clinical and commercial quantities of any products that we may commercialize. Manufacturers of our
products are required to comply with applicable requirements in the cGMP regulations, including quality control and quality assurance
and maintenance of records and documentation.
Other post-approval requirements applicable to drug and biological products include reporting post marketing surveillance to
continuously monitor the safety of the approved product. This is done through the collection of spontaneous reports of adverse events
and side effects, the assessment of safety signals, if any, and prescription event monitoring, among other methods. FDA maintains a
system of postmarketing surveillance because all possible side effects of a new drug may not be evident in preapproval studies, which
involve only several hundred to several thousand patients. Through postmarketing surveillance and risk assessment programs, FDA
and sponsors seek to identify adverse events that did not appear during the drug approval process. In addition, FDA monitors adverse
events such as adverse reactions and poisonings. FDA may use this information for a variety of purposes to identify safety signals not
previously identified with the product, to update drug labeling, and, on rare occasions, to reevaluate the approval or marketing
decision with respect to a product.
In addition, post-approval regulatory requirements include reporting of cGMP deviations that may affect the identity, potency,
purity and overall safety of a distributed product, record-keeping requirements, and complying with electronic record and signature
requirements. After a BLA is approved, the product also may be subject to official lot release. As part of the manufacturing process,
the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is
subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release
protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the
lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots for distribution by the
manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and
effectiveness of drug and biological products. The FDA will also conduct routine scheduled and unannounced inspections of drug
production and control facilities and processes, using field investigators and analysts, to assure ongoing safety and effectiveness of
approved marketed products. Inspections may be made in conjunction with regulators from other jurisdictions and in certain cases,
inspection findings and observations may be made public or may impair our ability to use the inspected facility, or to continue to
produce and market a product.
We also must comply with the FDA’s advertising and promotion requirements, such as those related to direct- to-consumer
advertising, the prohibition on promoting products for uses or in patient populations that are not described in the product’s approved
labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the
internet and notably, social media. In addition, discovery of previously unknown problems or the failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. Failure to comply with the applicable U.S. requirements at any time during the product
development process, approval process or after approval, may subject an applicant or manufacturer to administrative or judicial civil
or criminal sanctions and adverse publicity. Sanctions authorized under FDA’s legal authorities could include refusal to approve
pending applications, withdrawal of an approval, clinical hold, warning or untitled letters, product recalls, product seizures, total or
partial suspension of production or distribution, injunctions, fines, mandated corrective advertising or communications with doctors,
debarment, restitution, disgorgement of profits, or civil or criminal penalties.
Violations of the FDCA may serve as a basis for the refusal of, or exclusion from, government contracts, including federal
reimbursement programs, as well as other adverse consequences including lawsuits and actions by state attorneys general. Any agency
or judicial enforcement action could have a material adverse effect on us. Drug and biological product manufacturers and other entities
involved in the manufacture and distribution of approved drug or biological products are required to register their establishments with
the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with cGMPs and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of
production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in
restrictions on a product, manufacturer, or holder of an approved BLA, including withdrawal of the product from the market. In
addition, changes to a manufacturing process or facility generally require prior FDA approval before being implemented and other
types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further
FDA review and approval.
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U.S. Patent Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of the FDA approval of the use of our product candidates, some of our U.S.
patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984,
commonly referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to
five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent
term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent
term restoration period is generally one-half the time between the effective date of an IND and the submission date of a new drug
application, or NDA, or BLA plus the time between the submission date of an NDA or BLA and the approval of that application. Only
one patent applicable to an approved product is eligible for the extension and the application for the extension must be submitted prior
to the expiration of the patent. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the
application for any patent term extension or restoration.
Under the Hatch-Waxman Amendments, a drug product containing a new chemical entity as its active ingredient is entitled to
five years of market exclusivity, and a product for which the sponsor is required to generate new clinical data is entitled to three years
of market exclusivity. A drug or biological product can also obtain pediatric market exclusivity in the U.S. Pediatric exclusivity, if
granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other
exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an
FDA-issued “Written Request” for such a study.
The Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biological products
shown to be similar to, or interchangeable with, an FDA-licensed reference biological product. Biosimilarity, which requires that there
be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and
potency, can be shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a
product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical
results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched
after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of
the reference biologic.
A new biologic is granted 12 years of exclusivity from the time of first licensure during which a biosimilar may not be launched.
Government Regulation Outside of the U.S.
European Union Regulation
In addition to regulations in the U.S., we will be subject to a variety of regulations in other jurisdictions governing, among other
things, clinical studies and any commercial sales and distribution of our products. In particular, we view the EU and Japan as
important jurisdictions for our business.
For purposes of developing our products, we must obtain the requisite approvals from regulatory authorities in each country
prior to the commencement of clinical studies or marketing of the product in those countries. Certain countries outside of the U.S.
have a similar process that requires the submission of a clinical study application much like the IND prior to the commencement of
human clinical studies. In the EU, for example, a clinical trial application (“CTA”), must be submitted to each country’s national
health authority and an independent ethics committee, much like the FDA and the IRB, respectively. Once the CTA is approved in
accordance with a country’s requirements, clinical study development may proceed.
The EU has two main procedures for obtaining marketing authorizations in the EU Member States: a centralized procedure or
national authorization procedure, under the latter of which one can seek go through the mutual recognition procedure or the
decentralized procedure. All biotechnology products are assessed through the centralized procedure.
Under the centralized authorization procedure, sponsors submit a single marketing-authorization application to the EMA. This
allows the marketing-authorization holder to market the product and make it available to patients and healthcare professionals
throughout the EU on the basis of a single marketing authorization. EMA's Committee for Medicinal products for Human Use
(“CHMP”) carries out a scientific assessment of the application and give a recommendation on whether the medicine should be
marketed or not. Once granted by the EMA, the centralized marketing authorization is valid in all EU Member States as well as in the
European Economic Area (“EEA”) countries Iceland, Liechtenstein and Norway. The centralized procedure is mandatory for
biotechnology products.
Any product candidates we seek to commercialize in the EU are subject to review and approval by the European Medicines
Authority (“EMA”). Submissions for marketing authorization to the EMA must be received and validated by that body which appoints
a Rapporteur and Co-Rapporteur to review it. The entire review process must be completed within 210 days, with a “clock-stop” at
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day 120 to allow the submitting company to respond to questions set forth in the Rapporteur and Co-Rapporteur’s assessment report.
Once the company responds in full, the clock for review re-starts on day 121. If further clarification is needed, the EMA may request
an Oral Explanation on day 180, and the company submitting the application must appear before the CHMP to provide the requested
information. On day 210, the CHMP will vote to recommend for or against the approval of the application. The final decision of EMA
for marketing authorization following a positive CHMP recommendation is typically made within 60 days, with a draft decision
within 15 days of the CHMP recommendation.
After Marketing Authorizations have been granted, the company must submit periodic safety reports to the EMA (if approval
was granted under the Centralized Procedure) or to the National Health Authorities (if approval was granted under the DCP or the
MRP). In addition, pharmacovigilance measures must be implemented and monitored to ensure appropriate adverse event collection,
evaluation and expedited reporting, as well as timely updates to any applicable risk management plans. For some medications, post
approval studies may be required to complement available data with additional data to evaluate long term effects or to gather
additional efficacy data.
European marketing authorizations have an initial duration of five years. After this time, the marketing authorization may be
renewed by the competent authority on the basis of re-evaluation of the risk/benefit balance. Any marketing authorization which is not
followed within three years of its granting by the actual placing on the market of the corresponding medicinal product ceases to be
valid.
EU Exclusivity Periods
To obtain regulatory approval of an investigational biological product under EU regulatory systems, we must submit a
marketing authorization application (“MAA”). The application used to file the BLA in the U.S. is similar to that required in the EU,
with the exception of, among other things, country-specific document requirements. The EU also provides opportunities for market
exclusivity. For example, in the EU, upon receiving marketing authorization, new chemical entities generally receive eight years of
data exclusivity and an additional two years of market exclusivity. If granted, data exclusivity prevents regulatory authorities in the
EU from referencing the innovator’s data to assess a generic application. During the additional two-year period of market exclusivity,
a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic product can be
marketed until the expiration of the market exclusivity. However, there is no guarantee that a product will be considered by the EU’s
regulatory authorities to be a new chemical entity, and products may not qualify for data exclusivity. Products receiving orphan
designation in the EU can receive 10 years of market exclusivity, during which time no similar medicinal product for the same
indication may be placed on the market. An orphan product can also obtain an additional two years of market exclusivity in the EU for
pediatric studies. No extension to any supplementary protection certificate can be granted on the basis of pediatric studies for orphan
indications.
The criteria for designating an “orphan medicinal product” in the EU are similar in principle to those in the U.S. Under Article 3
of Regulation (EC) 141/2000, a medicinal product may be designated as orphan if (1) it is intended for the diagnosis, prevention or
treatment of a life-threatening or chronically debilitating condition; (2) either (a) such condition affects no more than five in 10,000
persons in the EU when the application is made, or (b) the product, without the benefits derived from orphan status, would not
generate sufficient return in the EU to justify investment; and (3) there exists no satisfactory method of diagnosis, prevention or
treatment of such condition authorized for marketing in the EU, or if such a method exists, the product will be of significant benefit to
those affected by the condition, as defined in Regulation (EC) 847/2000. Orphan medicinal products are eligible for financial
incentives such as reduction of fees or fee waivers and are, upon grant of a marketing authorization, entitled to 10 years of market
exclusivity for the approved therapeutic indication. The application for orphan drug designation must be submitted before the
application for marketing authorization. The applicant will receive a fee reduction for the marketing authorization application if the
orphan drug designation has been granted, but not if the designation is still pending at the time the marketing authorization is
submitted. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval
process.
The 10-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no
longer meets the criteria for orphan designation, for example, if the product is sufficiently profitable not to justify maintenance of
market exclusivity. Additionally, marketing authorization may be granted to a similar product for the same indication at any time if:
•
•
•
the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically
superior;
the applicant consents to a second orphan medicinal product application; or
the applicant cannot supply enough orphan medicinal product.
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In addition to law and regulation specific to drug development, we note that new data protection regulations that have
gone into effect in Europe are likely to have a significant impact on our activities, personnel, and may have an impact on our ability to
timely complete clinical trials and effectively develop and commercialize our product candidates. The General Data Protection
Regulation (the “GDPR”) was approved and adopted by the EU Parliament in April 2016 and went into effect on May 25, 2018.
Unlike a Directive, the GDPR does not require any enabling legislation to be passed by any government. The GDPR not only applies
to organizations located within the EU but may also apply to organizations located outside of the EU if they offer goods or services to,
or monitor the behavior of, EU data subjects or if they process the personal data of subjects residing in the European Union. The
implications of this regulation are therefore far reaching and may impose significant burdens on the Company and its processes and
systems. Additionally, the UK government has implemented a Data Protection Bill, which also went into effect on May 25, 2018, that
substantially implements the GDPR. For other countries outside of the EU, such as countries in Eastern Europe, Latin America or
Asia, the requirements governing the conduct of clinical studies, product licensing, coverage, pricing and reimbursement vary from
country to country. In all cases, again, the clinical studies are conducted in accordance with cGCP and the applicable regulatory
requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any product candidates for which we obtain
regulatory approval. In the U.S. and markets in other countries, sales of any products for which we receive regulatory approval for
commercial sale will depend, in part, on the availability of coverage and adequate reimbursement from third-party payors. Third-party
payors include government programs such as Medicare or Medicaid, managed care plans, private health insurers, and other
organizations. These third-party payors may deny coverage or reimbursement for a product or therapy in whole or in part if they
determine that the product or therapy was not medically appropriate or necessary. Third-party payors may attempt to control costs by
limiting coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug
products for a particular indication, and by limiting the amount of reimbursement for particular procedures or drug treatments. In
addition, in the United States, participation in government health programs such as Medicare and Medicaid are subject to complex
rules and controls relating to price reporting and calculation of prices to ensure that pricing provided to government entities for
periodic reporting purposes is aligned and compliant with numerous complex statutory requirements. The infrastructure and/or
external resources necessary to ensure continued compliance with these requirements is extensive and manufacturers are subject to
audit both by the Centers for Medicare and Medicaid Services and by State Medicaid authorities.
The cost of pharmaceuticals and devices continues to generate substantial governmental and third party payor interest. We
expect that the pharmaceutical industry will experience pricing pressures due to the trend toward managed healthcare, the increasing
influence of managed care organizations and additional legislative proposals. Third-party payors are increasingly challenging the price
and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy.
We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost- effectiveness
of our products, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered
medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate
reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investment in product development.
Some third-party payors also require pre-approval of coverage for new or innovative devices or drug therapies before they will
reimburse healthcare providers who use such therapies. While we cannot predict whether any proposed cost-containment measures
will be adopted or otherwise implemented in the future, these requirements or any announcement or adoption of such proposals could
have a material adverse effect on our ability to obtain adequate prices for our product candidates and to operate profitably.
In international markets, reimbursement and healthcare payment systems vary significantly by country, and many countries have
instituted price ceilings on specific products and therapies. There can be no assurance that our products will be considered medically
reasonable and necessary for a specific indication, that our products will be considered cost-effective by third-party payors, that
coverage or an adequate level of reimbursement will be available or that the third-party payors reimbursement policies will not
adversely affect our ability to sell our product profitably.
Healthcare Reform
In the U.S. and foreign jurisdictions, there have been a number of legislative and regulatory changes to the healthcare system
that could affect our future results of operations. In particular, there have been and continue to be a number of initiatives at the U.S.
federal and state levels that seek to reduce healthcare costs. In the U.S., the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003, or the Medicare Modernization Act, changed the way Medicare covers and pays for pharmaceutical
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products. The Medicare Modernization Act expanded Medicare coverage for drug purchases by the elderly by establishing Medicare
Part D and introduced a new reimbursement methodology based on average sales prices for physician administered drugs under
Medicare Part B. In addition, this legislation provided authority for limiting the number of drugs that will be covered in any
therapeutic class under the new Medicare Part D program. Cost reduction initiatives and other provisions of this legislation could
decrease the coverage and reimbursement rate that we receive for any of our approved products. While the Medicare Modernization
Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment
limitations in setting their own reimbursement rates.
Therefore, any reduction in reimbursement that results from the Medicare Modernization Act may result in a similar reduction
in payments from private payors.
In March 2010, President Obama signed into law the ACA, a sweeping law intended to broaden access to health insurance,
reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency
requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device
manufacturers and impose additional health policy reforms. We expect that the rebates, discounts, taxes and other costs resulting from
the ACA over time will have a negative effect on our expenses and profitability in the future. Furthermore, expanded government
investigative authority and increased disclosure obligations may increase the cost of compliance with new regulations and programs.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, on August 2,
2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select
Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit
Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the
legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to
providers of up to 2% per fiscal year, starting in 2013. Sequestration cuts went into effect on April 1, 2013, and the Bipartisan Budget
Act of 2013 extended sequestration for Medicare for another two years, through 2023. A bill signed by President Obama on February
15, 2014, further extended these cuts for an additional year, through fiscal year 2024. On January 21, 2014, President Obama signed
the fiscal year 2014 omnibus appropriations bill, modifying for fiscal year 2014 and fiscal year 2015 the cuts that went into effect
under the sequester on March 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of
2012, which, among other things, reduced Medicare payments to several providers and increased the statute of limitations period for
the government to recover overpayments to providers from three to five years. These laws may result in additional reductions in
Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial
operations.
The current presidential administration and Congress are also expected to attempt broad sweeping changes to the current health
care laws. We face uncertainties that might result from modifications or repeal of any of the provisions of the ACA including as a
result of current and future executive orders and legislative actions. The impact of those changes on us and potential effect on the
pharmaceutical industry as a whole is currently unknown. But, any changes to the ACA are likely to have an impact on our results of
operations, and may have a material adverse effect on our results of operations. We cannot predict what other health care programs
and regulations will ultimately be implemented at the federal or state level or the effect of any future legislation or regulation in the
United States may have on our business.
While the status of the ACA under the current administration remains in question, it is possible that healthcare reform measures
that have been and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure
on the price that we receive for any approved product, and could seriously harm our future revenue. Any reduction in reimbursement
from Medicare or other government programs may result in a similar reduction in payments from private payors, and formulary
restrictions among private payors including the largest pharmacy benefit managers have increased over recent months, especially as
regards to new and high cost market entrants. The implementation of cost containment measures or other healthcare reforms may
prevent us from being able to generate revenue, attain profitability, or commercialize our products.
In addition, different pricing and reimbursement schemes exist in other countries. In the European Community, governments
influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national healthcare
systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems
under which products may be marketed only once a reimbursement price has been agreed upon. Some of these countries may require,
as condition of obtaining reimbursement or pricing approval, the completion of clinical trials that compare the cost- effectiveness of a
particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for
medicines, but monitor and control company profits. The downward pressure on healthcare costs in general, particularly prescription
drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in
some countries, cross- border imports from low-priced markets exert a commercial pressure on pricing within a country.
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Other Healthcare Laws and Compliance Requirements
In the U.S., the research, manufacturing, distribution, sale and promotion of drug products, including biologics, and medical
devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, divisions of the U.S.
Department of Health and Human Services, including the Office of Inspector General and the Centers for Medicare and Medicaid
Services, the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales,
marketing and scientific/educational grant programs must comply with fraud and abuse laws such as the federal Anti-Kickback
Statute, as amended, the federal False Claims Act, as amended, and similar state laws. Pricing and rebate programs must comply with
the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans
Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the
General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal
and state consumer protection and unfair competition laws.
The federal Anti-Kickback Statute prohibits any person, including a prescription drug manufacturer (or a party acting on its
behalf), from knowingly and willfully soliciting, receiving, offering or providing remuneration, directly or indirectly, to induce or
reward either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment
may be made under a federal healthcare program such as the Medicare and Medicaid programs. This statute has been interpreted to
apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, and formulary managers on
the other. The term “remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts,
the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and
providing anything at less than its fair market value. Even the award of grant moneys, or the provision of in kind support, publicity
and even authorship, in certain cases, may be deemed to be “remuneration.” Although there are a number of statutory exceptions and
regulatory safe harbors protecting certain business arrangements from prosecution, the exception and safe harbors are drawn narrowly,
and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if
they do not qualify for an exception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection
from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by the recently enacted ACA, so
that the government need no longer prove, for purposes of establishing intent under the federal Anti-Kickback Statute, that a person or
entity had actual knowledge of the statute or specific intent to violate it. In addition, the ACA provides that a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below).
Additionally, many states have adopted laws similar to the federal Anti-Kickback Statute, and some of these state prohibitions apply
to the referral of patients for healthcare items or services reimbursed by any third-party payor, including private payors. In at least
some cases, these state laws do not contain safe harbors.
The federal False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes
to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims
Act allow a private individual to bring civil actions on behalf of the federal government and share in any recovery. In recent years, the
number of suits brought by private individuals has increased dramatically. In addition, various states have enacted false claims laws
analogous to the False Claims Act. Many of these state laws apply where a claim is submitted to any third-party payor and not merely
a federal healthcare program. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when
an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False
Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, improperly
reported government pricing metrics such as Best Price or Average Manufacturer Price, improper use of Medicare numbers when
detailing the provider of services, improper promotion of off-label uses (i.e., uses not expressly approved by FDA in a drug’s label),
and allegations as to misrepresentations with respect to the services rendered.
Substantial resources have been allocated by both the Department of Justice and the Federal Bureau of Investigation, among
other branches of the US government to identify and investigate possible health care fraud activities. Recent investigations include
those relating to allegedly egregious price increases by manufacturers and alleged fraud involving co-pay arrangements supported by
sponsors. As new theories of liability arise, there is a corresponding cost of doing business in order to maintain compliance.
Our future activities relating to the reporting of discount and rebate information and other information affecting federal,
provincial, state and third party reimbursement of our products, and the sale and marketing of our products and our service
arrangements or data purchases, among other activities, may be subject to scrutiny under these laws. We are unable to predict whether
we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the cost of
defending such claims, as well as any sanctions imposed, could adversely affect our financial performance. Also, the Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”), created several new federal crimes including healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud provision of HIPAA prohibits knowingly and willfully executing a
scheme to defraud any healthcare benefit program, including private third-party payors. The false statements provision prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items or services.
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In addition, we may be subject to, or our marketing activities may be limited by, data privacy and security regulation by both the
federal government and the states in which we conduct our business. For example, HIPAA and its implementing regulations
established uniform federal standards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses)
governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health
information. The American Recovery and Reinvestment Act of 2009, commonly referred to as the economic stimulus package,
included expansion of HIPAA’s privacy and security standards called the Health Information Technology for Economic and Clinical
Health Act (“HITECH”), which became effective on February 17, 2010. Among other things, HITECH makes HIPAA’s privacy and
security standards directly applicable to “business associates”—independent contractors or agents of covered entities that create,
receive, maintain, or transmit protected health information in connection with providing a service for or on behalf of a covered entity.
HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly
other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to
enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.
There are also an increasing number of state “sunshine” laws that require manufacturers to make reports to states on pricing and
marketing information, as well as regarding payments to healthcare professionals. Several states have enacted legislation requiring
pharmaceutical companies to, among other things, establish marketing compliance programs, file periodic reports with the state, make
periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as
well as to prohibit certain other sales and marketing practices. State laws are not harmonized and contain different reporting
requirements and restrictions which must be noted and adhered to. We currently do not report under these state laws, but will be
required to do if we are successful in obtaining marketing authorization for our products. We will need to develop the infrastructure
or rely on third party contractors to assist us in our compliance with these laws, and failure to comply may result in financial and other
penalties and consequences. In addition, beginning in 2013, a similar “sunshine” federal requirement began requiring manufacturers to
track and report to the federal government certain payments and other transfers of value made to certain covered recipients, including
physicians and other healthcare professionals, and teaching hospitals. In addition to payments, reporting may encompass requirements
to report on ownership or investment interests held by physicians and their immediate family members. The efforts and resources
needed to track and report payments go well beyond our affiliates operating in the United States, as reporting is required also for
payments made by affiliated entities in many cases to US covered recipients. In other jurisdictions (eg, Australia, Japan and Europe)
similar “sunshine-like” laws have also been adopted, which may require disclosure of certain payment and other information to
covered recipients. Extensive administration and systems, including to aggregate and categorize spend, are necessary in order to
enable compliant and timely reporting under these requirements. The US federal government began disclosing the reported
information on a publicly available website in 2014. These laws may affect our development, sales, marketing, and other promotional
activities by imposing administrative and compliance burdens on us. If we fail to track and report as required by these laws or
otherwise fail to comply with these laws, we could be subject to the penalty and sanctions of the pertinent state and federal authorities.
Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that
some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in
violation of any of the federal and state laws described above or any other governmental regulations that apply to us, we may be
subject to penalties, including criminal and significant civil monetary penalties, damages, fines, imprisonment, exclusion from
participation in government healthcare programs, injunctions, recall or seizure of products, total or partial suspension of production,
denial or withdrawal of premarketing product approvals, private qui tam actions brought by individual whistleblowers in the name of
the government or refusal to allow us to enter into supply contracts, including government contracts, and the curtailment or
restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which
may include, for instance, applicable post-approval requirements, including safety surveillance, anti-fraud and abuse laws,
implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.
Australian Disclosure Requirements
Business Strategies and Prospects for Future Years
We are focused on the following core strategic imperatives:
•
•
•
•
•
•
continue to innovate and optimize our disruptive technology platform for cell-based therapeutics;
develop a portfolio of clinically distinct products;
focus on bringing late-stage products to market and portfolio prioritization;
enabling manufacturing scale-up to meet demands of the portfolio;
leverage talent base to continue to establish a culture of shared leadership and accountability;
focus on strategic partnerships;
64
focus on prudent cash management; and
continue to strengthen our substantial and robust intellectual property estate.
•
•
Dividends
No dividends were paid during the course of the fiscal year ended June 30, 2018. There are no dividends or distributions
recommended or declared for payment to members, but not yet paid, during the year.
4.C
Organizational Structure
See “Item 4. Information on the Company – 4.B Business Overview – Overview”, “Item 18. Financial Statements – Note 12”
and Exhibit 8.1 to this Annual Report.
4.D
Property, Plants and Equipment
We lease approximately 11,150 square feet of office space in Melbourne, Australia, where our headquarters are located. We pay
approximately A$815,000 per year for this lease, which expires in April 2020. We also lease approximately 15,600 square feet in New
York City, where significant development and commercial activities are conducted. We pay $1,073,000 per year for this lease. We
also lease laboratory and office space in Singapore. We pay approximately S$348,000 per year for this lease, which expires in
December 2018. We also lease laboratory and office space in Texas and pay approximately $201,000 per year for this lease, which
expires in December 2019. All of our manufacturing operations are currently located at Lonza’s manufacturing facilities. See “Item
4.B Business Overview – Manufacturing and Supply Chain.”
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5.
Operating and Financial Review and Prospects
5.A
Operating Results
This operating and financial review should be read together with our consolidated financial statements in this Annual Report,
which have been prepared in accordance with IFRS as published by the IASB.
Financial Overview
We have incurred significant losses since our inception. We have incurred net losses during most of our fiscal periods since our
inception. For the year ended June 30, 2018, we had an accumulated deficit of $380.2 million. Our net loss for the year ended June 30,
2018 was $35.3 million.
We anticipate that we may continue to incur significant losses for the foreseeable future. There can be no assurance that we will
ever achieve or maintain profitability.
We expect our future capital requirements will continue as we:
•
•
•
•
•
•
•
continue the research and clinical development of our product candidates;
initiate and advance our product candidates into larger clinical studies;
seek to identify, assess, acquire, and/or develop other product candidates and technologies;
seek regulatory and marketing approvals in multiple jurisdictions for our product candidates that successfully complete
clinical studies;
establish collaborations with third parties for the development and commercialization of our product candidates, or
otherwise build and maintain a sales, marketing, and distribution infrastructure to commercialize any products for which
we may obtain marketing approval;
further develop and implement our proprietary manufacturing processes and expand our manufacturing capabilities and
resources for commercial production;
seek coverage and reimbursement from third-party payors, including government and private payors for future products;
65
•
•
•
•
make interest payments, principal repayments and other charges on our debt financing arrangements;
make milestone or other payments under our agreements pursuant to which we have licensed or acquired rights to
intellectual property and technology;
seek to maintain, protect, and expand our intellectual property portfolio; and
seek to attract and retain skilled personnel.
We expect our research and development expenditure to decrease over the next 12 to 24 months if we are able to successfully
partner one or more of our products. We expect management and administration expenses to remain relatively consistent. Subject to us
achieving successful regulatory approval, we expect an increase in our total expenses driven by an increase in our selling, general and
administrative expenses as we move towards commercialization. Therefore we will need additional capital to fund our operations,
which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution
arrangements and other collaborations, strategic alliances and licensing arrangements. As described in “Item 18 Financial Statements –
Note 1(i)”, a fully discretionary equity facility remains for up to A$120 million/US$90 million over 12 months to provide additional
funds as required. We do not know when, or if, we will generate revenues from our product sales significant enough to generate
profits. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and
commercialize one or more of our cell-based product candidates. For further discussion on our ability to continue as a going concern,
see “Item 18. Financial Statements – Note 1(i).”
Commercialization and Milestone Revenue. Commercialization and milestone revenue relates to up-front, royalty and milestone
payments recognized under development and commercialization agreements.
Revenues from such non-refundable, up-front payments are initially reported as deferred revenues on the consolidated balance
sheet and are recognized in revenue as earned over the respective performance period.
In the year ended June 30, 2018, we recognized $3.6 million in commercialization revenue relating to royalty income earned on
sales of TEMCELL® Hs. Inj., a registered trademark of JCR Pharmaceuticals Co., Ltd (“TEMCELL”), in Japan by our licensee, JCR
Pharmaceuticals Co. Ltd. (“JCR”), compared with $1.4 million for the year ended June 30, 2017. These amounts were recorded in
revenue as there are no further performance obligations required in regards to these items.
In the year ended June 30, 2018, we recognized $11.8 million (€10.0 million) in milestone revenue in relation to our patent
license agreement with TiGenix NV (“TiGenix”), now a wholly owned subsidiary of Takeda Pharmaceutical Company Limited
(“Takeda”), which granted Takeda exclusive access to certain of our patents to support global commercialization of the adipose-
derived mesenchymal stem cell product, Alofisel®, previously known as Cx601, a product candidate of Takeda, for the local
treatment of fistulae. The agreement includes the right for Takeda to grant sub-licenses to affiliates and third parties. Within this
$11.8 million, $5.9 million (€5.0 million) was recognized in relation to the non-refundable up-front payment received upon execution
of our patent license agreement with Takeda in December 2017 and $5.9 million (€5.0 million) in milestone revenue was recognized
in relation to further payments due within 12 months from the patent license agreement date for product Alofisel®. There was no
milestone revenue recognized in relation to the Takeda agreement in the year ended June 30, 2017. In the year ended June 30, 2018,
we also recognized $1.5 million in milestone revenue upon our licensee JCR, achieving a sales milestone on cumulative net sales of
TEMCELL in Japan, compared with $0.5 million in the year ended June 30, 2017. These amounts were recorded in revenue as there
are no further performance obligations required in regards to these milestones.
Interest Revenue. Interest revenue is accrued on a time basis by reference to the principal outstanding and at the effective
interest rate applicable.
Research and Development. Research and development expenditure is recognized as an expense as incurred.
Our research and development expenses consist primarily of:
•
•
•
third party costs comprising all external expenditure on our research and development programs such as fees paid to
Contract Research Organizations (“CROs”), and consultants who perform research on our behalf and under our direction,
rent and utility costs for our research and development facilities, and database analysis fees;
product support costs consisting primarily of salaries and related overhead expenses for personnel in research and
development functions (for example wages, salaries and associated on costs such as superannuation, share-based
incentives and payroll taxes, plus travel costs and recruitment fees for new hires);
intellectual property support costs comprising payments to our patent attorneys to progress patent applications and all
costs of renewing of our granted patents; and
66
•
Amortization of currently marketed products on a straight-line basis over the life of the asset.
Our research and development expenses are not charged to specific products or programs, since the number of clinical and
preclinical product candidates or development projects tends to vary from period to period and since internal resources are utilized
across multiple products and programs over any given period of time. As a result, our management does not maintain and evaluate
research and development costs by product or program. Acquired in-process research and development is capitalized as an asset and is
not amortized but is subject to impairment review during the development phase. Upon completion of its development, the acquired
in-process research and development amortization will commence.
Manufacturing Commercialization. Manufacturing commercialization expenditure is recognized as an expense as incurred. Our
manufacturing commercialization expenses consist primarily of:
•
•
•
•
salaries and related overhead expenses for personnel in manufacturing functions;
fees paid to our contract manufacturing organizations, which perform process development on our behalf and under our
direction;
costs related to laboratory supplies used in our manufacturing development efforts; and
costs related to share-based incentives granted to personnel in manufacturing functions.
Management and Administration. Management and administration expenses consist primarily of salaries and related costs for
employees in executive, corporate and administrative functions. Other significant management and administration expenses include
legal and professional services, rent and depreciation of leasehold improvements, insurance and information technology services.
Fair Value Remeasurement of Contingent Consideration. Remeasurement of contingent consideration pertains to the acquisition
of assets from Osiris Therapeutics, Inc. (“Osiris”). The fair value remeasurement of contingent consideration is recognized as a net
result of changes to the key assumptions of the contingent consideration valuation such as developmental timelines, probability of
success, market penetration, market population, product pricing and the increase in valuation as the time period shortens between the
valuation date and the potential settlement dates of contingent consideration. As the net result of changes to the key assumptions and
the time period shortening, we recognized a net remeasurement gain of $10.5 million and a net remeasurement loss of $0.1 million for
the years ended June 30, 2018 and 2017, respectively.
Other Operating Income and Expenses. Other operating income and expenses primarily comprise tax incentives and foreign
exchange gains and losses.
Tax incentives comprise payments from the Australian government’s Innovation Australia Research and Development Tax
Incentive program for research and development activities conducted in relation to our qualifying research that meets the regulatory
criteria. The research and development tax incentive credit is available for our research and development activities in Australia as well
as research and development activities outside of Australia to the extent such non-Australian based activities relate to intellectual
property owned by our Australian resident entities do not exceed half the expenses for the relevant activities and are approved by the
Australian government. A refundable tax offset is available to eligible companies with an annual aggregate turnover of less than
A$20.0 million. Eligible companies can receive a refundable tax offset for a percentage of their research and development spending.
For the years ended June 30, 2018 and 2017, the rate of the refundable tax offset is 43.5%. We recognized income of $1.8 million and
$1.5 million, respectively, from the Research and Development Tax Incentive program for the years ended June 30, 2018 and 2017.
Foreign withholding tax primarily relates to the tax on revenue recognized from our patent license agreement with Takeda
entered into in December 2017. We recognized $0.7 million of foreign withholding tax in the year ended June 30, 2018 and $Nil in the
year ended June 30, 2017.
Foreign exchange gains and losses relate to unrealized foreign exchange gains and losses on our foreign currency deposits held
across the Mesoblast Group, including U.S. dollar deposits held in Mesoblast Limited and Euro deposits and receivables held in the
Swiss and Singapore entities, respectively, plus realized gains and losses on any foreign currency payments to our suppliers due to
movements in exchange rates. We recognized foreign exchange gains of $0.2 million in the year ended June 30, 2018 and $Nil in the
year ended June 30, 2017.
Finance Costs. Finance costs consist of accrued interest expense and interest expense in relation to the amortization of
transaction costs and other charges associated with the borrowings as represented in our consolidated balance sheet using the effective
interest rate method over the period of initial recognition through maturity.
67
Income Tax Benefit/Expense. Income tax benefit/expense consists of net changes in deferred tax assets and liabilities recognized
on the balance sheet during the period. On December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Tax
Act”), which changed many aspects of U.S. corporate income taxation, including a reduction in the corporate income tax rate from
35% to 21%. We recognized the tax effects of the Tax Act in the year ended June 30, 2018, the most significant of which was a tax
benefit resulting from the remeasurement of deferred tax balances to 21%. We recognized a non-cash income tax benefit of $30.7
million in the year ended June 30, 2018 and $13.4 million in the year ended June 30, 2017.
68
Results of Operations
Comparison of Our Results for the Year ended June 30, 2018 with the Year ended June 30, 2017
The following table summarizes our results of operations for the years ended June 30, 2018 and 2017, together with the changes
in those items in dollars and as a percentage.
(in U.S. dollars, in thousands except per share information)
Consolidated Income Statement Data:
Revenue:
Commercialization revenue
Milestone revenue
Interest revenue
Total revenue
Research & development
Manufacturing commercialization
Management and administration
Fair value remeasurement of contingent consideration
Other operating income and expenses
Finance costs
Loss before income tax
Income tax benefit/(expense)
Loss attributable to the owners of Mesoblast Limited
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
3,641
13,334
366
17,341
(65,927)
(5,508)
(21,907)
10,541
1,312
(1,829)
(65,977)
30,687
(35,290) $
1,444
500
468
2,412
(58,914)
(12,065)
(23,007)
(130)
1,489
—
(90,215)
13,400
(76,815)
2,197
12,834
(102)
14,929
(7,013)
6,557
1,100
10,671
(177)
(1,829)
24,238
17,287
41,525
152%
NM
(22%)
NM
12%
(54%)
(5%)
NM
(12%)
NM
(27%)
129%
(54%)
Losses per share from continuing operations attributable to
the ordinary equity holders:
Basic - losses per share
Diluted - losses per share
Cents
Cents
Cents
% Change
(7.58)
(7.58)
(19.25)
(19.25)
11.67
11.67
(61%)
(61%)
* NM = not meaningful.
Revenue
Revenues were $17.3 million for the year ended June 30, 2018, compared with $2.4 million for the year ended June 30, 2017, an
increase of $14.9 million. The following table shows the movement within revenue for the years ended June 30, 2018 and 2017,
together with the changes in those items.
(in U.S. dollars, in thousands)
Revenue:
Milestone revenue
Commercialization revenue
Interest revenue
Revenue
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
13,334
3,641
366
17,341 $
500
1,444
468
2,412
12,834
2,197
(102)
14,929
NM
152%
(22%)
NM
Milestone revenue was $13.3 million in the year ended June 30, 2018, an increase of $12.8 million as compared with $0.5
million in the year ended June 30, 2017. This $12.8 million increase in the year ended June 30, 2018 is due to increases in milestone
revenues for Alofisel®, licensed with Takeda, and TEMCELL, licensed with JCR. There was an $11.8 million increase in milestone
revenue recognized in relation to our patent license agreement with Takeda. Within this $11.8 million, $5.9 million was recognized in
relation to the non-refundable up-front payment received upon execution of our patent license agreement with Takeda in December
2017 and $5.9 million of milestone revenue was recognized in relation to further payments due within 12 months of the patent license
agreement date for product Alofisel®. There was no milestone revenue recognized in relation to the Takeda agreement in the year
ended June 30, 2017. We also recognized $1.5 million and $0.5 million in milestone revenue during the years ended June 30, 2018
69
and 2017, respectively, upon our licensee, JCR, reaching cumulative net sales milestones for sales of TEMCELL in Japan, an increase
of $1.0 million.
Commercialization revenue was $3.6 million in the year ended June 30, 2018, an increase of $2.2 million as compared with $1.4
million in the year ended June 30, 2017. This $2.2 million increase in commercialization revenue is from royalty income earned on
sales of TEMCELL in Japan by our licensee JCR, with $3.6 million of royalty revenue recognized in the year ended June 30, 2018
compared with $1.4 million of royalty revenue recognized in the year ended June 30, 2017.
The $0.1 million decrease in interest revenue from the year ended June 30, 2018 compared with the year ended June 30, 2017
was primarily driven by us retaining higher cash reserves in the year ended June 30, 2017, when compared with the year ended June
30, 2018.
Research and development
Research and development expenses were $65.9 million for the year ended June 30, 2018, compared with $58.9 million for the
year ended June 30, 2017, an increase of $7.0 million. The $7.0 million increase in research and development expenses primarily
reflects an increase in expenditures on our clinical program for MPC-150-IM.
(in U.S. dollars, in thousands)
Research and development:
Third party costs
Product support costs
Intellectual property support costs
Amortization of current marketed products
Research and development
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
44,192 $
16,861
3,258
1,616
65,927 $
37,249
17,122
3,208
1,335
58,914
6,943
(261)
50
281
7,013
19%
(2%)
2%
21%
12%
Third party costs, which consist of all external expenditure on our research and development programs, increased by $6.9
million in the year ended June 30, 2018 compared with the year ended June 30, 2017.
Within this $6.9 million increase, there was a $12.4 million increase in third party costs for the advancement of our Tier 1
products due to clinical advancement during the period for the year ended June 30, 2018 compared with the year ended June 30, 2017.
In the year ended June 30, 2018 we incurred costs on our MPC-150-IM (CHF), MPC-06-ID (CLBP), MSC-100-IV (aGVHD) and
MPC-300-IV (inflammatory conditions) Tier 1 products. The increase in Tier 1 third party costs were offset by a $5.5 million
decrease in third party costs for our Tier 2 and pipeline products for the year ended June 30, 2018 compared with the year ended June
30, 2017 as we prioritized our funds towards Tier 1 products.
Product support costs, which consist primarily of salaries and related overhead expenses for personnel in research and
development functions, have decreased by $0.2 million for the year ended June 30, 2018 compared with the year ended June 30, 2017.
In the year ended June 30, 2018, operational streamlining initiatives from the June 2016 strategic review were maintained resulting in
full time equivalents reducing by 4.3 (9%) from 48.4 for the year ended June 30, 2017 to 44.1 for the year ended June 30, 2018. This
led to cost savings of $0.9 million across salaries and associated costs and $0.1 million in consulting expenses, for the year ended June
30, 2018 compared with the year ended June 30, 2017. The cost savings of $1.0 million in the year ended June 30, 2018 were offset by
an increase of $0.8 million in share based payment expenses in the year ended June 30, 2018 compared with the year ended June 30,
2017.
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. These costs remained consistent in the
year ended June 30, 2018 compared with the year ended June 30, 2017.
Amortization of current marketed products increased by $0.3 million from $1.3 million for the year ended June 30, 2017 to $1.6
million for the year ended June 30, 2018.
70
Manufacturing commercialization
Manufacturing commercialization expenses, which consist of fees paid to our contract manufacturing organizations and
laboratory supplies used in manufacturing commercialization of our MPC and MSC based products, decreased by $6.6 million from
the year ended June 30, 2017 compared with the year ended June 30, 2018. The decrease was primarily due to a reduction in the
number of production runs completed in the year ended June 30, 2018 compared with the year ended June 30, 2017 due to the clinical
supply demands for all ongoing trials being met.
(in U.S. dollars, in thousands)
Manufacturing commercialization:
MSC platform technology
MPC platform technology
Manufacturing support costs
Manufacturing commercialization
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
2,317 $
745
2,446
5,508 $
(285)
10,058
2,292
12,065
2,602
(9,313)
154
(6,557)
NM
(93%)
7%
(54%)
The MSC-based manufacturing commercialization expenses increased by $2.6 million in the year ended June 30, 2018
compared with the year ended June 30, 2017 primarily due to a credit of $1.2 million relating to a Goods and Services-Tax (“GST”)
received in the year ended June 30, 2017 for MSC-based product expenditure incurred in prior years. There was also an increase of
$1.4 million in the year ended June 30, 2018, compared with the year ended June 30, 2017, relating to an increase in process
validation activities for MSC-based manufacturing.
The MPC-based manufacturing commercialization expenses decreased by $9.3 million in the year ended June 30, 2018
compared with the year ended June 30, 2017 as there were no production runs required for MPC-based clinical supply in the year
ended June 30, 2018, whereas in the year ended June 30, 2017, we incurred costs for materials and completed a number of production
runs for our MPC-based products to meet clinical supply.
Manufacturing support costs, which consist primarily of salaries and related overhead expenses for personnel in manufacturing
commercialization functions, increased by $0.1 million from $2.3 million for the year ended June 30, 2017 to $2.4 million for the year
ended June 30, 2018. In the year ended June 30, 2018, operational streamlining initiatives from the June 2016 strategic review were
maintained resulting in full time equivalents decreasing by 0.9 (11%) from 7.9 for the year ended June 30, 2017 to 7.0 for the year
ended June 30, 2018 resulting in cost savings of $0.2 million in salaries and associated expenses. The cost savings of $0.2 million in
the year ended June 30, 2018 were offset by an increase of $0.1 million in share based payment expenses and an increase of $0.2
million in consultancy fees in the year ended June 30, 2018 compared with the year ended June 30, 2017.
Management and administration
Management and administration expenses were $21.9 million for the year ended June 30, 2018, compared with $23.0 million for
the year ended June 30, 2017, a decrease of $1.1 million. This decrease was primarily due to a reduction of corporate overheads and
legal and professional fees.
(in U.S. dollars, in thousands)
Management and administration:
Labor and associated expenses
Corporate overheads
Legal and professional fees
Management and administration
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
11,237 $
7,824
2,846
21,907 $
10,678
8,689
3,640
23,007
559
(865)
(794)
(1,100)
5%
(10%)
(22%)
(5%)
Labor and associated expenses increased by $0.6 million from $10.6 million for the year ended June 30, 2017 to $11.2 million
for the year ended June 30, 2018. There was an increase in full time equivalents of 0.6 (2%) from 24.9 for the year ended June 30,
2017 to 25.5 for the year ended June 30, 2018, however overall costs of salaries and associated expenses remained consistent in the
year ended June 30, 2018 compared with the year ended June 30, 2017. There was an increase of $0.3 million across recruitment and
other expenses and an increase of $0.2 million in short term incentives for the year ended June 30, 2018 compared with the year ended
June 30, 2017. This increase was offset by a decrease of $0.1 million in consultancy expenses in the year ended June 30, 2018,
compared with the year ended June 30, 2017. Labor and associated expenses also experienced unfavorable exchange rate fluctuations
of $0.2 million in the year ended June 30, 2018 compared with the year ended June 30, 2017, as the A$ strengthened against the US$
given the majority of management and administration expenses are incurred in A$ by our headquarter office located in Australia.
71
Corporate overhead expenses decreased by $0.9 million from $8.7 million for the year ended June 30, 2017 to $7.8 million for
the year ended June 30, 2018 as operational streamlining from the strategic review in June 2016 enabled us to reduce rent and
information technology support services. There was also a reduction in depreciation expenses as a result of certain manufacturing
assets being fully depreciated in June 2017.
Legal and professional fees decreased by $0.8 million from $3.6 million for the year ended June 30, 2017 to $2.8 million for the
year ended June 30, 2018 as legal activities decreased in the period.
Fair value remeasurement of contingent consideration
Fair value remeasurement of contingent consideration was a $10.5 million gain for the year ended June 30, 2018 compared with
a $0.1 million loss for the year ended June 30, 2017, an increase of $10.6 million. The $10.5 million gain for the year ended June 30,
2018 is due to the remeasurement of contingent consideration pertaining to the acquisition of assets from Osiris. This gain is a net
result of changes to the key assumptions of the contingent consideration valuation such as developmental timelines, product pricing,
market penetration, market population and the increase in valuation as the time period shortens between the valuation date and the
potential settlement dates of contingent consideration.
The $0.1 million loss for the year ended June 30, 2017 is due to the remeasurement of contingent consideration pertaining to the
acquisition of assets from Osiris. This loss is a net result of changes to the key assumptions of the contingent consideration valuation
such as developmental timelines, probability of success, market penetration, market population and the increase in valuation as the
time period shortens between the valuation date and the potential settlement dates of 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 royalties received from net sales.
Other operating income and expenses
Other operating income and expenses were $1.3 million for the year ended June 30, 2018, compared with $1.5 million for the
year ended June 30, 2017, a decrease of $0.2 million. The following table shows movements within other operating income and
expenses for the years ended June 30, 2018 and 2017, together with the changes in those items:
(in U.S. dollars, in thousands)
Other operating income and expenses:
Year ended
June 30,
2018
2017
$ Change
% Change
Research and development tax incentive income
Foreign withholding tax
Foreign exchange gains/(losses) (net)
Other operating income and expenses
$
$
1,807 $
(656)
161
1,312 $
1,532
—
(43)
1,489
275
(656)
204
(177)
18%
NM
NM
(12%)
Research and development tax incentive income increased by $0.3 million from $1.5 million for the year ended June 30, 2017 to
$1.8 million for the year ended June 30, 2018. 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 incentive available to us based on available
information at the time. We employ independent tax specialists to review, on an annual basis, the quantum of our previous research
and development tax claims and our on-going eligibility to claim the research and development tax incentive in Australia.
Of the $1.8 million research and development tax incentive recorded in other income for the year ended June 30, 2018, $0.1
million of income relates to a change in the original estimate of the research and development tax incentive income that we would
receive from the Australian Government for the year ended June 30, 2017.
Within the $1.5 million research and development tax incentive recorded in other income for the year ended June 30, 2017,
there is a reversal of $0.1 million of income due to a change in the original estimate of the research and development tax incentive
income for the year ended June 30, 2016.
In the year ended June 30, 2018, we recognized $0.7 million of foreign withholding tax expenses primarily related to revenue
recognized from our patent license agreement with Takeda entered into in December 2017. There were no foreign withholding tax
expenses recognized in the year ended June 30, 2017.
72
We are subject to foreign exchange gains and losses on foreign currency cash balances, creditors and debtors and for the year
ended June 30, 2017 these balances were minimal and therefore only minor foreign exchange losses have been recognized. In the year
ended June 30, 2018 we recognized a foreign exchange gain of $0.2 million, primarily due to movements in exchange rates on Euro
deposits and receivables held in the Swiss and Singapore entities, respectively, as the US$ appreciated against the Euro.
Finance costs
(in U.S. dollars, in thousands)
Finance costs:
Interest expense
Finance costs
Year ended
June 30,
2018
2017
$ Change
% Change
$
$
1,829
1,829
—
—
1,829
1,829
NM
NM
In the year ended June 30, 2018, we recognized $1.8 million of interest expenses in relation to our loan and security
agreement entered into with Hercules Capital Inc. (“Hercules”) on March 6, 2018. Within this $1.8 million, $1.1 million was
recognized in relation to interest expense accrued on the loan balance within the year and a further $0.7 million of interest expense
was recognized in relation to the amortization of transaction costs incurred on the outstanding loan principal for the year ended
June 30, 2018 using the effective interest rate method over the period of initial recognition through maturity. There was no interest
expense recognized in the year ended June 30, 2017.
Loss after income tax
(in U.S. dollars, in thousands)
Loss before income tax
Income tax benefit/(expense)
Loss after income tax
Year ended
June 30,
2018
(65,977) $
30,687
(35,290) $
2017
(90,215)
13,400
(76,815)
$
$
$ Change
% Change
24,238
17,287
41,525
(27%)
129%
(54%)
Loss before income tax was $66.0 million for the year ended June 30, 2018 compared with $90.2 million for the year ended
June 30, 2017, a decrease in the loss of $24.2 million. This decrease is the net effect of the changes in revenues and expenses which
have been fully discussed above.
A non-cash income tax benefit of $30.7 million was recognized in the year ended June 30, 2018 in relation to the net change in
deferred tax assets and liabilities recognized on the balance sheet during the period, primarily due to a revaluation of our deferred tax
assets and liabilities recognized as a result of changes in tax rates. Deferred taxes are measured at the rate in which they are expected
to settle within the respective jurisdictions, which can change based on factors such as new legislation or timing of utilization and
reversal of associated assets and liabilities. On December 22, 2017, the United States signed into law the Tax Act, which changed
many aspects of U.S. corporate income taxation, including a reduction in the corporate income tax rate from 35% to 21%. We
recognized the tax effects of the Tax Act in the year ended June 30, 2018, the most significant of which was a tax benefit resulting
from the remeasurement of deferred tax balances to 21%.
A non-cash income tax benefit of $13.4 million was recognized in the year ended June 30, 2017 in relation to the net change in
deferred tax assets and liabilities recognized on the balance sheet during the period.
73
Comparison of Our Results for the Year ended June 30, 2017 with the Year ended June 30, 2016
The following table summarizes our results of operations for the year ended June 30, 2017 and 2016, together with the changes
in those items in dollars and as a percentage.
(in thousands except per share information)
Consolidated Income Statement Data:
Revenue:
Commercialization revenue
Milestone revenue
Interest revenue
Total revenue
Research & development
Manufacturing commercialization
Management and administration
Fair value remeasurement of contingent consideration
Other operating income and expenses
Impairment of intangible assets
Loss before income tax
Income tax benefit/(expense)
Loss attributable to the owners of Mesoblast Limited
Year ended
June 30,
2017
2016
$ Change
% Change
$
$
$
1,444
500
468
2,412
(58,914)
(12,065)
(23,007)
(130)
1,489
—
(90,215)
13,400
(76,815) $
37,969
3,500
1,079
42,548
(50,013)
(29,763)
(22,500)
28,112
2,714
(61,919)
(90,821)
86,694
(4,127)
(36,525)
(3,000)
(611)
(40,136)
(8,901)
17,698
(507)
(28,242)
(1,225)
61,919
606
(73,294)
(72,688)
(96%)
(86%)
(57%)
(94%)
18%
(59%)
2%
NM
(45%)
NM
(1%)
(85%)
NM
Losses per share from continuing operations attributable to the
ordinary equity holders:
Basic - losses per share
Diluted - losses per share
Cents
Cents
Cents
% Change
(19.25)
(19.25)
(1.13)
(1.13)
(18.12)
(18.12)
NM
NM
* NM = not meaningful.
Revenue
Revenues were $2.4 million for the year ended June 30, 2017, compared with $42.5 million for the year ended June 30, 2016, a
decrease of $40.1 million. The following table shows the movement within revenue for the year ended June 30, 2017 and 2016,
together with the changes in those items.
(in thousands)
Revenue:
Commercialization revenue
Milestone revenue
Interest revenue
Revenue
Year ended
June 30,
2017
2016
$ Change
% Change
$
$
1,444 $
500
468
2,412 $
37,969
3,500
1,079
42,548
(36,525)
(3,000)
(611)
(40,136)
(96%)
(86%)
(57%)
(94%)
Commercialization revenues were $1.4 million in the year ended June 30, 2017, a decrease of $36.5 million as compared with
$38.0 million in the year ended June 30, 2016. This $36.5 million decrease in the year ended June 30, 2017 is due to the recognition
of $37.5 million of revenue for the year ended June 30, 2016, being the recognition of the remaining unamortized portion of the initial
up-front payments of $130.0 million received under the development and commercialization agreement (“DCA”) with Teva over our
initial estimated development program term, compared with $Nil in the year ended June 30, 2017 as we had fully recognized the
remaining deferred revenue amounts relating to the $130 million up-front payment in June 2016, when we regained full world-wide
rights from Teva on our product candidate MPC-150-IM. This decrease of commercialization revenue in the year ended June 30, 2017
was offset by an increase of $1.0 million relating to royalty income earned on sales of TEMCELL in Japan since the launch of the
product on February 24, 2016 by our licensee JCR, with $1.4 million of royalty revenue recognized in the year ended June 30, 2017,
compared with $0.4 million of royalty revenue recognized in the year ended June 30, 2016.
74
Milestone revenue was $0.5 million in the year ended June 30, 2017, a decrease of $3.0 million as compared with $3.5 million
in the year ended June 30, 2016. The difference of $3.0 million is due to the recognition of $3.5 million in milestone revenue in the
year ended June 30, 2016 upon our licensee, JCR, receiving full regulatory approval of MSC product TEMCELL in Japan, which is a
milestone under our agreement with JCR. In the year ended June 30, 2017, we recognized $0.5 million in milestone revenue upon our
licensee, JCR, reaching a cumulative net sales milestone for sales of TEMCELL in Japan.
The $0.6 million decrease in interest revenue from the year ended June 30, 2017 compared with the year ended June 30, 2016
was primarily driven by us retaining higher cash reserves in the year ended June 30, 2016, when compared with the year ended June
30, 2017. The decrease was also driven by us retaining a higher proportion of cash reserves in US$ instead of A$ in the year ended
June 30, 2017, when compared with the year ended June 30, 2016. This change in cash reserve holdings decreased revenue as yield on
US$ cash deposits are lower than yields on A$ cash deposits. We increased the proportion of cash reserves held in US$ to reduce
currency risk. Currency risk is minimized by ensuring the proportion of cash reserves held in each currency matches the expected rate
of spend of each currency.
Research and development
Research and development expenses were $58.9 million for the year ended June 30, 2017, compared with $50.0 million for the
year ended June 30, 2016, an increase of $8.9 million. The $8.9 million net increase in research and development expenses primarily
reflects an increase in expenditures on our clinical program for MPC-150-IM, which were partially offset by a reduction in product
support costs as management reduced costs in line with our corporate strategy.
(in thousands)
Research and development:
Third party costs
Product support costs
Intellectual property support costs
Amortization of current marketed products
Research and development
Year ended
June 30,
2017
2016
$ Change
% Change
$
$
37,249 $
17,122
3,208
1,335
58,914 $
26,189
20,643
2,737
444
50,013
11,060
(3,521)
471
891
8,901
42%
(17%)
17%
201%
18%
Third party costs, which consist of all external expenditure on our research and development programs, increased by $11.0
million in the year ended June 30, 2017 compared with the year ended June 30, 2016.
Within this $11.0 million increase, there was a $11.6 million increase in third party costs for the advancement of our Tier 1
products due to clinical advancement during the period for the year ended June 30, 2017, compared with the year ended June 30, 2016,
primarily due to the increase in clinical program costs for MPC-150-IM (CHF) as we regained full world-wide rights from Teva on
this product candidate in the month of June 2016 and consequently we were responsible for all research and development expenditure
incurred on this product candidate in the year ended June 30, 2017 whereas Teva was responsible for the majority of research and
development expenses in the year ended June 30, 2016. In the year ended June 30, 2017 we also incurred costs on our MPC-06-ID
(CLBP), MSC-100-IV (aGVHD) and MPC-300-IV (inflammatory conditions) Tier 1 products. The increase in Tier 1 third party costs
were offset by a $0.6 million decrease in third party costs for our Tier 2 and pipeline products for the year ended June 30, 2017,
compared with the year ended June 30, 2016 as we prioritized our funds towards Tier 1 products.
Product support costs, which consist primarily of salaries and related overhead expenses for personnel in research and
development functions, have decreased by $3.5 million for the year ended June 30, 2017, compared with the year ended June 30,
2016. In the year ended June 30, 2017, operational streamlining initiatives from the June 2016 strategic review were maintained
resulting in full time equivalents reducing by 26.1 (35%) from 74.5 for the year ended June 30, 2016 to 48.4 for the year ended June
30, 2017. This led to cost savings of $4.0 million in salaries and associated costs and $0.5 million in travel expenses, for the year
ended June 30, 2017 compared with the year ended June 30, 2016. The cost savings of $4.5 million in the year ended June 30, 2017
were offset by an increase of $0.7 million in share based payment expenses and an increase of $0.3 million in consultancy fees
primarily due to an increase in the associated clinical program costs for CHF in the year ended June 30, 2017, compared with the year
ended June 30, 2016.
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. These costs have risen by $0.5 million
in the year ended June 30, 2017 compared with the year ended June 30, 2016 due to increased activities across our entire patent
portfolio.
75
Amortization of current marketed products increased by $0.9 million for the year ended June 30, 2017, compared with the year
ended June 30, 2016 due to the TEMCELL asset becoming available for use in Japan since the launch of the product in February
2016.
Manufacturing commercialization
Manufacturing commercialization expenses, which consist of fees paid to our contract manufacturing organizations and
laboratory supplies used in manufacturing commercialization of our MPC and MSC based products, decreased by $17.7 million from
the year ended June 30, 2016 compared with the year ended June 30, 2017. The decrease was primarily due to a reduction in the
number of production runs completed in the year ended June 30, 2017 compared with the year ended June 30, 2016 due to the clinical
supply demands for all ongoing trials being met and a tax related credit for MSC-based product expenditure incurred in prior years.
(in thousands)
Manufacturing commercialization:
MPC platform technology
MSC platform technology
Manufacturing support costs
Manufacturing commercialization
Year ended
June 30,
2017
2016
$ Change
% Change
$
$
10,058 $
(285)
2,292
12,065 $
8,235
17,993
3,535
29,763
1,823
(18,278)
(1,243)
(17,698)
22%
(102%)
(35%)
(59%)
The MPC-based manufacturing commercialization expenses increased by $1.8 million in the year ended June 30, 2017
compared with the year ended June 30, 2016. There was a $4.1 million increase as a result of purchases of materials and 100% of the
production runs being for MPC-based clinical supply in the year ended June 30, 2017 whereas 19% of production was for MPC-based
clinical supply in the year ended June 30, 2016. This was offset by a $2.3 million decrease due to a reduction in process development
activities in year ended June 30, 2017 compared with the year ended June 30, 2016.
The MSC-based manufacturing commercialization expenses decreased by $18.3 million in the year ended June 30, 2017
compared with the year ended June 30, 2016. $17.1 million of this decrease was a result of no MSC-based production being
undertaken in the year ended June 30, 2017 whereas 81% of production runs in the year ended June 30, 2016 were for MSC-based
clinical supply. The remaining decrease of $1.2 million relates to a GST credit received in the year ended June 30, 2017 for MSC-
based product expenditure incurred in prior years.
Manufacturing support expenses, which consist primarily of salaries and related overhead expenses for personnel in
manufacturing commercialization functions, decreased by $1.2 million from $3.5 million for the year ended June 30, 2016 to $2.3
million for the year ended June 30, 2017 as a result of operational streamlining and management’s cost containment efforts. Full time
equivalents decreased by 2.9 (27%) from 10.8 for the year ended June 30, 2016 to 7.9 for the year ended June 30, 2017 resulting in
cost savings of $0.4 million in salaries and $0.3 million in share based payments. Management’s cost reduction efforts also resulted in
a decrease of $0.5 million across consulting and travel expenditure.
Management and administration
Management and administration expenses were $23.0 million for the year ended June 30, 2017, compared with $22.5 million for
the year ended June 30, 2016, an increase of $0.5 million. This increase was primarily due to an increase in labor and associated
expenses and legal and professional fees offset by a reduction in corporate overheads.
(in thousands)
Management and administration:
Labor and associated expenses
Corporate overheads
Legal and professional fees
Management and administration
Year ended
June 30,
2017
2016
$ Change
% Change
$
$
10,678 $
8,689
3,640
23,007 $
9,295
10,274
2,931
22,500
1,383
(1,585)
709
507
15%
(15%)
24%
2%
76
Labor and associated expenses increased by $1.4 million from $9.3 million for the year ended June 30, 2016 to $10.7 million for
the year ended June 30, 2017. In the year ended June 30, 2017, operational streamlining initiatives from the June 2016 strategic
review were maintained resulting in full time equivalents reducing by 2.3 (8%) from 27.2 for the year ended June 30, 2016 to 24.9 for
the year ended June 30, 2017. This led to cost savings of $0.4 million in salaries and associated benefits, $0.2 million in consultancy
expenses and $0.1 million in directors’ fees for the year ended June 30, 2017 compared with the year ended June 30, 2016. This
decrease was offset by an increase of $0.5 million in short term incentives and an increase of $1.4 million in share based payments in
the year ended June 30, 2017, compared with the year ended June 30, 2016. Labor and associated expenses also experienced
unfavorable exchange rate fluctuations of $0.2 million in the year ended June 30, 2017 compared with the year ended June 30, 2016,
as the A$ strengthened against the US$ given the majority of management and administration expenses are incurred in A$ by our
headquarter office located in Australia.
Corporate overhead expenses decreased by $1.6 million from $10.3 million for the year ended June 30, 2016 to $8.7 million for
the year ended June 30, 2017 as operational streamlining from the strategic review in June 2016 enabled us to reduce rent,
accommodation costs, travel expenses and other staff associated costs.
Legal and professional fees increased by $0.7 million from $2.9 million for the year ended June 30, 2016 to $3.6 million for the
year ended June 30, 2017 primarily due to Sarbanes Oxley Act implementation activities.
Fair value remeasurement of contingent consideration
Fair value remeasurement of contingent consideration was a $0.1 million loss for the year ended June 30, 2017 compared with a
$28.1 million gain for the year ended June 30, 2016, a decrease of $28.2 million. The $0.1 million loss for the year ended June 30,
2017 is due to the remeasurement of contingent consideration pertaining to the acquisition of assets from Osiris. This loss is a net
result of changes to the key assumptions of the contingent consideration valuation such as developmental timelines, probability of
success, market penetration, market population and the increase in valuation as the time period shortens between the valuation date
and the potential settlement dates of contingent consideration.
Within the $28.1 million gain for the year ended June 30, 2016, we recognized a gain of $34.5 million due to a reduction in
contingent consideration expected to be paid to Osiris on the MSC-assets due to a greater certainty over the commencement of the
earn out period. This change in assumption results in a reduction in the valuation of contingent consideration as an earlier earn out
period results in royalties being applicable to sales in years that are prior to peak year sales. The remaining net loss of $6.4 million was
recognized during the year ended June 30, 2016 as a result of changes to the key assumptions of contingent consideration valuation
such as developmental timelines, market population, market penetration, product pricing and the increase in valuation as the time
period shortens between the valuation date and the potential settlement dates of 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 royalties received from net sales.
Impairment of intangible assets
Impairment of intangible assets was $61.9 million for the year ended June 30, 2016, compared with $Nil for the year ended June
30, 2017. As a consequence of the June 2016 strategic review we recognized a $61.9 million non-cash impairment charge in the year
ended June 30, 2016 relating to our product candidates, MPC-MICRO-IO for the treatment of age-related macular degeneration and
MPC-CBE for the expansion of hematopoietic stem cells within cord blood. As of June 30, 2016 we had completed the enrollment of
Phase IIa MPC-MICRO-IO clinical trial and we were in a Phase III MPC-CBE clinical trial. We had suspended further patient
enrollment of both programs as we prioritized the funding of our Tier 1 product candidates. Existing and future cash resources will be
primarily directed to the delivery of Tier 1 product candidates for the foreseeable future and therefore we are unable to ascertain when
MPC-MICRO-IO and MPC-CBE patient enrollment will be restarted. Accordingly, impairment losses for the full carrying amounts
of the intangible assets relating to product candidates MPC-MICRO-IO and MPC-CBE were recognized in line with our accounting
policy.
These product candidates will remain technically viable and available to consider for future resource allocation and we will
continue to seek potential partners for them. The decision to impair the assets was required given resources have not been allocated to
continue the development and commercialization efforts of these assets for the foreseeable future.
This accounting charge for the year ended June 30, 2016 was non-cash and does not impact our liquidity or cash flows from our
operating activities. There were no impairment losses recognized for the year ended June 30, 2017.
77
Other operating income and expenses
Other operating income and expenses were $1.5 million for the year ended June 30, 2017, compared with $2.7 million for the
year ended June 30, 2016, a decrease of $1.2 million. The following table shows movements within other operating income and
expenses for the years ended June 30, 2017 and 2016, together with the changes in those items:
(in thousands)
Other operating income and expenses:
Year ended
June 30,
2017
2016
$ Change
% Change
Research and development tax incentive income
Foreign exchange (losses)/gains (net)
Other operating income and expenses
$
$
1,532 $
(43)
1,489 $
3,840
(1,126)
2,714
(2,308)
1,083
(1,225)
(60%)
(96%)
(45%)
Research and development tax incentive income decreased by $2.3 million from $3.8 million for the year ended June 30, 2016
to $1.5 million for the year ended June 30, 2017 due to a reduction in expenditure that is eligible for the Australian tax incentive. 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 incentive available to us based on available information at the time. We employ independent
tax specialists to review, on an annual basis, the quantum of our previous research and development tax claim and our on-going
eligibility to claim the research and development tax incentive in Australia.
Within the $1.5 million research and development tax incentive recorded in other income for the year ended June 30, 2017,
there is a reversal of $0.1 million of income due to a change in the original estimate of the research and development tax incentive
income for the year ended June 30, 2016.
Of the $3.8 million research and development tax incentive recorded in other income for the year ended June 30, 2016, $1.1
million relates to a change in the original estimate of the research and development tax incentive income that we would receive from
the Australian Government for the year ended June 30, 2015.
We are subject to foreign exchange gains and losses on foreign currency cash balances, creditors and debtors and for the year
ended June 30, 2017 these balances were minimal and therefore only minor foreign exchange losses have been recognized. In the year
ended June 30, 2016 we recognized a foreign exchange loss of $1.1 million, primarily relating to depreciation recognized on US$
deposits held in Mesoblast Limited.
Loss after income tax
(in thousands)
Loss before income tax
Income tax benefit/(expense)
Loss after income tax
Year ended
June 30,
2017
(90,215) $
13,400
(76,815) $
2016
(90,821)
86,694
(4,127)
$
$
$ Change
% Change
606
(73,294)
(72,688)
(1%)
(85%)
NM
Loss before income tax was $90.2 million for the year ended June 30, 2017 compared with $90.8 million for the year ended
June 30, 2016, a decrease in the loss of $0.6 million. This decrease is the net effect of the changes in revenues and expenses which
have been fully discussed above.
Non-cash income tax benefits of $13.4 million and $86.7 million were recognized in the years ended June 30, 2017 and 2016, in
relation to the net of deferred tax assets and liabilities recognized on the balance sheet during these periods, respectively.
Following our strategic review in June 2016 and the resulting operational streamlining, we recognized deferred tax assets for
operating tax losses and deductible temporary differences in the jurisdictions where there are offsetting taxable temporary differences
(deferred tax liabilities). Prior to this strategic review, we were in the process of consolidating certain intellectual property assets and
consequently taxable temporary differences were not available to offset deferred tax assets in the same jurisdiction.
78
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that future taxable profit will be
available against which the unused tax losses can be utilized. Deferred tax assets are offset against taxable temporary differences
(deferred tax liabilities) when the deferred tax balances relate to the same tax jurisdiction in accordance with our accounting policy.
As of June 30, 2017 and 2016, our cumulative operating losses have a total potential tax benefit of $113.1 million and $84.7
million at local tax rates (excluding other temporary differences), respectively, which may be available for use once we are in a
taxable profit position. These losses were incurred in different jurisdictions and can only be offset against profits earned in the relevant
jurisdiction. Further, in order to use these tax losses it is necessary to satisfy certain tests and, as a result, we cannot assure you that the
tax losses will be available to offset profits if and when we earn them.
Certain Differences Between IFRS and U.S. GAAP
IFRS differs from U.S. GAAP in certain respects. Management has not assessed the materiality of differences between IFRS
and U.S. GAAP. Our significant accounting policies are described in “Item 18 Financial Statements – Note 22”.
Quantitative and Qualitative Disclosure about Market Risk
The following sections provide quantitative information on our exposure to interest rate risk, share price risk, and foreign
currency exchange risk. We make use of sensitivity analyses which are inherently limited in estimating actual losses in fair value that
can occur from changes in market conditions. For further assessment on our market risks, see “Item 18. Financial Statements – Note
10(a).”
Foreign currency exchange risk
We have foreign currency amounts owing primarily in our Australian parent entity, whose functional currency is the A$,
relating to clinical, regulatory and overhead activities. We also have foreign currency amounts owing to us in our Switzerland and
Singapore entities, whose functional currencies are the US$. These amounts relate to revenue recognized from our patent license
agreement with Takeda entered into in December 2017. 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 our financial performance.
We manage the currency risk by evaluating levels to hold in each currency by assessing our future activities which will likely be
incurred in those currencies where possible. We haven’t entered into any hedges over our foreign currency investments or receivables
held.
Interest rate risk
Our main interest rate risk arises from long-term borrowings with a floating interest rate under our loan facility with Hercules,
which exposes us to cash flow interest rate risk. As interest rates fluctuate, the amount of interest payable on financing where the
interest rate is not fixed will also fluctuate. This interest rate risk can be managed with consideration of interest rate swaps which can
be entered into to convert the floating interest rate to a fixed interest rate as required. Additionally, we can repay the loan facility at
our discretion and we can also refinance if we are able to achieve terms suitable to us in the marketplace or from Hercules.
The Group did not enter into any interest rate swaps during the year ended June 30, 2018.
We are also exposed to interest rate risk that arises through movements in interest income we earn on our 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 dates of our deposits across various periods. Our strategy of entering into new deposits as old deposits mature and
reinvesting surplus funds ensures that we spread the timing of new deposits which assists us to achieve the average interest rates
available in the market throughout the year. We also ensure that sufficient funds are available, in at-call accounts, to meet our cash
flow requirements.
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, which is defined as movements other than foreign currency rates and interest rates. We are exposed to price risk which
arises from long-term borrowings under our facility with NovaQuest Capital Management, L.L.C. (“NovaQuest”), where the timing
and amounts of principal and interest payments is dependent on net sales of product candidate MSC-100-IV for the treatment of
aGVHD in pediatric patients in the United States and other territories excluding Asia. As net sales of MSC-100-IV for the treatment of
aGVHD in pediatric patients in these territories increase/decrease, the timing and amount of principal and interest payments relating to
79
this type of financing arrangement will also fluctuate, resulting in an adjustment to the carrying amount of financial liability. The
adjustment is recognized in the Income Statement as income or expense in the period the revision is made.
We do not consider any exposure to price risk other than those already described above.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated
financial statements, which we have prepared in accordance with IFRS. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods.
We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these
estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in our consolidated financial statements included in the
annual report, we believe that the following accounting policies are the most critical for fully understanding and evaluating our
financial condition and results of operations.
Revenue Recognition
Revenues comprise the fair value of the consideration received or receivable.
Commercialization and milestone revenue
Commercialization and milestone 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.
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 IAS 18 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 us, 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, within current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the
balance sheet date are classified as deferred revenue, within non-current liabilities.
TiGenix arrangement
In December 2017, we entered into a patent license agreement with TiGenix NV, now a wholly owned subsidiary of Takeda,
which granted Takeda exclusive access to certain of our patents to support global commercialization of the adipose-derived
mesenchymal stem cell product, Alofisel®, previously known as Cx601, a product candidate of Takeda, for the local treatment of
fistulae. The agreement includes the right for Takeda to grant sub-licenses to affiliates and third parties.
As part of the agreement, we received $5.9 million (€5.0 million) as a non-refundable up-front payment. We are entitled to
further payments of €5.0 million within 12 months of the patent license agreement date, and up to €10.0 million when Takeda reaches
certain product regulatory milestones. Additionally, we will receive single digit royalties on net sales of Alofisel®.
In the year ended June 30, 2018, we recognized $11.8 million in milestone revenue in relation to our patent license agreement
with Takeda. Within this $11.8 million, $5.9 million (€5.0 million) was recognized in relation to the non-refundable up-front payment
received upon execution of our patent license agreement with Takeda in December 2017 and $5.9 million (€5.0 million) was
recognized in relation to further payments due within 12 months of the patent license agreement date for product Alofisel®. These
amounts were recorded in revenue as there are no further performance obligations required in regards to these milestones.
80
On the basis that this agreement was entered into in December 2017, there was no milestone revenue recognized in the year
ended June 30, 2017 in relation to this agreement.
JCR arrangement
In October 2013, we acquired all of Osiris’ culture-expanded, MSC-based assets. These assets included assumption of a
collaboration agreement with JCR, a research and development oriented pharmaceutical company in Japan. Revenue recognized under
this model is limited to the amount of cash received or for which we are entitled, as JCR has the right to terminate the agreement at
any time.
Under the JCR Agreement, JCR is responsible for all development and manufacturing costs including sales and marketing
expenses. Under the JCR Agreement, JCR has the right to develop our MSCs in two fields for the Japanese market: exclusive in
conjunction with the treatment of hematological malignancies by the use of hematopoietic stem cells derived from peripheral blood,
cord blood or bone marrow, or the First JCR Field; and non-exclusive for developing assays that use liver cells for non-clinical drug
screening and evaluation, or the Second JCR Field. With respect to the First JCR Field, we are entitled to payments when JCR reaches
certain 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 Second JCR Field, we are entitled to a double
digit profit share. Royalty revenue is recognized upon the sale of the related products provided we have no remaining performance
obligations under the arrangement.
In the year ended June 30, 2018, we recognized $3.6 million in commercialization revenue relating to royalty income earned on
sales of TEMCELL in Japan since the launch of the product on February 24, 2016, by our licensee JCR, compared with $1.4 million
for the year ended June 30, 2017. These amounts were recorded in revenue as there are no further performance obligations required in
regards to these items.
In the year ended June 30, 2018, we recognized $1.5 million in cumulative net sales milestone revenue upon our licensee, JCR,
reaching milestones for sales of TEMCELL in Japan compared with $0.5 million in the year ended June 30, 2017. These amounts
were recorded in revenue as there are no further performance obligations required in regards to these items.
Government grant income
Revenue from government grants is recognized in the consolidated income statement on a systematic basis over the periods in
which the entity recognizes as expense the related costs for which the grants are intended to compensate in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government Assistance.
The Australian government allows a refundable tax offset to eligible companies with an annual aggregate turnover of less than
A$20.0 million. Eligible companies can receive a refundable tax offset for a percentage of their research and development spending at
the rate of 43.5% for periods from July 1, 2016. We have assessed our research and development activities and expenditure to
determine which of these costs are likely to be eligible under the incentive scheme. At each period end, we estimate and recognize the
refundable tax offset available to us based on available information at the time.
The receivable for reimbursable amounts that have not been collected is reflected in trade and other receivables on our
consolidated balance sheets.
Goodwill
We have recognized goodwill as a result of two separate acquisitions. Goodwill of $118.4 million was recognized on acquisition
of Angioblast Systems Inc. in 2010, $13.9 million was recognized on the acquisition of assets from Osiris in 2013 and $2.1 million
was recognized on finalization of the MSC business combination of Osiris in 2015. In all cases the goodwill recognized represented
excess in the purchase price over the net identifiable assets and in-process research and development acquired in the transaction. We
have a single operating unit and all goodwill has been allocated to that unit.
The goodwill resulting from these acquisitions is tested for impairment in accordance with IAS 36 Impairment of Assets which
requires testing be performed at any time during an annual period, provided the test is performed at the same time every year. We test
for impairment annually in the fourth quarter. Additionally, assets must be tested for impairment if there is an indication that an asset
may be impaired. The recoverable amounts of our assets and cash-generating units have been determined based on fair value less costs
to sell calculations, which require the use of certain assumptions. See Note 6 of our consolidated financial statements and the related
note thereto included in our annual report for more information regarding the assumptions used in determining the fair value less costs
to sell.
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In-process research and development
IFRS requires that acquired in-process research and development be initially measured at fair value and carried as an indefinite
life intangible asset subject to impairment reviews. We have recognized in-process research and development as a result of two
separate acquisitions. In-process research and development of $387.0 million was recognized on the acquisition of Angioblast Systems
Inc. in 2010 and $126.7 million was recognized on the acquisition of assets from Osiris in 2013 and $24.0 million was reclassified to
current marketed products upon the TEMCELL asset becoming available for use in Japan. In 2016, we fully impaired $61.9 million of
in-process research and development relating to our product candidates, MPC-MICRO-IO for the treatment of age-related macular
degeneration and MPC-CBE for the expansion of hematopoietic stem cells within cord blood, as we suspended further patient
enrollment of the Phase IIa MPC-MICRO-IO clinical trial and the Phase III MPC-CBE clinical trial as we prioritized the funding of
our Tier 1 product candidates. We still believe these product candidates remain viable upon further funding, or partnership, and
accordingly these products should not be regarded as abandoned, where typically, abandoned programs would be closed down and the
related research and development efforts are considered impaired and the asset is fully expensed. The remaining carrying amount of
in-process research and development as at June 30, 2018 and June 30, 2017 was $427.8 million.
All in-process research and development recognized on our balance sheet is a result of a business acquisition and 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 in the fourth quarter of each year in accordance with
IAS 36 Impairment of Assets which requires testing annually, or whenever there is an indication that an asset may be impaired. There
was no impairment charge recognized during the year ended June 30, 2018.
In-process research and development will continue to be tested for impairment until the related research and development efforts
are either completed or abandoned. At the time of completion, when the asset becomes available for use, all costs recognized in in-
process research and development that related to the completed asset are transferred to the intangible asset category, current marketed
products, at the asset’s historical cost.
Current marketed products
Current marketed products contain products that are currently being marketed. The assets are recognized on our balance sheet
as a result of business acquisitions or reclassifications from in-process research and development upon completion. Upon completion,
when assets become available for use, assets are reclassified from in-process research and development to current marketed products
at the historical value that they were recognized at within the in-process research and development category.
Upon reclassification to the current market products category, management determines the remaining useful life of the
intangible assets and amortizes them from the date they become available for use. In order for management to determine the 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 any other relevant
factors.
Management has chosen to amortize all intangible assets with a finite useful life on a straight-line basis over the useful life of
the asset. Current marketed products are tested for impairment in accordance with IAS 36 Impairment of Assets which requires
testing whenever there is an indication that an asset may be impaired.
We reclassified $24.0 million from in-process research and development to current marketed products upon the TEMCELL
asset becoming available for use in Japan.
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.
We impair assets in accordance with IAS 36 Impairment of Assets. IAS 36 Impairment of Assets outlines that an impairment
loss must be recognized if an asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an
asset’s fair value less costs to sell and its 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). The recoverable amounts of our assets and cash-generating units have been determined based
on fair value less costs to sell calculations, which require the use of certain assumptions. See Note 6 of our consolidated financial
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statements and the related note thereto included in our annual report for more information regarding the assumptions used in
determining the fair value less costs to sell.
Management maintains internal valuations of each asset annually (or more frequently should indicators of impairment be
identified) and valuations from independent experts are requested periodically, within every three year period. The internal valuations
are continually reviewed by management and consideration is given as to whether there are indicators of impairment which would
warrant impairment testing. An external valuation of our assets was carried out by an independent expert as at June 30, 2017 with the
recoverable amount of each asset exceeding its carrying amount. No impairment charge was recognized during the year ended June
30, 2018.
The recoverable amount of our cash generating unit, including goodwill and in-process research and development, exceeded the
carrying amounts in the annual impairment testing completed in June 2018 and therefore no impairment charges were recorded.
Investments and other financial assets
We invest our cash in term deposits and other similar low risk products. We classify investments as either a cash equivalent or a
short-term investment in accordance with IAS 7 Statement of Cash Flows. For a deposit to be classified as a cash equivalent it should
be held for the purpose of meeting short-term cash commitments rather than for investment or other purposes and IAS 7 outlines that:
•
•
it must be readily convertible to a known amount of cash (qualifies when it has a short maturity, of say, 3 months or less
from the date of acquisition); and
it must be subject to insignificant risk of change of value.
We review the terms and conditions of each deposit to determine if it is a cash equivalent in accordance with IAS 7.
Deposits with maturity dates between 3 months and 12 months are classified as short term investments. The carrying amount of
short-term investments approximates fair value due to the short maturities of these instruments, and there are no unrealized gains or
losses associated with these instruments. Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing an asset and liability.
As at June 30, 2018 and June 30, 2017, we did not hold any deposits with maturity dates between 3 months and 12 months and
therefore we did not hold any deposits classified as short term investments.
Fair Value Measurements
For financial instruments that are measured on the balance sheet at fair value, IFRS 7 requires disclosure of the fair value
measurements by level of the following fair value measurement hierarchy.
•
•
•
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 us 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).
Our level 3 asset consists of an investment in unlisted equity securities in the biotechnology sector. Level 3 assets were 100% of
total assets measured at fair value as at June 30, 2018 and June 30, 2017.
Our level 3 liabilities consist of a contingent consideration provision related to the acquisition of Osiris’ MSC business. Level 3
liabilities were 100% of total liabilities measured at fair value as at June 30, 2018 and June 30, 2017. There were no transfers between
any of the levels for recurring fair value measurements during the year.
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The following table summarizes the assumptions, techniques, and significant unobservable inputs used in level 3 fair value
measurements:
Range of inputs
(weighted average)
(in U.S. dollars,
in thousands, except percent data)
Description
Contingent consideration provision
Fair
value as
of
Fair
value as
of
June 30,
2018
42,070
June 30, Valuation Unobservable
2017
63,595
technique
Discounted
cash flows
inputs(1)
Risk adjusted
discount rate
Year Ended
June 30,
2018
11%-13%
(12.5%)
Year Ended
June 30,
2017
11%-13%
(12.5%)
Relationship of
unobservable inputs to
fair value
Year ended June 30, 2018: A
change in the discount rate by
0.5% would increase/decrease
the fair value by 1%.
Expected unit
revenues
n/a
n/a
n/a
n/a
Expected
sales
volumes
Year ended June 30, 2017: A
change in the discount rate by
0.5% would increase/decrease
the fair value by 1%.
Year ended June 30, 2018: A
10% increase/decrease in the
price assumptions adopted
would increase/decrease the
fair value by 4%.
Year ended June 30, 2017: A
10% increase/decrease in the
price assumptions adopted
would increase/decrease the
fair value by 5%.
Year ended June 30, 2018: A
10% increase/decrease in sales
volume assumptions adopted
would increase/decrease the
fair value by 4%.
Year ended June 30, 2017: A
10% increase/decrease in sales
volume assumptions adopted
would increase/decrease the
fair value by 5%.
(1)
There were no significant inter-relationships between unobservable inputs that materially affect fair values.
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Borrowings
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at
amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or
loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are treated
as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. If it is not probable,
the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will
be drawn down, the fee is capitalized as a prepayment for liquidity services and amortized over the period of the facility to which it
relates.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or
expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party
and the consideration paid, including any non-cash assets transferred of liabilities assumed, is recognized in profit or loss as other
income or finance costs.
Borrowings are classified as current liabilities unless we have an unconditional right to defer settlement of the liability for at
least 12 months after the reporting period.
Net deferred tax assets
We record deferred tax assets if, based upon the available evidence, it is more likely than not that we will recognize some or all
of the deferred tax assets. Deferred tax assets were recognized for unused tax losses based on the scheduling of reversals of deferred
tax liabilities and to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be
utilized. We have recorded deferred tax assets that relate to operating tax losses and deductible temporary differences to offset taxable
temporary differences (deferred tax liabilities) following our conclusion in the year ended June 30, 2016 to retain existing intellectual
property assets in their relative jurisdictions as we are no longer planning to consolidate intellectual property assets. There have been
no significant developments on this conclusion during the year ended June 30, 2018.
Accrued research and development and manufacturing commercialization expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process
involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been
performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have
not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for
services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date
in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our
estimates with the service providers and make adjustments if necessary.
Examples of estimated accrued expenses include fees paid to:
•
•
•
•
CROs in connection with clinical studies;
investigative sites in connection with clinical studies;
vendors in connection with preclinical development activities; and
vendors related to product manufacturing, process development and distribution of clinical supplies.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to
contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are
subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which
payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments
under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study
milestones.
In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be
expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust
the accrual or prepaid accordingly. To date, there have been no material differences from our estimates to the amount actually
incurred.
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Australian Disclosure Requirements
Significant Changes in the State of Affairs
There have been no significant changes within the state of our affairs during the year ended June 30, 2018 except as noted in the
“Important Corporate Developments” section included in Item 4.A.
Likely Developments and Expected Results of Operations
Our continued progress in clinical development brings our leading products closer to approval and commercial reality. Based on
interactions with the FDA, Mesoblast believes that successful results from the completed Phase 3 trial in aGVHD, together with Day
180 safety, survival and quality of life parameters in these patients, may provide sufficient clinical evidence to support a BLA filing in
the United States, where there are currently no approved products for steroid-refractory aGVHD. We are currently undertaking pre-
BLA and pre-launch activities in regards to this product candidate and intend to pursue a pediatric approval. Other significant
milestones are expected in the upcoming financial year in relation to our other Tier 1 product candidates, as detailed elsewhere in this
report.
Environmental Regulations
Our operations are not subject to any significant environmental regulations under either Commonwealth of Australia or
State/Territory legislation. We consider that adequate systems are in place to manage our obligations and are not aware of any breach
of environmental requirements pertaining to us.
5.B
Liquidity and Capital Resources
Sources of Liquidity
We have incurred losses from operations since our inception in 2004 and as of June 30, 2018, we had an accumulated deficit of
$380.2 million. We had cash and cash equivalents of $37.8 million as of June 30, 2018 and incurred net cash outflows from operations
of $75.0 million for the year ended June 30, 2018. As at June 30, 2018, we recognized funds receivable from debt financing and
unissued capital of $39.0 million pursuant to a financing facility with NovaQuest. On July 10, 2018 the net proceeds from the
financing facility of $39.0 million were received and recognized in cash and cash equivalents. We will also receive $40.0 million from
Tasly Pharmaceutical Group (“Tasly”) on closing of the strategic alliance that the two companies announced in July 2018 for
cardiovascular therapies in China. This receipt is subject to filing with the State Administration of Foreign Exchange.
In addition to the strategic alliance with Tasly, we have committed to entering into non-dilutive commercial partnering
transactions to fund operations. We also continue to work on various cost containment and deferment strategies. A fully discretionary
equity facility remains for up to A$120.0 million / US$90.0 million for the next 12 months to provide additional funds as
required. We may also consider equity-based financing or drawing further debt funding on current debt arrangements to fund future
operational requirements.
There
is uncertainty related
to meet our
requirements. Additionally, there is uncertainty related to our ability to sustainably maintain implemented cost reductions and further
defer programs on a timely basis while achieving expected outcomes.
to partner programs, raise capital or debt at
to our ability
terms
The continuing viability of us and our ability to continue as a going concern and meet our debts and commitments as they fall
due are dependent upon the strategic alliance with Tasly, non-dilutive funding in the form of commercial partnering transactions or
equity-based financing to fund future operations, together with maintaining implemented cost containment and deferment strategies.
Management and the directors believe that we will be successful in the above matters and, accordingly, have prepared the
financial report on a going concern basis, notwithstanding that there is a material uncertainty that may cast significant doubt on our
ability to continue as a going concern and that we may be unable to realize our assets and liabilities in the normal course of business.
References to matters that may cast significant doubt about our ability to continue as a going concern also raise substantial doubt
as contemplated by the Public Company Accounting Oversight Board (“PCAOB”) standards. For our audited financial statements, see
“Item 18 Financial Statements” included in our Form 20-F.
Audit Report
Our auditor has included an “emphasis of matter” paragraph in the audit report relating to our ability to continue as a going
concern (refer Note 1(i)).
86
Cash flows
(in thousands)
Cash Flow Data:
Net cash (outflows) in operating activities
Net cash (outflows)/ inflows in investing activities
Net cash inflows in financing activities
Net (decrease) in cash and cash equivalents
2018
Year ended June 30,
2017
2016
(75,012)
(1,153)
68,613
(7,552)
(95,471)
142
60,005
(35,324)
(87,996)
(1,727)
62,066
(27,657)
Comparison of cash flows for the Year ended June 30, 2018 with the Year ended June 30, 2017
Net cash outflows in operating activities
Net cash outflows for operating activities were $75.0 million for the year ended June 30, 2018, compared with $95.5 million for
the year ended June 30, 2017, a decrease of $20.5 million. The decrease of $20.5 million is due to a decrease in cash outflows of $15.1
million and an increase in cash inflows of $5.4 million in the year ended June 30, 2018 compared with the year ended June 30, 2017.
Outflows decreased by $15.1 million due to a reduction in payments to suppliers and employees primarily in relation to a
decrease in manufacturing commercialization costs in the year ended June 30, 2018, compared with the year ended June 30, 2017, as
the clinical supply demands for all ongoing trials have been met and a reduction in payments in relation to research and development
primarily on MPC-150-IM (CHF) and Tier 2 products in the year ended June 30, 2018, compared with the year ended June 30, 2017.
The $5.4 million increase of inflows comprised: inflows from milestone revenue increased by $5.6 million in relation to the
non-refundable up-front payment received upon execution of our patent license agreement with Takeda in December 2017; inflows
from milestone payments received on achievement of cumulative net sales milestones for TEMCELL in Japan increased by $1.0
million during the year ended June 30, 2018, compared with the year ended June 30, 2017; inflows from royalty income earned on
sales of TEMCELL in Japan increased by $1.7 million during the year ended June 30, 2018, compared with the year ended June 30,
2017; these increases in inflows were offset by a $2.8 million decrease in receipts for the research and development tax incentive
during the year ended June 30, 2018, compared with the year ended June 30, 2017 due to a $1.6 million receipt being delayed until
July 2018 that would have otherwise been receipted in the year ended June 30, 2018; and reduced interest receipts by $0.1 million as
our cash reserves have decreased in year ended June 30, 2018 when compared with the year ended June 30, 2017.
Net cash inflows in investing activities
Net cash outflows for investing activities were $1.2 million for the year ended June 30, 2018, compared with net cash inflows
for investing activities of $0.1 million for the year ended June 30, 2017, an increase of $1.3 million. The increase of $1.3 million is
due to an increase in cash outflows of $0.9 million and a decrease in cash inflows of $0.4 million.
The $0.9 million increase in outflows comprised: a $1.0 million increase in outflows for payments for contingent consideration
in the year ended June 30, 2018, compared with $Nil for the year ended June 30, 2017; this increase in outflows was offset by a
reduction of $0.1 million in payments for fixed assets, such as plant and equipment, in the year ended June 30, 2018 when compared
with the year ended June 30, 2017.
The inflows decreased by $0.4 million due to proceeds from rental deposits of $0.4 million which were returned to us in the year
ended June 30, 2017 on completion of part of the sublease agreement of our New York office space.
Net cash inflows in financing activities
Net cash inflows for financing activities were $68.6 million for the year ended June 30, 2018, compared with $60.0 million for
the year ended June 30, 2017, an increase of $8.6 million. The net cash inflows in the year ended June 30, 2018 include a $40.4
million receipt of gross proceeds from an institutional and retail entitlement offer to eligible existing shareholders in September 2017
and a $31.7 million receipt of net proceeds drawn at closing in March 2018 from a non-dilutive, four-year credit facility with
Hercules. In the year ended June 30, 2017, we received gross proceeds of $21.7 million from Mallinckrodt Pharmaceuticals on
January 6, 2017, in a private placement, and a $40.1 million receipt of gross proceeds from an institutional private placement on
March 31, 2017. We also received $0.1 million in receipts from employee share option exercises during the years ended June 30, 2018
and 2017. Additionally, there was $3.2 million of payments for associated capital raising costs in the year ended June 30, 2018,
compared with $1.9 million of share issue costs in the year ended June 30, 2017 and $0.4 million of payments for other associated
borrowings costs in the year ended June 30, 2018, an increase in outflows of $1.7 million.
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Comparison of cash flows for the Year ended June 30, 2017 with the Year ended June 30, 2016
Net cash outflows in operating activities
Net cash outflows for operating activities were $95.5 million for the year ended June 30, 2017, compared with $88.0 million for
the year ended June 30, 2016, an increase of $7.5 million. The increase of $7.5 million is due to a reduction in cash inflows of $4.1
million and an increase in cash outflows of $3.4 million in the year ended June 30, 2017 compared with the year ended June 30, 2016.
The $4.1 million reduction of inflows comprised: inflows from milestone payments received decreased by $3.0 million after our
licensee, JCR, reached a cumulative net sales milestone for sales of TEMCELL in Japan, during the year ended June 30, 2017 where
our licensee, JCR, reached a milestone for receiving full regulatory approval of MSC product TEMCELL in Japan during the year
ended June 30, 2016; interest receipts reduced by $0.6 million as our cash reserves in the year ended June 30, 2017 have decreased
when compared with the year ended June 30, 2016; inflows decreased by $1.7 million as receipts for the research and development tax
incentive were lower during the year ended June 30, 2017 when compared with the year ended June 30, 2016; these decreases in
inflows were offset by an increase of $1.2 million in receipts from royalty income earned on sales of TEMCELL in Japan during the
year ended June 30, 2017.
Outflows increased by $3.4 million due to fully absorbing the incremental clinical program costs for MPC-150-IM (CHF)
during the year ended June 30, 2017 as we were responsible for all research and development expenditure incurred on this product
candidate in the year ended June 30, 2017 whereas Teva was responsible for the majority of research and development expenses in the
year ended June 30, 2016. These increases in outflows were offset by cost savings due to operational streamlining efforts that reduced
full time equivalents and associated labor costs as well as a decrease in payments to suppliers in relation to manufacturing and
commercialization costs.
Net cash inflows in investing activities
Net cash inflows for investing activities were $0.2 million for the year ended June 30, 2017, compared with cash outflows of
$1.7 million for the year ended June 30, 2016, a decrease of $1.9 million. The $1.9 million decrease in cash outflows was comprised
of: a $0.8 million reduction in payments for investments in the year ended June 30, 2017; a decrease of $0.2 million for payments for
licenses in the year ended June 30, 2017; a decrease of $0.4 million related to lower payments for fixed assets, such as plant and
equipment, in the year ended June 30, 2017; and cash outflows were further decreased with an increase in cash inflows of $0.5 million
for rental deposits received as proceeds were returned to us in the year ended June 30, 2017 on completion of part of the sublease
agreement of our New York office space.
Net cash inflows in financing activities
Net cash inflows for financing activities were $60.0 million for the year ended June 30, 2017, compared with cash inflows for
financing activities of $62.1 million for the year ended June 30, 2016, a decrease of $2.1 million. The net cash inflows in the year
ended June 30, 2017 include a $21.6 million receipt of net proceeds from Mallinckrodt Pharmaceuticals on January 6, 2017, in a
private placement, and a $38.5 million receipt of net proceeds from an institutional private placement on March 27, 2017. In the year
ended June 30, 2016, we received net proceeds of $61.8 million from our initial public offering (“IPO”) of the Company’s ordinary
shares on Nasdaq. Additionally, there was $0.1 million in receipts from employee share option exercises and $0.2 million of payments
for other associated capital raising costs in the year ended June 30, 2017.
Operating Capital Requirements
To date, revenues have not been significant. We do not know when, or if, we will generate revenues from our product sales
significant enough to generate profits. We do not expect to generate significant revenue from product sales unless and until we obtain
regulatory approval of and commercialize more of our cell-based product candidates. We anticipate that we will continue to incur
losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory
approvals for, our cell-based product candidates, and begin to commercialize any approved products either directly ourselves or
through a collaborator or partner. We are subject to all of the risks inherent in the development of new cell-based products, and we
may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our
business. We anticipate that we will need substantial additional funding in connection with our continuing operations.
We expect our research and development expenditure to decrease over the next 12 to 24 months if we are able to successfully
partner one or more of our products. We expect management and administration expenses to remain relatively consistent. Subject to us
achieving successful regulatory approval we expect an increase in our total expenses driven by an increase in our selling, general and
administrative expenses as we move towards commercialization. Therefore, we will need additional capital to fund our operations,
which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution
arrangements and other collaborations, strategic alliances and licensing arrangements.
88
Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient
amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or
commercialization of one or more of our product candidates. If we raise additional funds through the issuance of debt or additional
equity securities, it could result in dilution to our existing shareholders, increased payment obligations and the existence of securities
with rights that may be senior to those of our ordinary shares. If we incur additional indebtedness, we could become subject to
covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur
additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that
could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial
condition and prospects.
Borrowings
Hercules
In March 2018, we entered into a loan and security agreement with Hercules for a $75.0 million non-dilutive, secured four-year
credit facility. We drew the first tranche of $35.0 million on closing. An additional $40.0 million may be drawn as certain milestones
are met. The loan matures in March 2022 with principal repayments commencing in October 2019 with the ability to defer the
commencement of principal repayments to October 2020 if certain milestones are met. Interest on the loan is payable monthly in
arrears on the 1st day of the month. At closing date, the interest rate was 9.45%. On March 22, 2018 and June 14, 2018, in line with the
increases in the U.S. prime rate, the interest rate on the loan increased to 9.70% and 9.95%, respectively.
NovaQuest
In June 2018, we drew the first tranche of $30.0 million of the principal amount from a $40.0 million secured loan with
NovaQuest. There is a four-year interest only period, until July 2022, with the principal repayable in equal quarterly instalments over
the remaining period of the loan. The loan matures in July 2026. Interest on the loan will accrue at a fixed rate of 15% per annum.
All interest and principal payments will be deferred until after the first commercial sale of our allogeneic product candidate
MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding Asia
(“pediatric aGVHD”). We can elect to prepay all outstanding amounts owing at any time prior to maturity, subject to a prepayment
charge, and may decide to do so if net sales of pediatric aGVHD are significantly higher than current forecasts.
If there are no net sales of pediatric aGVHD, the loan is only repayable on maturity in 2026. If in any annual period 25% of net
sales of pediatric aGVHD exceed the amount of accrued interest owing and from 2022, principal and accrued interest owing (“the
payment cap”), Mesoblast will pay the payment cap and an additional portion of excess sales which may be used for early prepayment
of the loan. If in any annual period 25% of net sales of pediatric aGVHD is less than the payment cap, then the payment is limited to
25% of net sales of pediatric aGVHD. Any unpaid interest will be added to the principal amounts owing and shall accrue further
interest. At maturity date, any unpaid loan balances are repaid.
Because of this relationship of net sales and repayments, changes in our estimated net sales may trigger an adjustment of the
carrying amount of the financial liability to reflect the revised estimated cash flows. The carrying amount adjustment is recalculated
by computing the present value of the revised estimated future cash flows at the financial instrument’s original effective interest rate.
The adjustment is recognized in the Income Statement in the period the revision is made.
The carrying amount of the loan is subordinated to the senior creditor, Hercules.
5.C
Research and Development, Patents and Licenses
For a description of the amount spent during each of the last three fiscal years on company-sponsored research and development
activities, as well as the components of research and development expenses, see “Item 5.A Operating Results – Results of
Operations.”
For a description of our research and development process, see “Item 4.B Business Overview.”
5.D
Trend Information
As a biotechnology company which primarily is still in the development stage, we are subject to costs of our clinical trials and
other work necessary to support applications for regulatory approval of our product candidates. Health regulators have increased their
focus on product safety. In addition regulators have also increased their attention on whether or not a new product offers evidence of
substantial treatment effect. These developments have led to requests for more clinical trial data, for the inclusion of a higher number
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of patients in clinical trials, and for more detailed analyses of the trials. In light of these developments, we expect these aspects of our
research and development expenses may need to increase as we continue to fund our programs to the market. Notwithstanding this
upward trend, our research and development expenses may still fluctuate from period to period due to varied rates of patient
enrollment and the timing of our clinical trials as our existing trials are completed and new trials commence. We cannot predict with
any degree of accuracy the outcome of our research or commercialization efforts.
5.E
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, other than
operating leases as mentioned below, as defined under SEC rules.
5.F
Contractual Obligations and Commitments
Borrowing commitments:
As of June 30, 2018, the maturity profile of the anticipated future contractual cash flows including interest in relation to our
borrowings, on an undiscounted basis and which, therefore differs from the carrying value, is as follows:
(in U.S. dollars, in thousands)
Borrowings(1)(2)
Within
1 year
Between
1-2 years
Between
2-5 years
(3,928)
(3,928)
(15,495)
(15,495)
(54,826)
(54,826)
Over
5 years
(49,228)
(49,228)
Total
contractual
cash flows
(123,477)
(123,477)
Carrying
amount
(59,397)
(59,397)
(1) Contractual cash flows include payments of principal, interest and other charges. Interest is calculated based on debt held at
June 30, 2018 without taking account drawdowns of further tranches.
(2) In relation to the contractual maturities of the NovaQuest borrowings, there is variability in the maturity profile of the anticipated
future contractual cash flows given the timing and amount of payments are calculated based on our estimated net sales of
pediatric aGVHD.
Lease commitment – as lessee:
We lease various offices under non-cancellable operating leases expiring within 1 to 4 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. As of June 20, 2018, our lease commitments are as follows:
(in thousands)
Operating leases
Total commitments
Total
Within one year
Later than one
year but no later
than three years
Later than three
years but no
later than five
years
3,926
3,926
1,651
1,651
2,240
2,240
35
35
Later than five
years
—
—
Lease commitments include amounts in A$ and Singapore dollars which have been translated to US$ as of June 30, 2018 using
foreign exchange rates published by the Reserve Bank of Australia.
Lease commitment – as lessor:
Future minimum lease payments expected to be received in relation to a non-cancellable sub-lease of operating leases are set out
below:
(in thousands)
Operating leases
Total commitment
Total
Within one year
220
220
155
155
Later than one
year but no later
than three years
Later than three
years but no
later than five
years
65
65
—
—
Later than five
years
—
—
Sub-lease commitment includes amounts in A$ which have been translated to US$ as of June 30, 2018 using foreign exchange
rate published by the Reserve Bank of Australia.
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In addition to the obligations in the table above, as of June 30, 2018 we also had the following significant contractual
obligations described below.
Contingent liabilities
We acquired certain intellectual property relating to our MPCs, or Medvet IP, pursuant to an Intellectual Property Assignment
Deed, or IP Deed, with Medvet Science Pty Ltd, or Medvet. Medvet’s rights under the IP Deed were transferred to Central Adelaide
Local Health Network Incorporated, or CALHNI, in November 2011. In connection with our use of the Medvet IP, on completion of
certain milestones we will be obligated to pay CALHNI, as successor in interest to Medvet, (i) certain aggregated milestone payments
of up to $2.2 million and single-digit royalties on net sales of products covered by the Medvet IP, for cardiac muscle and blood vessel
applications and bone and cartilage regeneration and repair applications, subject to minimum annual royalties beginning in the first
year of commercial sale of those products and (ii) single-digit royalties on net sales of the specified products for applications outside
the specified fields.
We have entered into a number of agreements with other third parties pertaining to intellectual property. Contingent liabilities
may arise in the future if certain events or developments occur in relation to these agreements. As of June 30, 2018 we have assessed
these contingent liabilities to be remote.
Capital commitments
We did not have any commitments for future capital expenditure outstanding as of June 30, 2018.
Item 6.
Directors, Senior Management and Employees
(Start of the Remuneration Report for Australian Disclosure Requirements)
Our board of directors (“the Board”) presents the 2017/18 Remuneration Report, which 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. The remuneration report sets out remuneration information for our
company’s key management personnel (“KMP”) for the financial year ended June 30, 2018.
6.A Key Management Personnel
Key management personnel, as defined in the International Accounting Standards 24 ‘Related Party Disclosures’ and the
Australian Corporations Act 2001, have authority and responsibility for planning, directing and controlling the activities of our
company, directly or indirectly, and include any director (whether executive or otherwise). With this definition in mind, the Board has
determined that in addition to themselves and Silviu Itescu (CEO), Paul Hodgkinson (CFO) should be designated as key management
personnel for the financial year ended June 30, 2018.
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Our key management personnel are listed in table below:
Name
Non-executive directors
Brian Jamieson
William Burns
Donal O’Dwyer
Eric Rose
Michael Spooner
Position
Change from last year
Chair, Board of Directors
Member, Nomination and Remuneration Committee
Member, Audit and Risk Committee
Vice Chair, Board of Directors
Non-executive Director
Chair, Nomination and Remuneration Committee
Member, Audit and Risk Committee
Non-executive Director
Non-executive Director
Chair, Audit and Risk Committee
Member, Nomination and Remuneration Committee
No change
No change
No change
No change
No change
Ben-Zion Weiner
Non-executive Director
Joseph Swedish
Non-executive Director
Resigned Effective Date
June 18, 2018
Joined Effective Date
June 18, 2018
Executive director
Silviu Itescu
Other executive KMP
Chief Executive Officer
Executive Director
No change
Paul Hodgkinson
Chief Financial Officer
Notes
Resigned Effective Date
May 31, 2018
1. Mr Paul Hodgkinson resigned as Chief Financial Officer effective May 31, 2018. At this time Mr Josh Muntner was
appointed as Chief Financial Officer. Mr Hodgkinson served as KMP up to the point of his resignation. We anticipate that for
FY19, Mr Muntner will be a KMP.
2. Ms Shawn Cline Tomasello was appointed to the board as a Non-executive Director on July 11, 2018 and will be considered
key management personnel for FY19.
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Details of Directors and Senior Management
Board of Directors
Brian Jamieson, FCA
Non-executive Chairman of the Board of Directors
Experience and expertise
Mr. Jamieson has served on our board of directors as Chairman since 2007 after retiring as Chief Executive of Minter Ellison
Melbourne. Previously he was Chief Executive Officer at KPMG Australia, a KPMG Board Member in Australia, and a member of
the USA Management Committee. Mr. Jamieson is Chairman of Sigma Healthcare Limited and a Non-Executive Director of
Highfield Resources Ltd, and Director and Treasurer of the Bionics Institute. He is a Fellow of the Institute of Chartered Accountants
in Australia and a Fellow of the Australian Institute of Company Directors. With his over 40 years of experience in providing advice
and audit services to a diverse range of public and large private companies, together with his service as a chairman and director at
other companies, Mr. Jamieson provides leadership, global management, accounting and regulatory expertise.
Other current directorships of listed public companies
Chairman, Sigma Healthcare Ltd (since 2005)
Non-executive Director, Highfield Resources Ltd (since 2018)
Former directorships of listed public companies within the last 3 years
Non-executive Director, Tatts Group Ltd (2005 – 2017)
William Burns, BA
Non-Executive Member of the Board of Directors
Experience and expertise
Mr. Burns has served on our board of directors since 2014 and was appointed Vice Chairman in 2016. He spent his entire
management career at the Beecham Group and F. Hoffmann-La Roche Ltd. He 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 is the Chair of
Molecular Partners, and has been a Non-Executive Director of Shire PLC, Chugai Pharmaceutical Co., Genentech, Crucell, and
Chairman of Biotie Therapies Corp. from 2014 until its sale to Acorda Therapeutics Inc. in 2016. Mr Burns is also a member of the
Oncology Advisory Board of the Universities of Cologne/Bonn in Germany. In 2014, he was appointed a trustee of the Institute of
Cancer Research, London, and in 2016 a Governor of The Wellcome Trust in London, UK. His extensive experience in the
pharmaceutical industry, specifically as a member of the board of directors of other pharmaceutical companies, provides
pharmaceutical, healthcare, industry, leadership and management expertise.
Other current directorships of listed public companies
Chair of Molecular Partners (since 2018)
Former directorships of listed public companies within the last 3 years
Chairman, Biotie Therapies Corp. (2014 – 2016)
Non-executive Director, Shire (UK) (2010 – 2018)
Donal O’Dwyer, BE, MBA
Non-Executive Member of the Board of Directors
Experience and expertise
Mr. O’Dwyer has served on our 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, Mr. O’Dwyer worked with Baxter Healthcare, rising from plant manager in Ireland to president of the
Cardiovascular Group, Europe, now Edwards Lifesciences. Mr. O’Dwyer is a qualified civil engineer with an MBA. He is on the
board of directors of a number of life sciences companies including Cochlear Limited, CardieX Ltd (formerly called Atcor Medical
Holdings Ltd), Fisher & Paykel Healthcare Ltd and NIB Health Funds Ltd. With his experience as a senior executive and a director, as
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well as his extensive experience in the cardiovascular and medical devices industries, Mr. O’Dwyer provides business, science,
engineering and management expertise.
Other current directorships of listed public companies
Non-executive Director, Cochlear Ltd (since 2005)
Non-executive Director, CardieX Ltd (formerly called Atcor Medical Holdings Ltd) (since 2004)
Non-executive Director, Fisher & Paykel Healthcare (since 2013)
Non-executive Director, NIB Holding Ltd (since 2016)
Former directorships of listed public companies within the last 3 years
None
Eric Rose, MD
Non-Executive Member of the Board of Directors
Experience and expertise
Dr. Rose has served on our board of directors since 2013. He is currently Executive Chairman of SIGA Technologies. 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, Dr. Rose 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, he
led the Columbia Presbyterian heart transplantation program in the United States. Dr. Rose currently sits on the board of directors of
ABIOMED. His experience as a surgeon, researcher and businessman provides medical, pharmaceutical, scientific and industry
expertise.
Other current directorships of listed public companies
Executive Chairman, SIGA Technologies, Inc. (since 2007)
Non-executive Director, ABIOMED, Inc. (2007 – 2012, 2014 – present)
Former directorships of listed public companies within the last 3 years
None
Michael Spooner, BCom, ACA, MAICD
Non-Executive Member of the Board of Directors
Experience and expertise
Mr. Spooner has served on our board of directors since 2004. During this period he has filled various roles including as
Executive Chairman from the date of our Australian IPO in 2004 until 2007. 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). He is the chairman of Simavita Limited
since May 2016 and Chairman of MicrofuidX since February 2018. Prior to returning to Australia in 2001, Mr. Spooner spent much of
his career internationally where he served in various roles including as a partner to PA Consulting Group, a UK-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 U.S. and Asian public companies. Mr. Spooner provides executive management, commercial, business strategy and
accounting expertise as well as established relationships with investment firms and business communities worldwide.
Other current directorships of listed public companies
Chairman, Simavita Ltd (since 2016)
Former directorships of listed public companies within the last 3 years
None
94
Ben-Zion Weiner, BSc, MSc, PhD
Non-Executive Member of the Board of Directors – Resigned effective date June 18, 2018
Experience and expertise
Dr. Weiner has served on our board of directors from 2012 to 2018. 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 (2014). His extensive experience in the
pharmaceutical industry and pharmaceutical companies provided pharmaceutical development, industry, scientific and management
expertise through to his resignation date.
Other current directorships of listed public companies
None
Former directorships of listed public companies within the last 3 years
None
Joseph Swedish, MHA
Appointed to the Board as Non-Executive Member of the Board of Directors on June 18, 2018.
Experience and expertise
Joseph. R. Swedish has more than two decades of healthcare leadership experience as the CEO for major United States
healthcare enterprises. Most recently, he has served as Executive Chairman, President and CEO of Anthem Inc from 2013 to 2018.
America’s leading health benefits provider. Prior to joining Anthem, Mr Swedish was CEO for several major integrated healthcare
delivery systems, including Trinity Health and Colorado’s Centura Health. Currently, he sits on the Board of Directors of IBM
Corporation, CDW Corporation, and Proteus Digital Health. Mr Swedish is Chairman of Duke University’s Fuqua School of Business
Board of Visitors. Previously, he was Chairman of the Catholic Health Association. Mr Swedish received a bachelor’s degree from the
University of North Carolina and his master’s degree in health administration from Duke University
Other current directorships of listed public companies
Non-Executive Director, IBM Corporation (since 2017)
Non-Executive Director, CDW Corporation (since 2015)
Former directorships of listed public companies within the last 3 years
Executive Chairman, Anthem Inc. (2013 - 2018)
Shawn Cline Tomasello, BS, MBA
Appointed to the Board as a Non-Executive Director on July 11, 2018.
Experience and expertise
With more than 30 years’ experience in the pharmaceutical and biotech industries, Shawn Cline Tomasello has substantial
commercial and transactional experience. Since 2015, Ms Tomasello has been Chief Commercial Officer at leading immuno-oncology
cell therapy company Kite Pharma, where she played a pivotal role in the company’s acquisition in 2017 by Gilead Sciences for $11.9
billion. Prior to this she served as Chief Commercial Officer at Pharmacyclics, Inc., which was acquired in 2015 by AbbVie, Inc. for
$21.0 billion. Ms Tomasello previously was President of the Americas, Hematology and Oncology at Celgene Corporation where she
managed over $4.0 billion in product revenues, and was instrumental in various global expansion and acquisition strategies. She has
also held senior positions at Genentech, Pfizer Laboratories, Miles Pharmaceuticals and Procter & Gamble. Ms Tomasello currently
serves on the Board of Directors of Centrexion Therapeutics, Oxford BioTherapeutics and Diplomat Rx. She received a MBA from
Murray State University and a B.S. in Marketing from the University of Cincinnati.
Other current directorships of listed public companies
Non-Executive Director, Diplomat Rx (since 2015)
95
Former directorships of listed public companies within the last 3 years
None
Charlie Harrison, BA, LLB (Hons)
Company Secretary
Experience and expertise
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.
Other current directorships of listed public companies
None
Former directorships of listed public companies within the last 3 years
None
Senior Management
Silviu Itescu, MBBS (Hons), FRACP, FACP, FACRA
Chief Executive Officer
Executive Member of the Board of Directors
Experience and expertise
Dr. Itescu is our Chief Executive Officer (“CEO”). He has served our board of directors since our founding in 2004, was
Executive Director from 2007 to 2011, and became CEO and Managing Director in 2011. Prior to founding Mesoblast in 2004,
Dr. Itescu established an international reputation as a physician scientist in the fields of stem cell biology, autoimmune diseases, organ
transplantation, and heart failure. He has been a faculty member of Columbia University in New York, and of Melbourne and Monash
universities in Australia. In 2011, Dr. Itescu was named BioSpectrum Asia Person of the Year. In 2013, he 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. 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 directorships of listed public companies within the last 3 years
None
Paul Hodgkinson, MA (Hons) FCA
Chief Financial Officer – Resigned effective date May 31, 2018
Mr. Hodgkinson served as our Chief Financial Officer (“CFO”) from June 2014 to May 2018. He has 16 years of international
pharmaceutical experience in the areas of finance, strategic planning, business development and licensing, manufacturing and supply
chain, and procurement. From 2011 through 2014, Mr. Hodgkinson served as the Country Chief Financial Officer for the Novartis
Australia and New Zealand group of companies and divisions, which was comprised of Alcon, Sandoz, and the Novartis Vaccines and
Diagnostics, Consumer Health, Animal Health, and Pharmaceuticals divisions. From 1998 to 2006, Mr. Hodgkinson held a number of
leadership roles with AstraZeneca in the United Kingdom, including Global Licensing Finance Director, before serving as CFO for
AstraZeneca Australia from 2006 through 2011. Mr. Hodgkinson is a member of the Institute of Chartered Accountants in Australia, is
a Fellow of the Institute of Chartered Accountants of England and Wales and holds a Master’s degree in engineering from Cambridge
University. He has also undertaken executive leadership programs at the Harvard Business School and INSEAD.
96
Josh Muntner, BFA, MBA
Chief Financial Officer – Appointed effective date May 31, 2018
Mr Muntner has accrued 20 years’ experience in healthcare investment banking and corporate finance, and has been involved in
a wide range of healthcare-related transactions with approximately $11.0 billion in value. Most recently, he led corporate development
and financial transactions at Nasdaq-listed biotechnology company, ContraFect Corporation. Previously, Mr Muntner served as
Managing Director and Co-Head of Healthcare Investment Banking at Janney Montgomery Scott, and spent nine years at
Oppenheimer & Co. and its U.S. predecessor, CIBC World Markets. He also served as an investment banker at Prudential Securities.
Mr Muntner has a BFA from Carnegie Mellon and a MBA from the Anderson School at UCLA.
Peter Howard, BSc, LLB (Hons)
General Counsel
Mr. Howard has served as our General Counsel and Corporate Executive since July 2011. As external counsel and partner at
Australian law firm, Middletons (now, K&L Gates), Mr. Howard has been integrally involved with Mesoblast since its inception and
public listing on the ASX in 2004. More generally, Mr. Howard has extensive experience with many biopharmaceutical firms and
major research institutions, covering public listings, private financings, strategic, licensing, intellectual property and mergers and
acquisition activities. He has done so in several roles, including as a partner at a major law firm, entrepreneur, director and senior
executive.
Donna Skerrett, MD
Chief Medical Officer
Dr. Skerrett has served as our Chief Medical Officer since 2011, and she previously held roles at Mesoblast in Clinical and
Regulatory Affairs since 2004. Dr. Skerrett has 20 years of combined experience in transfusion medicine, cellular therapy, and
transplantation. Prior to joining Mesoblast, Dr. Skerrett was Director of Transfusion Medicine and Cellular Therapy at Weill Cornell
Medical Center in New York from 2004 to 2011, and she served as Associate Director of Transfusion Medicine and Director of Stem
Cell Facilities at Columbia University’s New York-Presbyterian Hospital from 1999 to 2004. She has been an advisor to the New
York State Department of Health on the Progenitor Cell Committee since 1989 and has been Chair of the Governor’s Council on
Blood and Transfusion Services since 2007, and serves on the Executive Committee of the Alliance for Regenerative Medicine.
Paul Simmons, PhD
Head of Research and New Product Development
Dr. Simmons has served as our Head of Research and New Product Development since 2011. He has nearly 30 years of
experience in stem cell research, especially research in basic hematopoiesis and in precursor cells for the stromal system of the bone
marrow, and served as President of the International Society of Stem Cell Research, or ISSCR, from 2006 to 2007. Prior to joining
Mesoblast, Dr. Simmons held the C. Harold and Lorine G. Wallace Distinguished University Chair at the University of Texas Health
from 2008 to 2011 and served as the inaugural Professor and Director of the Centre for Stem Cell Research at the Brown Foundation
Institute of Molecular Medicine from 2006 to 2011. Dr. Simmons is, or has served as, an associate editor, a member of the editorial
board, or a reviewer on multiple scientific and medical journals including Experimental Hematology, Cytotherapy and Stem Cell
Research, Cell Stem Cell, Stem Reports, Science and Nature.
John McMannis, PhD
Head of Manufacturing
Dr. McMannis has served as our Head of Manufacturing since 2011. He has 27 years of experience in clinical cellular therapy
trials in both academic and commercial environments. Before joining Mesoblast, Dr. McMannis served at the University of Texas MD
Anderson Cancer Center as a Professor of Medicine from 1999 to 2011, and as the Director of the Cell Therapy Laboratory from 1999
to 2011, and as the Technical Director of the Cord Blood Bank from 2008 to 2011. Before his tenure at the University of Texas MD
Anderson Cancer Center, Dr. McMannis was a Senior Director Technical Affairs at the Immunotherapy Division of Baxter and
Therapy Scientist at COBE BCT (now Terumo BCT). Dr. McMannis has served on the scientific advisory boards at BioSafe SA,
Biolife Solutions, Inc., and General Electric and on the board of directors for the American Association of Blood Banks, or AABB,
and the National Marrow Donor Program, or NMDP, which operates the “Be the Match” donor program.
97
Geraldine Storton, BSc, MMS, MBA
Head of Regulatory Affairs and Quality Management
Ms. Storton is a seasoned pharmaceutical executive with more than 24 years’ experience across the full value chain of
Pharmaceutical and Medical Device Research and Development, production and commercialization worldwide. She has an extensive
background in regulatory affairs and quality, most recently as a consultant to cell therapy companies. Prior to this, Ms. Storton held
executive roles at Hospira, and its predecessor companies in both regulatory affairs and quality, with a focus on major program
management. As Vice President, Program Management, Quality, at Hospira headquarters in Chicago, she led a company-wide quality
remediation program to improve compliance in manufacturing across 15 facilities worldwide. As Regional Director, Commercial
Quality ANZ, Asia and Japan, Ms. Storton was responsible for quality oversight and management of all products sold in Asia Pacific
countries. Her responsibilities included regulatory compliance, batch release, field actions, complaints management, change control,
due diligence and new product launch. As director of global regulatory operations, Ms. Storton managed development and registration
of new products and on-market management of the existing product portfolio for all Hospira’s products developed or manufactured
within Asia Pacific for global distribution. She joined Mesoblast in December 2015.
Michael Schuster, MBA
Pharma Partnering
Mr. Schuster, who joined Mesoblast in 2004, leads the Group's partnering discussions. Previously he was the head of the
Group's investor relations outreach program and was part of the founding executive team at both Mesoblast Limited and Angioblast
Systems, Inc. Mr. Schuster was Executive Vice President of Global Therapeutic Programs from 2010 to 2013 and was the Director of
Business Development and Vice President of Operations from 2004 to 2010. He holds an undergraduate degree in science from Tufts
University, a Master’s degree in Immunology & Microbiology from New York Medical College, and an MBA from Fordham
University in New York.
There are no family relationships among any of our directors and senior management. The business address of each of our
directors and senior management is Mesoblast Limited, Level 38, 55 Collins Street, Melbourne, VIC 3000, Australia.
Directors’ Interests
The relevant interest of each director, as defined by section 608 of the Corporations Act, in the share capital of Mesoblast, as
notified by the directors to the ASX in accordance with section 205G(1) of the Corporations Act, at the date of this report is as
follows:
Director
William Burns
Silviu Itescu
Brian Jamieson
Donal O'Dwyer
Eric Rose
Michael Spooner
Ben-Zion Weiner
Resigned Effective Date June 18, 2018
Joseph Swedish
Joined Effective Date June 18, 2018
Shawn Cline Tomasello
Joined Effective Date July 11, 2018
Mesoblast Limited
ordinary shares
30,330
68,958,928
645,000
1,149,142
—
1,060,000
Options over
Mesoblast Limited
Ordinary Shares
80,000
—
—
—
80,000
—
40,000
80,000
—
—
—
—
98
Meeting of Directors
The number of meetings our board of directors (including committee meetings of directors) held during the year ended June 30,
2018 and the number of meetings attended by each director were:
Director
William Burns
Silviu Itescu
Brian Jamieson
Donal O'Dwyer
Eric Rose
Michael Spooner
Ben-Zion Weiner
Joseph Swedish
Board of Directors
B*
A*
13
15
15
15
15
15
13
15
13
15
15
15
13
14
1
1
Audit and Risk Committee
Nomination and
Remuneration Committee
A
—
—
4
4
—
4
—
—
B
—
—
4
4
—
4
—
—
A
—
—
8
8
—
8
—
—
B
—
—
8
8
—
8
—
—
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
* = This includes both in-person scheduled meetings as well teleconference meetings organized on an ad-hoc basis. Each director
attended every in-person, scheduled meeting.
— = Not a member of the relevant committee
NB: Certain directors attended various committee meetings by invitation in addition to those shown above.
6.B
Compensation
Executive summary
Mesoblast is a biopharmaceutical company with three programs in active phase 3 clinical studies 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 (MLC) technology platform characterized by
distinct properties which enable allogeneic or “off-the-shelf” use. Given our business activity and current development stage, as we
drive towards our goal of the successful commercialization of our technology, we generate losses each year and are net users of cash
as we invest to progress both our clinical programs and manufacturing processes.
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 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 Mesoblast is governed. Our approach must also be sufficiently
flexible to allow us to attract, retain and motivate high performing executives in the various locations in which we operate.
In addition, the Board believes, given the nature and stage of our Company, that the most appropriate measures to assess
company performance are the achievement of key, well-defined milestones that are critical to progressing the company technology
with the ultimate outcome being to bring our product candidates to market in order to improve patient outcomes and enhance value for
our shareholders.
As detailed in this report, our remuneration framework is designed to encourage the achievement of these key milestones set by
the Board in a timely manner. In particular, in the 2016-7 financial year, a substantial change was made to the Company's
remuneration framework with the introduction of a milestone vesting framework for executive LTI grants whereby options vest upon
the achievement of key specified outcomes which are tailored to each executive’s role (as opposed to the Company’s traditional
approach of time-based vesting). This approach was adopted to further strengthen the link between our executive LTI rewards and
achievements which we expect to generate shareholder returns.
Further, the Nomination & Remuneration Committee and Board of Mesoblast continues to review its remuneration framework
on an annual basis to ensure it remains ‘fit-for-purpose’ going forward and supports the Company’s strategy and the delivery of long
term value creation for Mesoblast’s shareholders. In the 2017-8 financial year, the Board has considered and agreed to implement
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further changes to the remuneration structure to apply from FY19, taking into account feedback received from key stakeholders.
While the outcomes of this review will be disclosed in further detail in the FY19 Remuneration Report, in summary, the Board has
determined to make the following changes to further facilitate the alignment between executives’ rewards and the shareholder
experience:
•
•
the introduction of STI deferral for the CEO, with a portion of the CEO’s STI payment deferred for one year; and
the introduction of an additional two-year minimum holding requirement for executive milestone LTI grants i.e. the
individual needs to meet the relevant milestone and remain employed for 2 years before the options vest.
The Board believes both of these changes will assist to further incentivize in the medium-term while facilitating long-term
retention for key management. In addition, the Company has provided greater transparency in relation to the specific KPIs which form
the basis of the Company’s STI payouts (see “Remuneration outcomes for FY18” below). We welcome any feedback you might have
on our remuneration framework as we continue to ensure it remains fair and balanced, provides the appropriate incentives for the
executives to deliver on achieving the key milestones that will ultimately drive long term shareholder returns and meets the needs and
expectations of our shareholders, employees and other stakeholders.
Overview of FY18 performance and remuneration outcomes
Mesoblast’s FY18 performance
Mesoblast has achieved numerous key clinical, regulatory and corporate objectives during the 2017/8 financial year which have
been reflected in remuneration outcomes.
The Company’s first Phase 3 trial reported the successful achievement of its primary endpoint of Day 28 overall response for
remestemcel-L (MSC-100-IV) in steroid-refractory acute Graft Versus Host Disease (aGVHD). This cell therapy is now well
positioned to be Mesoblast’s first approved product in the United States. Based on interactions with the FDA, Mesoblast believes that
successful results from the completed Phase 3 trial, together with Day 180 safety, survival and quality of life parameters in these
patients, may provide sufficient clinical evidence to support a BLA filing in the United States.
In addition to the above, the Company achieved the following key clinical and regulatory outcomes:
•
The FDA granted a Regenerative Medicine Advanced Therapy (RMAT) designation for the use of MPC-150-IM in end-stage
heart failure patients with left ventricular assist devices (LVADs). This trial has completed enrollment of 159 patients.
• Key Day 100 survival outcomes of its Phase 3 trial for remestemcel-L in children with steroid refractory aGVHD.
• Completed enrollment of 404 patients in Phase 3 trial evaluating its proprietary allogeneic mesenchymal precursor cell
product candidate for chronic low back pain.
• Full 52-week results in Phase 2 trial of MPC-300-IV in biologic refractory rheumatoid arthritis showed an early and durable
effect from a single infusion.
The Company also achieved key corporate and financial outcomes in or shortly after the financial year:
•
• The strength of Mesoblast’s intellectual property portfolio was highlighted with the license to TiGenix NV, now a wholly
owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), of certain of our patents. This license supports
the global commercialization of their adipose-derived mesenchymal stem cell product for the local treatment of fistulae.
Mesoblast will receive up to €20.0 million (approximately US$24.0 million) in payments, as well as single digit royalties on
net sales.
Shortly after the end of the financial year, Mesoblast entered into a strategic alliance with one of China’s largest
pharmaceutical companies, Tasly Pharmaceutical Group, for the development, manufacture and commercialization in China
of Mesoblast’s allogeneic mesenchymal precursor cell product candidates MPC-150-IM for the treatment or prevention of
chronic heart failure and MPC-25-IC for the treatment or prevention of acute myocardial infarction. Mesoblast will receive
$40.0 million on closing, up to $25.0 million on product regulatory approvals in China, and double-digit escalating royalties
on net product sales. This transaction is subject to filing with the State Administration of Foreign Exchange.
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• The Company executed on non-dilutional funding, with credit facilities with Hercules Capital Inc and NovaQuest Capital
•
Management, LLC finalized in the financial year.
Two leading United States healthcare executives joined the Mesoblast Board of Directors. Mr Joseph R. Swedish has more
than two decades of healthcare leadership experience as the CEO for major U.S. healthcare organizations, including most
recently as Executive Chairman, President and CEO of Anthem Inc., a Fortune 33 company and the leading U.S. health
benefits provider. Ms Shawn Cline Tomasello brings more than 30 years’ experience in the pharmaceutical and biotech
industries, with substantial commercial and transactional experience at Kite Pharma and Pharmacyclics, Inc.
• Revenues were $17.3 million for the year ended June 30, 2018, compared with $2.4 million for the year ended June 30, 2017,
an increase of $14.9 million. This increase of $14.9 million in the year ended June 30, 2018 was due to a 152% increase in
commercialization revenue ($2.2 million) from royalty income on sales of TEMCELL® Hs. Inj., an upfront payment of $5.9
million (€5.0 million) received upon execution of our patent license agreement with Takeda in December 2017, a future
payment from Takeda of $5.9 million (€5.0 million), due by December 2018, was recognized, and an increase of $1.0 million
in sales milestones recognized on sales of TEMCELL® Hs. Inj.
• Net cash outflows from operating activities in the year ended June 30, 2018 were reduced by $20.5 million (21%) compared
with the year ended June 30, 2017. The $20.5 million decrease comprised: a decrease in cash outflows of $15.1 million due to
a reduction in payments to suppliers and employees primarily in relation to a decrease in manufacturing commercialization
costs; and an increase in cash inflows of $5.4 million primarily in relation to the non-refundable up-front payment received
upon execution of our patent license agreement with Takeda in December 2017 and increased receipts from sales milestones
and royalty income on sales of TEMCELL® Hs. Inj. in Japan.
As a result of these strong achievements, which the Board believes are key drivers for long term success, incentives were paid to
the CEO and the Senior Executive team. Further details of this year’s remuneration outcomes are provided in the following section
and throughout this report.
Remuneration outcomes for FY18
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 can they be
effectively used to accurately reflect the performance of our 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 (see Remuneration Strategy and Framework for further detail on our framework). Annually the Board prioritizes the key
Company milestones for the coming year. These milestones form the CEO’s KPIs, the overall priorities for the company and establish
the basis for all STI payments. 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 a key part of the performance framework and is regularly measured and reported.
The Board, utilizing all information available to it on specific achievements has assessed the overall Company’s performance at
85% of target and the CEO’s performance at 90% of target.
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In the table below we outline the Board’s assessment of performance against the Company KPI’s for the year ended June 30,
2018.
Weighting
Rating
Assessed
Performance
Key Objectives
Execute on specified key
objectives within our Tier
1 clinical programs
Key Objectives Category
Graft vs Host Disease
(GvHD)
Chronic Heart Failure
(CHF)
Chronic Lower Back Pain
Rheumatoid Arthritis
Execute on financing and
partnering strategy
Financing
Partnering
Manufacturing process
development
Organization Structure and
Development
Key Specified Achievements
• Completed enrollment in GvHD
Phase 3 Trial
• Primary endpoint successfully
achieved
• Successful Day 100 survival
• Completed enrollment in end stage
CHF trial
• Received RMAT status for LVAD
patients
• End stage CHF trial results to be
presented late 2018
• CHF Ph3 study enrollment
continuing as planned
• Phase 3 Study – Enrollment
completed
• Reported on positive Phase 2 trial
results
• Funding via successful capital
raise A$51 Million
• Executed on a US$75 Million non-
dilutive credit facility
• Executed on a US$50 Million
financing announced July 2, 2018,
including US$40 Million non-
dilutive credit facility.
• Entered into licensing agreement
with Takeda
• Entered into a commercial
agreement for China for treatment
of Heart Disease with China
pharmaceutical company -Tasly
shortly after completion of financial
year
Significant advances achieved in
process development for fully
scalable manufacture of MPC -
bioreactors
• Minimal change in headcount
despite continuing increase in
activity
• Continued to strengthen employee
base with critical new hires
• Significant progress on Board
renewal – with the retirement of one
NED and the recruitment of 2 new
US based NED Directors with
outstanding industry experience
55%
90%
49.5%
35%
80%
28.0%
5%
70%
3.5%
5%
80%
4.0%
Assessed Total Company
Performance
100%
N/A
85.0%
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Executive KMP remuneration received in FY18
The table below represents remuneration paid to each executive KMP during the year.
Fixed remuneration and cash bonus (STI) relates to amounts received during the year and share based option payments and
vested LTI represent equity from prior years.
2018
Short-term benefits
Salary &
fees
$
Cash
Bonus(1)
$
Annual
Leave(3)
Non-
monetary
benefits
Other
$
Post-
employment
benefits
Super-
annuation
Long-
term
benefits
Long
service
leave(3)
Share-
based
payments
Options(4)
Other
Termi-
nation
benefits
Total
$
Name
Silviu Itescu (CEO)
Paul Hodgkinson (CFO)
Total executive KMP
Total executive KMP(2)
Currency
1,010,000 909,000
A$
389,583
—
A$
A$
1,399,583 909,000
US$ 1,086,637 705,748
$
$
77,694 — —
(17,399) — —
60,295 — —
46,813 — —
$
$
$
$
— — 2,033,623
20,049 16,880
20,049 (9,605) (92,281) — 290,347
40,098 7,275 (92,281) — 2,323,970
31,132 5,648 (71,647) — 1,804,330
(1) STI bonus payable for performance in the year ended June 30, 2018, not paid as at June 30, 2018.
(2) The US$ results has been translated at the average weighted exchange rate of 0.7764 for the year ended June 30, 2018.
(3) Annual leave compensation for Paul Hodgkinson presents as negative compensation because on his resignation on May 31,
2018, annual leave provision balance as at June 30, 2017 were reversed and recognized in annual leave compensation. On
Paul Hodgkinson’s resignation on May 31, 2018, long service leave provision balances as at this date were reversed and
recognized in long service leave compensation.
(4) On Paul Hodgkinson’s resignation, in accordance with the plan rules, non-vested options were forfeited which has reversed
previously recognized share based payment compensation.
2017
Short-term benefits
Salary &
fees
$
Cash
Bonus(1)
$
Annual
Leave
Non-
monetary
benefits
Other
$
Post-
employment
benefits
Super-
annuation
Long-
term
benefits
Long
service
leave
$
Share-
based
payments
Options
Other
Termi-
nation
benefits
$
Total
$
Name
Silviu Itescu (CEO)
Paul Hodgkinson (CFO)
Total executive KMP
Total executive KMP(2)
Currency
1,010,000 757,500 46,610 — —
A$
439,143 148,750 5,721 — —
A$
A$
1,449,143 906,250 52,331 — —
US$ 1,093,089 683,584 39,473 — —
$
$
$
$
19,616 16,880
— — 1,850,606
30,416 6,641 676,692 — 1,307,363
50,032 23,521 676,692 — 3,157,969
37,739 17,742 510,428 — 2,382,055
(1)
(2)
STI bonus payable for performance in the year ended June 30, 2017, not paid as at June 30, 2017.
The US$ results has been translated at the average weighted exchange rate of 0.7543 for the year ended June 30, 2017.
Remuneration Strategy and Framework
Executive Remuneration – Framework
Mesoblast’s executive remuneration framework is designed to attract, reward and retain a highly specialized group of
individuals working at the top of their respective fields in varied geographic locations. Key elements of the Mesoblast remuneration
framework are as follows:
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Remuneration Framework Summary
Performance-based Remuneration
Strategic Rationale
Fixed Pay
Assessed on market relativities
based on roles and responsibilities.
Short-term Incentives
performance
The
conditions
which attach to the STI are based
on key corporate / budgetary
milestones and the achievement
of strategic goals which are
designed to generate long-term
value creation in the interests of
shareholders.
Refer to ‘Short-Term Incentives
the
(STIs) Program’ within
and
‘Remuneration
Framework’ section.
Strategy
of
incentive
Long-term Incentives
drives
This
the
achievement
objectives
relevant
to each executive’s
link
role, strengthening
between the incentive rewards
and
of
the
shareholder returns.
generation
the
Refer to ‘Long-Term Incentives
(LTIs) Program’ within
the
‘Remuneration Strategy and
Framework’ section.
Description
to each
Set according
role’s
responsibilities, the incumbent’s
experience and qualifications, their
performance
role and
regional market relativities.
the
in
for
against
Set at a target relative to fixed
individual
pay and paid
annual
performance
corporate and
individual key
indicators (KPIs).
performance
Executive KPIs are
typically
milestone related as befitting a
pre-revenue company.
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.
Considerations
Supplemented by statutory and
to
customary benefits relevant
each region (e.g., superannuation
in Australia; medical insurance in
the US.)
STIs are typically set at a smaller
target
proportion of our
remuneration
to
conserve cash outflow.
than LTIs
total
The Board exercises discretion
to adjust LTI grants from the
remuneration mix as
target
needed.
For instance, if a
decline in share price would
produce an incongruous LTI
(i.e., number of
quantum
options).
Review
Oversight
Reviewed annually for changes in
the
market
individual’s
and
growth in the role.
and
performance
relativities
approved
Individual outcomes are reviewed
and
the
Nomination & Remuneration
Committee and then the Board.
first
by
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
individual
and
performance.
Individual outcomes are reviewed and approved first by the
Nomination & Remuneration Committee and then the Board.
Delivered as
Cash.
Cash.
Mesoblast equity with vesting
conditions that vary according
to role.
104
A pay mix for performance
The KMP’s target remuneration mix is as follows:
Name
Silviu Itescu
Paul Hodgkinson
Fixed Remuneration %
At-Risk STI %
At-Risk LTI %
2018
2017
2018
2017
2018
2017
50
40
50
40
50
20
50
20
—
40
—
40
The Board has customized the CEO’s remuneration mix in comparison with that of other Company executive KMP in
recognition that he continues to be a substantial shareholder of Mesoblast. The Board believes the CEO has sufficient exposure to our
company’s share performance to align his interests in value creation, and he therefore does not currently participate in the LTI. The
Board reviews the CEO’s remuneration package annually, including the remuneration mix.
The Nomination and Remuneration Committee retained KPMG to conduct a benchmarking study on CEO remuneration in July
2015. The findings of this exercise show the CEO’s total remuneration package was positioned below the 25th percentile of the
comparator group based on the exchange rate at that time. The comparator group included other pre-revenue biopharmaceutical
companies in the US with comparable expenditure levels with regard to market capitalization. This comparator group was selected as
reflective of the group of companies with which Mesoblast competes for its senior executive talent. In the opinion of the Board, and
having regard to this market data, the CEO’s fixed pay and total remuneration is set at a market competitive level and reflects the
skills, expertise and depth of experience of the incumbent.
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.
Short-Term Incentives (STIs) Program
The following table outlines a summary of the 2018 Short-Term Incentive Plan:
What is the 2018 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 range of each
participant’s fixed remuneration (determined according to role and ability to influence our
performance). Performance is assessed against a combination of company and individual
measures.
When is the 2018 STI grant paid to
eligible employees?
The STI amount will be paid, in the three month period ended September 30, 2018, to each
participant who satisfies applicable performance measures, following assessment of
performance against the applicable measures for the financial year ended June 30, 2018.
105
Who participates in the 2018 STI?
All employees hired on or before March 31, 2018 are eligible for consideration. Employees
hired during the year are recognized on a pro-rata basis.
Why does our board of directors
consider the 2018 STI an appropriate
incentive?
The STI is a globally recognized form of reward for management, aimed at ensuring focus
and alignment our goals and strategy. Based on both company and individual measures, and
in conjunction with other factors, our board of directors believes that it helps encourage and
reward high performance.
What are the performance conditions
under the 2018 STI?
Individual performance is measured against the achievement of individual KPIs, 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 our
performance and allocation of STIs?
At the end of the financial year our board of directors assesses our overall company
performance based on the achievement of Company and CEO’s KPIs. This assessment will
adjust how much of our bonus pool is eligible for allocation. For the financial year ended
June 30, 2018, the Board assessed our overall Company performance as meeting 85% of
objectives. People Leaders evaluate employees 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 and individual
performance against objectives.
What is the period over which our
performance is assessed?
The assessment period is the financial year preceding the payment date of the STI (July 1
through June 30).
Long-Term Incentives (LTIs) Program
In designing a LTI mechanism that is appropriate to our global team where 59% of our employees are based in the United
States, we seek to balance:
•
•
•
•
Australian practice and governance expectations, where LTI 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 (e.g. rolling monthly basis);
a strong preference for a single reward mechanism to maintain executive cohesion and teamwork; and
alignment with driving shareholder value.
Since July 1, 2015 Mesoblast has used a single LTI plan, our Employee Share Option Plan (“ESOP”). The ESOP was approved
by shareholders at the AGM held in November 2016. LTIs consist of options over ordinary shares of our company under the rules of
the ESOP. Recognizing that option grants in the US where the majority of our LTI participants reside typically have a ten year term,
grants made since July 10, 2015 have had a seven year term. The Board considers the appropriate term at the time each grant is
approved.
During this development phase, the achievement of significant milestones are key drivers in helping us get to major objectives
such as product approval.
For the financial year ended June 30, 2017, the Board introduced a milestone vesting framework for executive LTI grants
whereby options vest upon the achievement of specified outcomes (as opposed to the Company’s traditional approach of time-based
vesting). In this structure, we tailor individual LTI grants to vest with the achievement of objectives relevant to each executive’s role
at an exercise price per share that is equal to the fair market value at grant date. Upon the Board’s determination that the milestone has
been achieved, the options are designated as vested. We have adopted this approach to strengthen the link between our executive LTI
rewards and achievements which we expect to generate shareholder returns. This approach was applied to executive option grants
within the year ended June 30, 2018 and we expect it to be utilized for most future executive option grants.
LTI allocations are determined with consideration to the nature of the role within our organization, 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
106
years LTI grants have remained stable in terms of number of options granted reflecting the Board’s assessment that this grant size will
deliver the desired value to the participant’s over time.
Outside this executive milestone framework we issue traditional LTIs to select other participants at a price per share that is
typically 10% higher than the five day volume weighted average share price calculated at grant date. The options generally vest in
three equal tranches over three years. This is an important remuneration component in the biotechnology sector which allows us to be
competitive in the market place. We believe this approach is appropriate at this stage and that applying additional performance hurdles
to our traditional LTI grants 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.
The following is a summary of the key features of the LTI instrument, our ESOP:
What is the ESOP?
An incentive plan under which eligible participants are granted options over our ordinary
shares.
Why does our board of directors
consider the ESOP an appropriate long-
term incentive?
The ESOP is designed to reward participants for out-performance and to align long-term
interests of shareholders and participants, by linking a significant proportion of at-risk
remuneration to our future performance.
Who participates in the ESOP?
All eligible participants, who are in positions to influence achievement of our long- term
outcomes and where warranted by market practice for attraction and retention. The CEO
does not participate in the LTI due to his substantial shareholding in Mesoblast. The Board
believes the CEO has sufficient exposure to our company’s share performance to align his
interests in value creation.
What are the key features of the ESOP? Pricing and vesting conditions are determined by a participant’s designation as either an:
In what circumstances are ESOP
entitlements forfeited?
What are the performance conditions
under the ESOP?
•
•
executive participant
other participant
The ESOP will be forfeited upon cessation of employment prior to the conclusion of the
performance period in circumstances where a participant is a “bad leaver”. Bad leaver is
defined as part of the ESOP rules and includes serious misconduct. If the Board designate a
former employee as a bad leaver they forfeit all rights, entitlements and interests in any
unexercised options, both vested and unvested. Otherwise a leaver may retain vested options
subject to exercising the option within 60 days of cessation of employment or within a
longer period if so determined by the Board. Unvested options lapse immediately upon
cessation of employment.
Executive LTI grants are issued with an exercise price per share that is equal to the fair
market value at grant date and vest with the achievement of objectives relevant to each
executive’s role. Typically each executive has two or three objectives, each of which is
assigned to a tranche of options. Milestones from our initial grant under this framework
relate to achievements such as: progress with patient enrollment for a specific program,
signing a partnering agreement, completing an interim analysis, submitting a regulatory
filing.
Traditional options granted to other participants 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 and vest over three years.
In addition participants have to remain in employment with the Company for the LTIs to
vest.
Why did our board of directors choose
the
performance
above
conditions/hurdles?
A participant’s designation as an executive participant or other participant is determined
according to their seniority and the nature of their responsibilities. The objectives selected as
vesting milestones for our executives are expected to generate positive shareholder returns,
thereby creating direct alignment between executive and shareholder rewards.
What is the relationship between our
performance and allocation of 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. With the executive milestone
107
What is the maximum number of
options that may be granted to a
participant in the ESOP?
When do the options vest?
vesting framework, executives must achieve their objectives, to the satisfaction of the Board,
for the Options to vest. Once vested, the value of the remuneration fluctuates with our share
price with a floor price of that of which the option was issued. 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. In the financial year ended June 30, 2018, executive LTI grants were awarded
to maintain performance-based remuneration.
The maximum number of options that may be granted to each participant is determined by
the Board, subject to applicable legal thresholds.
For executive participants with milestone vesting grants, the Board designs the relevant
performance criteria with reference to objectives which can be reasonably forecast and set
given the dynamic nature of Mesoblast’s business and which will result in shareholder value
creation. The Board has authority to designate that options have vested when the related
milestone has been met.
For other participants, options typically vest in three equal tranches, one year, two years and
three years after the date of grant, provided performance conditions are met.
How are the 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 us (once all vesting conditions are satisfied).
Is the benefit of participation in the
ESOP affected by changes in the share
prices?
Yes, the value participants receive through participation in the ESOP will be reduced if the
share price falls during the performance period and will increase if the share price rises over
the performance period.
Non-Executive Director (“NED”) Remuneration
Our aim is to establish a board of directors comprised of global expertise in the biopharmaceutical industry and capital markets.
At the commencement of the year we had six NEDs, three based in Australia, one in the United States, one in Switzerland and one in
Israel. During the year Mr Ben-Zion Weiner resigned from the Board. Mr Weiner is based in Israel. Effective from June 18, 2018, Mr
Joseph Swedish based in the United States joined the Board as a NED. Subsequent to the year-end Ms Shawn Cline Tomasello also
joined our Board as a NED.
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.
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 A$1,250,000. A board and committee fee structure was adopted on November 1, 2013 based on advice provided
by Towers Watson in October 2012 with reference to companies of comparable size and complexity.
In consideration of our lower market capitalization at June 30, 2016, and with a goal of conserving cash, NEDs proposed that a
reduced fee structure take effect from July 1, 2016. Under this revised fee structure the Board Chair fee was reduced to AUD
$250,000 per annum and committee fees were suspended for all other NEDs. This fee structure remains in place with the exception
that fees for the chair of both the Audit and Risk and the Nomination and Remuneration Committees were reinstated as of January 1,
2018. The fees were reinstated to reflect the time commitment and workloads of these respective positions. We also note that the fees
were reinstated at 50% of their FY16 levels.
Position
Chair
Vice Chair
Member
From July 1, 2017 to June 30, 2018
Board of
Directors
A$250,000
A$175,000
A$128,250
Audit and
Risk
Committee
A$12,500
—
—
Nomination
and
Remuneration
Committee
A$12,500
—
—
108
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.
Remuneration Details - NEDs
Details of the remuneration of our NEDs for the year ended June 30, 2018 are set out below:
2018
Short-term benefits
Cash
Bonus
Annual
Leave
Non-
monetary
benefits Other
Salary &
fees
$
$
Currency
A$
A$
A$
A$
A$
A$
A$
$
175,000 — —
250,000 — —
134,500 — —
134,500 — —
128,250 — —
128,250 — —
— — —
$
$
— —
— —
— —
— —
— —
— —
— —
Long-
term
Post-
employment
benefits
Super-
annuation
benefits
Long
service
leave
Share-
based
payments
Options
Other
Termi-
nation
benefits
$
$
$
$
Total
$
20,049 —
12,777 —
12,777 —
— — 4,632 — 179,632
— — 270,049
— — 147,277
— — 147,277
— — 4,632 — 132,882
— — 4,632 — 132,882
—
— —
— —
A$
950,500 — —
— —
45,603 — 13,896 — 1,009,999
US$ 737,968 — —
— —
35,406 — 10,789 — 784,163
Name
William Burns
Brian Jamieson
Donal O’Dwyer
Michael Spooner
Ben-Zion Weiner
Eric Rose
Joseph Swedish(1)
Total non-executive
directors
Total non-executive
directors(2)
(1)
(2)
Joseph Swedish was appointed on June 18, 2018. Mr Swedish did not incur any compensation expenses for the year ended
June 30, 2018.
The US$ results has been translated at the average weighted exchange rate of 0.7764 for the year ended June 30, 2018.
Details of the remuneration of our NEDs for the year ended June 30, 2017 are set out below:
2017
Short-term benefits
$
Annual
Leave
Salary &
fees
$
Cash
Bonus(1)
$
167,208 — —
250,000 — —
128,250 — —
128,250 — —
128,250 — —
227,222 — —
Currency
A$
A$
A$
A$
A$
A$
Long-
term
Post-
employment
benefits
Super-
annuation
benefits
Long
service
leave
Share-
based
payments
Options
Other
Termi-
nation
benefits
Non-
monetary
benefits Other
Total
$
$
$
— —
— —
— —
— —
— —
— —
$
$
$
$
19,616 —
12,184 —
12,184 —
— — 18,448 — 185,656
— — 269,616
— — 140,434
— — 140,434
— — 18,448 — 146,698
— — 18,448 — 245,670
A$
1,029,180 — —
— —
43,984 — 55,344 — 1,128,508
US$ 776,311 — —
— —
33,176 — 41,745 — 851,232
Name
William Burns
Brian Jamieson
Donal O’Dwyer
Michael Spooner
Ben-Zion Weiner
Eric Rose
Total non-executive
directors
Total non-executive
directors(2)
(1)
(2)
STI bonus payable for performance in the year ended June 30, 2017, not paid as at June 30, 2017.
The US$ results has been translated at the average weighted exchange rate of 0.7543 for the year ended June 30, 2017.
109
Remuneration Governance
Role of the Board of Directors and the Nomination and Remuneration Committee
The Board is responsible for Mesoblast’s remuneration strategy and approach. The Board established the Nomination and
Remuneration 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 Nomination and Remuneration Committee’s objective is to ensure remuneration policies are fair and competitive and have
regard for industry benchmarks whilst being aligned with the objectives of our company. The Nomination and Remuneration
Committee seeks independent advice from remuneration consultants as and when it deems necessary.
Performance Review
The Board conducts periodic performance reviews of the Board and its operations as a whole. A review was conducted during
this financial year ended June 30, 2018. 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.
Use of Remuneration Consultants
During the financial year ended June 30, 2018, the Nomination and Remuneration Committee engaged KPMG to provide
remuneration advice to assist the Board in decision making, specifically a review of the Remuneration Report to the financial year
ended June 30, 2018 and advice in relation to specific changes to be made to Mesoblast’s remuneration framework to apply from
FY19 (see “Executive Summary”).
The advice provided by KPMG does not constitute a ‘remuneration recommendation’ as a defined in section 9B of the
Corporations Act 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.
Employment Agreements
The employment of our CEO and CFO are formalized in employment agreements, the key terms of which are as follows:
Name
CEO (Silviu Itescu)
CFO (Paul Hodgkinson)(1)
Term
Notice period
Termination benefit
Initial term of 3 years
commencing April 1, 2014, and
continuing subject to a 12
months’ notice period.
An ongoing employment
agreement until notice is given
by either party.
12 months
12 months base salary
6 months
6 months base salary
(1) Paul Hodgkinson resigned effective May 31, 2018 and did not receive any payments outside of the standard entitlement and
forfeited all non-vested options upon termination in accordance with the plan rules.
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.
110
The employment of the executive team is also formalized in employment contracts. Three members of the executive team have
employment contracts with initial terms ranging from 15 to 25 months, all of which have been fulfilled, and with notice periods
ranging from six to twelve months. The remaining members have continuous employment contracts with no fixed term and notice
periods ranging from one to six months.
Additional remuneration disclosures
The table and chart below detail Company performance on a market capitalization basis, against executive key management
personnel short-term at-risk compensation:
2018
2017
2016
2015
2014
Share price (ASX:MSB)
– closing at June 30
– high for the year
– low for the year
– share price volatility (annual)
Market capitalization at June 30 (in millions)
– increase/(decrease) – in $ millions
– increase/(decrease) – as %
Short-term incentives – % of target paid to CEO
Short-term incentives – as % of base salary paid to CEO
Short-term incentives – % of target paid to CFO
Short-term incentives – as % of base salary paid to CFO
A$1.48
A$2.36
A$1.19
53%
A$714
(A$177)
20%
90%
90%
—
—
A$2.08
A$3.44
A$1.03
52%
A$891
A$479
116%
75%
75%
70%
35%
A$1.08
A$4.06
A$1.01
60%
A$412
(A$855)
(67%)
—
—
—
—
A$3.76
A$5.88
A$3.17
46%
A$1,267
(A$170)
(12%)
90%
90%
100%
50%
A$4.47
A$6.8
A$4.18
36%
A$1,438
(A$240)
(14%)
87.5%
87.5%
n/a
n/a
Relative proportions of fixed versus variable remuneration expenses
For the years ended June 30, 2018 and 2017, the following table shows the relative proportions of remuneration for our
executive KMPs that are linked to performance and those that are fixed based on the amounts disclosed as statutory expense above:
Name
Silviu Itescu (CEO)
Paul Hodgkinson (CFO)
Fixed remuneration
At risk - STI
At risk - LTI
2018
%
2017
%
2018
%
2017
%
2018(1)
%
55
59
59
37
45
—
41
11
—
41
2017
%
—
52
(1)
Paul Hodgkinson's LTI has been adjusted for the impact of the reversal of previously recognized share based payment
compensation of non-vested options forfeited upon his resignation.
Performance-Based Remuneration
The proportion of at-risk performance remuneration for our executive KMPs that was awarded and forfeited during the periods
presented was as follows:
Name
For the year ended June 30, 2018
Silviu Itescu
Paul Hodgkinson
For the year ended June 30, 2017
Silviu Itescu
Paul Hodgkinson
Share Based Compensation
Total
Opportunity
A$
1,010,000
212,500
1,010,000
212,500
At-Risk STI %
Awarded %
Forfeited %
90
—
75
70
10
100
25
30
Share options granted to key management personnel (our directors, including Silviu Itescu, and Paul Hodgkinson) in the year
ended June 30, 2018 were 200,000 share options granted to Mr. Hodgkinson. In accordance with the plan rules, Mr. Hodgkinson
forfeited all non-vested options upon termination. There were no other grants made to key management personnel, including to our
111
directors, in the year ended June 30, 2018. During the year ended June 30, 2018, as a result of a fully underwritten institutional and
retail entitlement offer to existing eligible shareholders (on a 1 for 12 basis) in September 2017, the exercise price of all outstanding
options at the time was reduced by A$0.02 per option subject to the ESOP plan under clause 7.3. At the date of alteration, September
13, 2017, the market price of the shares was A$1.38. The difference between the total fair value of the options affected by the
alteration immediately before and after the modification was a reduction of A$138,975. There have been no other modifications to any
terms and conditions of share-based payment transactions during the year ended June 30, 2018.
Share options granted to key management personnel (our directors, including Silviu Itescu, and Paul Hodgkinson) in the year
ended June 30, 2017 were 450,000 share options granted to Mr. Hodgkinson. There were no other grants made to key management
personnel, including to our directors, in the year ended June 30, 2017. There was no modification to any terms and conditions of
share-based payment transactions during the year ended June 30, 2017.
Details of options over our ordinary shares provided as remuneration to each director and member of key management personnel
for the years ended June 30, 2018 and June 30, 2017 are set out in the tables below:
Remuneration Values
The following table provides the remuneration values:
For the year ended June 30, 2018
William Burns
Eric Rose
Ben-Zion Weiner
Donal O'Dwyer
Paul Hodgkinson
For the year ended June 30, 2017
William Burns
Eric Rose
Ben-Zion Weiner
Donal O'Dwyer
Paul Hodgkinson
Remuneration
consisting of
options(1)
Values of options
granted(2)
Value of options
exercised(3)
Value of options
lapsed(4)
2.6%
3.5%
3.5%
—
41.3%
9.9%
7.5%
12.6%
—
51.8%
—
—
—
—
A$117,520
—
—
—
—
A$605,025
—
—
—
A$255,861
—
—
—
—
A$689,028
—
—
—
—
—
—
—
—
—
—
—
(1)
(2)
(3)
(4)
The percentage of the value of remuneration consisting of options, based on the value of options expensed during the year
presented in accordance with IFRS 2 Share-based Payment.
The accounting value at acceptance date of options that were granted during the year presented as part of remuneration,
determined using Black-Scholes valuation model and in accordance with IFRS 2 Share-based Payment. The acceptance date is
the date at which the entity and the employee agree to a share-based payment arrangement, being when the entity and the
employee have a shared understanding of the terms and conditions of the arrangement.
The intrinsic value at exercise date of options that were exercised during the year presented, having been granted as part of
remuneration previously.
The intrinsic value at lapse date of options that lapsed during the year presented because a performance condition was not met,
but valued as if the performance condition had been met.
112
Reconciliation of Options held by KMP
The following table shows a reconciliation of options held by each KMP from the beginning to the year ended June 30, 2018:
Balance
at the
start of
the year
Granted
during
the year
Year
Vested
Exercised
Forfeited
Balance at the end of the year
Name
Silviu Itescu
—
—
William Burns
2015 80,000
Brian Jamieson
—
—
Donal O'Dwyer
2011 255,912
—
Michael Spooner
—
Ben-Zion Weiner 2015 80,000
2015 80,000
Eric Rose
Paul Hodgkinson 2018
—
Paul Hodgkinson 2017 450,000
Paul Hodgkinson 2016 400,000
Paul Hodgkinson 2015 450,000
—
Joseph Swedish
granted Number Number Number % Number Number %
—
80,000
—
—
—
80,000
80,000
100,000
300,000
266,668
—
—
—
—
—
—
—
—
—
(100,000)
(150,000)
(133,332)
(450,000)
—
—
—
—
(255,912)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200,000
—
—
—
—
—
100
—
—
—
100
100
50
67
67
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Vested and
exercisable
—
80,000
—
—
—
80,000
80,000
100,000
300,000
266,668
—
—
Vested and
unexercisable Unvested
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Terms and conditions of 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
13/10/2017(1)
Vesting date
one half - 30/04/2018
one half - 31/12/2018(2)
Expiry date
12/10/2024
Exercise price
Value per option
at acceptance
date
A$1.76
A$0.59
Vested %
50
13/01/2017(1)
27/04/2016
10/07/2015
25/03/2015
25/11/2014
one third - 31/03/2017
one third - 31/08/2017
one third - 30/11/2018(2)
one third - 07/03/2017
one third - 07/03/2018
one third - 07/03/2019(2)
one third - 02/07/2016
one third - 02/07/2017
one third - 02/07/2018(2)
25/03/2015(2)
one third - 25/11/2015
one third - 25/11/2016
one third - 25/11/2017
12/01/2024
A$1.65
A$1.34
06/03/2023
A$2.80
A$1.05
30/06/2022
A$4.20
A$1.40
67
67
67
23/07/2019
24/11/2019
A$4.69
A$4.00
A$0.92
A$1.30
100
100
(1) These options vest on the achievement of milestones relevant to the KMPs role. The milestones of this grant relate to capital
raising, compliance and partnering. The Board has authority to designate that options have vested when the related milestones are
met.
(2) These options were forfeited on Paul Hodgkinson’s resignation on May 31, 2018.
113
Shares provided on exercise of remuneration options:
For the year ended June 30, 2018
Donal O’Dwyer (for the year ended June 30, 2018)
For the year ended June 30, 2017
Donal O’Dwyer (for the year ended June 30, 2017)
Options Granted as Remuneration
No. of
options
exercised
during the
period
No. of
ordinary
shares in
Mesoblast
Limited
issued
Value per
share at
exercise date
(closing price)
Exercise
price per
option
Exercise Date
255,912
255,912
December 15,
2017
A$1.42
US$0.323
255,912
255,912 April 26, 2017
A$3.28
US$0.444
The following table presents options that have been granted over unissued shares during or since the end of the year ended June
30, 2018, to our Directors and our next 5 most highly remunerated officers.
Name
Directors
Silviu Itescu
Non-Directors
Daniel Devine
Donna Skerrett
Kenneth Borow
Michael Schuster
Roger Brown
Shareholdings
Issue Date
Exercise
Price
Number of
shares, under
option
—
—
—
October 13, 2017
October 13, 2017
October 13, 2017
October 13, 2017
October 13, 2017
A$1.76
A$1.76
A$1.76
A$1.76
A$1.76
200,000
200,000
200,000
200,000
200,000
The table below shows a reconciliation of ordinary shares held by each KMP from the beginning to the end of the 2018 financial year
in accordance with the Corporations Regulations (section 18).
Name
Silviu Itescu
William Burns
Brian Jamieson
Donal O'Dwyer
Michael Spooner(1)
Ben-Zion Weiner
Eric Rose
Paul Hodgkinson
Joseph Swedish
Balance at the start
of the year
Received during the
year upon exercise
of options
Other changes
during the year
Balance at the end
of the year
68,244,642
28,000
625,000
875,730
1,081,335
40,000
—
—
—
—
—
—
255,912
—
—
—
—
—
714,286
2,330
20,000
17,500
10,000
—
—
—
—
68,958,928
30,330
645,000
1,149,142
1,091,335
40,000
—
—
—
(1) Of this balance, Mr. Spooner has a relevant interest of 1,060,000 ordinary shares.
Voting and comments made at our company’s 2017 Annual General Meeting (“AGM”)
We received 81.0% of the votes cast in person or by proxy on a poll in favor of adopting the 2016/2017 remuneration report.
114
Employee Profile
As of June 30, 2018, we had 81 (2017: 75) employees globally:
Employees by Education
Employees by Experience
28
4
19
30
14
20
5
26
16
Phd/MD
Masters
Other
Bachelor
Pharma - Big Pharma
Pharma - Specialty Biotech
Corporate/Professional
Academia
Other
Employees by Gender
Employees by Region
34
47
1
24
8
48
Male
Female
AUS
Sing
USA
Swiss
59% of our employees are based in the United States where the Mesoblast operational activities are concentrated.
Australia is corporate headquarters with 30% of the employees work. This includes the CEO and the majority of the Executive
team.
The remaining 11% of employees are located in Singapore (10%) and 1% in Switzerland where research and technology transfer
activities are conducted.
115
Non-Executive Director Profile
As at June 30, 2018, we have six non-executive Directors (“NED”) with diverse industry and regional experience, as the charts
below illustrate:
NEDs by Region
NEDs by Experience
3
1
2
1
1
1
3
Switzerland
USA
Australia
Big Pharma/Medical Tech Australian Capital Markets
Professional Services
Medical Doctor
(End of Remuneration Report)
116
Australian Disclosure Requirements
Shares under option
Unissued ordinary shares of Mesoblast Limited under option at the date of this Directors’ report are as follows:
Issue date
9/07/2012
4/09/2013
24/02/2014
5/09/2014
9/10/2014
25/11/2014
12/12/2014
25/03/2015
25/03/2015
25/03/2015
25/03/2015
25/03/2015
12/05/2015
10/07/2015
26/08/2015
27/04/2016
27/04/2016
30/06/2016
31/10/2016
06/12/2016
06/12/2016
13/01/2017
28/06/2017
16/09/2017
16/09/2017
13/10/2017
13/10/2017
24/11/2017
24/11/2017
Sub-total
07/07/2010
07/07/2010
Sub-total
Grand Total
Exercise price of options
Expiry date of options
Number of shares under
option
A$6.67
A$6.26
A$6.36
A$4.69
A$4.52
A$4.00
A$4.49
A$4.98
A$4.98
A$4.98
A$4.69
A$4.44
A$4.28
A$4.20
A$4.05
A$2.80
A$2.74
A$2.20
A$2.80
A$1.31
A$1.19
A$1.65
A$2.23
A$1.54
A$1.40
A$1.94
A$1.76
A$1.41
A$1.28
US$0.305
US$0.340
8/07/2018
27/08/2018
31/12/2018
30/06/2019
8/10/2019
24/11/2019
31/10/2019
20/01/2019
25/01/2019
25/01/2019
30/06/2019
30/06/2019
16/02/2020
30/06/2022
16/08/2022
6/03/2023
17/04/2023
18/01/2021
6/03/2023
5/12/2023
5/12/2023
12/01/2024
27/06/2024
15/09/2024
15/09/2024
12/10/2024
12/10/2024
23/11/2024
23/11/2024
26/10/2018
26/10/2019
100,000
125,000
650,000
1,520,000
50,000
240,000
50,000
135,000
300,000
200,000
400,000
600,000
400,000
2,458,334
75,000
3,380,000
200,000
1,500,000
200,000
1,885,000
4,400,000
300,000
300,000
100,000
150,000
2,215,000
1,900,000
750,000
750,000
25,333,334
26,108
319,892
346,000
25,679,334
No option holder has any right under the options plan to participate in any other of our share issues.
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
6/12/2016
6/12/2016
07/07/2010
Total
Number of shares issued
Issue Price
8,333
25,000
255,912
289,245
A$1.31
A$1.31
US$0.323
Amount unpaid per share
—
—
—
Indemnification of Officers
During the financial year, we paid premiums in respect of a contract insuring our directors and company secretary, and all of our
executive officers. 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.
117
Proceedings on Our Behalf
The Corporations Act 2001 allows specified persons to bring, or intervene in, proceedings on our behalf. No proceedings have
been brought or intervened in on our behalf with leave of the Court under section 237 of the Corporations Act 2001.
Non-Audit Services
We 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.
Auditor’s Independence Declaration
A copy of the auditor’s independence declaration under Section 307C of the Corporations Act in relation to the audit for the
year ended June 30, 2018 is included in Exhibit 99.2 of this annual report on Form 20-F(1).
Rounding of Amounts
Our company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191,
issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the directors’ report.
Unless mentioned otherwise, amounts within this report have been rounded off in accordance with that Legislative Instrument to the
nearest thousand dollars, or in certain cases, to the nearest dollar.
The components of our directors’ report are incorporated in various places within this annual report on the Form 20-F. A table
charting these components is included within ‘Exhibit 99.1 Appendix 4E’(2).
Directors’ Resolution
This report is made in accordance with a resolution of the directors.
/s/ Brian Jamieson
Brian Jamieson
Chairman
Dated: August 30, 2018
/s/ Silviu Itescu
Silviu Itescu
Chief Executive Officer
(1) A copy of the Auditor's Independence Declaration is included at page 147.
(2) Appendix 4E was filed with the Australian Securities Exchange (ASX) on August 30, 2018.
118
6.C
Board Practices
Our board of directors currently consists of eight members, including seven non-executive directors and one executive director,
our Chief Executive Officer.
Our directors are generally elected to serve three-year terms in a manner similar to a “staggered” board of directors under
Delaware law. At every annual general meeting, one-third of the previously elected directors or, if their number is not a multiple of
three then the number nearest to but not exceeding one-third, must retire from office and are eligible for re-election. The directors who
retire in this manner are required to be the directors or director longest in office since last being elected. Additionally, no director,
except the Managing Director (currently designated as our Chief Executive Officer, Silviu Itescu), may hold office for a period in
excess of three years, or beyond the third annual general meeting following the director’s last election, whichever is the longer,
without submitting himself or herself for re-election. As a result of the staggered terms, not all of our directors will be elected in any
given year. The current terms of Messrs. Jamieson and Spooner will expire at the annual shareholders’ meeting in 2018.
Name
Brian Jamieson
William Burns
Donal O’Dwyer
Eric Rose
Michael Spooner
Joseph Swedish
Shawn Cline Tomasello
Last election at
AGM
2015
2016
2017
2016
2015
End of current
term
2018
2019
2020
2019
2018
First election at
AGM
2007
2014
2004
2013
2004
Upcoming
AGM
Upcoming
AGM
We believe that each of our directors has relevant industry experience. The membership of our board of directors is directed by
the following requirements:
•
•
•
•
•
•
•
our Constitution specifies that there must be a minimum of 3 directors and a maximum of 10, and our board of directors
may determine the number of directors within those limits;
we may appoint or remove any director by resolution passed in the general meeting of shareholders;
our directors may appoint any person to be a director, and that person only holds office until the next general meeting at
which time the director may stand for election by shareholders at that meeting;
it is the intention of our board of directors that its membership consists of a majority of independent directors who satisfy
the criteria for independence recommended by the ASX’s Corporate Governance Principles and Recommendations;
the chairperson of our board of directors should be an independent director who satisfies the criteria for independence
recommended by the ASX’s Corporate Governance Principles and Recommendations;
Australia's Corporations Act requires that at least two of our directors must be resident Australians; and
our board of directors should, collectively, have the appropriate level of personal qualities, skills, experience, and time
commitment to properly fulfill its responsibilities or have ready access to such skills where they are not available.
Our board of directors is responsible for, and has the authority to determine, all matters relating to our corporate governance,
including the policies, practices, management and operation. The principal roles and responsibilities of our board of directors are to:
•
•
•
•
•
facilitate board of directors and management accountability to our company and its shareholders;
ensure timely reporting to shareholders;
provide strategic guidance to us, including contributing to the development of, and approving, the corporate strategy;
oversee management and ensure there are effective management processes in place;
monitor:
o
o
organizational performance and the achievement of our strategic goals and objectives;
financial performance including approval of the annual and half-year financial reports and liaison with our auditors;
119
o
o
o
progress of major capital expenditures and other significant corporate projects including any acquisitions or
divestments;
compliance with our code of conduct;
progress in relation to our diversity objectives and compliance with its diversity policy;
review and approve business plans, the annual budget and financial plans including available resources and major capital
expenditure initiatives;
approve major corporate initiatives;
enhance and protect the reputation of the organization;
oversee the operation of our system for compliance and risk management reporting to shareholders; and
ensure appropriate resources are available to senior management.
•
•
•
•
•
Our non-executive directors do not have any service contracts with Mesoblast that provide for benefits upon termination of
employment.
Committees
To assist our board of directors with the effective discharge of its duties, it has established a Nomination and Remuneration
Committee and an Audit and Risk Management Committee. Each committee operates under a specific charter approved by our board
of directors. The Company previously had a separate Science and Technology Committee, but it has been determined that it is
appropriate that the function of this Committee (reviewing the Company’s strategic direction and investment with regard to research
and development and technology) be retained within the board as a whole.
Nomination and Remuneration Committee. The members of our Nomination and Remuneration Committee are Messrs.
Jamieson, O’Dwyer (Chairman) and Spooner, all of whom are independent, non-executive directors. The remuneration committee is a
committee of our board of directors, and is primarily responsible for making recommendations to our board of directors on:
•
•
•
•
•
•
board appointments;
non-executive director fees;
the executive remuneration framework;
remuneration of executive directors, including the CEO and other key executives;
short-term and long-term incentive awards; and
share ownership plans.
The committee’s objective is to ensure remuneration policies are fair and competitive and in line with similar industry
benchmarks while aligned with our objectives. The remuneration committee seeks independent advice from remuneration consultants
as and when it deems necessary. See “Management—Remuneration.”
Audit and Risk Management Committee. The members of our Audit and Risk Management Committee are Messrs. Jamieson,
O’Dwyer and Spooner (Chairman), all of whom are independent, non-executive directors. This committee oversees, reviews, acts on
and reports on various auditing and accounting matters to our board of directors, including the selection of our independent
accountants, the scope of our annual audits, fees to be paid to the independent accountants, the performance of our independent
accountants and our accounting practices. In addition, the committee oversees, reviews, acts on and reports on various risk
management matters to our board of directors.
The effective management of risk is central to our ongoing success. We have adopted a risk management policy to ensure that:
•
•
appropriate systems are in place to identify, to the extent that is reasonably practical, all material risks that we face in
conducting our business;
the financial impact of those risks is understood and appropriate controls are in place to limit exposures to them;
120
•
•
appropriate responsibilities are delegated to control the risks; and
any material changes to our risk profile are disclosed in accordance with our continuous disclosure reporting requirements
in Australia.
It is our objective to appropriately balance, protect and enhance the interests of all of our shareholders. Proper behavior by our
directors, officers, employees and those organizations that we contract to carry out work is essential in achieving this objective.
We have established a code of conduct, which sets out the standards of behavior that apply to every aspect of our dealings and
relationships, both within and outside Mesoblast. The following standards of behavior apply:
•
•
•
•
•
•
patient well-being;
comply with all laws that govern us and our operations;
act honestly and with integrity and fairness in all dealings with others and each other;
avoid or manage conflicts of interest;
use our assets properly and efficiently for the benefit of all of our shareholders; and
seek to be an exemplary corporate citizen.
6.D
Employees
As of June 30, 2018, we had 81 employees, 48 of whom are based in the United States, 24 of whom are based in Australia,
including our CEO and certain executive team members, 8 of whom are based in Singapore, and 1 of whom is based in Switzerland.
We had 75 and 108 employees as of June 30, 2017 and 2016, respectively. We have no collective bargaining agreements with our
employees. We have not experienced any work stoppages to date and consider our relations with our employees to be good.
The table below sets forth the breakdown of the total year-end number of our employees by main category of activity and
geographic area for the past three years:
As of June 30, 2018
USA
Australia
Singapore
Switzerland
Total
As of June 30, 2017
USA
Australia
Singapore
Switzerland
Total
As of June 30, 2016
USA
Australia
Singapore
Switzerland
Total
Research &
Development Commercial Manufacturing Corporate
Total
31
8
5
—
44
1
—
—
—
1
4
—
2
—
6
12
16
1
1
30
Research &
Development Commercial Manufacturing Corporate
Total
29
8
5
—
42
1
—
—
—
1
5
—
2
—
7
9
14
1
1
25
48
24
8
1
81
44
22
8
1
75
Research &
Development Commercial Manufacturing Corporate
Total
49
11
6
—
66
1
1
—
—
2
9
—
2
—
11
12
15
1
1
29
71
27
9
1
108
We have no collective bargaining agreement with our employees. We have not experienced any work stoppages to date and
consider our relations with our employees to be good.
121
See “Item 6.A Directors and Senior Management – Employee Profile”.
6.E
Share Ownership
The table below sets forth information regarding the beneficial ownership of our ordinary shares based on 482,639,654
(including 8,474,576 shares subscribed by NovaQuest in June 2018 and that were issued in July 2018) ordinary shares outstanding at
June 30, 2018 by each of our directors and key management personnel.
We have determined beneficial ownership in accordance with the rules of the SEC - it generally means that a person has a
beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power of that security, including
options that are exercisable within 60 days of June 30, 2018. Ordinary shares subject to options currently exercisable or exercisable
within 60 days of June 30, 2018 are deemed to be outstanding for computing the percentage ownership of the person holding these
options and the percentage ownership of any group of which the holder is a member, but are not deemed outstanding for computing
the percentage of any other person.
Based upon information known to us, as of June 30, 2018 we had 30 shareholders in the United States. These shareholders held
an aggregate of 89,453,643 of our ordinary shares, or approximately 18% of our outstanding ordinary shares.
Unless otherwise indicated, to our knowledge each shareholder possesses sole voting and investment power over the ordinary shares
listed. None of our shareholders has different voting rights from other shareholders. Unless otherwise indicated, the principal address
of each of the shareholders below is c/o Mesoblast Limited, Level 38, 55 Collins Street, Melbourne 3000, Australia.
Name
Directors and key management personnel:
Silviu Itescu(1)
William Burns(2)
Brian Jamieson(3)
Paul Hodgkinson(4)
Eric Rose(5)
Donal O'Dwyer(6)
Ben-Zion Weiner(7)
Michael Spooner
Joseph Swedish(8)
All directors and key management personnel as a group
(9 persons)
Ordinary Shares
beneficially owned
%
Number
68,958,928
110,330
645,000
666,668
80,000
1,149,142
120,000
1,060,000
—
14.3%
*
*
*
*
*
*
*
—
72,790,068
15.1%
*
(1)
(2)
(3)
(4)
(5)
(6)
Less than 1% of the outstanding ordinary shares.
Includes (a) 67,756,838 ordinary shares owned by Dr. Itescu, (b) 487,804 ordinary shares owned by Josaka Investments Pty Ltd,
the trustee of Dr. Itescu’s self-managed superannuation fund and (c) 714,286 ordinary shares owned by Tamit Nominees Pty
Ltd, an Australian corporation owned by Dr. Itescu.
Includes (a) 30,330 ordinary shares owned by Mr. Burns and (b) 80,000 ordinary shares subject to options exercisable at a price
of A$4.00 per share until November 24, 2019.
Includes (a) 150,000 ordinary shares owned by Mr. Jamieson and (b) 495,000 ordinary shares owned by Mr. Jamieson through
Timaru Close Pty Ltd.
Includes 666,668 ordinary shares subject to options of which; 133,334 are exercisable at a price of A$4.20 per share until June
30, 2022; 133,334 are exercisable at a price of A$2.80 per share until March 6, 2023; 300,000 are exercisable at a price of
A$1.65 per share until January 12, 2024; and 100,000 are exercisable at a price of A$1.76 per share until October 12, 2024. On
May 31, 2018, Mr. Hodgkinson resigned as Chief Financial Officer of the Company.
Includes 80,000 ordinary shares subject to options exercisable at a price of A$4.00 per share until November 24, 2019.
Includes (a) 811,824 ordinary shares owned by Mr. O’Dwyer, (b) 337,318 ordinary shares owned by Dundrum Investments Ltd.
as trustee for The O’Dwyer Family Trust. Mr. O’Dwyer and his spouse are the sole shareholders of Dundrum Investments Ltd.
122
(7)
Includes (a) 40,000 ordinary shares owned by Dr. Weiner, (b) 80,000 ordinary shares subject to options exercisable at a price of
A$4.00 per share until November 24, 2019. On June 18, 2018, Mr. Weiner resigned as director of the Company.
(8) Mr. Swedish was appointed as Director of the Company on June 18, 2018.
Item 7.
Major Shareholders and Related Party Transactions
7.A
Major Shareholders
The following table and accompanying footnotes present certain information regarding the beneficial ownership of our ordinary
shares based on 482,639,654(1) ordinary shares outstanding at June 30, 2018 by each person known by us to be the beneficial owner of
more than 5% of our ordinary shares. None of our shareholders has different voting rights from other shareholders.
(1)
The ordinary shares outstanding as at June 30, 2018 include unissued ordinary shares of 8,474,576 during the period. These
shares were issued to NovaQuest on July 10, 2018, under a placement agreement entered into prior to June 30, 2018.
Name
5% or Greater Shareholders:
M&G Investment Group(1)
Silviu Itescu(2)
Capital Research Global Investors(3)
Thorney Holdings(4)
Ordinary Shares
beneficially owned
Number
%
69,297,896
68,958,928
42,591,080
24,696,000
14.4%
14.3%
8.8%
5.1%
(1)
(2)
(3)
(4)
Includes ordinary shares owned indirectly through custodial accounts, over which shares M&G Investment Group retains voting
and dispositive power. The address for M&G Investment Group is 5 Laurence Pountney Hill, London EC4R 0HH, United
Kingdom.
Includes (a) 67,756,838 ordinary shares owned by Dr. Itescu, (b) 487,804 ordinary shares owned by Josaka Investments Pty Ltd,
the trustee of Dr. Itescu’s self-managed superannuation fund and (c) 714,286 ordinary shares owned by Tamit Nominees Pty
Ltd, an Australian corporation owned by Dr. Itescu.
Includes ordinary shares owned indirectly through custodial accounts, over which shares Capital Research Global Investors
retains voting and dispositive power. The address for Capital Research Global Investors is 333 South Hope Street, 55th Floor,
Los Angeles, CA 90071, USA.
Includes ordinary shares owned indirectly through custodial accounts, over which shares Thorney Holdings retains voting and
dispositive power. The address for Thorney Holdings is 55 Collins Street, Level 39, Melbourne, Victoria 3000, Australia.
To our knowledge, there have not been any significant changes in the ownership of our ordinary shares by major shareholders
over the past three years, except as follows (which is based on substantial shareholder notices filed with the ASX and SEC).
•
•
The Capital Group Companies, Inc. reported on February 16, 2016 that since March 24, 2015 it had acquired 3,461,051
ordinary shares. It reported on February 13, 2017 that since February 16, 2016 it had acquired 1,414,762 ordinary shares,
and it held 30,364,000 ordinary shares (including 452,000 ADSs, each representing 5 ordinary shares), or 7.9% of the
total voting power as of that date. It reported on December 29, 2017 that since February 14, 2017 it had acquired
7,271,080 ordinary shares, and it held 37,365,080 ordinary shares (including 452,000 ADSs, each representing 5 ordinary
shares), or 7.9% of the total voting power as of that date. It reported on March 8, 2018 that since December 30, 2017 it
had acquired 5,226,000 ordinary shares, and it held 42,591,080 ordinary shares (including 452,800 ADSs, each
representing 5 ordinary shares), or 9.0% of the total voting power as of that date.
Thorney Opportunities Ltd reported on March 31, 2017 that, between April 17, 2015 to March 31, 2017, it acquired
5,845,000 ordinary shares, and in total it held 24,696,000 ordinary shares, or 5.8% of the total voting power as of that
date.
• M&G Investment Group reported on November 25, 2015 that, after acquiring 14,625,593 ordinary shares (including
1,497,235 ADSs, each representing 5 ordinary shares acquired in the November 13, 2015 Nasdaq IPO) between February
123
21, 2012 and November 25, 2015, in total it held 46,643,788 ordinary shares, or 12.3% of the total voting power as of that
date. It reported on March 30, 2017 that it acquired 7,196,982 ordinary shares between November 26, 2015 and March
30, 2017, and that in total it held 54,026,630 ordinary shares (including 1,543,700 ADSs, each representing 5 ordinary
shares), or 13.4% of the total voting power as of that date. It reported on July 13, 2017 that it disposed of 368,590
ordinary shares between March 31, 2017 and July 13, 2017, and that in total it held 53,658,040 ordinary shares (including
1,539,053 ADSs, each representing 5 ordinary shares), or 12.35% of the total voting power as of that date. It reported on
September 6, 2017 that it acquired 11, 7943,313 ordinary shares between July 12, 2017 and September 6, 2017, and that
in total it held 65,452,353 ordinary shares (including 1,537,794 each representing 5 ordinary shares), or 14.19% of the
total voting power as of that date. It reported on December 31, 2017 that it acquired 3,845,543 ordinary shares between
September 7, 2017 and December 31, 2017, and that in total it held 69,297,896 ordinary shares (including 1,532,843
ADSs, each representing 5 ordinary shares), or 14.73% of the total voting power as of that date.
7.B
Related Party Transactions
The Company has not entered into any related party transactions during the years ended June 30, 2018 and 2017 other than
compensation made to Directors and other members of key management personnel, see “Item 6.B Compensation”.
7.C
Interests of Experts and Counsel
Not applicable.
Item 8.
Financial Information
8.A
Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements.”
Legal Proceedings
From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our
business. We are not presently party to any legal proceedings that, in the opinion of our management, would reasonably be expected to
have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us.
Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of
management resources and other factors.
Dividend policy
Since our inception, we have not declared or paid any dividends on our shares. We intend to retain any earnings for use in our
business and do not currently intend to pay cash dividends on our ordinary shares. Dividends, if any, on our outstanding ordinary
shares will be declared by and subject to the discretion of our board of directors, and subject to Australian law.
Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent
as holders of our ordinary shares, to the extent permitted by applicable law and regulations, less the fees and expenses payable under
the deposit agreement. Any dividend we declare will be distributed by the depositary bank to the holders of our ADSs, subject to the
terms of the deposit agreement. See “Item 12.D. Description of American Depositary Shares.”
8.B Significant Changes
On July 17, 2018, the Group announced that it had entered into a strategic alliance with Tasly Pharmaceutical Group (“Tasly”),
for the development, manufacture and commercialization in China of the Group’s allogeneic mesenchymal precursor cell (MPC)
product candidates MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or
prevention of acute myocardial infarction. The Group will receive $40.0 million from Tasly on closing of the strategic alliance,
comprising a $20.0 million up-front technology access fee and $20.0 million in an equity purchase in Mesoblast Limited at A$1.86 per
124
share, representing a 20% premium to a blended volume weighted average price calculated over three months, one month and one day.
This receipt is subject to filing with the State Administration of Foreign Exchange. The Group is also entitled to receive $25.0 million
on product regulatory approvals in China, double-digit escalating royalties on net product sales and is eligible to receive up to six
escalating milestone payments upon the product candidates reaching certain sales thresholds in China.
There were no other events that have arisen subsequent to June 30, 2018 and prior to the signing of this report that would likely
have a material impact on the financial results presented.
Item 9. The Offer and Listing
9.A
Offer and Listing Details
Our shares have been listed in Australia on the Australian Securities Exchange (ASX) since December 2004.
American Depositary Shares (“ADSs”), each representing five ordinary shares, are available in the US through an American
Depositary Receipts (“ADR”) program. This program was established under the deposit agreement which we entered into with
JPMorgan Chase Bank N.A. as depositary and our ADR holders. Our ADRs have been listed on the Nasdaq Global Select Market
since August 2015, and are traded under the symbol “MESO”.
The NASDAQ Global Select Market
Since November 2015, our ordinary shares in the form of ADSs have been trading on the Nasdaq Global Select Market under
the symbol “MESO.” The following table sets forth the high and low market prices for our ADSs reported on Nasdaq for the periods
indicated in U.S. dollars.
Period
Annual:
Fiscal year ended
June 30, 2016
June 30, 2017
June 30, 2018
Quarterly:
Fiscal year ended June 30, 2017
First quarter ended September 30, 2016
Second quarter ended December 31, 2016
Third quarter ended March 31, 2017
Fourth quarter ended June 30, 2017
Fiscal year ended June 30, 2018
First quarter ended September 30, 2017
Second quarter ended December 31, 2017
Third quarter ended March 31, 2018
Fourth quarter ended June 30, 2018
Most recent six months:
Month ended February 28, 2018
Month ended March 31, 2018
Month ended April 30, 2018
Month ended May 31, 2018
Month ended June 30, 2018
Month ended July 31, 2018
125
US$ High
US$ Low
15.56
12.50
8.55
6.57
5.90
9.78
12.50
8.55
7.45
7.79
6.66
7.76
7.79
6.34
6.30
6.66
7.27
3.50
3.90
4.74
3.90
4.01
5.28
7.55
5.29
4.80
4.74
5.24
4.74
5.63
5.37
5.24
5.37
5.62
The Australian Securities Exchange
Since December 2004, our ordinary shares have been listed in Australia on the ASX trading under the symbol “MSB”. The
following table sets forth the high and low market prices for our ordinary shares reported on the ASX for the periods indicated in
Australian dollars.
A$ High
A$ Low
6.80
5.88
4.06
3.44
2.36
1.93
1.55
2.50
3.44
2.36
1.95
2.06
1.66
1.84
2.06
1.66
1.64
1.59
1.91
4.18
3.17
1.01
1.03
1.19
1.03
1.07
1.43
1.93
1.31
1.21
1.19
1.39
1.19
1.46
1.40
1.39
1.46
1.50
Period
Annual:
Fiscal year ended
June 30, 2014
June 30, 2015
June 30, 2016
June 30, 2017
June 30, 2018
Quarterly:
Fiscal year ended June 30, 2017
First quarter ended September 30, 2016
Second quarter ended December 31, 2016
Third quarter ended March 31, 2017
Fourth quarter ended June 30, 2017
Fiscal year ended June 30, 2018
First quarter ended September 30, 2017
Second quarter ended December 31, 2018
Third quarter ended March 31, 2018
Fourth quarter ended June 30, 2018
Most recent six months:
Month ended February 28, 2018
Month ended March 31, 2018
Month ended April 30, 2018
Month ended May 31, 2018
Month ended June 30, 2018
Month ended July 31, 2018
9.B
Plan of Distribution
Not applicable.
9.C
Markets
See “Item 9.A Offer and Listing Details.”
9.D
Selling Shareholders
Not applicable.
9.E
Dilution
Not applicable.
9.F
Expenses of the Issue
Not applicable.
126
Item 10. Additional Information
10.A
Share Capital
Not applicable.
10.B
Memorandum and Articles of Association
Our Constitution is similar in nature to the bylaws of a U.S. corporation. It does not provide for or prescribe any specific
objectives or purposes of Mesoblast. Our Constitution is subject to the terms of the ASX Listing Rules and the Australian
Corporations Act. It may be modified or repealed and replaced by special resolution passed at a meeting of shareholders, which a
resolution is passed by at least 75% of the votes cast by shareholders (including proxies and representatives of shareholders) entitled to
vote on the resolution.
Under Australian law, a company has the legal capacity and powers of an individual both within and outside Australia. The
material provisions of our Constitution are summarized below. This summary is not intended to be complete nor to constitute a
definitive statement of the rights and liabilities of our shareholders, and is qualified in its entirety by reference to the complete text of
our Constitution, a copy of which is on file with the SEC.
Directors
Interested Directors
Except as permitted by the Corporations Act and the ASX Listing Rules, a director must not vote in respect of any contract or
arrangement in which the director has any direct or indirect material personal interest or any lesser interest according to our
Constitution. Such director must not be counted in a quorum, must not vote on the matter and must not be present at the meeting while
the matter is being considered.
Pursuant to our Constitution, a director is liable to us for any profits derived with regard to any matter in which the director has
a material interest unless the director:
•
•
declares the director’s interest in the matter as soon as practicable after the relevant facts come to the director’s
knowledge; and
does not contravene our Constitution or the Corporations Act in relation to the matter.
Unless a relevant exception applies, the Corporations Act requires our directors to provide disclosure of certain interests and
prohibits directors of companies listed on the ASX from voting on matters in which they have a material personal interest and from
being present at the meeting while the matter is being considered. In addition, unless a relevant exception applies, the Corporations
Act and the ASX Listing Rules require shareholder approval of any provision of financial benefits (including the issue by us of
ordinary shares and other securities) to our directors, including entities controlled by them and certain members of their families.
Borrowing Powers Exercisable by Directors
Pursuant to our Constitution, our business is managed by our board of directors. Our board of directors has the power to raise or
borrow money, and incur liens on or grant a security interest in any of our property or business or any uncalled portion of any partly
paid shares, and may issue debentures or give any other security for any of our debts, liabilities or obligations or of any other person,
in each case, in the manner and on terms it deems fit.
Election, Removal and Retirement of Directors
We may appoint or remove any director by resolution passed in the general meeting of shareholders. Additionally, our directors
are elected to serve three-year terms in a manner similar to a “staggered” board of directors under Delaware law. At every annual
general meeting, one-third of the previously elected directors or, if their number is not a multiple of three then the number nearest to
but not exceeding one-third, must retire from office and are eligible for re-election. Additionally, no director except the Managing
Director (currently designated as our chief executive officer, Silviu Itescu) may hold office for a period in excess of three years, or
beyond the third annual general meeting following the director’s last election, whichever is the longer, without submitting himself or
herself for re-election.
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A director who is appointed during the year by the other directors only holds office until the next general meeting at which time
the director may stand for election by shareholders at that meeting.
In addition, provisions of the Corporations Act apply where at least 25% of the votes cast on a resolution to adopt our
remuneration report (which resolution must be proposed each year at our annual general meeting) are against the adoption of the
report at two successive annual general meetings. Where these provisions apply, a resolution must be put to a vote at the second
annual general meeting to the effect that a further meeting, or a spill meeting, take place within 90 days. At the spill meeting, the
directors in office when the remuneration report was considered at the second annual general meeting (other than the Managing
Director) cease to hold office and resolutions to appoint directors (which may involve re-appointing the former directors) are put to a
vote.
Voting restrictions apply in relation to the resolutions to adopt our remuneration report and to propose a spill meeting. These
restrictions apply to our key management personnel and their closely related parties. See “Rights and Restrictions on Classes of
Shares—Voting Rights” below.
Pursuant to our Constitution, no person is eligible to be elected as a director unless a notice of the director’s candidature is
given to us at least 35 business days (30 business days for a meeting shareholders have requested directors to call) before the meeting.
This restriction does not apply to a retiring director or to the election of a director previously appointed by the directors during the
year.
Share Qualifications
There are currently no requirements for directors to own our ordinary shares in order to qualify as directors.
Rights and Restrictions on Classes of Shares
Subject to the Corporations Act and the ASX Listing Rules, the rights attaching to our ordinary shares are detailed in our
Constitution. Our Constitution provides that any of our ordinary shares may be issued with preferred, deferred or other special rights,
whether in relation to dividends, voting, return of share capital, payment of calls or otherwise as our board of directors may determine
from time to time. Subject to the Corporations Act, the ASX Listing Rules and any rights and restrictions attached to a class of shares,
we may issue further ordinary shares on such terms and conditions as our board of directors resolve. Currently, our outstanding
ordinary share capital consists of only one class of ordinary shares.
Dividend Rights
Our board of directors may from time to time determine to pay dividends to shareholders. All unclaimed dividends may be
invested or otherwise made use of by our board of directors for our benefit until claimed or otherwise disposed of in accordance with
our Constitution.
Voting Rights
Under our Constitution, any resolution to be considered at a meeting of the shareholders shall be decided on a show of hands
unless a poll is demanded by the shareholders at or before the declaration of the result of the show of hands. A poll may be demanded
by the chairman of the meeting; by at least five shareholders present and having the right to vote on at the meeting; any shareholder or
shareholders representing at least 5% of the votes that may be cast on the resolution on a poll; or any shareholder or shareholders
holding our shares conferring a right to vote at the meeting on which an aggregate sum has been paid up equal to not less than 5% of
the total sum paid up on all the shares conferring that right. On a show of hands, each shareholder entitled to vote at the meeting has
one vote regardless of the number of ordinary shares held by such shareholder. If voting takes place on a poll, rather than a show of
hands, each shareholder entitled to vote has one vote for each ordinary share held and a fractional vote for each ordinary share that is
not fully paid, such fraction being equivalent to the proportion of the amount that has been paid to such date on that ordinary share.
Under Australian law, an ordinary resolution is passed on a show of hands if it is approved by a simple majority (more than
50%) of the votes cast by shareholders present (in person or by proxy) and entitled to vote. If a poll is demanded, an ordinary
resolution is passed if it is approved by holders representing a simple majority of the total voting rights of shareholders present (in
person or by proxy) who (being entitled to vote) vote on the resolution. Special resolutions require the affirmative vote of not less than
75% of the votes cast by shareholders present (in person or by proxy) at the meeting.
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Pursuant to our Constitution, each shareholder entitled to attend and vote at a meeting may attend and vote in person or by
proxy or attorney and by representative. Shareholders may not vote electronically. Under Australian law, shareholders of a public
listed company are not permitted to approve corporate matters by written consent. Our Constitution does not provide for cumulative
voting.
Note that ADS holders may not directly vote at a meeting of the shareholders but may instruct the depositary to vote the
number of deposited ordinary shares their ADSs represent. Under voting by a show of hands, multiple “yes” votes by ADS holders
will only count as one “yes” vote and will be negated by a single “no” vote, unless a poll is demanded.
There are a number of circumstances where the Corporations Act or the ASX Listing Rules prohibit or restrict certain
shareholders or certain classes of shareholders from voting. For example, key management personnel whose remuneration details are
included elsewhere in this prospectus are prohibited from voting on the resolution that must be proposed at each annual general
meeting to adopt our remuneration report, as well as any resolution to propose a spill meeting. An exception applies to exercising a
directed proxy which indicates how the proxy is to vote on the proposed resolution on behalf of someone other than the key
management personnel or their closely related parties; or that person is chair of the meeting and votes an undirected proxy where the
shareholder expressly authorizes the chair to exercise that power. Key management personnel and their closely related parties are also
prohibited from voting undirected proxies on remuneration related resolutions. A similar exception to that described above applies if
the proxy is the chair of the meeting.
Right to Share in Our Profits
Subject to the Corporations Act and pursuant to our Constitution, prior to our liquidation, our shareholders are entitled to
participate in our profits only by payment of dividends. Our board of directors may from time to time determine to pay dividends to
the shareholders; however, no dividend is payable except in accordance with the thresholds set out in the Corporations Act.
Rights to Share in the Surplus in the Event of Liquidation
Our Constitution provides for the right of shareholders to participate in a surplus in the event of our liquidation.
Redemption Provisions
There are no redemption provisions in our Constitution in relation to ordinary shares. Under our Constitution and subject to the
Corporations Act, any preference shares may be issued on the terms that they are, or may at our option or at the option of the holder
be, liable to be redeemed.
Sinking Fund Provisions
Our Constitution allows our directors to, at their discretion, set aside any sums they think proper out of our profits as reserves,
which may be applied for any proper purpose.
Liability for Further Capital Calls
According to our Constitution, our board of directors may make any calls from time to time upon shareholders in respect of all
monies unpaid on partly paid shares respectively held by them, subject to the terms upon which any of the partly paid shares have
been issued. Each shareholder is liable to pay the amount of each call in the manner, at the time and at the place specified by our board
of directors. Calls may be made payable by instalment.
Provisions Discriminating Against Holders of a Substantial Number of Shares
There are no provisions under our Constitution discriminating against any existing or prospective holders of a substantial
number of our ordinary shares.
Variation or Cancellation of Share Rights
The rights attached to shares in a class of shares may only be varied or cancelled by a special resolution of shareholders,
together with either:
•
a special resolution passed at a separate meeting of members holding shares in the class; or
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•
the written consent of members with at least 75% of the votes in the class.
General Meetings of Shareholders
General meetings of shareholders may be called by our board of directors or, under the Corporations Act, by a single director.
Except as permitted under the Corporations Act, shareholders may not convene a meeting. Under the Corporations Act, shareholders
with at least 5% of the votes that may be cast at a general meeting may call and arrange to hold a general meeting. The Corporations
Act requires the directors to call and arrange to hold a general meeting on the request of shareholders with at least 5% of the votes that
may be cast at a general meeting. Notice of the proposed meeting of our shareholders is required at least 28 days prior to such meeting
under the Corporations Act.
No business shall be transacted at any general meeting unless a quorum is present at the time when the meeting proceeds to
business. Under our Constitution, the presence, in person or by proxy, attorney or representative, of five shareholders constitutes a
quorum, or if we have less than five shareholders, then the shareholders present at a meeting constitute a quorum. If a quorum is not
present within 15 minutes after the time appointed for the meeting, the meeting must be either dissolved if it was summoned by
shareholders or adjourned in any other case. A meeting adjourned for lack of a quorum is adjourned to the same day in the following
week at the same time and place, unless otherwise decided by our directors. The reconvened meeting is dissolved if a quorum is not
present within 15 minutes after the time appointed for the meeting.
Change of Control
Takeovers of listed Australian public companies, such as Mesoblast, are regulated by the Corporations Act, which prohibits the
acquisition of a “relevant interest” in issued voting shares in a listed company if the acquisition will lead to that person’s or someone
else’s voting power in Mesoblast increasing from 20% or below to more than 20% or increasing from a starting point that is above
20% and below 90%, subject to a range of exceptions.
Generally, a person will have a relevant interest in securities if the person:
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•
•
is the holder of the securities;
has power to exercise, or control the exercise of, a right to vote attached to the securities; or
has the power to dispose of, or control the exercise of a power to dispose of, the securities (including any indirect or direct
power or control)
If, at a particular time, a person has a relevant interest in issued securities and the person:
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has entered or enters into an agreement with another person with respect to the securities;
has given or gives another person an enforceable right, or has been or is given an enforceable right by another person, in
relation to the securities; or
has granted or grants an option to, or has been or is granted an option by, another person with respect to the securities, and
the other person would have a relevant interest in the securities if the agreement were performed, the right enforced or the
option exercised;
then, the other person is taken to already have a relevant interest in the securities.
There are a number of exceptions to the above prohibition on acquiring a relevant interest in issued voting shares above 20%.
In general terms, some of the more significant exceptions include:
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when the acquisition results from the acceptance of an offer under a formal takeover bid;
when the acquisition is conducted on market by or on behalf of the bidder under a takeover bid and the acquisition occurs
during the bid period;
when shareholders of Mesoblast approve an acquisition that would otherwise breach the prohibition, by resolution passed
at general meeting;
an acquisition by a person if, throughout the six months before the acquisition, that person or any other person has had
voting power in Mesoblast of at least 19% and, as a result of the acquisition, none of the relevant persons would have
voting power in Mesoblast more than three percentage points higher than they had six months before the acquisition;
as a result of a rights issue;
as a result of dividend reinvestment schemes;
as a result of certain underwriting arrangements;
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•
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through operation of law;
an acquisition that arises through the acquisition of a relevant interest in another company listed on the ASX, certain other
Australian financial markets or a foreign stock exchange approved in writing by ASIC;
arising from an auction of forfeited shares; or
arising through a compromise, arrangement, liquidation or buy-back.
A formal takeover bid may either be a bid for all securities in the bid class or a fixed proportion of such securities, with each
holder of bid class securities receiving a bid for that proportion of their holding. Under our Constitution, a proportionate takeover bid
must first be approved by resolution of our shareholders in a general meeting before it may proceed.
Breaches of the takeovers provisions of the Corporations Act are criminal offenses. In addition, ASIC and, on application by
ASIC or an interested party, such as a shareholder, the Australian Takeovers Panel have a wide range of powers relating to breaches of
takeover provisions, including the ability to make orders canceling contracts, freezing transfers of, and rights (including voting rights)
attached to, securities, and forcing a party to dispose of securities including by vesting the securities in ASIC for sale. There are
certain defenses to breaches of the takeover provisions provided in the Corporations Act.
Ownership Threshold
There are no provisions in our Constitution that require a shareholder to disclose ownership above a certain threshold. The
Corporations Act, however, requires a substantial shareholder to notify us and the ASX once a 5% interest in our ordinary shares is
obtained. Further, once a shareholder has (alone or together with associates) a 5% or greater interest in us, such shareholder must
notify us and the ASX of any increase or decrease of 1% or more in its interest in our ordinary shares. Following our initial public
offering in the United States, our shareholders are also subject to disclosure requirements under U.S. securities laws.
Issues of Shares and Change in Capital
Subject to our Constitution, the Corporations Act, the ASX Listing Rules and any other applicable law, we may at any time
issue shares and grant options or warrants on any terms, with preferred, deferred or other special rights and restrictions and for the
consideration and other terms that the directors determine. Our power to issue shares includes the power to issue bonus shares (for
which no consideration is payable to Mesoblast), preference shares and partly paid shares.
Subject to the requirements of our Constitution, the Corporations Act, the ASX Listing Rules and any other applicable law, including
relevant shareholder approvals, we may consolidate or divide our share capital into a smaller or larger number by resolution, reduce
our share capital (provided that the reduction is fair and reasonable to our shareholders as a whole, does not materially prejudice our
ability to pay creditors and obtains the necessary shareholder approval) or buy back our ordinary shares including under an equal
access buy-back or on a selective basis.
Access to and Inspection of Documents
Inspection of our records is governed by the Corporations Act. Any member of the public has the right to inspect or obtain
copies of our share registers on the payment of a prescribed fee. Shareholders are not required to pay a fee for inspection of our share
registers or minute books of the meetings of shareholders. Other corporate records, including minutes of directors’ meetings, financial
records and other documents, are not open for inspection by shareholders. Where a shareholder is acting in good faith and an
inspection is deemed to be made for a proper purpose, a shareholder may apply to the court to make an order for inspection of our
books.
10.C
Material Contracts
Loan Agreement with Hercules
In March 2018, we entered into a loan and security agreement with Hercules for a $75.0 million non-dilutive, secured four-year
credit facility with an initial interest rate of 9.45%. An additional $40.0 million may be drawn as certain milestones are met. The loan
matures in March 2022 with principal repayments commencing in October 2019 with the ability to defer the commencement of
principal repayments to October 2020 if certain milestones are met. Interest on the loan is payable monthly in arrears on the 1st day of
the month. The interest rate is floating. It is computed daily based on the actual number of days elapsed and it is the greater of either
9.45% or the prime rate as reported in the Wall Street Journal plus a certain margin.
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Loan Agreement with NovaQuest
In June 2018, we entered into a non-dilutive secured loan with NovaQuest for $40.0 million. There is a four-year interest only
period, until July 2022, with the principal repayable in equal quarterly instalments over the remaining period of the loan. The loan
matures in July 2026. Interest on the loan will accrue at a fixed rate of 15% per annum.
All interest and principal payments will be deferred until after the first commercial sale of our allogeneic product candidate
MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding Asia
(“pediatric aGVHD”). We can elect to prepay all outstanding amounts owing at any time prior to maturity, subject to a prepayment
charge, and may decide to do so if net sales of pediatric aGVHD are significantly higher than current forecasts.
If there are no net sales of pediatric aGVHD, the loan is only repayable on maturity in 2026. If in any annual period 25% of net
sales of pediatric aGVHD exceed the amount of accrued interest owing and from 2022, principal and accrued interest owing (“the
payment cap”), Mesoblast will pay the payment cap and an additional portion of excess sales which may be used for early prepayment
of the loan. If in any annual period 25% of net sales of pediatric aGVHD is less than the payment cap, then the payment is limited to
25% of net sales of pediatric aGVHD. Any unpaid interest will be added to the principal amounts owing and will accrue further
interest. At maturity date, any unpaid loan balances are repaid.
Agreements with Tasly Pharmaceutical Group
In July 2018, we entered into a Development and Commercialization Agreement as well as an Investment Agreement with
Tasly.
The Development and Commercialization Agreement provides Tasly with exclusive rights to develop, manufacture and
commercialize in China MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or
prevention of acute myocardial infarction. Tasly will fund all development, manufacturing and commercialization activities in China
for MPC-150-IM and MPC-25-IC. On closing, we will receive a $20.0 million upfront technology access fee. Further, we will receive
$25.0 million on product regulatory approvals in China. Mesoblast will receive double-digit escalating royalties on net product sales.
Mesoblast is eligible to receive six escalating milestone payments upon the product candidates reaching certain sales thresholds in
China.
The Development and Commercialization Agreement provides that Tasly can terminate this agreement with a specified amount
of notice, on the later of (a) third anniversary of the agreement coming into effect and (b) receipt of marketing approval in China for
each of MPC-150-IM or MPC-25-IC. Mesoblast has termination rights with respect to certain patent challenges by Tasly and if certain
competing activities are undertaken by Tasly. Either party may terminate the agreement on material breach of the agreement if such
breach in not cured within the specified cure period or if certain events related to bankruptcy of the other party occurs.
The Investment Agreement provides for a $20.0 million equity purchase in Mesoblast Limited by Tasly at A$1.86 per share.
The closing of both the Development and Commercialization Agreement and the Investment Agreement with Tasly is subject
to filing with the State Administration of Foreign Exchange.
TiGenix NV – patent license for treatment of fistulae
In December 2017, we entered into a Patent License Agreement with TiGenix NV, now a wholly owned subsidiary of Takeda,
which granted Takeda exclusive access to certain of our patents to support global commercialization of the adipose-derived
mesenchymal stem cell product Alofisel®, previously known as Cx601, a product candidate of Takeda, for the local treatment of
fistulae. The agreement includes the right for Takeda to grant sub-licenses to affiliates and third parties.
As part of the agreement, we received $5.9 million (€5.0 million) as a non-refundable up-front payment. We are entitled to
further payments of €5.0 million within 12 months of the patent license agreement date, and up to €10.0 million when Takeda reaches
certain product regulatory milestones. Additionally, we will receive single digit royalties on net sales of Alofisel®.
The agreement will continue in full force in each country (other than the United States) until the date upon which the last issued
claim of any licensed patent covering Alofisel® expires in such country (currently expected to be 2029) or, with respect to the United
States, until the later of (i) the date upon which the last issued claim of any licensed patent covering Alofisel® in the United States
expires (currently expected to be around 2031) or (ii) the expiration of the regulatory exclusivity period in the United States with an
agreed maximum term.
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Either we or Takeda may terminate the agreement for any material breach that is not cured within 90 days after notice. We also
have the right to terminate the agreement with a written notice in the event that Takeda file a petition in bankruptcy or insolvency or
Takeda makes an assignment of substantially all of its assets for the benefit of its creditors.
Takeda has the right to terminate its obligation to pay royalties for net sales in a specific country if it is of the opinion that there
is no issued claim of any licensed patent covering Alofisel® in such country, subject to referral of the matter to the joint
oversight/cooperation committee established under the agreement if we disagree.
10.D
Exchange Controls
The Australian dollar is freely convertible into U.S. dollars. In addition, there are currently no specific rules or limitations
regarding the export from Australia of profits, dividends, capital or similar funds belonging to foreign investors, except that certain
payments to non-residents must be reported to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”), which
monitors such transaction, and amounts on account of potential Australian tax liabilities may be required to be withheld unless a
relevant taxation treaty can be shown to apply.
Regulation of acquisition by foreign entities
Under Australian law, in certain circumstances foreign persons are prohibited from acquiring more than a limited percentage of
the shares in an Australian company without approval from the Australian Treasurer. These limitations are set forth in the Australian
Foreign Acquisitions and Takeovers Act 1975. These limitations are in addition to the more general overarching prohibition of an
acquisition of more than a 20% interest in a public company (in the absence of an applicable exception) under the takeovers provisions
of Australia's Corporations Act by any person whether foreign or otherwise.
Under the Foreign Acquisitions and Takeovers Act, as currently in effect, any foreign person, together with associates, or parties
acting in concert, is prohibited from acquiring 20% or more of the shares in any company having total assets of A$252 million or more
(or A$1,134 million or more in case of U.S. investors or investors from certain other countries). No asset threshold applies in the case
of foreign government investors and acquiring a direct interest in land owning entities Australia (generally 10%). Different rules
apply to sensitive industries (such as media, telecommunications, and encryption and security technologies), companies owning land
or that are agribusinesses. “Associates” is a broadly defined term under the Foreign Acquisitions and Takeovers Act and includes in
relation to any person:
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any relative of the person;
any person with whom the person is acting or proposes to act in concert;
any person with whom the person carries on a business in partnership;
any entity of which the person is a 'senior officer' (such as a director or executive);
if the person is an entity, any holding entity or any senior officer of the holding entity;
any entity whose senior officers are accustomed or obliged to act in accordance with the directions, instructions or wishes of
the person or if the person is an entity, its senior officers or vice versa;
any corporation in which the person holds a 'substantial interest' (i.e., 20%) or any person holding a substantial interest in the
person if a corporation;
a trustee of a trust in which the person holds a substantial interest or if the person is the trustee of a trust, a person who holds
a substantial interest in the trust;
if the person is a foreign government, government entities of that government.
The Australian Treasurer also has power in certain circumstances to make an order specifying that two or more persons are
associates.
In addition, a foreign person may not acquire shares in a company having total assets of A$252 million or more (or A$1,134
million or more in case of U.S. investors or investors from certain other countries) if, as a result of that acquisition, the total holdings
of all foreign persons and their associates will exceed 40% in aggregate without the approval of the Australian Treasurer. If the
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necessary approvals are not obtained, the Treasurer may make an order requiring the acquirer to dispose of the shares it has acquired
within a specified period of time. The same rule applies if the total holdings of all foreign persons and their associates already exceeds
40% and a foreign person (or its associate) acquires any further shares, including in the course of trading in the secondary market of
the ADSs. Different rules apply to government investors, and acquisitions of interests in sensitive business acquisitions, agribusiness
and land owning entities.
Each foreign person seeking to acquire holdings in excess of the above caps (including their associates, as the case may be)
would need to complete an application form setting out the proposal and relevant particulars of the acquisition/shareholding and pay
the relevant application fees. The Australian Treasurer then has 30 days to consider the application and make a decision. However, the
Australian Treasurer may extend the period by up to a further 90 days by publishing an interim order. The Australian Foreign
Investment Review Board, an Australian advisory board to the Australian Treasurer has provided a guideline titled Australia’s
Foreign Investment Policy which provides an outline of the policy. As for the risk associated with seeking approval, the policy
provides, among other things, that the Treasurer will reject an application if it is contrary to the national interest.
If the level of foreign ownership exceeds 40% at any time, we would be considered a foreign person under the Takeovers Act. In
such event, we would be required to obtain the approval of the Australian Treasurer for our company, together with our associates, to
acquire (i) more than 20% of an Australian company or business with assets totalling over A$252 million; or (ii) any direct or indirect
ownership in Australian land; or (iii) any ‘direct interest’ in any agribusiness.
The percentage of foreign ownership in our company would also be included determining the foreign ownership of any
Australian company or business in which it may choose to invest. Since we have no current plans for any such acquisition and do not
own any property, any such approvals required to be obtained by us as a foreign person under the Takeovers Act will not affect our
current or future ownership or lease of property in Australia.
Our Constitution does not contain any additional limitations on a non-resident’s right to hold or vote our securities.
Australian law requires the transfer of shares in our company to be made in writing or electronically through the Clearing House
Electronic Subregister System. No stamp duty will be payable in Australia on the transfer of ADSs.
10.E
Taxation
The following summary of the material Australian and U.S. federal income tax consequences of an investment in our ADSs or
ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this Form 20-F, all of which are
subject to change, possibly with retroactive effect. This summary does not deal with all possible tax consequences relating to an
investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state, local and other tax laws other than
Australian and U.S. federal income tax laws.
Certain Material U.S. Federal Income Tax Considerations to U.S. Holders
The following summary describes certain material U.S. federal income tax consequences to U.S. holders (as defined below) of
the ownership and disposition of our ordinary shares and ADSs as of the date hereof. Except where noted, this summary deals only
with our ordinary shares or ADSs acquired and held as capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended, or the Code. This section does not discuss the tax consequences to any particular holder, nor any tax
considerations that may apply to holders subject to special tax rules, such as:
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banks, insurance companies, regulated investment companies and real estate investment trusts;
financial institutions;
individual retirement and other tax-deferred accounts;
certain former U.S. citizens or long-term residents;
brokers or dealers in securities or currencies;
traders that elect to use a mark-to-market method of accounting;
partnerships and other entities treated as partnership or pass through entities for U.S. federal income tax purposes, and
partners or investors in such entities;
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tax-exempt organizations (including private foundations);
persons that may have been subject to the alternative minimum tax;
persons that hold or dispose of ordinary shares or ADSs as a position in a straddle or as part of a hedging, constructive
sale, conversion or other integrated transaction;
persons that have a functional currency other than the U.S. dollar;
persons that own (directly, indirectly or constructively) 10% or more of the vote or value of our equity;
persons subject to special tax accounting rules as a result of any item of gross income with respect to ordinary shares or
ADSs being taken into account in an applicable financial statement;
persons who acquire ordinary shares or ADSs pursuant to the exercise of any employee share option or otherwise as
compensation; or
persons that are not U.S. holders (as defined below).
In this section, a “U.S. holder” means a beneficial owner of ordinary shares or ADSs, other than a partnership or other entity
treated as a partnership for U.S. federal income tax purposes, that is, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States (for U.S. federal income tax purposes);
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or
under the laws of the United States or any state thereof or the District of Columbia;
an estate the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source;
or
a trust (i) the administration of which is subject to the primary supervision of a court in the United States and for which
one or more U.S. persons have the authority to control all substantial decisions or (ii) that has an election in effect under
applicable U.S. income tax regulations to be treated as a U.S. person.
The discussion below is based upon the provisions of the Code, and the U.S. Treasury regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be replaced, revoked or modified, possibly with retroactive effect, so as to
result in U.S. federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon
the terms of the deposit agreement and assumes that the deposit agreement, and all other related agreements, will be performed in
accordance with their terms.
If a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes acquires, owns or
disposes of ordinary shares or ADSs, the U.S. federal income tax treatment of a partner generally will depend on the status of the
partner and the activities of the partnership. Partners of partnerships that acquire, own or dispose of ordinary shares or ADSs should
consult their tax advisors.
You are urged to consult your own tax advisor with respect to the U.S. federal, as well as state, local and non-U.S., tax
consequences to you of acquiring, owning and disposing of ordinary shares or ADSs in light of your particular circumstances,
including the possible effects of changes in U.S. federal income and other tax laws and the effects of any tax treaties.
ADSs
Assuming the deposit agreement and all other related agreements will be performed in accordance with their terms, a U.S.
holder of ADSs will be treated as the beneficial owner for U.S. federal income tax purposes of the underlying shares represented by
the ADSs. The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are
delivered to the depositary, or intermediaries in the chain of ownership between holders of American depositary shares and the issuer
of the security underlying the American depositary shares, may be taking actions that are inconsistent with claiming foreign tax credits
by holders of American depositary shares. These actions would also be inconsistent with claiming the reduced rate of tax, described
below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of any foreign taxes and the
availability of the reduced tax rate for dividends received by certain non-corporate U.S. holders, each described below, could be
affected by actions taken by such parties or intermediaries.
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Distributions
Subject to the passive foreign investment company, or PFIC, rules discussed below, U.S. holders generally will include as
dividend income the U.S. dollar value of the gross amount of any distributions of cash or property (without deduction for any
withholding tax), other than certain pro rata distributions of ordinary shares, with respect to ordinary shares or ADSs to the extent the
distributions are made from our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. A
U.S. holder will include the dividend income on the day actually or constructively received: (i) by the holder, in the case of ordinary
shares, or (ii) by the depositary, in the case of ADSs. To the extent, if any, that the amount of any distribution by us exceeds our
current and accumulated earnings and profits, as so determined, the excess will be treated first as a tax-free return of the U.S. holder’s
tax basis in the ordinary shares or ADSs and thereafter as capital gain. Notwithstanding the foregoing, we do not intend to determine
our earnings and profits on the basis of U.S. federal income tax principles. Consequently, any distributions generally will be reported
as dividend income for U.S. information reporting purposes. See “—Backup Withholding Tax and Information Reporting
Requirements” below. Dividends paid by us will not be eligible for the dividends-received deduction generally allowed to U.S.
corporate shareholders.
The U.S. dollar amount of dividends received by an individual, trust or estate with respect to the ordinary shares or ADSs will
be subject to taxation at preferential rates if the dividends are “qualified dividends.” Dividends paid on ordinary shares or ADSs will
be treated as qualified dividends if (i)(a) we are eligible for the benefits of a comprehensive income tax treaty with the United States
that the Secretary of the Treasury of the United States determines is satisfactory for this purpose and includes an exchange of
information program or (b) the dividends are with respect to ordinary shares (or ADSs in respect of such shares) which are readily
tradable on a U.S. securities market; (ii) certain holding period requirements are met; and (iii) we are not classified as a PFIC for the
taxable year in which the dividend is paid or for the preceding taxable year. The Agreement between the Government of the United
States of America and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income, or the Treaty, has been approved for the purposes of the qualified dividend rules, and we expect to
qualify for benefits under the Treaty. In addition, our ADSs are listed on the Nasdaq Global Select Market, and as such U.S. Treasury
Department guidance indicates that our ADSs will be readily tradable on an established U.S. securities market. Thus, we believe that
as long as we are not a PFIC, dividends we pay generally should be eligible for the preferential tax rates on qualified dividends.
However, the determination of whether a dividend qualifies for the preferential tax rates must be made at the time the dividend is paid.
U.S. holders should consult their own tax advisors regarding the availability of the preferential tax rates on dividends.
Includible distributions paid in Australian dollars, including any Australian withholding taxes, will be included in the gross
income of a U.S. holder in a U.S. dollar amount calculated by reference to the spot exchange rate in effect on the date of actual or
constructive receipt, regardless of whether the Australian dollars are converted into U.S. dollars at that time. If Australian dollars are
converted into U.S. dollars on the date of actual or constructive receipt, the tax basis of the U.S. holder in those Australian dollars will
be equal to their U.S. dollar value on that date and, as a result, a U.S. holder generally should not be required to recognize any foreign
currency exchange gain or loss. If Australian dollars so received are not converted into U.S. dollars on the date of receipt, the U.S.
holder will have a basis in the Australian dollars equal to their U.S. dollar value on the date of receipt. Any foreign currency exchange
gain or loss on a subsequent conversion or other disposition of the Australian dollars generally will be treated as ordinary income or
loss to such U.S. holder and generally will be income or loss from sources within the United States for foreign tax credit limitation
purposes.
Dividends received by a U.S. holder with respect to ordinary shares (or ADSs in respect of such shares) will be treated as
foreign source income, which may be relevant in calculating the holder’s foreign tax credit limitation. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with
respect to ADSs or ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. holders,
constitute “general category income.”
Subject to certain complex limitations, including the PFIC rules discussed below, a U.S. holder generally will be entitled, at
such holder's option, to claim either a credit against such holder's U.S. federal income tax liability or a deduction in computing such
holder's U.S. federal taxable income in respect of any Australian taxes withheld. If a U.S. holder elects to claim a deduction, rather
than a foreign tax credit, for Australian taxes withheld for a particular taxable year, the election will apply to all foreign taxes paid or
accrued by or on behalf of the U.S. holder in the particular taxable year.
The availability of the foreign tax credit and the application of the limitations on its availability are fact specific and are subject
to complex rules. You are urged to consult your own tax advisor as to the consequences of Australian withholding taxes and the
availability of a foreign tax credit or deduction. See “—Australian Tax Considerations Australian—Income Tax—Taxation of
Dividends” below.
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Sale, Exchange or Other Disposition of Ordinary Shares or ADSs
Subject to the PFIC rules discussed below, a U.S. holder generally will, for U.S. federal income tax purposes, recognize capital
gain or loss, if any, on a sale, exchange or other disposition of ordinary shares or ADSs equal to the difference between the amount
realized on the disposition and the U.S. holder’s tax basis (in U.S. dollars) in the ordinary shares or ADSs. This recognized gain or
loss will generally be long-term capital gain or loss if the U.S. holder has held the ordinary shares or ADSs for more than one year.
Generally, for U.S. holders who are individuals (as well as certain trusts and estates), long-term capital gains are subject to U.S.
federal income tax at preferential rates. For foreign tax credit limitation purposes, gain or loss recognized upon a disposition generally
will be treated as from sources within the United States. The deductibility of capital losses is subject to limitations for U.S. federal
income tax purposes.
You should consult your own tax advisor regarding the tax consequences if a foreign tax is imposed on a disposition of ADSs or
ordinary shares, including availability of a foreign tax credit or deduction in respect of any Australian tax imposed on a sale or other
disposition of ordinary shares or ADSs. See “—Australian Tax Considerations—Australian Income Tax—Tax on Sales or Other
Dispositions of Shares—Capital Gains Tax.”
Passive Foreign Investment Company
As a non-U.S. corporation, we will be a PFIC for any taxable year if either: (i) 75% or more of our gross income for the taxable
year is passive income (such as certain dividends, interest, rents or royalties and certain gains from the sale of shares and securities or
commodities transactions, including amounts derived by reason of the temporary investment of funds raised in offerings of our
ordinary shares or ADSs); or (ii) the average quarterly value of our gross assets during the taxable year that produce passive income or
are held for the production of passive income is at least 50% of the value of our total assets. For purposes of the PFIC asset test,
passive assets generally include any cash, cash equivalents and cash invested in short-term, interest bearing debt instruments or bank
deposits that are readily convertible into cash. If we own at least 25% (by value) of the stock of another corporation, we will be
treated, for purposes of the PFIC income and asset tests, as owning our proportionate share of the other corporation’s assets and
receiving our proportionate share of the other corporation’s income.
We do not believe that we were a PFIC for the taxable year ending June 30, 2018. However, if there is a change in the type or
composition of our gross income, or our actual business results do not match our projections, it is possible that we may become a
PFIC in future taxable years. Investors should be aware that our gross income for purposes of the PFIC income test depends on the
receipt of Australian research and development tax incentive credits and other revenue, and there can be no assurances that such tax
incentive credit programs will not be revoked or modified, that we will continue to conduct our operations in the manner necessary to
be eligible for such incentives or that we will receive other gross income that is not considered passive for purposes of the PFIC
income test. The value of our assets for purposes of the PFIC asset test will generally be determined by reference to our market
capitalization, which may fluctuate. The composition of our income and assets will also be affected by how, and how quickly, we
spend the cash raised in offerings of our ordinary shares or ADSs. Under circumstances where our gross income from activities that
produce passive income significantly increases relative to our gross income from activities that produce non-passive income or where
we decide not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially
increase. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close
of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year. There can be
no assurance that we will not be a PFIC for any taxable year, as PFIC status is determined each year and depends on the composition
of our income and assets and the value of our assets in such year. If we are a PFIC for any taxable year, upon request, we intend to
provide U.S. holders with the information necessary to make and maintain a “Qualified Electing Fund” election, as described below.
Default PFIC Rules
If we are a PFIC for any taxable year during which you own our ordinary shares or ADSs, unless you make the mark-to-market
election or the Qualified Electing Fund election described below, you will generally be (and remain) subject to additional taxes and
interest charges, regardless of whether we remain a PFIC in any subsequent taxable year, (i) on certain “excess distributions” we may
make; and (ii) on any gain realized on the disposition or deemed disposition of your ordinary shares or ADSs. Distributions in respect
of your ordinary shares (or ADSs in respect of such shares) during the taxable year will generally constitute “excess” distributions if,
in the aggregate, they exceed 125% of the average amount of distributions in respect of your ordinary shares (or ADSs) over the three
preceding taxable years or, if shorter, the portion of your holding period before such taxable year.
To compute the tax on “excess” distributions or any gain: (i) the “excess” distribution or the gain will be allocated ratably to
each day in your holding period for the ADSs or the ordinary shares; (ii) the amount allocated to the current taxable year and any
taxable year before we became a PFIC will be taxed as ordinary income in the current year; (iii) the amount allocated to other taxable
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years will be taxable at the highest applicable marginal rate in effect for that year; and (iv) an interest charge at the rate for
underpayment of taxes will be imposed with respect to any portion of the “excess” distribution or gain described under (iii) above that
is allocated to such other taxable years. In addition, if we are a PFIC or, with respect to a particular U.S. holder, we are treated as a
PFIC for the taxable year in which the distribution was paid or the prior taxable year, no distribution that you receive from us will
qualify for taxation at the preferential rate for non-corporate holders discussed in “—Distributions” above. You should consult with
your own tax advisor regarding the application of the default PFIC rules based on your particular circumstances.
If we are a PFIC for any taxable year during which a U.S. holder holds our ADSs or ordinary shares and any of our non-U.S.
subsidiaries is also a PFIC (i.e., a lower-tier PFIC), such U.S. holder would be treated as owning a proportionate amount (by value) of
the shares of the lower-tier PFIC and would be subject to the rules described above on certain distributions by the lower-tier PFIC and
our disposition of shares of the lower-tier PFIC, even though such U.S. holder would not receive the proceeds of those distributions or
dispositions. You should consult with your own tax advisor regarding the application to you of the PFIC rules to any of our
subsidiaries if we are a PFIC.
Mark-to-Market Election
If we are a PFIC for any taxable year during which you own our ADSs or ordinary shares, you will be able to avoid the rules
applicable to “excess” distributions or gains described above if the ordinary shares or ADSs are “marketable” and you make a timely
“mark-to-market” election with respect to your ordinary shares or ADSs. The ordinary shares or ADSs will be “marketable” stock as
long as they remain regularly traded on a national securities exchange, such as the Nasdaq Global Select Market, or a foreign
securities exchange regulated by a governmental authority of the country in which the market is located and which meets certain
requirements, including that the rules of the exchange effectively promote active trading of listed stocks. If such stock is traded on
such a qualified exchange or other market, such stock generally will be “regularly traded” for any calendar year during which such
stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter, but no assurances can be given in
this regard. Our ordinary shares are traded on the ASX, which may qualify as an eligible foreign securities exchange for this purpose.
If you are eligible to make a “mark-to-market” election with respect to our ordinary shares or ADSs and you make this election
in a timely fashion, you will generally recognize as ordinary income or ordinary loss the difference between the fair market value of
your ordinary shares or ADSs on the last day of any taxable year and your adjusted tax basis in the ordinary shares or ADSs. Any
ordinary income resulting from this election will generally be taxed at ordinary income rates. Any ordinary losses will be deductible
only to the extent of the net amount of previously included income as a result of the mark-to-market election, if any. Your adjusted tax
basis in the ordinary shares or ADSs will be adjusted to reflect any such income or loss. Any gain recognized on the sale or other
disposition of your ordinary shares or ADSs in a year when we are a PFIC will be treated as ordinary income, and any loss will be
treated as an ordinary loss (but only to the extent of the net amount previously included as ordinary income as a result of the mark-to-
market election).
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. holder may continue to be
subject to the PFIC rules with respect to such holder's indirect interest in any investments held by us that are treated as an equity
interest in a PFIC for U.S. federal income tax purposes, including shares in any of our subsidiaries that are treated as PFICs.
You should consult with your own tax advisor regarding the applicability and potential advantages and disadvantages to you of
making a “mark-to-market” election with respect to your ordinary shares or ADSs if we are or become a PFIC, including the tax issues
raised by lower-tier PFICs that we may own and the procedures for making such an election.
QEF Election
Alternative rules to those set forth under “Default PFIC Rules” above apply if an election is made to treat us as a “Qualified
Electing Fund,” or QEF, under Section 1295 of the Code. A QEF election is available only if a U.S. holder receives an annual
information statement from us setting forth such holder's pro rata share of our ordinary earnings and net capital gains, as calculated for
U.S. federal income tax purposes.
Upon request from a U.S. holder, we will endeavor to provide to the U.S. holder within 90 days after the request an annual
information statement, in order to enable the U.S. holder to make and maintain a QEF election for us or for any of our subsidiaries that
is or becomes a PFIC. However, there is no assurance that we will have timely knowledge of our or our subsidiaries’ status as a PFIC
in the future or of the required information to be provided. You should consult your own tax advisor regarding the availability and tax
consequences of a QEF election with respect to the ordinary shares or ADSs or with respect to any lower-tier PFIC that we may own
under your particular circumstances.
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Reporting
If we are a PFIC for any taxable year during which you own our ordinary shares or ADSs, as a U.S. holder, you will generally
be required to file IRS Form 8621 on an annual basis, and other reporting requirements may apply. The PFIC rules are complex and
you should consult with your own tax advisor regarding whether we or any of our subsidiaries are a PFIC, the tax consequences of any
elections that may be available to you, and how the PFIC rules may affect the U.S. federal income tax consequences of the receipt,
ownership, and disposition of our ordinary shares or ADSs.
Tax on Net Investment Income
Certain non-corporate U.S. holders will be subject to a 3.8% tax on the lesser of (i) the U.S. holder’s “net investment income”
for the relevant taxable year; and (ii) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain
threshold. A U.S. holder’s net investment income will generally include dividends received on the ordinary shares or ADSs and net
gains from the disposition of ordinary shares or ADSs, unless such dividend income or net gains are derived in the ordinary course of
the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). A U.S. holder
that is an individual, estate or trust should consult the holder’s tax advisor regarding the applicability of the tax on net investment
income to the holder’s dividend income and gains in respect of the holder’s investment in the ordinary shares or ADSs.
Backup Withholding Tax and Information Reporting Requirements
U.S. backup withholding tax and information reporting requirements generally apply to payments to non-corporate holders of
ordinary shares or ADSs. Information reporting will apply to payments of dividends on, and to proceeds from the disposition of,
ordinary shares or ADSs by a paying agent within the United States to a U.S. holder, other than U.S. holders that are exempt from
information reporting and properly certify their exemption. A paying agent within the United States will be required to withhold at the
applicable statutory rate, currently 24%, in respect of any payments of dividends on, and the proceeds from the disposition of, ordinary
shares or ADSs within the United States to a U.S. holder (other than U.S. holders that are exempt from backup withholding and
properly certify their exemption) if the holder fails to furnish its correct taxpayer identification number or otherwise fails to comply
with applicable backup withholding requirements. U.S. holders who are required to establish their exempt status generally must
provide a properly completed IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. holder’s
U.S. federal income tax liability. A U.S. holder generally may obtain a refund of any amounts withheld under the backup withholding
rules in excess of such holder’s U.S. federal income tax liability by filing the appropriate claim for refund with the IRS in a timely
manner and furnishing any required information.
Certain U.S. holders may be required to report (on IRS Form 8938) information with respect to such holder’s interest in
“specified foreign financial assets” (as defined in Section 6038D of the Code), including stock of a non-U.S. corporation that is not
held in an account maintained by a U.S. “financial institution”. Persons who are required to report specified foreign financial assets
and fail to do so may be subject to substantial penalties. U.S. holders are urged to consult their own tax advisors regarding foreign
financial asset reporting obligations and their possible application to the holding of ordinary shares or ADSs.
The discussion above is a general summary only. It is not intended to constitute a complete analysis of all tax considerations
applicable to an investment in our ADSs or ordinary shares. You should consult with your own tax advisor concerning the tax
consequences to you of an investment in our ADSs or ordinary shares in light of your particular circumstances.
Australian Tax Considerations
In this section, we discuss the material Australian income tax, stamp duty and goods and services tax considerations related to
the acquisition, ownership and disposal by the absolute beneficial owners of the ordinary shares or ADSs. It is based upon existing
Australian tax law as of the date of this annual report, which is subject to change, possibly retrospectively. This discussion does not
address all aspects of Australian tax law which may be important to particular investors in light of their individual investment
circumstances, such as shares held by investors subject to special tax rules (for example, financial institutions, insurance companies or
tax exempt organizations). In addition, this summary does not discuss any foreign or state tax considerations, other than stamp duty
and goods and services tax. Prospective investors are urged to consult their tax advisors regarding the Australian and foreign income
and other tax considerations of the acquisition, ownership and disposition of the shares. This summary is based upon the premise that
the holder is not an Australian tax resident and is not carrying on business in Australia through a permanent establishment (referred to
as a “Foreign Shareholder” in this summary).
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Australian Income Tax
Nature of ADSs for Australian Taxation Purposes
Ordinary shares represented by ADSs held by a U.S. holder will be treated for Australian taxation purposes as held under a
“bare trust” for such holder. Consequently, the underlying ordinary shares will be regarded as owned by the ADS holder for Australian
income tax and capital gains tax purposes. Dividends paid on the underlying ordinary shares will also be treated as dividends paid to
the ADS holder, as the person beneficially entitled to those dividends. Therefore, in the following analysis we discuss the tax
consequences to non-Australian resident holders of ordinary shares which, for Australian taxation purposes, will be the same as to
U.S. holders of ADSs.
Taxation of Dividends
Australia operates a dividend imputation system under which dividends may be declared to be “franked” to the extent of tax
paid on company profits. Fully franked dividends are not subject to dividend withholding tax. Dividends payable to non-Australian
resident shareholders that are not operating from an Australian permanent establishment, or Foreign Shareholders, will be subject to
dividend withholding tax, to the extent the dividends are not foreign (i.e., non-Australian) sourced and declared to be conduit foreign
income, or CFI, and are unfranked. Dividend withholding tax will be imposed at 30%, unless a shareholder is a resident of a country
with which Australia has a double taxation agreement and qualifies for the benefits of the treaty. Under the provisions of the current
Double Taxation Convention between Australia and the United States, the Australian tax withheld on unfranked dividends that are not
CFI paid by us to which a resident of the United States is beneficially entitled is limited to 15%.
If a company that is a non-Australian resident shareholder directly owns a 10% or more interest, the Australian tax withheld on
unfranked dividends (that are not CFI) paid by us to which a resident of the United States is beneficially entitled is limited to 5%. In
limited circumstances the rate of withholding can be reduced to zero.
Tax on Sales or Other Dispositions of Shares—Capital Gains Tax
Foreign Shareholders will not be subject to Australian capital gains tax on the gain made on a sale or other disposal of our
ordinary shares, unless they, together with associates, hold 10% or more of our issued capital, at the time of disposal or for 12 months
of the last 2 years prior to disposal.
Foreign Shareholders who own a 10% or more interest would be subject to Australian capital gains tax if more than 50% of our
assets held directly or indirectly, determined by reference to market value, consists of Australian real property (which includes land
and leasehold interests) or Australian mining, quarrying or prospecting rights. The Double Taxation Convention between the United
States and Australia is unlikely to limit the amount of this taxable gain. Australian capital gains tax applies to net capital gains of
Foreign Shareholders at the Australian tax rates for non-Australian residents, which start at a marginal rate of 32.5%. Net capital gains
are calculated after reduction for capital losses, which may only be offset against capital gains.
The 50% capital gains tax discount is not available to non-Australian residents on gains accrued after May 8, 2012. Companies
are not entitled to a capital gains tax discount.
Broadly, where there is a disposal of certain taxable Australian property, the purchaser will be required to withhold and remit to
the Australian Taxation Office (“ATO”) 12.50% of the proceeds from the sale. A transaction is excluded from the withholding
requirements in certain circumstances, including where the value of the taxable Australian property is less than A$750,000, the
transaction is an on-market transaction conducted on an approved stock exchange, a securities lending, or the transaction is conducted
using a broker operated crossing system. There is also an exception to the requirement to withhold where the Commissioner issues a
clearance certificate which broadly certifies that the vendor is not a foreign person. The Foreign Shareholder may be entitled to
receive a tax credit for the tax withheld by the purchaser which they may claim in their Australian income tax return.
Tax on Sales or Other Dispositions of Shares—Shareholders Holding Shares on Revenue Account
Some Foreign Shareholders may hold ordinary shares on revenue rather than on capital account for example, share traders.
These shareholders may have the gains made on the sale or other disposal of the ordinary shares included in their assessable income
under the ordinary income provisions of the income tax law, if the gains are sourced in Australia.
Foreign Shareholders assessable under these ordinary income provisions in respect of gains made on ordinary shares held on
revenue account would be assessed for such gains at the Australian tax rates for non-Australian residents, which start at a marginal
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rate of 32.5%. Some relief from Australian income tax may be available to such non-Australian resident shareholders under the
Double Taxation Convention between the United States and Australia.
To the extent an amount would be included in a Foreign Shareholder’s assessable income under both the capital gains tax
provisions and the ordinary income provisions, the capital gain amount would generally be reduced, so that the shareholder would not
be subject to double tax on any part of the income gain or capital gain.
The comments above in “Tax on Sales or Other Dispositions of Shares—Capital Gains Tax” regarding a purchaser being
required to withhold 12.5% tax on the acquisition of certain taxable Australian property equally applies where the disposal of the
Australian real property asset by a foreign resident is likely to generate gains on revenue account, rather than a capital gain.
Dual Residency
If a shareholder were a resident of both Australia and the United States under those countries’ domestic taxation laws, that
shareholder may be subject to tax as an Australian resident. If, however, the shareholder is determined to be a U.S. resident for the
purposes of the Double Taxation Convention between the United States and Australia, the Australian tax may be subject to limitation
by the Double Taxation Convention. Shareholders should obtain specialist taxation advice in these circumstances.
Australian Death Duty
Australia does not have estate or death duties. As a general rule, no capital gains tax liability is realized upon the inheritance of a
deceased person’s ordinary shares. The disposal of inherited ordinary shares by beneficiaries may, however, give rise to a capital gains
tax liability if the gain falls within the scope of Australia’s jurisdiction to tax (as discussed above).
Stamp Duty
No Australian stamp duty is payable by Australian residents or non-Australian residents on the issue, transfer and/or surrender
of the ADSs or the ordinary shares in Mesoblast, provided that the shares issued, transferred and/or surrendered do not represent 90%
or more of the issued shares in Mesoblast.
Goods and Services Tax
The supply of ADSs and/or ordinary shares in Mesoblast will not be subject to Australian goods and services tax.
10.F
Dividends and Paying Agents
Not applicable.
10.G
Statement by Experts
Not applicable.
10.H
Documents on Display
Any statement in this Form 20-F about any of our contracts or other documents is not necessarily complete. If the contract or
document is filed as an exhibit to the Form 20-F the contract or document is deemed to modify the description contained in this Form
20-F. You must review the exhibits themselves for a complete description of the contract or document.
You may review a copy of our filings with the SEC, as well as other information furnished to the SEC, including exhibits and
schedules filed with it, at the SEC’s public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information. In addition, the SEC maintains a website at http://www.sec.gov that contains reports
and other information regarding issuers that file electronically with the SEC. These SEC filings are also available to the public from
commercial document retrieval services.
We are required to file or furnish reports and other information with the SEC under the Securities Exchange Act of 1934 and
regulations under that act. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the form and
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content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and short swing profit
recovery provisions contained in Section 16 of the Exchange Act.
10.I
Subsidiary Information
For information about our subsidiaries, see “Item 18. Financial Statements – Note 12.”
Item 11. Quantitative and Qualitative Disclosures about Market Risk
For information about our exposure to market risk and how we manage this risk, see “Item 18. Financial Statements – Note 10.”
Item 12. Description of Securities Other than Equity Securities
12.A
Debt Securities
Not applicable.
12.B
Warrants and Rights
Not applicable.
12.C
Other Securities
Not applicable.
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12.D
American Depositary Shares
Fees Payable by ADR Holders
Holders of our ADRs may have to pay our ADS depositary, JPMorgan Chase Bank N.A. (JPMorgan), fees or charges up to the
amounts described in the following table:
Persons depositing or withdrawing ordinary shares or ADS
holders must pay:
$5.00 (or less) per 100 ADSs (or portion of 100
ADSs)
$0.05 (or less) per ADS
$1.50 per ADR
$0.04 (or less) per ADS per calendar year
Fees Payable by the Depositary to the Issuer
Description of service
• Issuance of ADSs, including issuances pursuant to a
deposits of shares, share or rights distributions, stock
dividend, stock split, merger or any other transactions
affecting the issuance of ADSs
• Cancellation of ADSs for the purpose of withdrawal
of deposited securities
• Cash distribution to ADS holders
• Transfers of ADRs
• Administrative services performed by the depositary
From time to time, the depositary may make payments to us to reimburse and/or share revenue from the fees collected from
ADS holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment
and maintenance of the ADS program. In performing its duties under the deposit agreement, the depositary may use brokers, dealers
or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.
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Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
PART II
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2018. “Disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the company's
management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of June 30, 2018.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal
control over financial reporting as of June 30, 2018 based on the criteria set forth in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management has
concluded that its internal control over financial reporting was effective as of June 30, 2018.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the period covered by this Form 20-F
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable
assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well
designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will
be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur
or that all control issues and instances of fraud, if any, have been detected.
Item 16A. Audit Committee Financial Expert
The Board of Directors of Mesoblast Ltd has determined that Brian Jamieson and Michael Spooner each possess specific
accounting and financial management expertise and that each is an Audit Committee Financial Expert as defined by the SEC. The
Board of Directors has also determined that Donal O’Dwyer, a member of the Audit and Risk Management Committee, has sufficient
experience and ability in finance and compliance matters to enable him to adequately discharge his responsibilities. All members of
the Audit and Risk Management Committee are “independent” according to the listing standards of the Nasdaq Global Select Market.
Item 16B. Code of Ethics
Our Code of Conduct covers conflicts of interest, confidentiality, fair dealing, protection of assets, compliance with laws and
regulations, whistle blowing, security trading and commitments to stakeholders. In summary, the code requires that at all times all
144
Company personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and Company
policies. This document is accessible on our internet website at: http://www.mesoblast.com/company/corporate-governance/code-of-
conduct.
Item 16C. Principal Accountant Fees and Services
Pre-Approval of Audit and Non-Audit Services
The Audit and Risk Management Committee’s pre-approval is required for all services provided by PwC. These services may
include audit services, audit-related services, tax services and permissible non-audit services, and are subject to a specific budget. The
Audit and Risk Management Committee uses a combination of two approaches – general pre-approval and specific pre-approval – in
considering whether particular services or categories of services are consistent with the SEC’s rules on auditor independence. Under
general pre-approval proposed services may be pre-approved without consideration of specific case-by-case services.
Audit and Non-Audit Services Fees
See “Item 18. Financial Statements – Note 18”. For the purpose of SEC classification, there were no audit-related, tax or other
fees that were paid or payable to PwC during the year ended June 30, 2018 and 2017.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Under Nasdaq Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home
country corporate governance practices instead of certain provisions of the Nasdaq Stock Market Rules. For example, we may follow
home country practice with regard to certain corporate governance requirements, such as the composition of the board of directors and
quorum requirements applicable to shareholders’ meetings. In addition, we may follow home country practice instead of the Nasdaq
Stock Market Rules requirement to hold executive sessions and to obtain shareholder approval prior to the issuance of securities in
connection with certain acquisitions or private placements of securities. Further, we may follow home country practice instead of the
Nasdaq Stock Market Rules requirement to obtain shareholder approval prior to the establishment or amendment of certain share
option, purchase or other compensation plans. A foreign private issuer that elects to follow a home country practice instead of any
Nasdaq rule must submit to Nasdaq, in advance, a written statement from an independent counsel in such issuer’s home country
certifying that the issuer’s practices are not prohibited by the home country’s laws. We submitted such a written statement to Nasdaq.
Other than as set forth below, we currently intend to comply with the corporate governance listing standards in the Nasdaq
Stock Market Rules to the extent possible under Australian law. However, we may choose to change such practices to follow home
country practice in the future.
The Nasdaq Stock Market Rules require that a listed company specify that the quorum for any meeting of the holders of share
capital be at least 33 1/3% of the outstanding shares of the company’s common voting stock. We follow our home country practice,
rather than complying with this rule. Consistent with Australian law, our bylaws do not require a quorum of at least 33 1/3% of the
issued voting shares of Mesoblast for any general meeting of its shareholders. Our constitution provides that a quorum for a general
meeting of our shareholders constitutes five shareholders present in person, by proxy, by attorney, or, where the shareholders is a body
corporate, by representative. This provision and our practice of holding meetings with this quorum are not prohibited by the ASX
Listing Rules or any other Australian law.
145
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17.
Financial Statements
See “Item 18. Financial Statements.”
Item 18.
Financial Statements
PART III
The following financial statements are filed as part of this annual report on Form 20-F.
Australian Disclosure Requirements
The financial statements cover Mesoblast Limited and its subsidiaries. The financial statements were authorized for issue by the
board of directors on August 30, 2018. 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
146
Auditor’s Independence Declaration
As lead auditor for the audit of Mesoblast Limited for the year ended 30 June 2018, 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
30 August 2018
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, 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.
147
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148
Index to Financial Statements
Consolidated Income Statement ..........................................................................................................................................................
Consolidated Statement of Comprehensive Income............................................................................................................................
Consolidated Statement of Changes in Equity ....................................................................................................................................
Consolidated Balance Sheet ................................................................................................................................................................
Consolidated Statement of Cash Flows ...............................................................................................................................................
Notes to Consolidated Financial Statements .......................................................................................................................................
150
151
152
153
154
155
149
Mesoblast Limited
Consolidated Income Statement
(in U.S. dollars, in thousands, except per share amount)
Revenue
Research & development
Manufacturing commercialization
Management and administration
Fair value remeasurement of contingent consideration
Other operating income and expenses
Finance costs
Impairment of intangible assets
Loss before income tax
Income tax benefit/(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
3
3
3
3
3
4
2018
Year Ended June 30,
2017
2016
17,341
(65,927)
(5,508)
(21,907)
10,541
1,312
(1,829)
—
(65,977)
30,687
(35,290)
2,412
(58,914)
(12,065)
(23,007)
(130)
1,489
—
—
(90,215)
13,400
(76,815)
42,548
(50,013)
(29,763)
(22,500)
28,112
2,714
—
(61,919)
(90,821)
86,694
(4,127)
Cents
Cents
Cents
(7.58)
(7.58)
(19.25)
(19.25)
(1.13)
(1.13)
The above consolidated income statement should be read in conjunction with the accompanying Notes.
150
Mesoblast Limited
Consolidated Statement of Comprehensive Income
(in U.S. dollars, in thousands)
Loss for the year
Other comprehensive (loss)/income
Items that may be reclassified to profit and loss
Changes in the fair value of available-for-sale financial
assets
Exchange differences on translation of foreign operations
Other comprehensive (loss)/income for the period,
net of tax
Total comprehensive losses attributable to the
owners of Mesoblast Limited
Note
7(b)
7(b)
Year Ended June 30,
2018
(35,290)
2017
(76,815)
2016
(4,127)
324
(903)
31
316
(334)
(705)
(579)
347
(1,039)
(35,869)
(76,468)
(5,166)
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying Notes.
151
Mesoblast Limited
Consolidated Statement of Changes in Equity
(in U.S. dollars, in thousands)
Balance as of July 1, 2015
Loss for the period
Other comprehensive loss
Total comprehensive loss for the period
Transactions with owners in their
capacity as owners:
Contributions of equity net of transaction costs
Transfer exercised options
Fair value of share-based payments
Reclassification of modified options to liability
Balance as of June 30, 2016
Balance as of 1 July 2016
Loss for the period
Other comprehensive income
Total comprehensive profit/(loss) for the period
Transactions with owners in their
capacity as owners:
Contributions of equity net of transaction costs
Transfer exercised options
Fair value of share-based payments
Reclassification of modified options from liability
Balance as of 30 June 2017
Balance as of July 1, 2017
Profit for the period
Other comprehensive income/(loss)
Total comprehensive profit/(loss) for the period
Transactions with owners in their
capacity as owners:
Contributions of equity net of transaction costs
Contributions of equity for unissued ordinary
shares, net of transaction costs
Transfer of exercised options
Fair value of share-based payments
Reclassification of modified options to liability
Balance as of June 30, 2018
Note
7(a)
17
7(a)
17
7(a)
17
Share Option
Reserve
Investment
Revaluation
Reserve
Retained
Earnings Total
Foreign
Currency
Translation
Reserve
(37,984) (263,960) 467,987
(4,127)
(1,039)
(5,166)
(4,127)
—
(4,127)
—
(705)
(705)
—
—
(334)
(334)
Issued Capital
709,191
—
—
—
60,740
—
—
—
—
—
(134)
3,149
1,244
4,259
64,999
64,999
—
—
—
—
—
(13)
5,036
(103)
4,920
69,919
69,919
—
—
—
60,947
60,947
134
—
—
134
770,272
770,272
—
—
—
60,140
60,140
13
—
—
13
830,425
830,425
—
—
—
—
—
—
—
—
—
(334)
(334)
31
31
—
—
—
—
—
—
— 60,947
— 60,947
—
—
3,149
—
1,244
—
4,393
—
(38,689) (268,087) 528,161
(38,689) (268,087) 528,161
— (76,815) (76,815)
316
347
—
316 (76,815) (76,468)
—
—
—
—
—
—
— 60,140
— 60,140
—
—
5,036
—
—
(103)
4,933
—
(38,373) (344,902) 516,766
—
(303)
(303)
—
324
324
(38,373) (344,902) 516,766
— (35,290) (35,290)
(903)
(579)
—
(903) (35,290) (35,869)
49,358
—
9,660
59,018
38
—
—
38
889,481
—
—
(38)
5,959
134
6,055
75,974
—
—
—
—
—
—
—
21
—
— 49,358
—
—
—
—
—
—
—
9,660
— 59,018
—
—
5,959
—
—
134
6,093
—
(39,276) (380,192) 546,008
The above consolidated statement of changes in equity should be read in conjunction with the accompanying Notes.
152
Mesoblast Limited
Consolidated Balance Sheet
(in U.S. dollars, in thousands)
Assets
Current Assets
Cash & cash equivalents
Trade & 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
Provisions
Total Current Liabilities
Non-Current Liabilities
Deferred tax liability
Provisions
Borrowings
Total Non-Current Liabilities
Total Liabilities
Net Assets
Equity
Issued Capital
Reserves
(Accumulated losses)/retained earnings
Total Equity
Note
5(a)
5(b)
5(b)
6(a)
5(c)
5(d)
6(b)
5(e)
6(c)
6(d)
6(c)
5(f)
7(a)
7(b)
As of June 30,
2018
2017
37,763
50,366
12,942
101,071
1,084
2,321
3,361
584,606
591,372
692,443
18,921
5,082
24,003
20,079
42,956
59,397
122,432
146,435
546,008
45,761
3,743
14,105
63,609
1,814
1,997
1,916
586,350
592,077
655,686
21,805
14,865
36,670
49,293
52,957
—
102,250
138,920
516,766
889,481
36,719
(380,192)
546,008
830,425
31,243
(344,902)
516,766
The above consolidated balance sheet should be read in conjunction with the accompanying Notes.
153
Mesoblast Limited
Consolidated Statement of Cash Flows
(in U.S. dollars, in thousands)
Cash flows from operating activities
Commercialization revenue received
Milestone payment received
Research and development tax incentive received
Payments to suppliers and employees (inclusive of goods and
services tax)
Interest received
Interest paid
Income taxes (paid)/refunded
Net cash (outflows) in operating activities
Cash flows from investing activities
Payments for contingent consideration
Investment in fixed assets
Rental deposits received
Payments for investments
Payments for licenses
Net cash (outflows)/inflows in investing activities
Cash flows from financing activities
Proceeds from borrowings
Payments of transaction costs from borrowings
Proceeds from issue of shares
Payments for share issue costs
Net cash inflows by financing activities
Note
2018
Year ended June 30,
2017
2016
8(b)
3,019
7,125
—
1,332
500
2,813
(84,682)
(100,598)
367
(816)
(25)
(75,012)
483
—
(1)
(95,471)
(952)
(201)
—
—
—
(1,153)
31,704
(392)
40,566
(3,265)
68,613
(7,552)
45,761
(446)
37,763
—
(311)
453
—
—
142
—
—
61,932
(1,927)
60,005
(35,324)
80,937
148
45,761
99
3,500
4,466
(97,190)
1,129
—
—
(87,996)
—
(722)
—
(805)
(200)
(1,727)
—
—
68,549
(6,483)
62,066
(27,657)
110,701
(2,107)
80,937
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
FX (losses)/gains on the translation of foreign bank accounts
Cash and cash equivalents at end of period
8(a)
The above consolidated statement of cash flows should be read in conjunction with the accompanying Notes.
154
Mesoblast Limited
Notes to Consolidated Financial Statements
Mesoblast Limited (“the Company”) and its subsidiaries (“the Group”) are primarily engaged in the development of
regenerative medicine products. The Group’s primary proprietary regenerative medicine technology platform is based on specialized
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. In November 2015, the Company listed in the United States of
America (“U.S.”) on the Nasdaq Global Select Market (“Nasdaq”) and from this date has been dual-listed in Australia and the U.S.
These financial statements and notes are presented in U.S. dollars (“$” or “USD” or “US$”), unless otherwise noted, including
certain amounts that are presented in Australian dollars (“AUD” or “A$”).
1. Basis of preparation
The general purpose financial statements of Mesoblast Limited and its subsidiaries have been prepared in accordance with
International Financial Reporting Standards, as issued by the International Accounting Standards Board and Australian equivalent
International Financial Reporting Standards, as issued by the Australian Accounting Standards Board. Mesoblast Limited is a for-
profit entity for the purpose of preparing the financial statements.
(i) Going concern
For the fiscal years ended June 30, 2018, 2017 and 2016, the Group incurred a total comprehensive loss after income tax of
$35.9 million, $76.5 million and $5.2 million, respectively, and had net cash outflows from operations of $75.0 million, $95.5 million
and $88.0 million, respectively. As of June 30, 2018, the Group held total cash and cash equivalents of $37.8 million. As of June 30,
2018, the Group recognized funds receivable from debt financing and unissued capital of $39.0 million pursuant to a financing facility
with NovaQuest Capital Management, L.L.C. (“NovaQuest”). On July 10, 2018 the net proceeds from the financing facility of $39.0
million were received and recognized in cash and cash equivalents. The Group will also receive $40.0 million from Tasly
Pharmaceutical Group (“Tasly”) on closing of the strategic alliance that the two companies announced in July 2018 for cardiovascular
therapies in China. This receipt is subject to filing with the State Administration of Foreign Exchange.
In addition to the strategic alliance with Tasly, the Group has committed to entering into non-dilutive commercial partnering
transactions to fund operations. The Group also continues to work on various cost containment and deferment strategies. A fully
discretionary equity facility remains for up to A$120 million/US$ 90 million over 12 months to provide additional funds as required.
The Group may also consider equity-based financing or drawing further debt funding on current debt arrangements to fund future
operational requirements.
There is uncertainty related to the Group’s ability to partner programs, raise capital or debt at terms to meet the Group’s
requirements. Additionally, there is uncertainty related to the Group’s ability to sustainably maintain implemented cost reductions and
further defer programs on a timely basis while achieving expected outcomes.
The continuing viability of the Group and its ability to continue as a going concern and meet its debts and commitments as they
fall due are dependent upon the strategic alliance with Tasly, non-dilutive funding in the form of commercial partnering transactions
or equity-based financing to fund future operations, together with maintaining implemented cost containment and deferment
strategies.
Management and the directors believe that the Group will be successful in the above matters and, accordingly, have prepared the
financial report on a going concern basis, notwithstanding that there is a material uncertainty that may cast significant doubt on the
Group’s ability to continue as a going concern and that it may be unable to realize its assets and liabilities in the normal course of
business.
References to matters that may cast significant doubt about the Group’s ability to continue as a going concern also raise
substantial doubt as contemplated by the Public Company Accounting Oversight Board (“PCAOB”) standards.
(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.
155
(iii) New and amended standards adopted by the Group
There were no new or amended accounting standards that were applicable to the Group for the June 30, 2018 reporting period.
(iv) New accounting standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for the June 30, 2018
reporting period. The Group has not elected to apply any pronouncements before their operative date in the annual reporting period
beginning July 1, 2017.
Initial application of the following Standards is not expected to materially impact the amounts recognized or disclosures made in
the current financial report and management do not consider these new accounting standards to have a material impact on future
transactions made in relation to the Group. The Group is in the process of assessing the impact of these new standards on its
accounting policy.
The following standards applicable to the Group but are not yet adopted are summarized below:
Title of standard
IFRS 9 Financial Instruments
Key requirements
IFRS 9 introduced revisions in the following areas:
•
•
Classification and measurement – replacement of the existing complex rule-based requirements
with a principle-based approach which is driven by cash flow characteristics and business model.
Impairment – a single impairment model to be applied to all financial instruments where expected
credit losses must be accounted for from when the financial instruments are first recognized. This
requirement lowers the threshold for recognition of full lifetime expected losses.
• Hedge accounting – a reformed model for hedge accounting with enhanced disclosures about risk
management activity.
Impact
The Group has reviewed its financial assets and liabilities and expects the following impact from the
adoption of the new standard from July 1, 2018:
• Accounting for non-trading equity investments – IFRS 9 requires investments in equity instruments
to be recorded at fair value with changes recognized through profit or loss (FVTPL). There is an
allowance for management to make an irrevocable election on initial recognition for fair value
changes in non-trading equity investments to be recorded in other comprehensive income (FVOCI).
The Group has an available-for-sale financial asset recorded at $2.3 million as at June 30, 2018,
measured at FVOCI. On transition to IFRS 9 on July 1, 2018, the Group expects to make an
election to record this investment in an equity instrument at FVOCI. Therefore, no material impact
is expected on the measurement of the AFS financial asset on transition.
• Accounting for financial liabilities – the Group has financial liabilities arising from contingent
consideration of $42.1 million as at June 30, 2018, which is mandatorily carried at FVTPL, and
financial liabilities carried at amortized cost of $59.4 million as at June 30, 2018. There is an
allowance for management to make an irrevocable election on initial recognition for financial
liabilities that are measured at amortized cost to be measured at FVTPL. The Group does not
expect to designate any of its financial liabilities carried at amortized cost as FVTPL using the fair
value option upon adoption of IFRS 9 on July 1, 2018. Therefore, the Group does not expect any
material impact on transition to IFRS 9 from July 1, 2018.
Effective Date
IFRS 9 must be applied for financial years commencing on or after January 1, 2018. The Group has not
adopted IFRS 9 before its mandatory date.
Title of standard
IFRS 15 Revenue from Contracts with Customers
Key requirements
IFRS 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
156
• 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.
Impact
The Group has reviewed all relevant revenue arrangements and expects the following effects of applying the
new standard on the Group’s financial statements:
• Accounting for sales- or usage-based royalties – IFRS 15 contains an exception to the general
principles for accounting for variable consideration for sales- or usage-based royalties arising from
licenses of IP. Under this exception, royalties are recognized at the later of when underlying sales
occur and all royalty-related performance obligations are satisfied. In the year ended June 30, 2018,
the Group earned sales-based royalty and milestone income from licensing arrangement with JCR
Pharmaceuticals Co., Ltd. (“JCR”) of $5.1 million. The Group estimates that the impact of
applying the sales- or usage-based royalty exception will not have a material impact on transition to
IFRS 15 from July 1, 2018.
• Accounting for the licensing of intellectual property (“IP”) – IFRS 15 contains specific
implementation guidance for the accounting for licenses of IP. In particular, the Group is required
to determine whether a license granted to a customer provides a right to use IP or a right to access
IP. This determination affects whether revenue is recognized at a point in time or over time,
respectively. In the year ended June 30, 2018, the Group recognized milestone revenue relating to
the non-refundable up-front payment of $5.9 million (€5.0 million) received upon execution of the
Group’s patent license arrangement with Takeda Pharmaceutical Company Limited (“Takeda”) in
December 2017 and $5.9 million (€5.0 million) in relation to further payments due within 12
months of the patent license agreement date for the product Alofisel®. The license of IP to Takeda
is a license to use under IFRS 15 and therefore revenue is recognized at a point in time as
performance obligations are satisfied. Since the performance obligations have been satisfied for the
revenue recognized in the year ended June 30, 2018, the Group does not expect a material impact
on transition to IFRS 15 on July 1, 2018.
• Accounting for contracts with variable consideration – IFRS 15 contains a constraint that allows
variable consideration to be included in the transaction price only to the extent that it is highly
probable that a significant reversal of cumulative revenue recognized will not occur. Under the
patent license arrangement with Takeda, the Group is entitled to up to €10.0 million in payments
from Takeda when Alofisel® reaches certain product regulatory milestones. The product regulatory
milestones are subject to the constraint over variable consideration and the Group has not
recognized consideration in respect of these payments in the calculation of the transaction price for
revenue recognized in the year to June 30, 2018. Therefore, we do not expect there to be a material
impact on transition to IFRS 15 on July 1, 2018.
Effective Date
IFRS 15 must be applied for financial years commencing on or after January 1, 2018. The Group has not
adopted IFRS 15 before its mandatory date and intends to adopt the standard using the modified
retrospective approach which means that the cumulative impact of the adoption will be recognized in
retained earnings as of July 1, 2018, and comparative disclosures will not be restated.
Title of standard
IFRS 16 Leases
Key requirements
IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee; they
are recognized on the balance sheet as they are treated in a similar way to finance leases applying IAS 17.
Leases are ‘capitalized’ by recognizing the present value of the lease payments and showing them either as
lease assets (right-of-use assets) or together with property, plant and equipment. If lease payments are
made over time, a financial liability is required to be recognized to represent the obligation to make future
lease payments.
There is little change for the accounting for a lessor.
157
Impact
Refer to Notes 14 (b) and (c) for the lease commitments the Group holds as a lessee and lessor.
The Group is currently evaluating the effect that the updated IFRS 16 will have on the consolidated
financial statements and related disclosures.
Effective Date
IFRS 16 must be applied on or after January 1, 2019. The Group does not intend to adopt IFRS 16 before
its mandatory date.
2. Significant changes in the current reporting period
(i) Significant events
The financial position and performance of the Group was affected by the following events during the year ended June 30, 2018:
• On December 14, 2017, the Group entered into a patent license agreement with TiGenix NV, now a wholly owned subsidiary
of Takeda, which granted Takeda exclusive access to certain of its patents to support global commercialization of the
adipose-derived mesenchymal stem cell product Alofisel®, previously known as Cx601 for the local treatment of fistulae.
The agreement includes the right for Takeda to grant sub-licenses to affiliates and third parties. As part of the agreement, the
Group received $5.9 million (€5.0 million) as a non-refundable up-front payment. The Group will be entitled to further
payments of €5.0 million within 12 months of the patent license agreement date, and up to €10.0 million when Takeda
reaches certain product regulatory milestones. Additionally, the Group will receive single digit royalties on net sales of
Alofisel®.
• On December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (“the Tax Act”), which changed many
aspects of U.S. corporate income taxation, including a reduction in the corporate income tax rate from 35% to 21%. The
Group recognized the tax effects of the Tax Act, the most significant of which was a tax benefit resulting from the
remeasurement of deferred tax balances to 21%, see Note 4.
• On March 6, 2018, the Group entered into a $75.0 million non-dilutive, four year credit facility with Hercules Capital, Inc.
(“Hercules”). The Group drew the first tranche of $35.0 million of the principal amount on closing. An additional $40.0
million may be drawn as certain milestones are met. The loan matures in March 2022 with principal repayments commencing
in October 2019 with the ability to defer the commencement of principal repayments to October 2020 if certain milestones
are met, see Note 5(f).
• On June 29, 2018, the Group entered into a $40.0 million non-dilutive, eight year credit facility and a $10.0 million equity
placement with NovaQuest. The Group drew the first tranche of $30.0 million of the principal amount on closing, with an
additional tranche of $10.0 million becoming available on marketing approval of remestemcel-L (“MSC-100-IV”) by the
United States Food and Drug Administration (“FDA”). The loan matures in July 2026 with principal repayments from net
sales of MSC-100-IV and interest payments deferred until after the first commercial sale, see Note 5(f).
• On July 17, 2018, the Group announced that it had entered into a strategic alliance with Tasly Pharmaceuticals Group
(“Tasly”) for the development, manufacture and commercialization in China of the Group’s allogenic mesenchymal precursor
cell products, MPC-150-IM for the treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or
prevention of acute myocardial infraction. Tasly will receive exclusive rights and will fund all development, manufacturing
and commercialization activities in China for MPC-150-IM and MPC-25-IC.
The Group will receive $40.0 million from Tasly on closing of the strategic alliance, comprising a $20.0 million up-front
technology access fee and $20.0 million in an equity purchase in Mesoblast Limited at A$1.86 per share, representing a 20%
premium to a blended volume weighted average price calculated over three months, one month and one day. This receipt is
subject to filing with the State Administration of Foreign Exchange. The Group is also entitled to receive $25.0 million on
product regulatory approvals in China, double-digit escalating royalties on net product sales and is eligible to receive up to
six escalating milestone payments upon the product candidates reaching certain sales thresholds in China, see Note 15.
158
3. Loss before income tax
(in U.S. dollars, in thousands)
Revenue
Commercialization Revenue
Milestone Revenue
Interest Revenue
Total Revenue
Clinical trial and research & development
Manufacturing production & development
Employee benefits
Salaries and employee benefits
Defined contribution superannuation expenses
Equity settled share-based payment transactions(1)
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
Other Management & administration expenses
Overheads & administration
Consultancy
Legal, patent and other professional fees
Intellectual property expenses (excluding the amount
amortized above)
Total Other Management & administration expenses
Fair value remeasurement of contingent consideration
Remeasurement of contingent consideration
Total Fair value remeasurement of contingent
consideration
Note
2018
Year Ended June 30,
2017
2016
3,641
13,334
366
17,341
(42,863)
(3,640)
(19,343)
(374)
(6,199)
(25,916)
(909)
(1,741)
(2,650)
(8,477)
(3,295)
(3,436)
1,444
500
468
2,412
(38,141)
(8,313)
(20,039)
(362)
(5,276)
(25,677)
(1,578)
(1,479)
(3,057)
(8,128)
(3,329)
(4,452)
(3,065)
(18,273)
(2,889)
(18,798)
37,969
3,500
1,079
42,548
(30,270)
(21,506)
(24,350)
(362)
(3,389)
(28,101)
(1,625)
(567)
(2,192)
(10,361)
(3,396)
(3,888)
(2,562)
(20,207)
5(g)(iii)
10,541
10,541
(130)
(130)
28,112
28,112
Impairment of intangible assets
Impairment of in-process research and development acquired
Total Impairment of intangible assets
6(b)
—
—
—
—
(61,919)
(61,919)
Other operating income and expenses
Research & development tax incentive(2)
Foreign exchange gains/(losses)
Foreign withholding tax paid
Total Other operating income and expenses
Finance costs
Interest expense
Total Finance costs
1,807
161
(656)
1,312
(1,829)
(1,829)
1,532
(43)
—
1,489
—
—
3,840
(1,126)
—
2,714
—
—
Total loss before income tax
(65,977)
(90,215)
(90,821)
159
(1)
Share-based payment transactions
For the year ended June 30, 2018, 2017 and 2016, share-based payment transactions have been reflected in the Consolidated
Statement of Comprehensive Income functional expense categories as follows:
(in U.S. dollars)
Research and development
Manufacturing and commercialization
Management and administration
(2) Research and development tax incentive
Year Ended June 30,
2018
3,638,311
558,928
2,001,349
6,198,588
2017
2,837,231
420,762
2,017,172
5,275,165
2016
2,461,110
681,355
246,197
3,388,662
The Group’s research and development activities are eligible under an Australian Government tax incentive for eligible
expenditures from July 1, 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. The Group uses the assistance of independent tax specialists to review, on an annual
basis, the quantum of our previous research and development tax claim and our on-going eligibility to claim this tax incentive in
Australia. For years ended June 30, 2018, 2017 and 2016, the Group has recognized income of $1.8 million, $1.5 million and
$3.8 million, respectively.
Of the $1.8 million research and development tax incentive recorded in other income for the year ended June 30, 2018, $0.1
million relates to a 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 June 30, 2017.
Of the $1.5 million research and development tax incentive recorded in other income for the year ended June 30, 2017, $(0.1)
million relates to a 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 June 30, 2016.
Of the $3.8 million research and development tax incentive recorded in other income for the year ended June 30, 2016, $1.1
million relates to a 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 June 30, 2015.
4. Income tax benefit/(expense)
(in U.S. dollars, in thousands)
(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% (2017: 30%)
Tax effect of amounts which are not deductible/(exempt)
in calculating taxable income:
Share-based payments expense
Research and development tax concessions
Foreign exchange translation gains/(losses)
Contingent consideration
Other sundry items
Current year tax expense/(benefit)
Adjustments for current tax of prior periods
Differences in overseas tax rates
Tax benefit not recognized
Change in tax rate on Deferred tax assets
Change in tax rate on Deferred tax liability
Previously unrecognized tax losses now recouped to reduce
deferred tax expense/(benefit)
Income tax expense/(benefit) attributable to loss before
income tax
160
2018
Year Ended June 30,
2017
2016
(65,977)
(19,793)
(90,215)
(27,065)
(90,821)
(27,246)
1,544
537
(242)
(3,162)
1,011
(20,105)
(3,616)
5,259
11,065
27,471
(50,761)
1,488
2,442
—
39
497
(22,599)
(5,870)
7,797
7,272
—
—
884
699
—
(11,221)
(1,873)
(38,757)
(2,224)
9,192
5,851
—
—
—
—
(60,756)
(30,687)
(13,400)
(86,694)
(in U.S. dollars, in thousands)
(b)Income tax expense/(benefit)
Current tax
Current tax
Total current tax expense/(benefit)
Deferred tax
(Increase)/decrease in deferred tax assets
Decrease in deferred tax liabilities
Total deferred tax expense/(benefit)
Income tax expense/(benefit)
2018
Year Ended June 30,
2017
2016
—
—
—
—
—
—
20,183
(50,870)
(30,687)
(30,687)
(13,204)
(196)
(13,400)
(13,400)
(65,022)
(21,672)
(86,694)
(86,694)
Deferred tax assets have been brought to account only to the extent that it is foreseeable that they are recoverable against future
tax liabilities.
Deferred tax assets are recognized for unused tax losses to the extent that it is probable that future taxable profit will be
available against which the unused tax losses can be utilized. Deferred tax assets are offset against taxable temporary differences
(deferred tax liabilities) when the deferred tax balances relate to the same tax jurisdiction in accordance with our accounting policy.
Deferred taxes are measured at the rate in which they are expected to settle within the respective jurisdictions, which can
change based on factors such as new legislation or timing of utilization and reversal of associated assets and liabilities. On December
22, 2017, the United States signed into law the Tax Act, which changed many aspects of U.S. corporate income taxation, including a
reduction in the corporate income tax rate from 35% to 21%. The Group recognized the tax effects of the Tax Act in the year ended
June 30, 2018, the most significant of which was a tax benefit resulting from the remeasurement of deferred tax balances to 21%.
(in U.S. dollars, in thousands)
(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 brought to account)
Deferred tax recorded in equity (if brought to account)
(in U.S. dollars, in thousands)
(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
2018
Year Ended June 30,
2017
2016
(1,059)
877
(182)
(764)
960
196
(148)
808
660
2018
Year Ended June 30,
2017
2016
—
—
—
—
—
—
161
(in U.S. dollars, in thousands)
(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
Other tax credits
Potential tax benefit at local tax rates
As of June 30,
2018
2017
2016
41,501
34,896
27,060
3,704
3,908
3,432
3,220
48,425
—
38,804
—
30,492
As of June 30, 2018, 2017 and 2016, the Group has deferred tax assets not brought to account of $48.4 million, $38.8 million
and $30.5 million, respectively. Deferred tax assets have been brought to account only to the extent that it is foreseeable that they are
recoverable against future tax liabilities.
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:
Assets at
FVOCI(1)
Assets at
FVTPL(2)
Assets at
amortized
cost
Total
—
—
2,321
—
2,321
—
—
1,997
—
1,997
—
—
—
—
—
—
—
—
—
—
37,763
50,366
—
3,361
91,490
45,761
3,743
—
1,916
51,420
37,763
50,366
2,321
3,361
93,811
45,761
3,743
1,997
1,916
53,417
Financial assets
(in U.S. dollars, in thousands)
As of June 30, 2018
Cash & cash equivalents
Trade & other receivables
Available-for-sale financial asset
Other non-current assets
As of June 30, 2017
Cash & cash equivalents
Trade & other receivables
Available-for-sale financial asset
Other non-current assets
(1)
(2)
Fair value through other comprehensive income
Fair value through profit or loss
Notes
5(a)
5(b)
5(c)
5(d)
5(a)
5(b)
5(c)
5(d)
162
Financial liabilities
(in U.S. dollars, in thousands)
As of June 30, 2018
Trade and other payables
Borrowings
Contingent considerations
As of June 30, 2017
Trade and other payables
Contingent considerations
Notes
5(e)
5(f)
5(g)(iii)
5(e)
5(g)(iii)
Liabilities at
FVOCI(1)
Liabilities at
FVTPL(2)
Liabilities at
amortized cost
Total
—
—
—
—
—
—
—
—
—
42,070
42,070
—
63,595
63,595
18,921
59,397
—
78,318
21,805
—
21,805
18,921
59,397
42,070
120,388
21,805
63,595
85,400
(1)
(2)
Fair value through other comprehensive income
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.
a.
Cash and cash equivalents
(in U.S. dollars, in thousands)
Cash at bank
Deposits at call(1)
As of June 30,
2018
2017
37,221
542
37,763
7,722
38,039
45,761
(1) As of June 30, 2018 and June 30, 2017, interest-bearing deposits at call include amounts of $0.4 million and $0.5 million,
respectively, held as security and are 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.
b.
Trade and other receivables and prepayments
(i) Trade receivables
(in U.S. dollars, in thousands)
Trade debtors
Funds receivable from debt financing and unissued capital(1)
Income tax and tax incentives recoverable
Other receivables
Foreign withholding tax recoverable
Security deposit
Sundry debtors
Other recoverable taxes (Goods and services tax and
value-added tax)
Interest receivables
Trade and other receivables
As of June 30,
2018
2017
6,630
38,950
3,305
615
471
250
81
53
11
50,366
474
—
1,631
698
471
250
120
87
12
3,743
163
(1) On July 2, 2018, the Group announced that the Group had entered into a financing agreement with NovaQuest on June 29, 2018
to develop and commercialize its allogeneic product candidate MSC-100-IV for pediatric patients with acute Graft versus Host
Disease ("aGVHD”). The contractual terms of the agreement pertaining to the receipt of funds were binding and therefore the
Group recognized a receivable of $39.0 million at June 30, 2018. On July 10, 2018 the net proceeds from the financing facility
of $39.0 million were received and recognized in cash and cash equivalents.
(ii) Prepayments
(in U.S. dollars, in thousands)
Clinical trial research and development expenditure
Other
Prepaid insurance and subscriptions
Prepayments
As of
June 30,
2018
2017
12,042
759
141
12,942
13,571
340
194
14,105
(iii) 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 as of June 30, 2018 and June 30, 2017.
(iv) Other receivables
These amounts generally arise from transactions outside the usual operating activities of the Group.
(v) 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.
(vi) 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(a) and (b).
c.
Available-for-sale financial assets
Available-for-sale financial assets include the following classes of financial assets:
(in U.S. dollars, in thousands)
Unlisted securities:
Equity securities
As of June 30,
2018
2017
2,321
2,321
1,997
1,997
(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 FVTPL, 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(l)(v) for further details about the Group’s impairment policies for financial assets.
164
(iii) Amounts recognized in other comprehensive income
For the years ended June 30, 2018, 2017 and 2016, the Group recognized in statement of comprehensive income a gain of $0.3
million, a gain of $Nil and a loss of $0.3 million respectively, for change in fair value of the available-for-sale financial assets.
(iv) Fair value, impairment and risk exposure
Information about the methods and assumptions used in determining fair value is provided in Note 5(g). None of the available-
for-sale financial assets are either past due or impaired.
All available-for-sale financial assets are denominated in USD.
d.
Other non-current assets
(in U.S. dollars, in thousands)
Bank Guarantee
Letter of Credit
U.S. Tax credits
As of June 30,
2018
2017
710
1,178
1,473
3,361
738
1,178
—
1,916
(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 held in an account named Mesoblast, Inc. at the Bank of America according to the terms of an irrevocable standby
letter of credit which is security for the sublease agreement for our occupancy of 505 Fifth Avenue, New York, New York, United
States of America. The letter of credit is security for the full and faithful performance and observance by the subtenant of the terms,
covenants and conditions of the sublease. The letter of credit is 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 July 31, 2021.
U.S. Tax credits
These funds are receivable from the Internal Revenue Service (“IRS”) as a result of the changes in the U.S. corporate income
tax legislation with the Tax Act which was signed into law in December 2017. Tax credits arising from the Alternative Minimum Tax
(“AMT”) regime have become refundable in 2021.
(ii) Impairment and risk exposure
No other non-current assets are either past due or impaired.
e.
Trade and other payables
(in U.S. dollars, in thousands)
Trade payables and other payables
Trade and other payables
As of June 30,
2018
2017
18,921
18,921
21,805
21,805
The carrying amounts of trade and other payables are assumed to be the same as their fair values, due to their short-term nature.
165
f.
Borrowings
(in U.S. dollars, in thousands)
Current
Secured liabilities:
Borrowing arrangements
Non-current
Secured liabilities:
Borrowing arrangements
Less: transaction costs
Amortization of transaction costs
As of June 30,
2018
2017
—
—
65,000
(6,328)
725
59,397
—
—
—
—
—
—
(i) Borrowing arrangements
Hercules Capital, Inc.
On March 6, 2018, the Group drew the first tranche of $35.0 million of the principal amount from the $75.0 million 9.45%
floating rate loan with Hercules. An additional $40.0 million may be drawn as certain milestones are met. The loan matures in March
2022 with principal repayments commencing in October 2019 with the ability to defer the commencement of principal repayments up
to October 2020 if certain milestones are met. Interest on the loan is payable monthly in arrears on the 1st day of the month. At closing
date, the interest rate was 9.45%. On March 22, 2018 and June 14, 2018, in line with the increases in the U.S. prime rate, the interest
rate on the loan increased to 9.70% and 9.95%, respectively.
The carrying amount of the non-current loan is secured by a first charge over the assets of the Group, excluding $0.7 million of
bank guarantees and $1.2 million of letters of credit included in other non-current assets (refer to Note 5(d)), $0.5 million of interest-
bearing deposits at call included in cash and cash equivalents (refer to Note 5(a)) and $0.2 million of cash held as security included in
trade and other receivables (refer to Note 5(b)). These items have been used to secure liabilities other than the non-current loan.
NovaQuest Capital Management, L.L.C.
On June 29, 2018, we drew the first tranche of $30.0 million of the principal amount from the $40.0 million secured loan with
NovaQuest. There is a four-year interest only period, until July 2022, with the principal repayable in equal quarterly instalments over
the remaining period of the loan. The loan matures in July 2026. Interest on the loan will accrue at a fixed rate of 15% per annum.
All interest and principal payments will be deferred until after the first commercial sale of our allogeneic product candidate
MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding Asia
(“pediatric aGVHD”). We can elect to prepay all outstanding amounts owing at any time prior to maturity, subject to a prepayment
charge, and may decide to do so if net sales of pediatric aGVHD are significantly higher than current forecasts.
If there are no net sales of pediatric aGVHD, the loan is only repayable on maturity in 2026. If in any annual period 25% of net
sales of pediatric aGVHD exceed the amount of accrued interest owing and, from 2022, principal and accrued interest owing (“the
payment cap”), Mesoblast will pay the payment cap and an additional portion of excess sales which may be used for early prepayment
of the loan. If in any annual period 25% of net sales of pediatric aGVHD is less than the payment cap, then the payment is limited to
25% of net sales of pediatric aGVHD. Any unpaid interest will be added to the principal amounts owing and shall accrue further
interest. At maturity date, any unpaid loan balances are repaid.
Because of this relationship of net sales and repayments, changes in our estimated net sales may trigger an adjustment of the
carrying amount of the financial liability to reflect the revised estimated cash flows. The carrying amount adjustment is recalculated
by computing the present value of the revised estimated future cash flows at the financial instrument’s original effective interest rate.
The adjustment is recognized in the Income Statement in the period the revision is made.
The carrying amount of the loan is subordinated to the senior creditor, Hercules.
166
(ii) Compliance with loan covenants
The Group has complied with the financial covenants of its borrowing facilities during the year ended June 30, 2018. There
were no borrowings during the year ended June 30, 2017.
(iii) Net debt reconciliation
(in U.S. dollars, in thousands)
As of June 30, 2017
Changes from financing cash flows
Proceeds from debt
Payment of transaction costs
Repayment of loans
Movement in short-term borrowings
Total changes in liabilities arising on financing cash flows
Non-cash changes
Funds receivable from debt financing
Accrued transaction costs
Amortization of transaction costs
As of June 30, 2018
(iv) Fair values of borrowing arrangements
Current
borrowings
Non-current
borrowings
—
—
—
—
—
—
—
—
—
—
Total
—
—
31,704
(392)
—
—
31,312
28,950
(1,590)
725
59,397
31,704
(392)
—
—
31,312
28,950
(1,590)
725
59,397
The carrying amount of the borrowings at amortized cost in accordance with our accounting policy is a reasonable
approximation of fair value.
g.
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
June 30, 2018 and June 30, 2017 on a recurring basis, categorized by level according to the significance of the inputs used in making
the measurements:
As of June 30, 2017
(in U.S. dollars, in thousands)
Financial Assets
Available-for-sale financial assets:
Equity securities - biotech sector
Total Financial Assets
Financial Liabilities
Financial liabilities at fair value through profit or loss:
Contingent consideration
Total Financial Liabilities
Notes
Level 1
Level 2
Level 3
Total
—
—
—
—
1,997
1,997
1,997
1,997
—
—
—
—
63,595
63,595
63,595
63,595
5(c)
6(d)
167
As of June 30, 2018
(in U.S. dollars, in thousands)
Financial Assets
Available-for-sale financial assets:
Equity securities - biotech sector
Total Financial Assets
Financial Liabilities
Financial liabilities at fair value through profit or loss:
Contingent consideration
Total Financial Liabilities
Notes
Level 1
Level 2
Level 3
Total
5(c)
6(d)
—
—
—
—
2,321
2,321
2,321
2,321
—
—
—
—
42,070
42,070
42,070
42,070
There were no transfers between any of the levels for recurring fair value measurements during the period.
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 discounted cash flow analysis to determine the fair value measurements of level 3 instruments.
(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 instruments for the years ended June 30, 2018 and June 30, 2017:
(in U.S. dollars, in thousands)
Opening balance - July 1, 2016
Amount used during the year
Charged/(credited) to consolidated income statement:
Remeasurement(1)
Closing balance - June 30, 2017
Opening balance - July 1, 2017
Amount used during the year
Charged/(credited) to consolidated income statement:
Remeasurement(2)
Closing balance - June 30, 2018
Contingent
consideration
provision
63,716
(251)
130
63,595
63,595
(10,984)
(10,541)
42,070
(1)
In the year ended June 30, 2017 a loss of $0.1 million was recognized on the remeasurement of contingent consideration
pertaining to the acquisition of assets from Osiris. This loss is a net result of changes to the key assumptions of the contingent
consideration valuation such as developmental timelines, probability of success, market penetration, market population and the
168
increase in valuation as the time period shortens between the valuation date and the potential settlement dates of contingent
consideration.
(2)
In the year ended June 30, 2018 a gain of $10.5 million was recognized on the remeasurement of contingent consideration
pertaining to the acquisition of assets from Osiris. This gain is a net result of changes to the key assumptions of the contingent
consideration valuation such as developmental timelines, product pricing, market population, market penetration and the
increase in valuation as the time period shortens between the valuation date and the potential settlement dates of contingent
consideration.
(iv) Valuation inputs and relationship to fair value
The following table summarizes the quantitative information about the significant unobservable inputs used in level 3 fair value
measurements:
(in U.S. dollars,
in thousands, except percent data)
Description
Contingent consideration provision
Fair value as of
June 30,
Valuation Unobservable
Range of inputs
(weighted average)
Year Ended
June 30,
2018
42,070
2017
63,595
technique
Discounted
cash flows
inputs(1)
Risk adjusted
discount rate
2018
11%-13%
(12.5%)
2017
11%-13%
(12.5%)
Expected unit
revenues
n/a
n/a
Expected sales
volumes
n/a
n/a
Relationship of
unobservable inputs to
fair value
Year ended June 30, 2018: A
change in the discount rate by
0.5% would increase/decrease
the fair value by 1%.
Year ended June 30, 2017: A
change in the discount rate by
0.5% would increase/decrease
the fair value by 1%.
Year ended June 30, 2018: A
10% increase/decrease in the
price assumptions adopted
would increase/decrease the
fair value by 4%.
Year ended June 30, 2017: A
10% increase/decrease in the
price assumptions adopted
would increase/decrease the
fair value by 5%.
Year ended June 30, 2018: A
10% increase/decrease in sales
volume assumptions adopted
would increase/decrease the
fair value by 4%.
Year ended June 30, 2017: A
10% increase/decrease in sales
volume assumptions adopted
would increase/decrease the
fair value by 5%.
(1)
There were no significant inter-relationships between unobservable inputs that materially affect fair values.
(v) Valuation processes
In connection with the Osiris acquisition, on October 11, 2013 (the “acquisition date”), an independent valuation of the
contingent consideration was carried out by an independent valuer.
For the years ended June 30, 2018 and 2017, 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
169
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 net result of changes to key assumptions such as developmental
timelines, product pricing, market population, market penetration, probability of success and the increase in valuation as the time
period shortens between the valuation date and the potential settlement dates of contingent consideration.
The fair value of contingent consideration
(in U.S. dollars, in thousands)
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 June 30,
2018
2017
23,674
34,501
18,396
42,070
29,094
63,595
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. This assumption is reviewed as part of the
valuation process outlined above.
Expected unit revenues:
Expected market sale price of the most comparable products currently available in the market place. This
assumption is reviewed as part of the valuation process outlined above.
Expected sales volumes:
Expected sales volumes of the most comparable products currently available in the market place. This
assumption is reviewed as part of the valuation process outlined above.
170
6. Non-financial assets and liabilities
a.
Property, plant and equipment
(in U.S. dollars, in thousands)
Year Ended June 30, 2017
Opening net book amount
Additions
Exchange differences
Disposals
Depreciation charge
Closing net book value
As of June 30, 2017
Cost
Accumulated depreciation
Net book value
Year ended June 30, 2018
Opening net book amount
Additions
Exchange differences
Disposals
Depreciation charge
Closing net book value
As of June 30, 2018
Cost
Accumulated depreciation
Net book value
Plant and
Equipment
Office Furniture
and Equipment
Computer
Hardware
and
Software
1,752
17
31
—
(1,049)
751
706
—
(25)
—
(134)
547
605
296
13
(3)
(395)
516
Total
3,063
313
19
(3)
(1,578)
1,814
4,139
(3,388)
751
1,255
(708)
547
3,105
(2,589)
516
8,499
(6,685)
1,814
751
16
(1)
—
(460)
306
547
2
(1)
—
(134)
414
516
176
(12)
(1)
(315)
364
1,814
194
(14)
(1)
(909)
1,084
4,152
(3,846)
306
1,249
(835)
414
3,199
(2,835)
364
8,600
(7,516)
1,084
(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 3 – 15 years
Office furniture and equipment 3 – 10 years
Computer hardware and software 3 – 4 years
See Note 22(n) for other accounting policies relevant to property, plant and equipment.
171
b.
Intangible assets
(in U.S. dollars, in thousands)
Year Ended June 30, 2017
Opening net book value
Exchange differences
Amortization charge
Closing net book value
As of June 30, 2017
Cost
Accumulated amortization
Accumulated impairment
Net book amount
Year Ended June 30, 2018
Opening net book value
Exchange differences
Amortization charge
Closing net book value
As of June 30, 2018
Cost
Accumulated amortization
Accumulated impairment
Net book amount
Goodwill
Acquired licenses
to patents
In-process
research and
development
acquired
Current marketed
products
Total
134,453
—
—
134,453
2,036 427,779
—
6
(144)
—
1,898 427,779
23,555 587,823
6
—
(1,335)
(1,479)
22,220 586,350
134,453
—
—
134,453
2,770 489,698
—
(872)
(61,919)
—
1,898 427,779
23,999 650,920
(2,651)
(1,779)
(61,919)
—
22,220 586,350
134,453
—
—
134,453
1,898 427,779
—
(3)
(125)
—
1,770 427,779
22,220 586,350
(3)
—
(1,616)
(1,741)
20,604 584,606
134,453
—
—
134,453
2,749 489,698
—
(979)
(61,919)
—
1,770 427,779
23,999 650,899
(4,374)
(3,395)
(61,919)
—
20,604 584,606
(i) Carrying value of in-process research and development acquired by product
(in U.S. dollars, in thousands)
Cardiovascular products
Intravenous products for metabolic diseases and
inflammatory/immunologic conditions
Osiris MSC products
As of
June 30,
2018
2017
254,351 254,351
70,730
70,730
102,698 102,698
427,779 427,779
For all products included within the above balances, the underlying currency of each item recorded is USD.
(ii) Amortization methods and useful lives
The Group amortizes intangible assets with a finite useful life using the straight-line method over the following periods:
•
•
Acquired licenses to patents 7 – 16 years
Current marketed products 15 – 20 years
See Note 22(o) for the other accounting policies relevant to intangible assets and Note 22(i) for the Group’s policy regarding
impairments.
172
(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(i). 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 and 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(o)(iii)). The intangible asset’s life will remain indefinite until such
time it is completed and commercialized or impaired. The carrying value of in-process research and development 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.
On acquisition, goodwill was not able to be allocated to the cash generating unit (“CGU”) level or to a group of CGU given the
synergies of the underlying research and development. 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 June 30, 2018 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 internal and external indicators:
•
•
•
•
•
•
•
discounted expected future cash flows of programs valued by the Group’s internal valuation team and reviewed by 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. When determining key assumptions, the business units refer to both external
sources and past experience as appropriate. The valuation is considered to be level 3 in the fair value hierarchy due to
unobservable inputs used in the valuation;
the scientific results and progress of the trials since acquisition;
the valuation of the Group that was applicable to the July 10, 2018 equity placement undertaken with NovaQuest through
issuing of the Group’s securities on the ASX;
the valuation of the Group that was applicable to the January 6, 2017 equity placement undertaken with Mallinckrodt
Pharmaceuticals (NYSE: MNK) through issuing of the Group’s securities on the ASX;
the valuation of the Group that was applicable to the March 31, 2017 equity placement undertaken with institutional
investors through issuing of the Group’s securities on the ASX;
the market capitalization of the Group on the ASX (ASX:MSB) on the impairment testing date of June 30, 2018; and
the valuation of the Group’s assets from an independent valuation as of June 30, 2017.
Costs of disposal were assumed to be immaterial at June 30, 2018.
Discounted cash-flows used a real pre-tax discount rate range of 14.4% to 21.0%, 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.
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
remaining in-process research and development, exceeds the carrying amounts, and therefore there is no impairment. Additionally the
173
recoverable amount of remaining in-process research and development also 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.
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
The Group has considered and assessed reasonably possible changes in the key assumptions and has not identified any instances
that could cause the carrying amount of our intangible assets at June 30, 2018 to exceed its recoverable amount.
Whilst there is no impairment, the key sensitivities in the valuation remain the continued successful development of our
technology platform.
c.
Provisions
(in U.S. dollars, in thousands)
Contingent consideration
Employee benefits
Provision for license agreements
As of
June 30, 2018
Non-current
Current
Total
Current
As of
June 30, 2017
Non-current
724
4,358
—
5,082
41,346
101
1,509
42,956
42,070
4,459
1,509
48,038
11,054
3,811
—
14,865
52,541
416
—
52,957
Total
63,595
4,227
—
67,822
(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. Further disclosures can be found in Note 5(g)(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 June 30, 2018 and 2017, the entire amount of the accrual was $0.7
million and $0.7 million 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.
(ii) Movements
The contingent consideration provision relates to the Group’s liability for certain milestones and royalty achievements. Refer
to Note 5(g)(iii) for movements in contingent consideration for the years ended June 30, 2018 and 2017.
174
d.
Deferred tax balances
(i) Deferred tax balances
(in U.S. dollars, in thousands)
Deferred tax assets
The balance comprises temporary differences attributable to:
Tax losses
Other temporary differences
Total deferred tax assets
Deferred tax liabilities
The balance comprises temporary differences attributable to:
Intangible assets
Total deferred tax liabilities
Net deferred tax liabilities
Deferred tax assets expected to be settled within 12 months
Deferred tax assets expected to be settled after 12 months
Deferred tax liabilities expected to be settled within 12 months
Deferred tax liabilities expected to be settled after 12 months
As of June 30,
2018
2017
55,904
669
56,573
76,652
76,652
20,079
—
56,573
147
76,505
74,660
3,566
78,226
127,519
127,519
49,293
—
78,226
147
127,372
(ii) Movements
(in U.S. dollars, in thousands)
As of June 30, 2016
Charged/(credited) to:
- profit or loss
As of June 30, 2017
Reclassifications
Charged/(credited) to:
- profit or loss
As of June 30, 2018
Tax losses(1)
(DTA)
Other
temporary
differences(1)
(DTA)
Intangible
assets (DTL)
Total (DTL)
(57,650)
(7,372)
127,715
62,693
(17,010)
(74,660)
1,473
17,283
(55,904)
3,806
(3,566)
—
(196)
127,519
—
(13,400)
49,293
1,473
2,897
(669)
(50,867)
76,652
(30,687)
20,079
(1) Deferred tax assets are netted against deferred tax liabilities.
7. Equity
a.
Contributed equity
(i) Share capital
Contributed equity
(i) Share capital
Ordinary shares(1)
Less: Treasury Shares
Total Contributed Equity
2018
2017
Shares No.
As of June 30,
2016
2016
2017
2018
(U.S. dollars, in thousands)
482,639,654 428,221,398 381,373,137 889,481 830,425 770,272
(3,500,000) (3,500,000) (3,500,000)
—
479,139,654 424,721,398 377,873,137 889,481 830,425 770,272
—
—
175
(1)
As of June 30, 2018, total ordinary shares include 2,000,000 unpaid shares issued to Kentgrove Capital on January 19, 2018.
(ii) Movements in ordinary share capital
Opening balance
Issues of ordinary shares during the period
Exercise of share options(1)
Share issue for Nasdaq IPO
Consideration for available-for-sale financial
assets
Share based compensation for services rendered
Payment for contingent consideration
Entitlement offer to existing eligible shareholders
Placement of shares under an equity facility
agreement(2)
Placement of shares under a share placement
agreement
Placement of shares under a license
agreement
Transaction costs arising on share issue
Unissued ordinary shares during the period
Placement of shares under a share placement
agreement(3)
Transaction costs arising on share issue
Total contributions of equity during the period
Share options reserve transferred to equity on
exercise of options
Ending balance
2018
As of June 30,
2017
Shares No.
2016
2018
As of June 30,
2017
(U.S. dollars, in thousands)
2016
428,221,398 381,373,137 336,997,729 830,425 770,272 709,191
289,245
—
272,579
422,903
— 42,675,295
116
—
149
268
— 68,280
—
540,051
6,029,545
36,191,982
—
280,911
—
—
1,277,210
—
662
—
— 10,000
— 40,449
—
240
—
—
1,495
—
—
—
2,000,000
—
—
—
—
— 46,294,771
—
— 61,710
—
—
892,857
—
(9,096)
45,943,680 46,848,261 44,375,408 49,358 60,140 60,947
—
(1,959)
1,000
(2,869)
—
—
—
8,474,576
—
—
—
54,418,256 46,848,261 44,375,408 59,018 60,140 60,947
— 10,000
(340)
9,660
—
—
—
8,474,576
—
—
134
482,639,654 428,221,398 381,373,137 889,481 830,425 770,272
13
38
(1) Options are issued to employees, directors and consultants in accordance with the Mesoblast Employee Share Options Plan
(“ESOP”). The shares issued and share capital received upon the exercise of options are recorded above.
(2)
(3)
These shares were issued to Kentgrove Capital on January 19, 2018 in accordance with contractual obligations to maintain
Mesoblast’s existing established equity facility.
These shares were issued to NovaQuest on July 10, 2018, under a placement agreement entered into prior to June 30, 2018
pursuant to which NovaQuest purchased US$10.0 million of Mesoblast common shares.
(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 to the Group’s employee share option plan, including details of shares issued under the scheme, is set out in
Note 17.
176
b.
Reserves
(i) Reserves
(in U.S. dollars, in thousands)
Share-based payments reserve
Investment revaluation reserve
Foreign currency translation reserve
(ii) Reconciliation of reserves
As at June 30,
2018
2017
75,974
21
(39,276)
36,719
69,919
(303)
(38,373)
31,243
(in U.S. dollars, in thousands)
Share-based payments reserve
Opening balance
Transfer to ordinary shares on exercise of options
Share option expense for the year
Reclassification of modified options to/(from) liability
Closing Balance
As at June 30,
2018
2017
69,919
(38)
5,959
134
75,974
64,999
(13)
5,036
(103)
69,919
Investment Revaluation Reserve
Opening balance
Changes in the fair value of available-for-sale financial assets
Closing Balance
(303)
324
21
(334)
31
(303)
Foreign currency translation reserve
Opening balance
Currency (loss)/gain on translation of foreign operations
net assets
Closing Balance
(38,373)
(38,689)
(903)
316
(39,276)
(38,373)
(iii) Nature and purpose of reserves
Share-based payment reserve
The share-based payments reserve is used to recognize:
•
•
the fair value(1) of options issued but not exercised; and
the fair value(1) of deferred shares granted but not yet vested.
(1) The fair value recognized is determined at the acceptance date, which is the date at which the entity and the employee
agree to a share-based payment arrangement, being when the entity and the employee have a shared understanding of
the terms and conditions of the arrangement.
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.
177
8. Cash flow information
(in U.S. dollars, in thousands)
(a) Reconciliation of cash and cash equivalents
Cash at bank
Deposits at call
As of June 30,
2017
2018
37,221
542
37,763
7,722
38,039
45,761
2016
21,860
59,077
80,937
(in U.S. dollars, in thousands)
(b) Reconciliation of net cash flows used in operations
with loss after income tax
Loss for the period
Add/(deduct) net loss for non-cash items as follows:
Depreciation and amortization
Foreign exchange (gains)/losses
Finance costs
Remeasurement of contingent consideration
Payment under a license agreement paid in shares
Equity settled share-based payment
Deferred tax benefit
Impairment of intangible assets
Commercialization revenue
Change in operating assets and liabilities:
(Increase)/decrease in trade and other receivables
Decrease/(increase) in prepayments
(Increase)/decrease in tax assets
(Decrease)/increase in trade creditors and accruals
(Decrease)/increase in provisions
Net cash outflows used in operations
Year Ended June 30,
2018
(35,290)
2017
(76,815)
2016
(4,127)
2,650
(160)
725
(10,541)
1,000
6,199
(30,664)
—
—
(6,093)
1,503
(1,807)
(4,464)
1,930
(75,012)
3,057
38
—
130
—
5,276
(13,400)
—
—
(859)
(10,201)
1,282
(5,740)
1,761
(95,471)
2,192
1,090
—
(28,112)
—
3,389
(86,694)
61,919
(37,509)
(531)
495
626
2,425
(3,159)
(87,996)
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.
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 5(g) and 12);
fair value of goodwill and other intangible assets including in-process research and development (Note 6(b));
useful life of intangible assets (Note 6(b));
recognition of deferred tax assets and deferred tax liabilities (Note 4(b));
accrued research and development and manufacturing commercialization expenses (Note 5(e)); and
178
•
fair value of share-based payments (Note 17).
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
Market risk – currency risk
Exposure arising from
Future commercial transactions
Recognized financial assets and
liabilities not denominated in the
functional currency of each entity
within the Group
Measurement
Cash flow forecasting
Sensitivity analysis
Market risk – interest rate
risk
Long-term borrowings at floating
rates
Sensitivity analysis
Management
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.
The facility can be refinanced
and/or repaid. Interest rate swaps
can be entered into to convert the
floating interest rate to a fixed
interest rate as required.
Term deposits at fixed rates
Sensitivity analysis
Vary length of term deposits.
Market risk – price risk
Long-term borrowings
Sensitivity analysis
Credit risk
Cash and cash equivalents, and
trade and other receivables
Aging analysis
Credit ratings
Liquidity risk
Cash and cash equivalents
Borrowings
Rolling cash flow forecasts
Forecasts of net sales of the
product underlying the
NovaQuest borrowing
arrangement are updated on a
quarterly basis to evaluate the
impact on the carrying amount of
the financial liability.
Only transact with the best risk
rated banks available in each
region giving consideration to
the products required.
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.
a. Market risk
(i) Currency risk
The Group has foreign currency amounts owing primarily in USD in Mesoblast Limited (AUD functional currency) relating to
clinical, regulatory and overhead activities as well as Euro deposits and Euro receivables held in the Swiss and Singapore entities,
respectively (USD functional currency) primarily relating to revenue recognized from its patent license agreement with Takeda
entered into in December 2017. The Group also has foreign currency amounts owing in various other non-USD currencies in USD
functional currency entities in the Group relating to clinical, regulatory and overhead activities. These foreign currency balances give
179
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.
Currency risk is minimized by ensuring the proportion of cash reserves held in each currency matches the expected rate of spend
of each currency.
As of June 30, 2018, the Group held 92% of its cash in USD, and 8% in AUD. As of June 30, 2017 the Group held 95% of its
cash in USD, and 5% in AUD.
The balances held at the end of the year that give rise to currency risk exposure are presented in USD in the following table,
together with a sensitivity analysis which assesses the impact that a change of +/-20% in the exchange rate as of June 30, 2018 and
June 30, 2017 would have had on the Group’s reported net profits/(losses) and/or equity balance.
(in U.S. dollars, in thousands)
As of June 30, 2018
Bank accounts - USD
Bank accounts - CHF
Bank accounts - SGD
Bank accounts - EUR
Trade and other receivables - SGD
Trade and other receivables - USD
Trade and other receivables - CHF
Trade and other receivables - EUR
Trade payables and accruals - USD
Trade payables and accruals - AUD
Trade payables and accruals - SGD
Trade payables and accruals - GBP
Trade payables and accruals - EUR
Trade payables and accruals - CHF
Trade payables and accruals - SEK
Provisions - SGD
Provisions - CHF
(in U.S. dollars, in thousands)
As of June 30, 2017
Bank accounts - USD
Bank accounts - CHF
Bank accounts - SGD
Trade and other receivables - SGD
Trade and other receivables - USD
Trade and other receivables - CHF
Trade payables and accruals - USD
Trade payables and accruals - AUD
Trade payables and accruals - SGD
Trade payables and accruals - EUR
Trade payables and accruals - CHF
Provisions - SGD
Foreign
currency
balance held
+20%
-20%
Profit/(Loss)
USD
Profit/(Loss)
USD
USD 81 $
CHF 157 $
SGD 178 $
EUR 2 $
SGD 29 $
USD 10,000 $
CHF 6 $
EUR 4,750 $
(USD 1,797) $
(AUD 446) $
(SGD 176) $
(GBP 52) $
(EUR 1) $
(CHF 50) $
(SEK 118) $
(SGD 74) $
(CHF 2) $
$
(14) $
31 $
49 $
0 $
8 $
(1,667) $
1 $
815 $
300 $
(121) $
(48) $
(0) $
(0) $
(10) $
2 $
(20) $
(0) $
(674) $
20
(31)
(49)
(0)
(8)
2,500
(1)
(815)
(449)
121
48
(2)
0
10
(3)
20
0
1,361
Foreign
currency
balance held
+20%
-20%
Profit/(Loss)
USD
Profit/(Loss)
USD
USD 447 $
CHF 183 $
SGD 325 $
SGD 48 $
USD 40 $
CHF 1 $
(USD 2,016) $
(AUD 441) $
(SGD 197) $
(EUR 42) $
(CHF 19) $
(SGD 65) $
$
(74) $
35 $
90 $
13 $
(7) $
0 $
336 $
(115) $
(54) $
(7) $
(4) $
(18) $
195 $
112
(35)
(90)
(13)
10
(0)
(504)
115
54
7
4
18
(322)
180
(ii) Cash flow and fair value interest rate risk
The Group’s main interest rate risk arises from long-term borrowings with a floating interest rate under our loan facility with
Hercules, which exposes the Group to cash flow interest rate risk. As interest rates fluctuate, the amount of interest payable on
financing where the interest rate is not fixed will also fluctuate. This interest rate risk can be managed by interest rate swaps which can
be entered into to convert the floating interest rate to a fixed interest rate as required. Additionally, the Group can repay its loan
facility at its discretion and can also refinance if the terms are suitable in the marketplace or from the existing lender.
The Group did not enter into any interest rate swaps during the year ended June 30, 2018.
The exposure of the Group’s borrowing to interest rate changes are as follows:
(in U.S. dollars, in thousands, except percent data)
Financial liabilities
Non-current borrowings
Variable rate borrowings - Hercules
As of
June 30, 2018
As of
June 30, 2017
Total
% of total
loans
Total
% of total
loans
31,966
31,966
54%
54%
—
—
—
—
An analysis by maturities is provided in Note 10(c) below. The percentage of total loans shows the proportion of loans that are
currently at variable rates in relation to the total amount of borrowings.
The borrowings which expose the Group to interest rate risk are described in the table below, together with the maximum and
minimum interest rates being earned as of June 30, 2018 and June 30, 2017. The effect on profit is shown if interest rates change by
5%, in either direction, is as follows:
(in U.S. dollars, in thousands, except percent data)
Low
As of
June 30, 2018
High
As of
June 30, 2017
High
Low
Borrowings - USD
Rate increase by 5%
Rate decrease by 5%(1)
9.95%
10.45%
9.45%
USD
31,966(2)
9.95%
10.45% USD 159
9.45% (USD 159)
—
—
—
—
—
—
—
—
—
(1) The interest rate will not decrease to below 9.45% per the terms of the loan agreement.
(2) The effect on profit/loss of interest rate changes is based on the loan carrying value of $32.0 million with principal
payments commencing in October 2019.
The Group is also exposed 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 working
capital requirements of the Group.
181
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 June 30, 2018 and June 30, 2017 The effect on profit is shown if interest rates change by 10%, in
either direction, is as follows:
(in U.S. dollars, in thousands, except percent data)
Funds invested - USD
Rate increase by 10%
Rate decrease by 10%
As of
June 30, 2018
High
Low
As of
June 30, 2017
Low
High
0.80%
0.88%
0.72%
0.80% USD 99
0.88% USD 0
(USD 0)
0.72%
0.55%
0.61%
0.50%
0.55% USD 37,577
USD 21
0.61%
(USD 21)
0.50%
AUD
Funds invested - AUD
Rate increase by 10%
Rate decrease by 10%
(iii) Price risk
Low
High
Low
High
2.72%
2.99%
2.45%
2.72% AUD 600
2.99% AUD 2
(AUD 2)
2.45%
2.42%
2.66%
2.18%
2.42% AUD 600
AUD 1
2.66%
(AUD 1)
2.18%
Price risk is the risk that future cash flows derived from financial instruments will be altered as a result of a market price
movement, which is defined as movements other than foreign currency rates and interest rates. The Group is exposed to price risk
which arises from long-term borrowings under its facility with NovaQuest, where the timing and amounts of principal and interest
payments is dependent on net sales of product candidate MSC-100-IV for the treatment of aGVHD in pediatric patients in the United
States and other territories excluding Asia. As net sales of MSC-100-IV for the treatment of aGVHD in pediatric patients in these
territories increase/decrease, the timing and amount of principal and interest payments relating to this type of financing arrangement
will also fluctuate, resulting in an adjustment to the carrying amount of financial liability. The adjustment is recognized in the Income
Statement as income or expense in the period the revision is made.
The exposure of the Group’s borrowing to price rate changes are as follows:
(in U.S. dollars, in thousands, except percent data)
Financial liabilities
Non-current borrowings
Borrowings - NovaQuest
As of
June 30, 2018
As of
June 30, 2017
Total
% of total
loans
Total
% of total
loans
27,431
27,431
46%
46%
—
—
—
—
As at June 30, 2018, all other factors held constant, a 20% increase in the forecast net sales of MSC-100-IV for the treatment of
aGVHD in pediatric patients in the United States and other territories excluding Asia would increase non-current borrowing and
decrease profit by $2.3 million, whereas a 20% decrease in the net sales of MSC-100-IV for the treatment of aGVHD in pediatric
patients in the United States and other territories excluding Asia would decrease non-current borrowings and increase profit by $1.3
million.
The Group does not consider it has any exposure to price risk other than those already described above.
182
b.
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. The Group does not generally have trade receivables. The Group’s receivables are tabled below.
(in U.S. dollars, in thousands)
Cash and cash equivalents
Deposits at call (Note 5(a)) - minimum A rated
Cash at bank (Note 5(a)) - minimum A rated
Trade and other receivables
Receivable from other parties (non-rated)
Receivable from the Australian Government (Income
Tax)
Receivable from the Australian Government (Foreign
Withholding Tax)
Receivable from minimum A rated bank deposits
(interest)
Receivable from the Australian Government (Goods and
Services Tax)
Receivable from the United States Government (Income
Tax)
Receivable from the Swiss Government (Value-Added
Tax)
Other non-current assets
Receivable from the United States Government (U.S. tax
credits)
As of June 30,
2018
2017
542
37,221
38,039
7,722
45,745
1,067
3,305
1,631
400
262
48
24
6
—
12
86
27
1
1,473
—
c.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to pay its debts as and when they fall due. Liquidity risk has been
assessed in Note 1(i).
All financial liabilities, excluding contingent consideration, held by the Group as of June 30, 2018 and June 30, 2017 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.
As of June 30, 2018, the maturity profile of the anticipated future contractual cash flows including interest in relation to the
Group’s borrowings, on an undiscounted basis and which, therefore differs from the carrying value, is as follows:
(in U.S. dollars, in thousands)
Borrowings(1)(2)
Within
1 year
Between
1-2 years
Between
2-5 years
(3,928)
(3,928)
(15,495)
(15,495)
(54,826)
(54,826)
Over
5 years
(49,228)
(49,228)
Total
contractual
cash flows
(123,477)
(123,477)
Carrying
amount
(59,397)
(59,397)
(1) Contractual cash flows include payments of principal, interest and other charges. Interest is calculated based on debt held
at June 30, 2018 without taking account drawdowns of further tranches.
(2) In relation to the contractual maturities of the NovaQuest borrowings, there is variability in the maturity profile of the
anticipated future contractual cash flows given the timing and amount of payments are calculated based on our estimated
net sales of pediatric aGVHD.
183
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.
12. Interests in other entities
The Group’s subsidiaries as of June 30, 2018 and 2017 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.
Country of
incorporation
Class of
shares
Equity holding
As of June 30,
2018
%
2017
%
Mesoblast, Inc.
Mesoblast International Sàrl (includes Mesoblast
International Sàrl Singapore Branch)
Mesoblast Australia Pty Ltd
Mesoblast UK Ltd
Mesoblast International (UK) Ltd
USA
Ordinary
Switzerland
Australia
United Kingdom
United Kingdom
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
13. Contingent assets and liabilities
a.
Contingent assets
The Group did not have any contingent assets outstanding as of June 30, 2018 and June 30, 2017.
b.
Contingent liabilities
(i) Central Adelaide Local Health Network Incorporated (“CALHNI”) (formerly Medvet)
The Group acquired certain intellectual property relating to our MPCs, or Medvet IP, pursuant to an Intellectual Property
Assignment Deed, or IP Deed, with Medvet Science Pty Ltd, or Medvet. Medvet’s rights under the IP Deed were transferred to
Central Adelaide Local Health Network Incorporated, or CALHNI, in November 2011. In connection with its use of the Medvet IP, on
completion of certain milestones the Group will be obligated to pay CALHNI, as successor in interest to Medvet, (i) certain
aggregated milestone payments of up to $2.2 million and single-digit royalties on net sales of products covered by the Medvet IP, for
cardiac muscle and blood vessel applications and bone and cartilage regeneration and repair applications, subject to minimum annual
royalties beginning in the first year of commercial sale of those products and (ii) single-digit royalties on net sales of the specified
products for applications outside the specified fields.
(ii) Other contingent liabilities
The Group has entered into a number of other agreements with other third parties pertaining to intellectual property. Contingent
liabilities may arise in the future if certain events or developments occur in relation to these agreements. As of June 30, 2018 the
Group has assessed these contingent liabilities to be remote and specific disclosure is not required.
14. Commitments
a.
Capital commitments
The Group did not have any commitments for future capital expenditure outstanding as of June 30, 2018 and June 30, 2017.
184
b.
Lease commitments: Group as lessee
The Group leases various offices under non-cancellable operating leases expiring within 1 to 4 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.
(in U.S. dollars, in thousands)
Operating leases
Total commitments
Later than one
year but no
later than
three years
Later than
three years
but no later
than five
years
Later than
five years
Total
Within one
year
3,926
3,926
1,651
1,651
2,240
2,240
35
35
—
—
Lease commitments include amounts in AUD and Singapore dollars which have been translated to USD as of June 30, 2018
foreign exchange rates published by the Reserve Bank of Australia.
c.
Lease commitments: Group as lessor
The Group sub-leases under non-cancellable operating leases expiring within 2 years. Future minimum lease payments expected
to be received in relation to non-cancellable operating sub-leases are set out below:
(in U.S. dollars, in thousands)
Operating leases
Total commitments
d.
Purchase commitments
Later than one
year but no
later than
three years
Later than
three years
but no later
than five
years
Later than
five years
Total
Within one
year
220
220
155
155
65
65
—
—
—
—
The Group did not have any purchase commitments as of June 30, 2018.
15. Events occurring after the reporting period
In July 2018, the Group entered into a strategic alliance with Tasly Pharmaceuticals Group (“Tasly”) for the development,
manufacture and commercialization in China of the Group’s allogenic mesenchymal precursor cell products, MPC-150-IM for the
treatment or prevention of chronic heart failure and MPC-25-IC for the treatment or prevention of acute myocardial infraction. Tasly
will receive exclusive rights and will fund all development, manufacturing and commercialization activities in China for MPC-150-IM
and MPC-25-IC.
The Group will receive $40.0 million from Tasly on closing of the strategic alliance, comprising a $20.0 million up-front
technology access fee and $20.0 million in an equity purchase in Mesoblast Limited at A$1.86 per share, representing a 20% premium
to a blended volume weight average price calculated over three months, one month and one day. This receipt is subject to filing with
the State Administration of Foreign Exchange. The Group is also entitled to receive $25.0 million on product regulatory approvals in
China, double-digit escalating royalties on net product sales and is eligible to receive up to six escalating milestone payments upon the
product candidates reaching certain sales thresholds in China.
On closing of the strategic alliance, the Group expects to recognize the amount relating to the up-front technology access fee in
revenue and the amount relating to the equity purchase in issued capital.
There were no other events that have occurred after June 30, 2018 and prior to the signing of this financial report that would
likely have a material impact on the financial results presented.
185
16. 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 12 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:
(in U.S. dollars)
Short-term employee benefits
Long-term employee benefits
Post-employment benefits
Share based payments
Year Ended June 30,
2018
2017
2,577,166 2,592,456
17,742
70,915
552,174
2,588,495 3,233,287
5,648
66,539
(60,858)
d.
Transactions with other related parties
Accounts receivable from revenues, accounts payable to expenses and loans from subsidiaries as at the end of the fiscal 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.
17. 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. Due to changes in the Australian taxation
regime, the Company no longer issues new LFSP since July 1, 2015.
Grant policy
In accordance with the Company’s policy, options and loan funded shares are typically issued in three equal tranches. For
issues granted prior to July 1, 2015 the length of time from grant date to expiry date was typically 5 years. Grants since July 1, 2015,
are issued with a seven year term.
Options issued to employees generally vest based on service or time conditions. In the year ended June 30, 2018, senior
executives were issued options that vest based on performance conditions. For time based vesting options, 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 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 Board approval date. In the case of options that have time based
vesting conditions, the board of directors adds a 10% premium. Options with performance based vesting conditions are issued with no
premium. No new options were issued to the directors 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.
186
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, the limit imposed under the Australian Securities and Investments
Commission Class Order 14/1000.
In addition, the LFSP which has not been issued since July 1, 2015, 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.
187
Exercised No.
(during the
year)
(127,956)
(127,956)
—
—
—
—
a.
Reconciliation of outstanding share based payments
Series
Grant Date
Expiry Date
Exercise
Price
Opening
Balance
Granted No.
(during the
year)
26/10/2018 USD 0.305
26/10/2019 USD 0.340
8/07/2018 AUD 6.67
154,064
447,848
150,000
INC
INC
17/LF3
7/12/2010
7/12/2010
9/07/2012
25/01/2013-
29/01/2013
24/05/2013
3/09/2013
4/09/2013
1/01/2014
12/12/2014
5/09/2014
25/08/2014
9/10/2014
25/11/2014
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
6/01/2015
12/05/2015
10/07/2015
26/08/2015
27/04/2016
27/04/2016
31/10/2016
30/06/2016
6/12/2016
6/12/2016
13/01/2017
28/06/2017
16/09/2017
16/09/2017
13/10/2017
13/10/2017
24/11/2017
24/11/2017
19/LF5
20/LF6
21/LF7
22/LF8
25a (i&ii)
25b
27/LF12
27(iv)
28/LF13
29
30a(1)
30b(1)
30c(1)
30d(1)
30e(1)
30f(1)
30g(1)
30h(1)
30i(1)
30j
LF14
31b
32
33
34
34a
34b
35
36
36a
36b
37
38
38a
39
39a
40
40a
June 30, 2018
Weighted average share purchase price
24/01/2018-
28/01/2018 AUD 6.27
23/05/2018 AUD 6.34
30/06/2018 AUD 5.90
27/08/2018 AUD 6.26
31/12/2018 AUD 6.36
31/10/2019 AUD 4.49
30/06/2019 AUD 4.69
24/08/2019 AUD 4.65
8/10/2019 AUD 4.52
24/11/2019 AUD 4.00
30/06/2018 AUD 4.98
25/01/2018 AUD 4.98
20/01/2019 AUD 4.98
25/01/2019 AUD 4.98
25/01/2018 AUD 4.98
25/01/2019 AUD 4.98
23/07/2019 AUD 4.69
30/06/2019 AUD 4.69
30/06/2019 AUD 4.44
23/07/2019 AUD 4.69
16/12/2019 AUD 4.66
16/02/2020 AUD 4.28
30/06/2022 AUD 4.20
16/08/2022 AUD 4.05
6/03/2023 AUD 2.80
17/04/2023 AUD 2.74
6/03/2023 AUD 2.80
18/01/2021 AUD 2.20
5/12/2023 AUD 1.31
5/12/2023 AUD 1.19
12/01/2024 AUD 1.65
27/06/2024 AUD 2.23
15/09/2024 AUD 1.54
15/09/2024 AUD 1.40
12/10/2024 AUD 1.94
12/10/2024 AUD 1.76
23/11/2024 AUD 1.41
23/11/2024 AUD 1.28
—
50,000
—
425,000
—
1,865,000
—
225,000
—
650,000
—
50,000
—
2,070,000
—
75,000
—
85,000
—
240,000
—
650,000
—
235,000
—
135,000
—
300,000
—
165,000
—
200,000
—
300,000
—
400,000
—
600,000
—
150,000
—
150,000
—
200,000
—
2,620,000
—
91,667
—
3,621,667
—
200,000
—
200,000
—
1,500,000
(33,333)
2,045,000
—
4,400,000
—
450,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,100,246
(289,245)
AUD 3.35 AUD 1.74 AUD 0.52
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
300,000
100,000
150,000
2,310,000
2,000,000
750,000
750,000
6,360,000
Lapsed/Cancelled
No. (during the
year)
Vested and
exercisable
No (end of
year)
Closing
Balance
—
—
—
26,108
319,892
150,000
26,108
319,892
150,000
—
—
—
225,000
650,000
50,000
2,045,000
—
75,000
240,000
—
—
135,000
300,000
—
200,000
—
400,000
600,000
—
150,000
200,000
2,458,334
75,000
3,380,000
200,000
200,000
1,500,000
1,885,000
4,400,000
300,000
300,000
100,000
150,000
2,215,000
1,900,000
750,000
750,000
(50,000)
(425,000)
(1,865,000)
—
—
—
(25,000)
(75,000)
(10,000)
—
(650,000)
(235,000)
—
—
(165,000)
—
(300,000)
—
—
(150,000)
—
—
(161,666)
(16,667)
(241,667)
—
—
—
(126,667)
—
(150,000)
—
—
—
(95,000)
(100,000)
—
—
—
—
—
225,000
650,000
50,000
2,045,000
—
75,000
240,000
—
—
135,000
300,000
—
200,000
—
400,000
600,000
—
150,000
200,000
1,683,336
50,000
2,299,982
133,334
200,000
1,500,000
611,666
1,495,002
300,000
100,000
—
—
—
200,000
—
—
(4,841,667) 26,329,334 14,339,320
AUD 4.97 AUD 2.68 AUD 3.39
(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 17(b)).
188
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
INC
INC
INC
INC
16/LF2
17/LF3
18/LF4
26/10/2018 USD 0.305
26/10/2019 USD 0.340
25/04/2017 USD 0.444
2/05/2017 USD 0.444
23/02/2017 AUD 8.48
8/07/2018 AUD 6.69
7/12/2010
7/12/2010
7/12/2010
7/12/2010
24/02/2012
9/07/2012
21/09/2012-
29/10/2012
25/01/2013-
29/01/2013
24/05/2013
3/09/2013
4/09/2013
26/11/2013
17/12/2013
1/01/2014
12/12/2014
1/07/2014
24/07/2014
5/09/2014
4/08/2014
25/08/2014
9/10/2014
25/11/2014
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
6/01/2015
27/04/2015
12/05/2015
10/07/2015
26/08/2015
27/04/2016
27/04/2016
31/10/2016
30/06/2016
6/12/2016
6/12/2016
13/01/2017
19/LF5
20/LF6
21/LF7
22/LF8
23a
24
25a (i&ii)
25b
25
26/LF11
27/LF12
27(ii)
27(iv)
28/LF13
29
30a(1)
30b(1)
30c(1)
30d(1)
30e(1)
30f(1)
30g(1)
30h(1)
30i(1)
30j
LF14
31a
31b
32
33
34
34a
34b
35
36
36a
36b
June 30, 2017
Weighted average share purchase price
30/06/2017 AUD 6.70
24/01/2018-
28/01/2018 AUD 6.29
23/05/2018 AUD 6.36
30/06/2018 AUD 5.92
27/08/2018 AUD 6.28
10/10/2018 AUD 6.20
16/12/2018 AUD 6.25
31/12/2018 AUD 6.38
31/10/2019 AUD 4.51
6/04/2019 AUD 5.80
23/07/2019 AUD 4.71
30/06/2019 AUD 4.71
3/08/2019 AUD 4.60
24/08/2019 AUD 4.67
8/10/2019 AUD 4.54
24/11/2019 AUD 4.02
30/06/2018 AUD 5.00
25/01/2018 AUD 5.00
20/01/2019 AUD 5.00
25/01/2019 AUD 5.00
25/01/2018 AUD 5.00
25/01/2019 AUD 5.00
23/07/2019 AUD 4.71
30/06/2019 AUD 4.71
30/06/2019 AUD 4.46
23/07/2019 AUD 4.71
16/12/2019 AUD 4.66
16/02/2020 AUD 4.73
16/02/2020 AUD 4.30
30/06/2022 AUD 4.22
16/08/2022 AUD 4.07
6/03/2023 AUD 2.82
17/04/2023 AUD 2.76
6/03/2023 AUD 2.82
18/01/2021 AUD 2.22
5/12/2023 AUD 1.33
5/12/2023 AUD 1.21
12/01/2024 AUD 1.67
154,064
447,848
127,956
127,956
340,000
250,000
1,948,333
—
—
—
—
—
—
—
—
—
(127,956)
(127,956)
—
—
—
—
—
—
(340,000)
(100,000)
154,064
447,848
—
—
—
150,000
—
(1,948,333)
—
—
Vested and
exercisable
No (end of
year)
154,064
447,848
—
—
—
150,000
—
100,000
—
595,000
—
2,430,000
—
225,000
—
33,333
—
25,000
—
650,000
—
50,000
—
10,000
—
125,000
—
2,865,000
—
50,000
—
75,000
—
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
—
20,000
—
200,000
—
3,840,000
—
125,000
(16,667)
5,140,000
—
200,000
—
—
—
1,500,000
—
—
—
—
—
—
25,414,490
(272,579)
AUD 4.39 AUD 1.32 AUD 0.72
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200,000
—
2,095,000
4,400,000
450,000
7,145,000
50,000
425,000
1,865,000
225,000
—
—
650,000
50,000
—
—
2,070,000
—
75,000
85,000
240,000
650,000
235,000
135,000
300,000
165,000
200,000
300,000
400,000
600,000
150,000
150,000
—
200,000
2,620,000
91,667
3,621,667
200,000
200,000
1,500,000
2,045,000
4,400,000
450,000
(50,000)
(170,000)
(565,000)
—
(33,333)
(25,000)
—
—
(10,000)
(125,000)
(795,000)
(50,000)
—
(150,000)
—
—
—
—
—
—
—
—
—
—
—
—
(20,000)
—
(1,220,000)
(33,333)
(1,501,666)
—
—
—
(50,000)
—
—
50,000
425,000
1,865,000
225,000
—
—
650,000
33,334
—
—
1,380,004
—
50,000
56,666
160,002
650,000
235,000
135,000
300,000
165,000
200,000
200,000
266,668
600,000
100,000
100,000
—
200,000
873,334
41,667
1,218,324
66,667
200,000
—
—
816,667
150,000
(7,186,665) 25,100,246 12,165,245
AUD 5.10 AUD 3.35 AUD 4.36
(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 17(b)).
189
Series
Grant Date
Expiry Date
Exercise
Price
Opening
Balance
Granted No.
(during the
year)
Lapsed/Cancelled
No. (during the
year)
7/07/2015 USD 0.046
26/10/2018 USD 0.305
26/10/2019 USD 0.340
25/04/2017 USD 0.444
2/05/2017 USD 0.444
21/09/2015 AUD 2.64
29/11/2015 AUD 3.48
30/06/2016 AUD 7.99
23/02/2017 AUD 8.48
8/07/2018 AUD 6.69
287,903
154,064
447,848
127,956
127,956
135,000
1,453,350
3,413,334
340,000
250,000
Exercised No.
(during the
year)
(287,903)
—
—
—
—
(135,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Vested and
exercisable
No (end of
year)
Closing
Balance
—
154,064
447,848
127,956
127,956
—
—
—
340,000
250,000
—
154,064
447,848
127,956
127,956
—
—
—
340,000
250,000
—
—
—
—
—
—
(1,453,350)
(3,413,334)
—
—
2,276,667
—
—
(328,334)
1,948,333
1,948,333
INC
INC
INC
INC
INC
13
14
15/LF1
16/LF2
17/LF3
18/LF4
30/06/2017 AUD 6.70
24/01/2018-
28/01/2018 AUD 6.29
23/05/2018 AUD 6.36
30/06/2018 AUD 5.92
27/08/2018 AUD 6.28
10/10/2018 AUD 6.20
16/12/2018 AUD 6.25
31/12/2018 AUD 6.38
31/10/2019 AUD 4.51
6/04/2019 AUD 5.80
23/07/2019 AUD 4.71
30/06/2019 AUD 4.71
3/08/2019 AUD 4.60
24/08/2019 AUD 4.67
8/10/2019 AUD 4.54
24/11/2019 AUD 4.02
30/06/2018 AUD 5.00
25/01/2018 AUD 5.00
20/01/2019 AUD 5.00
25/01/2019 AUD 5.00
25/01/2018 AUD 5.00
25/01/2019 AUD 5.00
23/07/2019 AUD 4.71
30/06/2019 AUD 4.71
30/06/2019 AUD 4.46
23/07/2019 AUD 4.71
16/12/2019 AUD 4.66
16/02/2020 AUD 4.73
16/02/2020 AUD 4.73
16/02/2020 AUD 4.30
30/06/2022 AUD 4.22
16/08/2022 AUD 4.07
6/03/2023 AUD 2.82
17/04/2023 AUD 2.76
18/01/2021 AUD 2.22
19/LF5
20/LF6
21/LF7
22/LF8
23a
24
25a (i&ii)
25b
25
26/LF11
27/LF12
27(ii)
27(iv)
28/LF13
29
30a(1)
30b(1)
30c(1)
30d(1)
30e(1)
30f(1)
30g(1)
30h(1)
30i(1)
30j
LF14
31
31a
31b
32
33
34
34a
35
June 30, 2016
Weighted average share purchase price
100,000
865,000
2,741,667
275,000
50,000
148,333
650,000
50,000
15,000
215,000
3,380,000
50,000
75,000
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,800,000
—
125,000
—
5,255,000
—
200,000
—
1,500,000
21,869,078 11,880,000
(422,903)
AUD 5.49 AUD 3.32 AUD 0.88
—
(270,000)
(311,667)
(50,000)
(16,667)
(123,333)
—
—
(5,000)
(90,000)
(515,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(60,000)
—
(200,000)
(960,000)
—
(115,000)
—
—
100,000
100,000
595,000
595,000
1,878,336
2,430,000
150,002
225,000
33,333
33,333
16,666
25,000
650,000
650,000
16,667
50,000
10,000
10,000
41,667
125,000
961,670
2,865,000
16,667
50,000
25,000
75,000
78,333
235,000
80,001
240,000
650,000
650,000
235,000
235,000
135,000
135,000
200,000
300,000
165,000
165,000
200,000
200,000
100,000
300,000
133,334
400,000
400,000
600,000
50,000
150,000
50,000
150,000
—
—
6,667
20,000
200,000
200,000
—
3,840,000
—
125,000
—
5,140,000
—
200,000
—
1,500,000
(7,911,685) 25,414,490 10,574,500
AUD 5.93 AUD 4.39 AUD 5.38
7/12/2010
7/12/2010
7/12/2010
7/12/2010
7/12/2010
22/09/2010
29/11/2010
22/12/2011
24/02/2012
9/07/2012
21/09/2012-
29/10/2012
25/01/2013-
29/01/2013
24/05/2013
3/09/2013
4/09/2013
26/11/2013
17/12/2013
1/01/2014
12/12/2014
1/07/2014
24/07/2014
5/09/2014
4/08/2014
25/08/2014
9/10/2014
25/11/2014
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
6/01/2015
16/03/2015
27/04/2015
12/05/2015
10/07/2015
26/08/2015
27/04/2016
27/04/2016
30/06/2016
(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 17(b)).
The weighted average share price at the date of exercise of options exercised during the years ended June 30, 2018, 2017 and
2016 were AUD 1.46, AUD 3.28 and AUD 3.68 respectively.
190
The weighted average remaining contractual life of share options and loan funded shares outstanding as of June 30, 2018, 2017
and 2016 were 4.24 years, 4.09 years and 3.85 years, respectively.
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 generally granted in
three equal tranches. For issues granted prior to July 1, 2015 the length of time from grant date to expiry date was typically 5 years.
Grants since July 1, 2015, are issued with a seven year term. Vesting occurs either based on achievement of performance conditions or
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 November
30, 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
December 7, 2010);
• Mesoblast receives IND clearance from the FDA for its first clinical trial for Intervertebral Disc Repair (vested
March 17, 2011);
• Mesoblast completes patient enrollment for its first clinical trial under IND for Intervertebral Disc Repair
(vested October 12, 2012);
• Mesoblast obtains a license from the Therapeutics Goods Administration (TGA) for the manufacture (vested
July 20, 2010).
All the remaining options under series 10 were exercised during the years ended June 30, 2015 and 2014.
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.
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 (December 7, 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.
Incentive rights granted pursuant to the Equity Facility Agreement with Kentgrove Capital, dated June 30, 2016,
had fully vested on the agreement date and will expire thirty six months after the date of the issue of the incentive
right.
25a(i&ii)
INC.
31b
35
36 (a&b)
Options were granted in two or three 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.
38a & 40a
Options were granted in one tranche 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
191
commercial objectives.
39a
Options were granted in one or 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 June 30, 2015, the Company repurchased an aggregate amount of $13.9 million (AUD 17.7 million) 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 AUD 4.44 to AUD 4.98
under ESOP 30a to 30i. As of March 25, 2015 (the “modification date”), the total incremental fair value granted as a result of these
modifications was $0.6 million. During the year ended June 30, 2018, as a result of a fully underwritten institutional and retail
entitlement offer to existing eligible shareholders (on a 1 for 12 basis) in September 2017, the exercise price of all outstanding options
at the time was reduced by A$0.02 per option subject to the ESOP plan under clause 7.3. There were no modifications made to share-
based payment arrangements during the year ended June 30, 2017.
c.
Fair values of share based payments
The weighted average fair value of share options granted during the years ended June 30, 2018, 2017 and 2016 were AUD 0.61,
AUD 1.46 and AUD 1.07, 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 acceptance date
The share price used in valuation is the share price at the date at which the entity and the employee agree to a share-based
payment arrangement, being when the entity and the employee have a shared understanding of the terms and conditions of the
arrangement. This price is generally the volume weighted average share price for the five trading days leading up to the 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. Historical volatility data is considered in determining expected future 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.
192
Model inputs
The model inputs for the valuations of options approved and granted during the year ended June 30, 2018 are as follows:
Series
37
38
38a
39
39a
40
40a
Financial
year of
grant
2018
2018
2018
2018
2018
2018
2018
Exercise/Loan
price per share
AUD
2.23
1.54
1.40
1.94
1.76
1.41
1.28
Share price at
acceptance date
AUD
2.02
1.37
1.37
1.34
1.34
1.32
1.32
Expected share
price volatility
52.21%
52.04%
52.56%
52.49%
52.49%
52.35%
52.35%
Life(1)
5.8 yrs
5.8 yrs
5.8 yrs
5.9 yrs
5.9 yrs
5.8 yrs
5.8 yrs
Dividend yield
0%
0%
0%
0%
0%
0%
0%
Risk-free
interest rate
2.22%
2.41%
2.27%
2.16%
2.16%
2.43%
2.43%
(1) Expected life after factoring likely early exercise.
The closing share market price of an ordinary share of Mesoblast Limited on the ASX as of June 30, 2018 was AUD 1.48.
The model inputs for the valuations of options approved and granted during the year ended June 30, 2017 are as follows:
Series
34b
36
36a
36b
Financial
year of
grant
2017
2017
2017
2017
Exercise/Loan
price per share
AUD
2.82
1.33
1.21
1.67
Share price at
acceptance date
AUD
1.24
2.32
2.32
2.32
Expected share
price volatility
51.13%
51.63%
51.63%
51.63%
Life(1)
4.6 yrs
5.5 yrs
5.5 yrs
5.6 yrs
Dividend yield
0%
0%
0%
0%
Risk-free
interest rate
2.16%
2.15%
2.15%
2.15%
(1) Expected life after factoring likely early exercise.
The closing share market price of an ordinary share of Mesoblast Limited on the ASX as of June 30, 2017 was AUD 2.08.
The model inputs for the valuations of options approved and granted during the year ended June 30, 2016 are as follows:
Series
32
33
34
34a
35
Financial
year of
grant
2016
2016
2016
2016
2016
Exercise/Loan
price per share
AUD
4.22
4.07
2.82
2.76
2.22
Share price at
acceptance date
AUD
3.87
3.19
2.41
2.41
1.05
Expected share
price volatility
40.38%
40.38%
53.33%
53.33%
53.33%
Life(1)
5.2 yrs
5.1 yrs
5.0 yrs
5.1 yrs
3.0 yrs
Dividend yield
0%
0%
0%
0%
0%
Risk-free
interest rate
2.22%
2.00%
2.13%
2.13%
1.65%
(1) Expected life after factoring likely early exercise.
The closing share market price of an ordinary share of Mesoblast Limited on the ASX as of June 30, 2016 was AUD 1.08.
18. 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:
193
(in U.S. dollars)
a. PricewaterhouseCoopers Australia
Audit and other assurance services
Audit and review of financial reports
Other audit services(1)
Total remuneration of PricewaterhouseCoopers Australia
b. Network firms of PricewaterhouseCoopers Australia
Audit and other assurance services
Audit and review of financial reports
Total remuneration of Network firms of
PricewaterhouseCoopers Australia
Total auditors' remuneration(2)
2018
Year Ended June 30,
2017
2016
620,837
92,403
713,240
729,598
42,306
771,904
437,373
345,965
783,338
93,839
77,723
95,315
93,839
807,079
77,723
849,627
95,315
878,653
(1) Audit and review of financial reports and registration statements in connection with the United States initial public offering,
filing on Form S-8, F-3 and related Australian prospectuses.
(2) All services provided are considered audit services for the purpose of SEC classification.
194
19. Losses per share
Losses per share
(in cents)
(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 losses per
share
(in U.S. dollars, in thousands)
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
Losses from continuing operations
attributable to the ordinary equity holders of the
company:
Used in calculating basic losses per share
Losses attributable to the ordinary equity
holders of the company used in calculating
diluted losses per share
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
2018
Year Ended June 30,
2017
2016
(7.58)
(19.25)
(1.13)
(7.58)
(19.25)
(1.13)
(7.58)
(19.25)
(1.13)
(7.58)
(19.25)
(1.13)
(35,290)
(76,815)
(4,127)
(35,290)
(76,815)
(4,127)
(35,290)
(76,815)
(4,127)
2018
Number
2017
Number
2016
Number
465,688,997
399,042,172 364,208,554
465,688,997
399,042,172 364,208,554
Options granted to employees (see Note 17) 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 June 30, 2018, 2017 and 2016. Shares that may be paid as contingent consideration
(see Note 13(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 June 30, 2018, 2017 and 2016.
The calculations for the years ended June 20, 2018, 2017 and 2016 have been adjusted to reflect the bonus element in the
entitlement offer to existing eligible shareholders which occurred during September 2017.
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20. Parent entity financial information
a.
Summary financial information
The parent entity financial information disclosure is an Australian Disclosure Requirement as required by Corporations
Regulations 2001. The individual financial statements for the parent entity show the following aggregate amounts:
(in U.S. dollars, in thousands)
Balance Sheet
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Shareholders' Equity
Issued Capital
Reserves
Foreign Currency Translation Reserve
Share Options Reserve
(Accumulated losses)
Loss for the period
Total comprehensive loss for the period
As of June 30,
2018
2017
19,499
676,385
7,276
666,357
6,086
6,186
6,400
6,815
889,480
830,424
(174,948)
61,320
(105,653)
670,199
(146,840)
55,265
(79,307)
659,542
(26,346)
(26,346)
(24,216)
(24,216)
b.
Contingent liabilities of the parent entity
(i) Central Adelaide Local Health Network Incorporated (“CALHNI”) (formerly Medvet)
Mesoblast Limited acquired certain intellectual property relating to our MPCs, or Medvet IP, pursuant to an Intellectual
Property Assignment Deed, or IP Deed, with Medvet Science Pty Ltd, or Medvet. Medvet’s rights under the IP Deed were transferred
to Central Adelaide Local Health Network Incorporated, or CALHNI, in November 2011. In connection with its use of the Medvet IP,
on completion of certain milestones Mesoblast Limited will be obligated to pay CALHNI, as successor in interest to Medvet, (i)
certain aggregated milestone payments of up to $2.2 million and single-digit royalties on net sales of products covered by the Medvet
IP, for cardiac muscle and blood vessel applications and bone and cartilage regeneration and repair applications, subject to minimum
annual royalties beginning in the first year of commercial sale of those products and (ii) single-digit royalties on net sales of the
specified products for applications outside the specified fields.
21. 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.
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.
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a. 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 June 30, 2018 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.
b.
Segment reporting
The Group predominately operates in one segment as set out in Note 21.
c.
(i)
Foreign currency translation
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 functional currency of Mesoblast Limited is the
AUD. The consolidated financial statements are presented in USD, which is the Group’s presentation currency.
(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.
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(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 sold 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.
d.
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 and milestone revenue
Commercialization and milestone 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.
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 IAS 18 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 us, 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, within current liabilities. Amounts not expected to be recognized as revenue within the 12 months following the
balance sheet date are classified as deferred revenue, within non-current liabilities.
TiGenix arrangement
In December 2017, the Group entered into a patent license agreement with TiGenix NV, now a wholly owned subsidiary of
Takeda Pharmaceutical Company Limited (“Takeda”), which granted Takeda exclusive access to certain of our patents to support
global commercialization of the adipose-derived mesenchymal stem cell product, Alofisel®, previously known as Cx601, a product
198
candidate of Takeda, for the local treatment of fistulae. The agreement includes the right for Takeda to grant sub-licenses to affiliates
and third parties.
As part of the agreement, the Group received $5.9 million (€5.0 million) as a non-refundable up-front payment. The Group is entitled
to further payments of €5.0 million within 12 months of the patent license agreement date, and up to €10.0 million when Takeda
reaches certain product regulatory milestones. Additionally, the Group will receive single digit royalties on net sales of Alofisel®.
In the year ended June 30, 2018, the Group recognized $11.8 million in milestone revenue in relation to the Group’s patent license
agreement with Takeda. Within this $11.8 million, $5.9 million (€5.0 million) was recognized in relation to the non-refundable up-
front payment received upon execution of the Group’s patent license agreement with Takeda in December 2017 and $5.9 million (€5.0
million) was recognized in relation to further payments due within 12 months of the patent license agreement date for product
Alofisel®. These amounts were recorded in revenue as there are no further performance obligations required in regards to these
milestones.
On the basis that this agreement was entered into in December 2017, there was no milestone revenue recognized in the year ended
June 30, 2017 in relation to this agreement.
JCR arrangement
In October 2013, the Group acquired all of Osiris’ culture-expanded, MSC-based assets. These assets included assumption of a
collaboration agreement with JCR, a research and development oriented pharmaceutical company in Japan. Revenue recognized under
this model is limited to the amount of cash received or for which the Group is entitled to, as JCR has the right to terminate the
agreement at any time.
JCR is responsible for all development and manufacturing costs including sales and marketing expenses. Under the JCR
Agreement, JCR has the right to develop the Group’s MSCs in two fields for the Japanese market: exclusive in conjunction with the
treatment of hematological malignancies by the use of hematopoietic stem cells derived from peripheral blood, cord blood or bone
marrow, or the First JCR Field; and non-exclusive for developing assays that use liver cells for non-clinical drug screening and
evaluation, or the Second JCR Field. With respect to the First JCR Field, 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 Second JCR Field, the Group is
entitled to a double digit profit share. 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 June 30, 2018 and 2017, the Group recognized $3.6 million and $1.4 million, respectively, in
commercialization revenue relating to royalty income earned on sales of TEMCELL in Japan, by our licensee JCR. These amounts
were recorded in revenue as there are no further performance obligations required in regards to these items.
For the year ended June 30, 2018, the Group recognized $1.5 million in cumulative net sales milestone revenue upon licensee,
JCR, reaching milestones for sales of TEMCELL in Japan. For the year ended June 30, 2017, the Group recognized $0.5 million of
milestone revenue from JCR. These amounts were recorded in revenue as there are no further performance obligations required in
regards to these item.
(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 July 1, 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 July 1, 2011. The research and development tax incentive credit is available for our research and development
activities in Australia as well as research and development activities outside of Australia to the extent such non-Australian based
activities relate to intellectual property owned by our Australian resident entities do not exceed half the expenses for the relevant
199
activities and are approved by the Australian government. A refundable tax offset is available to eligible companies with an annual
aggregate turnover of less than A$20.0 million. Eligible companies can receive a refundable tax offset for a percentage of their
research and development spending. For the years ended June 30, 2018 and 2017, the rate of the refundable tax offset is 43.5%. The
Group recognized income of $1.8 million and $1.5 million, from the Research and Development Tax Incentive program for the years
ended June 30, 2018 and 2017, respectively.
The Group’s research and development activities are eligible under an Australian government tax incentive for eligible
expenditure from July 1, 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.
The receivable for reimbursable amounts that have not been collected is reflected in trade and other receivables in the Group’s
consolidated balance sheets. Income associated with the research and development tax incentive is recorded in the Group’s other
operating income and expenses in the Group’s consolidated income statement.
e.
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 labor 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.
f.
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 assets are only recognized to the
extent that there are sufficient deferred tax liabilities unwinding.
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.
200
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.
g.
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 14). 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.
h.
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 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.
i.
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.
j.
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.
k.
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
201
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.
l.
(i)
Investments and other financial assets
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
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.
202
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(g).
(v)
Impairment
The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a 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.
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
203
m. 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.
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.
n.
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.
o.
(i)
Intangible assets
Goodwill
Goodwill is measured as described in Note 22(h). 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 21).
(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 in the fourth quarter 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 remaining
useful life of the asset, management would consider the expected flow of future economic benefits to the entity with reference to the
204
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.
(iv) Current marketed products
Current marketed products contain products that are currently being marketed. The assets are recognized on our balance sheet as
a result of business acquisitions or reclassifications from In-process research and development upon completion. Upon completion,
when assets become available for use, assets are reclassified from in-process research and development to current marketed products
at the historical value that they were recognized at within the in-process research and development category.
Upon reclassification to the current market products category management determines the remaining useful life of the intangible
assets and amortizes them from the date they become available for use. In order for management to determine the 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 any other relevant factors.
Management have chosen to amortize all intangible assets with a finite useful life on a straight-line basis over the useful life of
the asset. Current marketed products are tested for impairment in accordance with IAS 36 Impairment of Assets which requires testing
whenever there is an indication that an asset may be impaired.
p.
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.
205
q.
Borrowings
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently measured at
amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or
loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are
recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. If it is
not probable, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of
the facility will be drawn down, the fee is capitalized as a prepayment for liquidity services and amortized over the period of the
facility to which it relates.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or
expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party
and the consideration paid, including any non-cash assets transferred of liabilities assumed, is recognized in profit or loss as other
income or finance costs.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for
at least 12 months after the reporting period.
Hercules
On March 6, 2018, the Group entered into a loan and security agreement with Hercules, for a $75.0 million non-dilutive, four-
year credit facility. The Group drew the first tranche of $35.0 million on closing. An additional $40.0 million may be drawn as certain
milestones are met. The loan matures in March 2022 with principal repayments commencing in October 2019 with the ability to defer
the commencement of principal repayments to October 2020 if certain milestones are met. Interest on the loan is payable monthly in
arrears on the 1st day of the month. At closing date, the interest rate was 9.45%. On June 14, 2018, in line with the increase in the U.S.
prime rate, the interest rate on the loan increased to 9.95%.
NovaQuest
On June 29, 2018, we drew the first tranche of $30.0 million of the principal amount from the $40.0 million secured loan with
NovaQuest. There is a four-year interest only period, until July 2022, with the principal repayable in equal quarterly instalments over
the remaining period of the loan. The loan matures in July 2026. Interest on the loan will accrue at a fixed rate of 15% per annum.
All interest and principal payments will be deferred until after the first commercial sale of our allogeneic product candidate
MSC-100-IV in pediatric patients with steroid refractory aGVHD, in the United States and other geographies excluding Asia
(“pediatric aGVHD”). We can elect to prepay all outstanding amounts owing at any time prior to maturity, subject to a prepayment
charge, and may decide to do so if net sales of pediatric aGVHD are significantly higher than current forecasts.
If there are no net sales of pediatric aGVHD, the loan is only repayable on maturity in 2026. If in any annual period 25% of net
sales of pediatric aGVHD exceed the amount of accrued interest owing and, from 2022, principal and accrued interest owing (“the
payment cap”), Mesoblast will pay the payment cap and an additional portion of excess sales which may be used for early prepayment
of the loan. If in any annual period 25% of net sales of pediatric aGVHD is less than the payment cap, then the payment is limited to
25% of net sales of pediatric aGVHD. Any unpaid interest will be added to the principal amounts owing and shall accrue further
interest. At maturity date, any unpaid loan balances are repaid.
Because of this relationship of net sales and repayments, changes in our estimated net sales may trigger an adjustment of the
carrying amount of the financial liability to reflect the revised estimated cash flows. The carrying amount adjustment is recalculated
by computing the present value of the revised estimated future cash flows at the financial instrument’s original effective interest rate.
The adjustment is recognized in the Income Statement in the period the revision is made.
The carrying amount of the loan is subordinated to the senior creditor, Hercules.
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
206
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 IAS 37 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 acceptance 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 behavioral
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 17.
The fair value determined at the acceptance 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.
u.
Contributed equity
Ordinary shares are classified as equity.
Transaction costs arising on the issue of equity instruments are recognized separately in equity. 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.
207
v.
(i)
Loss per share
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 fiscal 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.
Rounding of amounts
Amounts in the financial statements have been rounded off to the nearest thousand dollars, or in certain cases, the nearest dollar,
unless mentioned otherwise.
208
Australian Disclosure Requirements
Directors’ Declaration
In the directors’ opinion:
(a)
the financial statements and Notes set out on pages 149 to 208 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 at June 30, 2018 and of its performance for the fiscal
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 1 ‘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.
/s/ Brian Jamieson
Brian Jamieson
Chairman
Melbourne, August 30, 2018
/s/ Silviu Itescu
Silviu Itescu
Chief Executive Officer
209
Independent auditor’s report
To the members of Mesoblast Limited
Report on the audit of the financial report
Our opinion
In our opinion:
The accompanying financial report of Mesoblast Limited (the Company) and its controlled entities (together, the
Group) is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the Group's financial position as at 30 June 2018 and of its financial
performance for the year then ended
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited
The Group financial report comprises:
•
•
•
•
•
•
•
the consolidated balance sheet as at 30 June 2018
the consolidated income statement for the year then ended
the consolidated statement of comprehensive income for the year then ended
the consolidated statement of changes in equity for the year then ended
the consolidated statement of cash flows for the year then ended
the notes to the consolidated financial statements, which include a summary of significant accounting
policies
the directors’ declaration.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our
report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group in accordance with the auditor independence requirements of the Corporations
Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110
Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in
Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, 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.
210
Material uncertainty related to going concern
We draw attention to Note 1(i) in the financial report, which indicates that the Group incurred net cash outflows
from operations of $75.0 million. As a result, the Group is dependent on funding from the strategic alliance with
Tasly, commercial partnering transactions or equity-based financing, together with maintaining implemented cost
containment and deferment strategies. These conditions, along with other matters set forth in Note 1(i), indicate
the existence of material uncertainty that may cast significant doubt about the Group's ability to continue as a going
concern. Our opinion is not modified in respect of this matter.
Our audit approach
An audit is designed to provide reasonable assurance about whether the financial report is free from material
misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the
financial report as a whole, taking into account the geographic and management structure of the Group, its
accounting processes and controls and the industry in which it operates.
The Group is a Research and Development (R&D) stage biopharmaceutical entity headquartered in Melbourne,
Australia and is in the process of developing innovative cell-based regenerative medicine products. The Group has
operations in Australia, the United States and Singapore with key management functions, including finance,
performed in Melbourne, Australia.
Materiality
•
For the purpose of our audit we used overall Group materiality of $4 million, which represents approximately 5% of the
Group’s adjusted loss before tax of continuing operations.
• We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.
• We adjusted for the non-cash impact of fair value re-measurements of the contingent consideration as it is an unusual or
infrequently occurring item. We also adjusted for the impact of the milestone revenue generated from licencing of certain
intellectual property with TiGenix as it is an infrequently occurring item for the current R&D stage of the Company.
• We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable
thresholds.
211
Audit Scope
•
•
Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates
involving assumptions and inherently uncertain future events.
Audit procedures were performed over the Australian, United States and Singaporean operations to enable us to give an
opinion on the financial report as a whole. Under instruction and supervision by PwC Australia, local component auditors
in the United States assisted with the procedures.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of
the financial report for the current period. The key audit matters were addressed in the context of our audit of the
financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We
communicated the key audit matters to the Audit and Risk Committee.
In addition to the matters described in the Material uncertainty related to going concern section, we have
determined the matters described below to be the key audit matters to be communicated in our report.
Key audit matter
How our audit addressed the key audit matter
Carrying value of in-process research and
development (IPRD) acquired
Refer to note 6b in the financial report
The Group recognised an IPRD asset of $427.8 million
at 30 June 2018, which is considered to be an
intangible asset subject to annual impairment testing at
the cash generating unit level, which is the product
level. The impairment test is done as at 30 June 2018.
The recoverable amount of IPRD is derived from its
estimated future cash flows (the models) and there is a
risk that if these cash flows do not meet the Group’s
expectations the assets may be impaired.
In designing our audit approach for the key audit matter
we leverage information supporting key assumptions
from prior years to serve as a baseline for assessing
future cash flows in the year ended 30 June 2018. We
selected this approach because the assets subject to
testing are still in the research and development stage
with no historical performance information to compare
to. Therefore we focused on relevant changes to
underlying key assumptions in the period given the long
development time of the IPRD products.
There are a number of significant judgements and
estimates in determining the recoverable amount of the
IPRD for each product’s cash flows including estimated
market penetration for each program through to patent
expiry, cost of goods sold, selling costs, clinical trial
schedules, and discount rates.
We assessed whether the models used were consistent
with the requirements of Australian Accounting
Standards by understanding the types of cashflows
included, their application within the models, and
verifying the mathematical accuracy of the models.
The carrying value of IPRD is also dependent on the
continued successful development of the underlying
technology platform and the late stage product
candidates.
We focused on this area due to the significant carrying
amount of IPRD assets relative to total assets of the
Group along with the significant and complex
judgements and estimates by the Group underlying the
We assessed the key inputs underpinning the models to
independent third party sources and comparable
company benchmarks. We placed greater emphasis on
the IPRD valuations where the strategic focus had
shifted from the prior year and underlying assumptions
had changed, with specific focus on developments in the
current Phase 3 trials and the status of potential
strategic partnerships for IPRD assets.
212
Key audit matter
How our audit addressed the key audit matter
impairment assessment.
We engaged PwC internal valuation experts to
independently calculate a range of discount rates
through a benchmark analysis of comparable companies
and we compared the range to the discount rates used
by the Group.
We obtained and assessed the Group’s sensitivity
analysis and performed certain independent
sensitivities to ascertain the impact of reasonably
possible changes in the key assumptions in the models.
We considered the results of clinical trials and platform
technology updates announced by the Group.
Carrying value of goodwill
Refer to note 6b in the financial report
The Group recognised goodwill at year end of $134.5
million, which is tested by the Group for impairment
annually. Goodwill arose from the acquisition of
Angioblast Systems, Inc in the year ended 30 June 2011
and the acquisition of Osiris Therapeutics, Inc.’s stem
cell business in the year ended 30 June 2014.
Goodwill is assessed for impairment at the consolidated
level.
The Group focus on whether the estimated cash flows
of product intangible assets, as discussed within the
carrying value of in-process research and development
(IPRD) acquired key audit matter above, support the
goodwill balance, scientific results and progress of
clinical trials, and the implied valuation of the Group.
We considered the Group’s assessment of Goodwill
allocation at the consolidated level based on the level at
which the Group’s performance and allocation of
resources is analysed by the Chief Operating Decision
Maker. We also considered synergies realised from
historical business combinations in assessing whether
impairment testing over goodwill should be performed
at the group level.
We obtained the valuation models for the IPRD assets.
We leveraged audit evidence obtained in assessing the
carrying value of IPRD (described in the previous key
audit matter) and considered if the total fair value of
intangible assets in the valuation models was higher
than their book amount, including goodwill, in the
aggregate.
Similar to IPRD, the recoverable amount of Goodwill is
dependent on the continued successful development of
the underlying technology platform and the late stage
product candidates.
We assessed management’s valuation analysis of the
total fair value of intangibles assets compared with the
Company’s market capitalisation at 30 June 2018 and
the Company’s historical share price trends.
We focused on this area because the determination of
whether or not an impairment charge for goodwill was
necessary involved significant judgements made by the
Group. The judgements made in valuing in-process
research and development assets are also relevant for
the annual Goodwill impairment test because of their
magnitude relative to the cash generating unit.
We obtained the reports of independent securities
analysts who periodically publish estimates of their
calculation of the fair value of the enterprise and
underlying assumptions. We compared the average
enterprise fair value per analyst reports obtained with
the net assets of the Group.
213
Key audit matter
How our audit addressed the key audit matter
Valuation of contingent consideration
Refer to note 5g in the financial report
The contingent consideration liability arises from the
purchase of Osiris Therapeutics, Inc.’s stem cell
business in the year ended 30 June 2014. The Group is
liable for future fixed and variable payments arising
from milestones achieved and sales from acquired
products for a specified period of time, paid in the form
of royalties.
A significant number of judgements are made in
determining the appropriate value for the liability at
period end. Underpinning the liability is the financial
information used in developing cash flow forecasts for
the in-process research and development (IPRD)
valuation model discussed above. Additionally, other
information such as the risk-adjusted discount rate for
the contingent consideration liability is assessed. The
Group focuses on key changes to assumptions
underpinning the estimate during the period in
determining whether the liability is materially accurate
at 30 June 2018.
We focused on this area due to the size of the liability
relative to the total liabilities of the Group and the
potentially significant impact to the financial statements
of changes in key judgemental assumptions.
As the Group utilises a discounted cash flow calculation,
similar to that used for the valuation of IPRD, we agreed
the significant assumptions of patient population,
development timelines, and sales price in the liability
calculation to those which were utilised in the IPRD
valuation model.
We developed an understanding of the drivers of the
most significant change in the valuation of the
contingent consideration for the period. Changes
related primarily to refinements in timelines,
population, and pricing along with the unwinding of the
discount rate related to the underlying products
acquired from Osiris Therapeutics, Inc. We agreed
changes to development plans to underlying
management approved documentation, and where
applicable, documentation assessed by parties external
to the Group.
We engaged PwC internal valuation experts to
independently calculate a range of discount rates
through a benchmark analysis of comparable companies
and we compared the range to the discount rates used
by the Group.
In addition to the movements in assumptions, we
verified that a fixed payment milestone was met during
the year by evaluating the requirements in the
agreement and understanding the related developments
within the Group’s business and traced the payment
made to Osiris Therapeutics, Inc. to supporting
documentation.
Other information
The directors are responsible for the other information. The other information comprises the information included
in the Group's annual report for the year ended 30 June 2018, but does not include the financial report and our
auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included Part I
and Part II of the form 20-F. We expect the remaining other information to be made available to us after the date
of this auditor's report, including the Message from the Chairman, Shareholder Information, and Corporate
Directory.
Our opinion on the financial report does not cover the other information and we do not and will not express an
opinion or any form of assurance conclusion thereon.
214
In connection with our audit of the financial report, our responsibility is to read the other information identified
above and, in doing so, consider whether the other information is materially inconsistent with the financial report
or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this
auditor’s report, we conclude that there is a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
When we read the other information not yet received as identified above, if we conclude that there is a material
misstatement therein, we are required to communicate the matter to the directors and use our professional
judgement to determine the appropriate action to take.
Responsibilities of the directors 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 Corporations Act 2001 and for such internal control
as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair
view and is free from material misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial report.
A further description of our responsibilities for the audit of the financial report is located at the Auditing and
Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf.
This description forms part of our auditor's report.
Report on the remuneration report
Our opinion on the remuneration report
We have audited the remuneration report included in pages 91 to 116 of the directors’ report for the year ended 30
June 2018.
In our opinion, the remuneration report of Mesoblast Limited for the year ended 30 June 2018 complies with
section 300A of the Corporations Act 2001.
215
Responsibilities
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.
PricewaterhouseCoopers
Jon Roberts
Partner
Melbourne
30 August 2018
216
Item 19.
Exhibits
Item
1.1
1.2
4.1
4.2
4.3
4.4†
4.5
4.6
4.7†
4.8†
4.9
4.10
4.11
4.12
4.13
4.14#
4.15#
4.16#
4.17
4.18
4.19
Constitution of Mesoblast Limited (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on
Form F-1 filed with the SEC on November 2, 2015).
Certificate of Registration of Mesoblast Limited (incorporated by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form F-1 filed with the SEC on November 2, 2015).
Form of Deposit Agreement between Mesoblast Limited and JPMorgan Chase Bank, N.A., as depositary, and Holders of the
American Depositary Receipts (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form
F-1 filed with the SEC on November 2, 2015).
Form of American Depositary Receipt evidencing American Depositary Shares (included in Exhibit 4.1).
Clinical Trial Agreement by and between The National Heart, Lung, and Blood Institute and Mesoblast, Inc. dated July 28,
2014 (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form F-1 filed with the SEC
on November 2, 2015).
Manufacturing Services Agreement by and between Mesoblast Limited and Lonza Walkersville, Inc. and Lonza Bioscience
Singapore Pte. Ltd., dated September 20, 2011 (incorporated by reference to Exhibit 10.6 to the Company’s Registration
Statement on Form F-1 filed with the SEC on November 2, 2015).
Purchase Agreement by and between Mesoblast International Sàrl and Osiris Therapeutics, Inc., dated October 10, 2013
(incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form F-1 filed with the SEC on
November 2, 2015).
Amendment #1 to Purchase Agreement by and between Mesoblast International Sàrl and Osiris Therapeutics, Inc., dated
December 17, 2014 (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form F-1 filed
with the SEC on November 2, 2015).
License Agreement by and between Osiris Acquisition II, Inc. and JCR Pharmaceuticals Co., Ltd., dated August 26, 2003
(incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form F-1 filed with the SEC on
November 2, 2015).
Amendment 1 to License Agreement by and between Osiris Acquisition II, Inc. and JCR Pharmaceuticals Co., Ltd., dated
June 27, 2005 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form F-1 filed with
the SEC on November 2, 2015).
Technology Transfer and License Agreement by and between Case Western Reserve University and Osiris Therapeutics,
Inc., dated January 1, 1993 (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form F-
1 filed with the SEC on November 2, 2015).
Amendment Number 1 to Technology Transfer and License Agreement by and between Case Western Reserve University
and Osiris Therapeutics, Inc., dated November 3, 1993 (incorporated by reference to Exhibit 10.12 to the Company’s
Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Amendment to the Technology Transfer and License Agreement by and between Case Western Reserve University and
Osiris Therapeutics, Inc., dated October 18, 1999 (incorporated by reference to Exhibit 10.13 to the Company’s Registration
Statement on Form F-1 filed with the SEC on November 2, 2015).
Third Amendment to Technology Transfer and License Agreement by and between Case Western Reserve University and
Osiris Therapeutics, Inc., dated October 27, 2003 (incorporated by reference to Exhibit 10.14 to the Company’s Registration
Statement on Form F-1 filed with the SEC on November 2, 2015).
Intellectual Property Assignment Deed by and between Mesoblast Limited and Medvet Science Pty Ltd, dated October 4,
2004 (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form F-1 filed with the SEC
on November 2, 2015).
Loan Funded Share Plan Rules, as amended, and form of loan agreement thereunder (incorporated by reference to Exhibit
10.17 to the Company’s Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Employee Share Option Plan Rules, and form of option agreement thereunder (incorporated by reference to Exhibit 10.18 to
the Company’s Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Employment Agreement, dated August 8, 2014, by and between Mesoblast Limited and Silviu Itescu (incorporated by
reference to Exhibit 10.19 to the Company’s Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Sublease, by and between Mesoblast Limited and CIT Group Inc., dated September 27, 2011 (incorporated by reference to
Exhibit 10.21 to the Company’s Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Sublease, by and between Mesoblast Limited and Collins Place Pty Ltd, AMP Capital Investors Limited, and Australia and
New Zealand Banking Group Limited, dated April 21, 2014 (incorporated by reference to Exhibit 10.22 to the Company’s
Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Form of 2012 Deed of Indemnity, Insurance and Access (incorporated by reference to Exhibit 10.23 to the Company’s
Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
217
4.20
4.21†
4.22†
4.23†
4.24†
8.1
10
12.1
12.2
13.1
13.2
99.1
99.2
#
†
Form of 2014 Deed of Indemnity, Insurance and Access (incorporated by reference to Exhibit 10.24 to the Company’s
Registration Statement on Form F-1 filed with the SEC on November 2, 2015).
Patent License and Settlement Agreement with TiGenix S.A.U., dated December 14, 2017.
Loan and Security Agreement by and among Mesoblast Limited, Mesoblast UK Limited, Mesoblast International (UK)
Limited, Mesoblast, Inc., Mesoblast International Sarl and Hercules Capital, Inc., dated March 6, 2018.
Loan and Security Agreement by and between Mesoblast Limited, Mesoblast UK Limited, Mesoblast, Inc., Mesoblast
International (UK) Limited, Mesoblast International Sàrl and NQP SPV II, L.P., dated June 29, 2018.
Development and Commercialization Agreement by and between Mesoblast Inc., Mesoblast International Sàrl and Tasly
Pharmaceutical Group Co., Ltd. dated July 17, 2018.
List of Significant Subsidiaries of Mesoblast Limited.
Consent of independent registered public accounting firm.
Certification of the Chief Executive Officer pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
Appendix 4E preliminary final report for the twelve months to June 30, 2018.
Auditor’s independence declaration, dated August 30, 2018.
Indicates management contract or compensatory plan.
Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and have been filed
separately with the Securities and Exchange Commission.
218
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
Mesoblast Limited
By:
Name:
Title:
By:
Name:
Title:
/s/ Brian Jamieson
Brian Jamieson
Chairman
/s/ Silviu Itescu
Silviu Itescu
Chief Executive Officer
Dated: August 30, 2018
219
SHAREHOLDER INFORMATION
A. Substantial Shareholders
Holders of substantial holdings of ordinary shares in the Company and the numbers of shares in which they and their associates have a relevant
interest as of 1 October 2018:
Shareholder
M&G Investment Group
Professor Silviu Itescu
Capital Research Global Investors
Thorney Holdings
Number of ordinary shares held
69,297,896
68,958,928
42,591,080
24,696,000
B. Distribution of Equity Securities and Voting Rights
Distribution of holders of equity securities as of 1 October 2018:
Range
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
Ordinary shares (i)
Options (ii)(1)
3,920
4,704
1,698
1,898
182
12,402
0
0
24
14
37
75
Number of holders of less than a marketable parcel of 213 shares ($2.34 per share)
743
(1) There are 23,029,000 options on issue as of 1 October 2018.
The voting rights attaching to each class of equity securities are:
i. Ordinary shares
On a show of hands, every member present at a meeting, in person or by proxy, shall have one vote and upon a poll each share shall have
one vote.
ii. Options
No voting rights.
MESOBLAST LIMITED 2018 ANNUAL REPORT 220
C. Twenty Largest Holders of Quoted Securities
The names of the 20 largest shareholders of each class of equity security as of 1 October 2018 are listed below.
Rank Name
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) Limited
Professor Silviu Itescu
J P Morgan Nominees Australia Limited
Lalp Pty Ltd
Citicorp Nominees Pty Limited
Independent Asset Management Pty Limited
National Nominees Limited
UBS Nominees Pty Ltd
HSBC Custody Nominees (Australia) Limited
Dalit Pty Ltd
Mr Gregory John Matthews & Mrs Janine Marie Matthews
Mesoblast Australia Pty Ltd(1)
BNP Paribas Noms Pty Ltd
HSBC Custody Nominees (Australia) Limited-GSCO ECA
Adelaide Health Services Inc
HSBC Custody Nominees (Australia) Limited – A/C 2
Citicorp Nominees Pty Limited
Dalit Pty Ltd
Beth Sackstein
BNP Paribas Nominees Pty Ltd
156,236,852
67,751,838
51,847,744
14,934,000
9,209,426
8,371,929
7,500,161
6,545,818
6,323,628
4,468,839
4,056,219
3,500,000
2,098,631
2,024,948
1,953,000
1,635,310
1,563,347
1,445,000
1,277,210
1,244,220
33.08
14.35
10.98
3.16
1.95
1.77
1.59
1.39
1.34
0.95
0.86
0.74
0.44
0.43
0.41
0.35
0.33
0.31
0.27
0.26
(1) As trustee for the Mesoblast Limited Employee Share Trust, held on behalf of employees who participate in the Company’s loan funded share plan.
353,988,120
74.95
D. Securities under escrow
As of 1 October 2018, there are 8,633,477 ordinary shares in the Company subject to escrow. Of these securities under escrow, the escrow
period of 158,901 ordinary shares will expire on 25 October 2018 and the escrow period of 8,474,576 ordinary shares will expire on 10 July 2019.
E. On-Market Buy-Back
There is no current on-market buy-back of the Company’s ordinary shares.
F. Stock Exchanges
The Company’s ordinary shares are listed on the Australian Securities Exchange and are traded under the symbol ‘MSB’. The Company’s
American Depositary Shares, each representing five ordinary shares, are listed on the Nasdaq Global Select Market and are traded under
the symbol ‘MESO’.
221 MESOBLAST LIMITED 2018 ANNUAL REPORT
CORPORATE DIRECTORY
Directors
Brian Jamieson (Chairman)
Silviu Itescu
William Burns
Donal O’Dwyer
Eric Rose
Michael Spooner
Ben-Zion Weiner (resigned 18 June 2018)
Joseph Swedish (appointed 18 June 2018)
Shawn Cline Tomasello (appointed 11 July 2018)
Share Registry
Link Market Services Limited
Tower 4
727 Collins Street
Melbourne
Victoria 3008
Australia
Telephone +61 1300 554 474
Facsimile +61 2 9287 0303
www.linkmarketservices.com.au
Auditors
PricewaterhouseCoopers
Level 19, 2 Riverside Quay
Southbank
Victoria 3006
Australia
Telephone +61 3 8603 1000
Facsimile +61 3 8603 1999
Company Secretary
Charles Harrison
Registered Office
Level 38
55 Collins Street
Melbourne VIC 3000
Australia
Telephone +61 3 9639 6036
Facsimile +61 3 9639 6030
Country of Incorporation
Australia
Listing
Australian Securities Exchange
(ASX Code: MSB)
Nasdaq Global Select Market
(Nasdaq Code: MESO)
Website
www.mesoblast.com
MESOBLAST LIMITED 2018 ANNUAL REPORT 222
www.mesoblast.com