Mesoblast boosts R&D spend on stem cell platform

The expansion of Mesoblast’s MPC adult stem cell development programs came at a cost in 1H13, but the company has more than adequate cash reserves to cover the increased burn.

Mesoblast (ASX:MSB) said its 1H13 net loss grew nearly 60% as the company ramped up spending on clinical and product development of its mesenchymal stem cell (MPC) platform.

The regenerative medicine company reported a cash burn for operations of $33.8 million for the half-year period.

Operating expenses increased by $3.9 million to $35.9 million, partly due to a $4.5 million increase in R&D costs to $17.2 million.

Revenue from continuing operations meanwhile fell by $3.9 million to $14.7 million, due to an accounting change in the way the company’s US$130 million ($126.4 million) upfront payment from US pharmaceutical giant Cephalon is being amortised.

Cephalon paid US$220 million for a nearly 20% stake in Mesoblast in late 2010, and the upfront payment was in addition to this investment.

Mesoblast also reported a $1 million increase in manufacturing expenses associated with its adult stem cell clinical programs to $8.9 million.

The company ended the half year with cash reserves of $178.6 million. CEO professor Silviu Itescu said the company’s “strong cash position enables us to pursue our key areas of MPC product development in parallel”.

He said the increased expenditures for the half year were in line with the company’s expectations given its broadening clinical development strategy.

“Specifically, during the period we initiated new phase II clinical programs of our intravenous product for diseases of inflammation and immunity, including diabetes and rheumatoid arthritis; completed recruitment in the 100-patient phase II trial for disc repair; initiated new preclinical studies in inflammatory lung diseases and increased product manufacturing as necessary to support these programs,” he said.

In an investment note, Bell Potter biotech analyst Stuart Roberts said with its expanded clinical programs Mesoblast can now be considered a player in multiple areas of medicine beyond heart failure and is in the cash position to see its development through.

In particular, he said Mesoblast “has created potentially game-changing products for spinal fusion and for disc repair”, with clinical trial data strongly supporting the use of MPCs in these conditions.

“[The outcome of the trials] makes Mesoblast a player in the US$1.6 billion global market for bone graft substitutes and opens the way for MPCs to displace Medtronic’s BMP - which once had US$750-800 million per annum in revenue - in spinal fusion,” Roberts said.

Bell Potter has upgraded its valuation for Mesoblast shares to $10.71 base case and $20.45 optimistic case, from $9.73 and $18.93 respectively. Its target remains unchanged at $14.50.

Mesoblast shares were trading 2.27% lower at $6.88 as of around 11:30 am on Tuesday.