F-1 1 d943277df1.htm REGISTRATION SUBMISSION ON FORM F-1 Registration Submission on Form F-1
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As filed with the Securities and Exchange Commission on November 2, 2015.

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

MESOBLAST LIMITED

(Exact name of Registrant as specified in its charter)

 

 

 

Australia   2836   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Silviu Itescu

Chief Executive Officer and Executive Director

Level 38

55 Collins Street

Melbourne 3000

Australia

Telephone: +61 (3) 9639-6036

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Mesoblast, Inc.

Level 3

505 5th Avenue

New York, NY 10017

(212) 880-2060

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

    Jeffrey D. Saper, Esq.

    Steven V. Bernard, Esq.

    Megan J. Baier, Esq.

    Wilson Sonsini Goodrich &

Rosati, P.C.

    650 Page Mill Road

    Palo Alto, CA 94304

 

Peter T. Howard

General Counsel and

Corporate Executive

Level 38

55 Collins Street

Melbourne 3000

Australia

 

Ian Davis

John Steven

Minter Ellison

Level 23, Rialto Towers

525 Collins Street

Melbourne 3000

Australia

 

Thomas J. Ivey, Esq.

Mark J. Leemen, Esq.

Skadden, Arps, Slate,

Meagher & Flom LLP

525 University Avenue #1400

Palo Alto, CA 94301

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered(1)

  Amount to be
Registered(2)
  Proposed Maximum
Offering Price
Per Share
  Proposed Maximum
Aggregate Offering
Price(3)
 

Amount of

Registration Fee

Ordinary shares, no par value

  33,019,430   US$2.42   US$79,907,021   US$8,047

 

 

(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-207378). Each American depositary share represents five ordinary shares.
(2) Includes (a) all ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option, and (b) all ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this Registration Statement and the date the shares are first bona fide offered to the public. The shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission acting pursuant to said Section 8(a) may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 2, 2015

Prospectus

5,742,510 American Depositary Shares

representing 28,712,550 ordinary shares

 

LOGO

Mesoblast Limited

 

 

This is an initial public offering in the United States of American depositary shares, or ADSs, representing 28,712,550 ordinary shares of Mesoblast Limited, or Mesoblast. Mesoblast is offering 5,742,510 ADSs. Each ADS represents five ordinary shares, no par value, deposited with JPMorgan Chase Bank, N.A., as depositary.

Our ordinary shares currently trade on the Australian Securities Exchange under the symbol “MSB.” On October 29, 2015 the closing price for our ordinary shares was A$3.41 per share, equivalent to a price of US$2.42 per share, or US$12.10 per ADS, assuming an exchange rate of US$0.7103 per Australian dollar. We have applied to list our ADSs on the NASDAQ Global Select Market under the symbol “MESO”.

 

 

Investing in our ADSs involves a high degree of risk. See “Risk Factors” beginning on page 13.

 

     Per ADS      Total  

Initial public offering price

   US$                    US$                

Underwriting discounts and commissions(1)

   US$         US$     

Proceeds before expenses, to us

   US$         US$     

 

  (1) See “Underwriting” for a description of the compensation payable to the underwriters.

We have granted the underwriters the right to purchase up to an additional 861,376 ADSs from us at the initial public offering price less underwriting discounts and commissions.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs to purchasers on or about                     , 2015.

 

 

Joint Bookrunners

 

J.P. Morgan       Credit Suisse

Co-managers

 

Maxim Group LLC    Ladenburg Thalmann

                    , 2015


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LOGO

 

mesoblast the regenerative medicine company We are a global leader in regenerative medicine Our proprietary technology platform is based on specialized cells known as mesenchymal lineage adult stem cells, or MLCs. We have leveraged our technology to build what we believe is the most advanced regenerative medicine portfolio in the industry, with the potential to address multiple conditions with significant unmet medical needs.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     8   

Summary Consolidated Financial and Operating Data

     11   

Risk Factors

     13   

Forward-Looking Statements

     53   

Use of Proceeds

     55   

Price Range of Our Ordinary Shares

     56   

Dividends and Dividend Policy

     57   

Capitalization

     58   

Dilution

     59   

Selected Consolidated Financial Data

     61   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     63   

Business

     88   

Management

     141   

Principal Shareholders

     159   

Related Party Transactions

     161   

Description of Share Capital

     163   

Description of American Depositary Shares

     170   

Shares and ADSs Eligible For Future Sale

     181   

Taxation

     183   

Underwriting

     192   

Expenses Relating to This Offering

     197   

Legal Matters

     198   

Experts

     198   

Enforcement of Civil Liabilities

     198   

Where You Can Find More Information

     198   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus and any related free-writing prospectus that we authorize to be distributed to you. We and the underwriters have not authorized any person to provide you with information different from that contained in this prospectus or any related free-writing prospectus that we authorize to be distributed to you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of the securities offered hereby.

No action is being taken in any jurisdiction outside the United States to permit a public offering of the ADSs or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of the prospectus applicable to that jurisdiction.

Until                     , 2015 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade in our ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

 

 

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STATISTICAL AND OTHER INDUSTRY AND MARKET DATA

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosure contained in this prospectus and we believe these industry publications and third-party research, surveys and studies are reliable.

TRADEMARKS

We own or have rights to trademarks and trade names that we use in connection with the operation of our business, including our corporate name, logos, product names and website names. Other trademarks and trade names appearing in this prospectus are the property of their respective owners. Solely for your convenience, some of the trademarks and trade names referred to in this prospectus are listed without the ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks and trade names.

CONVENTIONS THAT APPLY TO THIS PROSPECTUS

Except where the context requires otherwise and for purposes of this prospectus only:

 

    “ADSs” refers to our American depositary shares, each of which represents five ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs.

 

    “ASX” refers to the Australian Stock Exchange, where our ordinary shares are listed.

 

    “Mesoblast,” “we,” “us” or “our” refer to Mesoblast Limited and its subsidiaries.

 

    “A$” or “Australian dollars” 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.

 

    “GAAP” refers to the Generally Accepted Accounting Principles in the United States.

 

    “FDA” refers to the United States Food and Drug Administration.

 

    “NIH” refers to the United States National Institutes of Health.

 

    “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.

Unless otherwise indicated, the consolidated financial statements and related notes included in this prospectus have been presented in U.S. dollars and also comply with IFRS, which differs in certain significant respects from GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Differences Between IFRS and GAAP.” For us and our subsidiaries that use a functional currency that is not U.S. dollars, the assets and liabilities have been translated at the closing exchange rate, while the income and expenses have been translated at the exchange rate at the transaction date. The resulting exchange differences are recognized in our consolidated statement of comprehensive income. See note 21(d) in the notes to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for more information.

Certain information in this prospectus is expressed in Australian dollars, such as share option exercise prices and transaction values in “Related Party Transactions,” among others. The exchange rate as quoted by the Reserve Bank of Australia on October 29, 2015 was A$1.00 to US$0.7103. In various places throughout this prospectus, we have assumed this exchange rate to convert our last reported sale price on the ASX of A$3.41 on October 29, 2015 to US$2.42. We make no representation that the Australian dollar or U.S. dollar amounts referred to in this prospectus could have been converted into U.S. dollars or Australian dollars, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Related to Ownership of Our ADSs, Our Trading Market and This Offering—We are subject to risk associated with currency fluctuations, and changes in foreign currency exchange rates could impact our results of operations.”

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our ADSs. You should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references in this prospectus to “Mesoblast,” “we,” “us” and “our” refer to Mesoblast Limited and its subsidiaries. Clinical milestone event dates in this prospectus refer to calendar year periods.

Overview

We are a global leader in the field of regenerative medicine. We have leveraged our proprietary technology platform, which is based on specialized cells known as mesenchymal lineage adult stem cells, or MLCs, to establish what we believe to be the most advanced regenerative medicine product portfolio in the industry. We have what we believe to be an extensive safety profile for our product candidates, with over 1,340 patients treated. Based on outcomes in Phase 2 trials across multiple indications, we now have five MLC product candidates that are in active Phase 3 trials or are Phase 3-ready.

In September 2015, our licensee JCR Pharmaceuticals Co. Ltd, or JCR, received full approval for the first “allogeneic” cell-based product in Japan, meaning a product containing cells from a single donor expanded and used in many unrelated patients. We believe we are well positioned to have the first industrially-manufactured allogeneic stem cell product approved in the United States.

Our deep understanding of the fundamental mechanisms of action of MLCs and our proprietary manufacturing processes have been leveraged to create a portfolio of independent, non-interchangeable MLC-derived product candidates. Each of our product candidates has its own distinct technical characteristics, target indications, individual reimbursement strategy, separate commercialization potential, and unique partnering opportunities.

We have focused on significantly advanced stages of diseases where specific subpopulations of patients have high unmet medical needs, as this provides potential accelerated development pathway opportunities and the potential for attractive pricing. Our goal is to first gain broad acceptance of our approved products based on our technology as treatment options for these severely ill patients, then expand the applications of such products over time to broader patient populations.

Our lead products have been prioritized into tiers based on stage of development, market opportunity, and expected time to market, and we allocate resources based on such prioritization. Our Tier 1 product candidates are being developed for the treatment of chronic congestive heart failure, or CHF, chronic low back pain, or CLBP, acute graft versus host disease, or aGVHD, a condition where donor cells attack a patient receiving a bone marrow transplant, resulting in tissue damage that is often fatal, and for chronic inflammatory conditions, such as biologic-refractory rheumatoid arthritis, or RA, and diabetic kidney disease, or DKD. Our Tier 2 lead product candidates are being developed for the treatment of acute cardiac ischemia and for the treatment of Crohn’s disease, among other indications.

We expect a number of important clinical and commercial milestone events to occur over the next 12 to 24 months for our most advanced product candidates, including:

 

    By the end of 2015, we expect to announce 6 month results from the first cohort in the Phase 2 trial of our product candidate for RA. Results from the second cohort are expected during the first half of 2016. We believe positive results from this trial would support progression towards Phase 3 and potential partnering discussions.

 



 

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    During the first quarter 2016, we expect that our licensee JCR will launch TEMCELL® Hs. Inj. (JR-031), or TEMCELL, its MSC-based product for aGVHD in Japan. Decisions by Japanese regulators on price reimbursement for JCR’s product TEMCELL are pending. Under our agreement with JCR, we are entitled to receive milestone payments on product regulatory approvals, escalating double-digit royalties in the twenties and other payments at pre-defined thresholds of cumulative net sales.

 

    During the first quarter 2016, we expect to announce the outcome of the first interim analysis of safety and efficacy from a Phase 3 trial of our product candidate for advanced CHF. We expect the second interim analysis for futility, resizing and possible overwhelming efficacy to occur in the first quarter 2017. Phase 2b trial results for our product candidate for end-stage CHF are expected in middle 2017. This product candidate is partnered on a global basis with Teva Pharmaceutical Industries, Ltd., or Teva.

 

    During the third quarter 2016, we expect to announce top-line results from an interim analysis of a Phase 3 trial of our product candidate for aGVHD. This interim analysis may support a BLA filing by the end of 2016. We expect to complete recruitment of this Phase 3 trial in the fourth quarter 2016 and to have top-line results of the trial in the first quarter 2017.

 

    During the third quarter 2016, we expect to complete enrollment of the first Phase 3 trial of our product candidate for CLBP.

Proprietary Platform

Our MLC technology platform enables development of a broad product range based on distinct cell types derived from or that are the progeny of the earliest precursors of the mesenchymal cell lineage in adult tissues. Mesenchymal precursor cells, or MPCs, constitute the earliest known cell type in the MLC lineage in vivo. MPCs can be isolated using monoclonal antibodies and culture-expanded using methods that enable efficient expansion without differentiation. Mesenchymal stem cells, or 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 different functional characteristics of each cell type enables distinct product development for different targeted diseases.

MLCs are present around blood vessels in all tissues, where they can respond to signals associated with tissue damage. This response includes the secretion by MLCs of a diverse variety of biomolecules that affect various reparative and immunomodulatory mechanisms responsible for maintaining tissue health. Understanding the mechanisms of action by which these biomolecules induce tissue restoration has broad applicability in treating diseases for which current standards of care are inadequate. Our lead MLC product candidates have been developed through proprietary manufacturing processes to optimize expression of certain biomolecules. The expressed biomolecules are those implicated in the mechanisms of action by which the MLC product candidate is thought to modify outcomes for the target condition for which it is being developed.

Scalable Manufacturing

MLCs have two additional, distinct characteristics that, when combined with our proprietary manufacturing processes, enable allogeneic or “off-the-shelf” use of our product candidates. First, we have developed proprietary methods that enable the isolation of MLCs from healthy donors and their large-scale expansion while maintaining their ability to produce key biomolecules associated with tissue health and repair. In addition, unlike other categories of stem cells, MLCs are “immune privileged,” in that they do not express specific cell surface co-stimulatory molecules that would otherwise initiate an immune response when administered to unrelated patients. These characteristics allow us to produce large quantities of off-the-shelf MLC-based product candidates from a few donors for use in thousands of unrelated recipients, with consistent, well-defined therapeutic properties, batch-release criteria and established potency assays, all with accompanying manufacturing and distribution economies-of-scale.

 



 

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Our Lead Product Candidates

We have developed product candidates to target specific disease states by understanding and capitalizing on the mechanisms of action of our proprietary MLCs, including induction of new tissue growth, new blood vessel network formation, reduction in fibrosis and scarring, and immunomodulation.

A summary of our lead programs, their corresponding stage of development, and strategic collaboration status are captured in the table below.

Tier 1 Programs

 

Product
Candidates

 

Programs

 

Collaborator/
Geographic
Rights

 

Stage of Development

 

Anticipated Milestones

MPC-150-IM

  Class II/III CHF   Teva (Global)  

•    Phase 2 trial completed

•    Phase 3 trial enrollment ongoing

•    Enrollment of the patients for first interim analysis completed

 

•    Outcome of first Phase 3 interim analysis for safety and efficacy in first quarter 2016

•    Second interim analysis for futility, resizing and possible overwhelming efficacy in first quarter 2017

•    Phase 3 trial complete in 2018 with potential to accelerate based on second interim analysis

  End-stage CHF  

Teva

(Global)

 

•    Phase 2a trial completed

•    Phase 2b trial enrollment ongoing, funded by the NIH

 

•    Phase 2b trial results expected in middle 2017

MPC-06-ID

  CLBP  

Proprietary

(Global)

 

•    Phase 2 trial completed

•    Phase 3 trial enrollment ongoing

 

•    Complete enrollment of first Phase 3 trial in third quarter 2016

•    Design being finalized for interim analysis in fourth quarter 2016

•    Phase 3 program complete in first half 2018

TEMCELL/

MSC-100-IV

  Acute GVHD   JCR (Japan)  

•    JCR received full approval in September 2015

 

•    Launch in Japan in first quarter 2016

  Acute steroid-refractory GVHD   Proprietary (Global, ex-Japan)  

•    Enrollment ongoing for U.S. pediatric Phase 3 trial

 

•    U.S. Phase 3 pediatric trial top-line results from an interim analysis in third quarter 2016, positive results may support BLA filing by end of 2016

•    Complete recruitment of Phase 3 trial in fourth quarter 2016

•    Top-line results of Phase 3 trial in first quarter 2017

MPC-300-IV

  Rheumatoid arthritis (biologic refractory)   Proprietary (Global)  

•    Phase 2 trial ongoing

•    First cohort enrollment completed

•    Second cohort enrolling

 

•    6 month data for first cohort by the end of 2015

•    Second cohort results in first half 2016

  Diabetic kidney disease   Proprietary (Global)  

•    Phase 2 trial ongoing, enrollment completed

 

•    Phase 2b/3 trial design ongoing

 

All time periods refer to calendar year periods.

Tier 2 Programs

 

Product Candidates

  

Programs

   Collaborator/
Geographic
Rights
 

Stage of Development/

Anticipated Milestones

MPC-25-IC

   Acute cardiac ischemia    Teva

(Global)

 

•    Phase 2 trial ongoing

MPC-25-Osteo

   Spinal fusion    Proprietary
(Global)
 

•    Phase 2 trial completed

•    Phase 3 trial design ongoing

MPC-CBE

   Bone marrow transplantation (BMT)    Teva
(Global)
 

•    Phase 3 trial ongoing

MSC-100-IV

   Crohn’s disease (biologic refractory)    Proprietary

(Global)

 

•    Phase 3 trial ongoing

 

All time periods refer to calendar year periods.

For product registration purposes, Phase 3 programs may require more than one trial.

 



 

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MPC-150-1M for CHF

MPC-150-IM is our Phase 3 product candidate partnered with Teva, which is being developed as a treatment for both advanced and end-stage CHF. With respect to advanced CHF, we have completed a Phase 2 trial in Class II/III CHF where results showed that a single 150 million dose treatment with MPC-150-IM, as compared to control and other dose levels, led to the greatest positive effects on clinical outcomes, including significant improvement in left ventricular volumes, and prevention of any heart failure-related major adverse cardiovascular events, or HF-MACE, over 3 years. The most substantial benefit seen in MPC-150-IM treated patients was in the subset with the greatest contractile deficiency and advanced heart failure. Advanced heart failure patients represent a major unmet clinical need which continues to exist despite recent advances in drug therapy, and where we believe product success would result in highest reimbursement.

Teva recently completed discussions with the FDA, during which important changes to the Phase 3 program for advanced CHF using MPC-150-IM were agreed to. In particular, the total number of subjects to be recruited for the ongoing Phase 3 trial, using a time to first event analysis of HF-MACE as the primary endpoint, will be reduced from approximately 1,730 to 1,165. Additionally, a second interim analysis will be performed in the ongoing Phase 3 trial when 50% of the HF-MACE have occurred. We expect the outcome of the first Phase 3 interim analysis for safety and efficacy in the first quarter of 2016. We expect the second interim analysis for futility, resizing and possible overwhelming efficacy in the first quarter of 2017.

A confirmatory study is planned to be conducted in parallel in a similar patient population of approximately 500 subjects using recurrent HF-MACE as the primary endpoint. The use of recurrent HF-MACE as a primary endpoint in the confirmatory study is supported by a new analysis of the completed Phase 2 trial, where patients treated with MPC-150-IM had no HF-MACE over 36 months of follow-up, compared with 11 recurrent HF-MACE in the control group (p<0.001, log rank test). The clinical data from these two studies will be supportive to each other for full product approval. Based on our discussions with the FDA, we believe that positive clinical data from these two studies will be sufficient for product approval.

With respect to end-stage CHF, a Phase 2b trial of MPC-150-IM has been initiated by the Cardiothoracic Surgical Trials Network, or CSTN, and funded by the U.S. National Institutes of Health, or NIH, in 120 patients with end-stage CHF requiring mechanical support by a left ventricular assist device, or LVAD. This trial builds on an earlier Phase 2a clinical trial that demonstrated feasibility and safety, and suggested that a single low-dose injection of our proprietary MLCs improved cardiac function and had an early benefit on survival. Results of this new Phase 2b trial are expected in mid-2017.

If we receive BLA approval for MPC-150-IM, we expect to participate in a market for CHF that in the U.S. alone has 5.7 million adult patients and 870,000 new diagnoses per year.

MPC-06-ID for CLBP

MPC-06-ID is our proprietary Phase 3 product candidate for the treatment of CLBP resulting from degenerative disc disease, or DDD. In a Phase 2 study, compared to controls, MPC-06-ID treatment resulted in a significantly greater proportion of patients achieving reduced back pain and improved back function over 24 months of follow-up. Based upon meetings with the FDA, we will conduct two double-blinded Phase 3 trials with approximately 330 patients each, and we expect to complete enrollment of the first of the two Phase 3 trials in the third quarter of 2016. We expect to complete the Phase 3 program in the first half of 2018. The first of these trials has been initiated. Because current treatments for CLBP focus only on pain relief rather than addressing the underlying degenerative nature of the disease, we believe MPC-06-ID could fill an unmet treatment gap for the large population of patients with DDD.

MSC-100-IV for aGVHD

Our third Tier 1 product is an intravenously-delivered MLC product candidate for the treatment of aGVHD following allogeneic bone marrow transplantation, or BMT. JCR, our partner in Japan for aGVHD, received

 



 

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Japanese regulatory approval for TEMCELL in September 2015. Decisions by Japanese regulators on price reimbursement for JCR’s product TEMCELL are pending. During the first quarter 2016, we expect that JCR will launch TEMCELL in Japan. We are developing an MLC product candidate for the treatment of aGVHD globally, outside Japan. Data from a pediatric Expanded Access Program, or EAP, in the United States, from the first 160 children treated for severe, multi-line refractory aGVHD, showed a significant response and survival benefit. A pediatric Phase 3 trial has commenced and is actively enrolling in the U.S. We expect top-line results from an interim analysis of this trial in the third quarter of 2016, and top-line results of the completed trial in the first quarter 2017. Based on our discussions with the FDA, we believe positive data from this trial will be sufficient for conditional approval in the United States, and an additional pediatric or adult Phase 3 trial will be required for full product approval. Interim analysis may support BLA filing by the end of 2016.

MPC-300-IV for Chronic Inflammatory Conditions

MPC-300-IV, our fourth Tier 1 product, is an intravenously-delivered immunomodulatory product candidate for the treatment of chronic inflammatory conditions, including biologic-refractory rheumatoid arthritis and diabetic kidney disease. A Phase 2 trial of MPC-300-IV is ongoing in patients with biologic-refractory rheumatoid arthritis, where the first dose cohort has completed recruitment, the second dose cohort is actively enrolling, and where 6 month results for the first cohort are expected by the end of 2015 and results from the second cohort are expected during the first half of 2016. A Phase 2 trial of MPC-300-IV in insufficiently controlled type 2 diabetes patients showed a dose-dependent response on improvement in HbA1c, or hemoglobin A1c, the primary measure of glycemic control for diabetes, which may be consistent with an immunomodulatory effect on disease pathogenesis. In addition, a Phase 2 trial of MPC-300-IV in patients with diabetic kidney disease has completed recruitment and six months of follow-up, and we announced the three month primary endpoint as well as six month results in June 2015.

Competitive Strengths

We hold a leadership position in regenerative medicine and believe we have more product candidates in late stage clinical trials than any other stem cell based regenerative medicine company. The key strengths underpinning our leadership position include:

 

    Disruptive technology platform. Our proprietary MLC platform allows us to develop product candidates that have the potential to significantly improve the treatment of a number of serious and debilitating conditions. Unlike other stem cell technologies, MLCs are allogeneic, “off-the-shelf” therapies that can be developed from a small number of healthy adult donors and administered to many patients, with batch-to-batch consistency, commercial scale capabilities and predictable therapeutic properties, without any material immune response in patients.

 

    Broad portfolio of distinct and advanced product candidates. We have advanced a significant number of clinical product candidates that target a wide range of diseases, including five Phase 3 or Phase 3-ready product candidates, and potentially the first allogeneic industrially manufactured product candidate to be approved in the United States, all backed by an extensive patient safety data file.

 

    Target markets with high unmet needs where technology shows greatest prospects. Our strategy is to develop product candidates that target the significantly advanced stages of certain diseases where specific sub-populations have high unmet medical needs. As a result, we will potentially benefit from accelerated development pathways and attractive pricing, as well as the opportunity to expand over time into broader patient populations with less severe stages of a targeted disease.

 

    Scalable manufacturing capabilities. We have developed proprietary manufacturing processes that we expect will enable production at commercial scale with reproducibility and batch-to-batch consistency. To further support our efforts, we have established a strategic alliance with Lonza, a global leader in biopharmaceutical manufacturing, and we are currently manufacturing in their state-of-the-art facility in Singapore on an exclusive basis for cell therapies.

 



 

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    Intellectual property leadership. We have a large patent portfolio of issued and pending claims covering compositions of matter and methods of use for MLCs, as well as for elements of our manufacturing processes. As of August 31, 2015, we had 72 patent families, including 661 patents or patent applications. We believe our intellectual property position provides us with substantial competitive advantages for the commercial development of regenerative medicine products.

 

    Strategic alliances. We have established strategic relationships that provide clinical development, manufacturing and commercial capabilities, as well as financial support to advance our product candidates. These alliances include Teva, Lonza and JCR. We will evaluate and, where appropriate, enter into additional collaborations with industry leading biopharmaceutical and other organizations to further advance our product candidate portfolio and to gain access to product development and funding support.

 

    Experienced management team. Our CEO, Dr. Silviu Itescu, is a pioneer in the study and clinical development of stem cell therapeutics, and a globally recognized leader in the field of regenerative medicine. Our broader management team, through prior employment at leading drug development companies and regulatory agencies, has substantial experience in the clinical development, manufacturing, regulatory management and commercialization of biopharmaceuticals.

Recent Developments

In April 2015, Celgene Alpine Investment Company III, LLC, a member of the Celgene Corporation Group, or Celgene, purchased 15.3 million ordinary shares in Mesoblast Limited for a consideration of A$58.5 million (US$45 million) and agreed to a six-month right of first refusal with respect to our proprietary mesenchymal lineage adult stem cell product candidates for the prevention and treatment of aGVHD, certain oncologic diseases, inflammatory bowel diseases, and organ transplant rejection. On October 16, 2015, we announced that we agreed with Celgene to extend Celgene’s right of first refusal for an additional six months.

Risk Factors

Our business and the successful execution of our strategies are subject to certain risks and uncertainties related to our business and our industry, regulation of our business and our corporate structure, doing business in Australia and ownership of our ADSs, our trading market and this offering. The risks and uncertainties related to our business and our industry include, but are not limited to:

 

    We have never generated any revenue from product sales and may never be profitable.

 

    Our product candidates are based on our novel MLC technology, which makes it difficult to predict the time and cost of product development and subsequently obtaining regulatory approval. To date, no industrially manufactured stem cell products have been approved in the United States.

 

    We may encounter substantial delays in our clinical studies or we may fail to demonstrate safety and efficacy, particularly in multi-national clinical trials, to the satisfaction of applicable regulatory agencies.

 

    We have incurred net operating losses and as of June 30, 2015, have an accumulated deficit of US$264.0 million since our inception. We anticipate that we will continue to incur substantial operating losses for the foreseeable future. It is possible that we may never achieve or sustain profitability.

 

    Even if this offering is successful, we will 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.

 



 

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    We may find it difficult to enroll patients in our clinical trials, especially for indications such as aGVHD which have a limited patient population. As such, this could delay or prevent development of our product candidates.

 

    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.

 

    We are substantially dependent on the expertise of Teva and JCR to develop and commercialize our product candidates in certain indications. If we fail to maintain our current strategic relationships with Teva and JCR, our business, commercialization prospects and financial condition may be materially adversely affected.

 

    We rely on Lonza as our sole supplier and manufacturer of certain of our product candidates. Our business could be harmed if significant quantities of our product candidates cannot be manufactured at acceptable quality levels or costs.

 

    We may not be able to adequately protect our proprietary technology.

See “Risk Factors” and “Forward-Looking Statements” for a more detailed discussion of these and other risks and uncertainties that we may face.

Our Corporate Information

We were formed in 2004 as an Australian company. In December 2004 we completed an initial public offering of our ordinary shares and listing of these shares on the Australian Securities Exchange, or the ASX, under the symbol “MSB.” In 2005, our ADSs began to be quoted on the Over-The-Counter Market under the symbol “MBLTY.” In 2010, we acquired Angioblast Systems, Inc., a Delaware corporation created by our founder and Chief Executive Officer, Dr. Silviu Itescu, and previously owned in part by Mesoblast Limited, focusing on the development of therapeutic products based on MPCs for certain applications. In October 2013, we acquired the culture-expanded, or cells cultured with media that provides nutrients to allow them to divide and replicate, mesenchymal stem cell, or MSC, assets of Osiris Therapeutics, Inc.

Our principal executive offices are located at Level 38, 55 Collins Street, Melbourne 3000, Australia. Our telephone number at this address is +61 (3) 9639-6036. Our office in the United States is located at Level 3, 505 Fifth Avenue, New York, NY 10017. Our telephone number at this address is (212) 880-2060. Our website is www.mesoblast.com. Information contained on our website is not part of this prospectus. Our agent for service of process in the United States is our wholly-owned subsidiary, Mesoblast, Inc., a Delaware corporation, located at Level 3, 505 5th Ave, New York, NY 10017.

Implications of Being a Foreign Private Issuer

We qualify as a “foreign private issuer” as defined in Section 405 of the Securities Act of 1933, as amended. As a foreign private issuer, we are exempt from certain rules under 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. We intend to take advantage of these exemptions as a foreign private issuer. We also qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, but we do not intend to take advantage of the benefits and exemptions available to us as such.

 



 

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THE OFFERING

 

ADSs offered by us

5,742,510 ADSs

 

ADSs to be outstanding immediately after this offering

6,016,107 ADSs

 

Ordinary shares to be outstanding immediately after this offering

365,710,279 ordinary shares (370,017,159 ordinary shares, if the underwriters exercise their over-allotment option in full)

 

Over-allotment option

We have granted the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to 861,376 additional ADSs from us at the public offering price less the underwriting discount to cover over-allotments, if any.

 

The ADSs

Each ADS represents five ordinary shares, no par value. The ADSs are evidenced by ADRs issued by the depositary.

 

  The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

Use of proceeds

We anticipate that the net proceeds from this offering will be approximately US$60.0 million, or approximately US$69.7 million if the underwriters exercise their option to purchase additional ADSs in full, at an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We currently intend to use the net proceeds from this offering as follows:

 

   

approximately $24.0 million to support commercial manufacturing requirements for our Tier 1 and Tier 2 product candidates, through development and implementation of our proprietary manufacturing processes and expansion of our manufacturing capabilities and resources, including, but not limited to, finalizing the development and implementation of the 3D bioreactor-based manufacturing of our products, finalizing the development of our proprietary fetal bovine serum, or

 



 

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FBS, -free media, and expansion of the scale of manufacturing to support commercial production of our products at our collaborator Lonza;

 

    approximately $26.0 million to fund the costs of ongoing Clinical Tier 1 Programs, including approximately $6.0 million for our Phase 3 clinical trial of MSC-100-IV for the treatment of aGVHD; approximately $9.0 million for our Phase 3 clinical trial of MPC-06-ID for the treatment of CLBP; and approximately $11.0 million for our Phase 2b/3 clinical trial of MPC-300-IV for the treatment of biologic-refractory rheumatoid arthritis and diabetic kidney disease; and

 

    approximately $10.0 million for general and administrative expenses (including personnel-related costs), working capital and other general corporate purposes, including funding general corporate overhead and the costs of operating as a public company, and general research and development expenses associated with our technology platform and earlier stage product development costs.

 

  See “Use of Proceeds.”

 

Depositary

JP Morgan Chase Bank, N.A.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in the ADSs.

 

Lock-up

We have agreed for a period of 180 days after the date of this prospectus not to sell, transfer or otherwise dispose of any of our ordinary shares, ADSs or similar securities, subject to certain exceptions. Furthermore, each of our directors, our chief executive officer, our chief financial officer and Cephalon, Inc. have agreed to a similar 180-day lock-up. See “Underwriting.”

 

Listing

We have applied to list our ADSs on the NASDAQ Global Select Market.

 

Proposed trading symbol

“MESO”.

The number of ordinary shares to be outstanding following the offering is based on 336,997,729 fully paid ordinary shares outstanding at June 30, 2015, and excludes:

 

    the exercise of employee options outstanding at June 30, 2015 to purchase 18,369,078 fully paid ordinary shares issuable upon at a weighted average exercise price of A$5.25 per ordinary share;

and includes:

 

    an aggregate of 3,500,000 ordinary shares at a weighted average exercise price of A$6.78 held in trust as part of our loan funded share plan, or LFSP.

Pursuant to our LFSP, we make limited recourse, interest free loans to non-executive employees to purchase our ordinary shares. We generally issue new ordinary shares (rather than purchasing such shares in the open

 



 

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market) and place such shares in a trust to be held on behalf of the employee. The trustee holds the corresponding ordinary shares on behalf of the employee until the employee chooses to settle the loan pertaining to such shares and all vesting conditions have been satisfied, at which point ownership of such shares is fully transferred to the employee. See “Remuneration—Non-CEO Executive Remuneration—Australian Loan Funded Share Plan (LFSP).”

Except as otherwise indicated, all information contained in this prospectus assumes:

 

    no exercise of options after June 30, 2015; and

 

    no exercise by the underwriters of their right to purchase up to an additional 861,376 ADSs from us to cover over-allotments.

 



 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated financial data presented below as of and for the years ended June 30, 2015, 2014 and 2013 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected in the future. The summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

Our financial statements are presented in U.S. dollars and have been prepared in accordance with IFRS.

 

    Year Ended June 30,  
      US$ 2015         US$ 2014         US$ 2013    
   

(in thousands except per share
information)

 

Consolidated Income Statement Data:

     

Revenue:

     

Commercialization revenue

    15,004        15,004        18,685   

Milestone revenue

    2,000        —          —     

Interest revenue

    2,757        8,386        10,616   
 

 

 

   

 

 

   

 

 

 

Revenue from continuing operations

    19,761        23,390        29,301   

Other income:

     

Foreign exchange gains

    10,478        —          —     

Research & development tax incentive

    4,418        7,775        5,495   

Other revenue

    407        —          —     

Rental income

    96        —          —     

Release of excess provision for services

    —          2,344        —     
 

 

 

   

 

 

   

 

 

 

Other income

    15,399        10,119        5,495   
 

 

 

   

 

 

   

 

 

 

Total revenue from continuing operations

    35,160        33,509        34,796   

Expenses from continuing operations:

     

Research and development

    (62,649     (50,929     (48,513

Manufacturing commercialization

    (23,783     (25,434     (23,082

Management and administration

    (29,636     (24,403     (22,899

Finance costs

    (8,506     (4,078     —     

Other expenses

    (6,830     (4,195     (952
 

 

 

   

 

 

   

 

 

 

Total expenses from continuing operations

    (131,404     (109,039     (95,446

Loss before income tax

    (96,244     (75,530     (60,650
 

 

 

   

 

 

   

 

 

 

Income tax expense

    —          (4     (1,470
 

 

 

   

 

 

   

 

 

 

Loss attributable to the owners of Mesoblast Limited

    (96,244     (75,534     (62,120
 

 

 

   

 

 

   

 

 

 

Losses per share from continuing operations attributable to the ordinary equity holders of Mesoblast Limited:

    Cents        Cents        Cents   

Basic—losses per share(1)

    (29.99     (23.65     (21.02

Diluted—losses per share(1)

    (29.99     (23.65     (21.02

 

(1) Please refer to Note 20 to our consolidated financial statements included elsewhere in this prospectus for a calculation of basic and diluted losses per share.

 



 

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     As of June 30,  
     Actual      As adjusted(1)  
     US$ 2015      US$ 2015  
     (in thousands)  

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

     110,701         170,738   

Total current assets

     122,460         182,497   

Total assets

     781,766         841,803   

Total current liabilities

     48,407         48,407   

Total liabilities

     313,779         313,779   

Total equity

     467,987         528,024   

 

(1) The unaudited as adjusted consolidated balance sheet data has been adjusted to reflect the issuance and sale of 28,712,550 ordinary shares in the form of ADSs by us in this offering and our receipt of the estimated net proceeds from such issuance and sale in this offering, each based on an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 



 

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RISK FACTORS

You should carefully consider the risks described below and all other information contained in this prospectus 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 ADSs could decline, and you may lose part or all of your investment. This prospectus 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 prospectus.

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. As of June 30, 2015, we had a comprehensive loss of US$122.0 million. Our net loss for the year ended June 30, 2015 was US$96.2 million. As of June 30, 2015, we have an accumulated deficit of US$264.0 million since our inception. We do not know whether or when we will become profitable. To date, we have not generated any revenues from the sale of products. Our losses have resulted principally from costs incurred in our manufacturing and clinical development activities.

We anticipate that our expenses will increase in the future as we move toward commercialization, including the scaling up of our manufacturing activities. 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 potential licensing revenue from sales of TEMCELL by JCR in Japan), 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:

 

    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 infrastructure;

 

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    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 and know-how;

 

    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, or the EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

Even if this offering is successful, we will 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, 2015, our cash and cash equivalents were US$110.7 million. We are in the process of finalizing our financial closing and reporting process for the first quarter ended September 30, 2015. We reported that we had approximately US$77.8 million in cash and cash equivalents as of September 30, 2015. This number is unaudited and does not present all information necessary for an understanding of our financial condition as of September 30, 2015 and our results of operations for the three months ended September 30, 2015. PricewaterhouseCoopers has not audited, reviewed, compiled or performed any procedures with respect to these results and does not express an opinion or any other form of assurance with respect thereto. We anticipate making a public announcement of our results of operations for the first quarter ended September 30, 2015 on or about December 15, 2015. 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, even if this offering is successful, 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:

 

    continue the research and clinical development of our product candidates, including MPC-150-IM (Class II-IV CHF), MPC-06-ID (CLBP), MSC-100-IV (aGVHD) and MPC-300-IV (inflammatory conditions) product candidates;

 

    initiate and advance our product candidates into larger and more expensive clinical studies, including a Phase 3 clinical trial for our MPC-25-Osteo (spinal fusion) product candidate;

 

    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;

 

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    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;

 

    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.

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. 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.

Risks Related to Clinical Development and Regulatory Review and Approval of Our Product Candidates

Our product candidates are based on our novel 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 stem cell products have been approved in the United States.

We have not commercially marketed, distributed or sold any products. 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

 

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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 other industrially manufactured 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, our licensed product in Japan, we have never obtained regulatory approval for a product. We must conduct extensive testing of our product candidates to demonstrate their safety and efficacy, including both preclinical animal testing and 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 we or they 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 collaborator may be prevented or delayed in obtaining marketing approval for our product candidates.

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 the expected clinical milestones outlined in this prospectus. A failure can occur at any stage of testing. Events that may prevent successful or timely commencement, enrollment or completion of clinical development include:

 

    delays in raising, or inability to raise, sufficient capital to fund the planned trials;

 

    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 clinical research organizations, or CROs, and clinical trial sites;

 

    delays in obtaining required Institutional Review Board, or IRB, approval at each clinical trial site;

 

    delays in recruiting suitable clinical sites and patients (i.e., subjects) to participate in clinical trials;

 

    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, or 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;

 

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    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 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 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, especially for indications such as aGVHD which are designated as orphan or niche markets, 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. More specifically, certain of our product candidates, including MSC-100-IV for aGVHD, target indications with relatively small patient populations, which can prolong the clinical trial timeline for the regulatory process if sufficient patients cannot be enrolled in a timely manner. 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.

In addition, our planned clinical trials targeting more prevalent indications, such as our product candidates for CLBP, MPC-06-ID, and CHF, MPC-150-IM, may require the recruitment of several thousand patients. 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:

 

    size of the patient population, particularly in orphan diseases;

 

    severity of the disease under investigation;

 

    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;

 

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    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 participate in 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 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:

 

    difficulty in establishing or managing relationships with physicians and CROs;

 

    different standards 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:

 

    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, or 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 treat 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, MSC-100-IV, which will focus on steroid-refractory aGVHD, and MPC-CBE, which will focus on bone marrow transplants after high dose chemotherapy. 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 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

 

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regulatory approval (other than TEMCELL, our licensed product 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 frequently and may continue to change in the future. For example, in November 2014, Japan’s parliament enacted new legislation to promote the safe and accelerated development of treatments using stem cells. The new Pharmaceuticals, Medical Devices and Other Therapeutic Products Act, or PMD Act, establishes a framework for expedited approval in Japan for certain regenerative medical products. As this is a new regulation, it is not clear yet what impact it will have on the operation of our business. 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 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:

 

    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, or 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 for use in 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

 

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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.

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 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, including both federal and state requirements in the United States. 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, or 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:

 

    restrictions on the marketing or manufacturing of the product candidates, withdrawal of the product candidates from the market, or voluntary or mandatory product recalls;

 

    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;

 

    product seizure or detention, or refusal to permit the import or export of products; and

 

    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.

 

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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, or 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 ordinary shares. 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 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. We may in the future seek fast track designation for 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 a patient population of fewer than 200,000 in the United States, or 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. In the European Union, or 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

 

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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 this or other product candidates in other indications or in other jurisdictions, such as for MSC-100-IV in the EU, 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 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, in any event, 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 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 new pathway could allow competitors to reference data from innovator biological products already approved after 12 years from the time of approval. In his proposed budget for fiscal years 2014 and 2015, President Obama proposed to cut this 12-year period of exclusivity down to seven years. The President has also proposed to prohibit additional periods of exclusivity due to minor changes in product formulations, a practice often referred to as “evergreening.” 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

 

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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 Our Strategic Alliances

We are substantially dependent on the expertise of Teva and JCR to develop and commercialize our product candidates in certain indications. If we fail to maintain our current strategic relationships with Teva and JCR, our business, commercialization prospects and financial condition may be materially adversely affected.

We have entered into agreements with Cephalon, Inc. (a wholly owned subsidiary of Teva), or Cephalon, and JCR, under which Teva and JCR are responsible for certain development and commercialization activities related to the respective product candidates. Teva is responsible for Phase 3 trials, and for the commercialization (excluding manufacturing) of certain of our stem cell product candidates in specified indications, namely in the cardiovascular, central nervous system and bone marrow transplant fields. Currently, we are collaborating with Teva, and Teva has commenced a Phase 3 trial for our MPC-150-IM product candidate for CHF. JCR is responsible for the development and commercialization of TEMCELL for the treatment of aGVHD in the Japanese market. The prospects for these product candidates to be successfully developed and commercialized depend on the expertise and financial strength of Teva and JCR.

Our collaborations with Teva or JCR may not be successful, and we may not realize the expected benefits from such collaborations, due to a number of important factors, including but not limited to the following:

 

    Teva or JCR may terminate their agreement with us as described below prior to completing development or commercialization of our product candidates, in whole or in part, adversely impacting our potential approval and revenue from licensed products;

 

    the timing and amount of any payments we may receive under these agreements will depend on, among other things, the efforts, allocation of resources, and successful commercialization of the relevant product candidates by Teva or JCR, as applicable, under our agreements;

 

    the timing and amounts of expense reimbursement that we may receive are uncertain; or

 

    Teva or JCR may change the focus of their development or commercialization efforts or pursue or emphasize higher-priority programs.

In particular, with the exception of the cardiovascular field, in which Teva has committed to conduct and fund the Phase 3 clinical trial in CHF at least through the first interim analysis, Teva has the right to terminate their agreement with us upon advance notice to us. JCR has the right to terminate their agreement with us upon advance notice to us.

A failure by Teva or JCR to successfully develop our product candidates which are covered by the collaboration, or commercialize such, or the termination of our agreement with Teva or JCR, as applicable, may have a material adverse effect on our business, results of operations and financial condition.

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.

 

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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 other biopharmaceutical companies for the development and/or commercialization of our current and future product candidates. For example, in April 2015, we entered into an agreement with Alpine Investment Company III, LLC, a member of the Celgene Corporation Group, or Celgene, under which Celgene purchased 15.3 million of our ordinary shares for US$45 million and received a six-month right of first refusal with respect to our product candidates for the prevention and treatment of aGVHD, certain oncologic diseases, inflammatory bowel diseases, and organ transplant rejection. On October 16, 2015, we announced that we have agreed with Celgene to extend Celgene’s right of first refusal for an additional six months. 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 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:

 

    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;

 

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    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;

 

    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 and we are in the process of establishing a new manufacturing facility and processes for clinical supply for our MSC product candidates. 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 MPC product candidates in our manufacturing facilities, owned by Lonza Walkersville, Inc. and Lonza Bioscience Singapore Pte. Ltd., collectively referred to as Lonza. With respect to MSCs, successful clinical production of MSCs was established prior to our acquisition of the MSC assets. We are now establishing MSC production in a Lonza facility in Singapore. 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

 

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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, or 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, 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:

 

    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 foreign 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;

 

    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.

 

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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 under our relationship with Teva or otherwise.

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. For example, under our collaboration with Teva, we are obligated to supply our product candidates subject to that collaboration at our expense. In return, we are paid a transfer price equal to an escalating double-digit percentage of Teva’s net sales price for our product candidates. 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 general market availability third parties to provide various “devices” or “carriers” for some of our programs (e.g., the catheter for use with MPC-150-IC, the collagen sponge used in spinal fusion, 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, or FBS. This material comes from limited sources, and as a result is expensive. As a result, we or

 

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our collaborators may not be able to obtain sufficient quantities of our 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:

 

    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 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

 

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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 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 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 for cell count, viability and appearance. 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 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:

 

    the efficacy and safety of the product candidate, as demonstrated in clinical trials;

 

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    the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the product, including any warnings 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; and

 

    the effectiveness of our, and our collaborators’, sales and marketing efforts.

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, 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 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:

 

    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. Examples of

 

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potential competitors for our Tier 1 products include, but are not limited to, Novartis Pharmaceuticals and Servier Laboratories for CHF; Johnson & Johnson, Pfizer, Inc. and ISTO Technologies for CLBP; Amgen Inc., Pfizer, Inc. and Johnson & Johnson for aGVHD; and NephroGenex, Inc. and AbbVie Inc. for diabetic nephropathy. Many of our potential competitors, potentially including the aforementioned, 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, or 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.

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:

 

    a covered benefit under its health plan;

 

    safe, effective and medically necessary;

 

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    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, where our licensee, JCR is awaiting a decision on price reimbursement from Japanese regulators, 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 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 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, evidenced by JCR receiving full approval for the first “allogeneic” cell-based product in Japan, 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, our pricing and reimbursement may be adversely affected.

 

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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.

Certain of our research and product development focuses on treatments for small patient populations, including orphan or niche markets. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with 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 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 and Switzerland, and we have a collaborator, JCR, with rights to develop and distribute products based on our MSC technology 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 into such markets. We may, therefore, 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. If any of our product candidates are approved for commercialization, we may enter into agreements with third parties to market them on 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:

 

    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;

 

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    potential import and export issues 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;

 

    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, 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 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:

 

    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;

 

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    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 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

 

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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, or the 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.

Recent 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.

On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The USPTO has and continues to develop and implement regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act. The full effect of these changes are currently unclear as the USPTO has not yet adopted all pertinent final rules and regulations, the courts have yet to address these provisions and the applicability of the Leahy-Smith Act and new regulations on specific patents, including our patents discussed herein, have not been determined and would need to be reviewed. Accordingly, it is not yet clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. As a result, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents, all of which could have a material adverse effect on our business and financial condition.

On June 13, 2013, the U.S. Supreme Court decision in Association for Molecular Pathology v. Myriad Genetics, Inc., held that isolated DNA sequences are not patentable because they constitute a product of nature. The Supreme Court did not address stem cells in particular, and as a result, it is not yet clear what, if any, impact this recent Supreme Court decision or future decisions will have on the operation of our business.

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

 

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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 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, 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 in the healthcare industry are subject to extensive laws

 

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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 will be a listed company in the United States following the completion of this offering, 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 in 2013, which we are still working to integrate into our business. 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:

 

    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, 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:

 

    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 Australian corporate taxation. As of June 30, 2015, our cumulative operating losses have a potential tax benefit of $69.9 million at local tax rates. 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. 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. Our carry forward net operating losses in the U.S. first start to expire in 2032. In addition, we are eligible for certain research and development tax incentive refundable credits in Australia which may increase our available cash flow. We currently project to benefit from these incentives in future taxable years. 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. If these incentives are revoked or modified or if we are no longer eligible for such incentives, our business, results of operations and financial condition may be adversely affected.

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’

 

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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:

 

    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, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or 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, as amended, the ACA, 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, or 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.

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

 

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programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state laws.

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, or 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 Data Protection Directive, Canada’s Personal Information Protection and Electronic Documents Act and other data protection, privacy and similar national, state/provincial and local laws 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. We participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under these anti-corruption laws. 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.

 

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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.

Risks Related to Ownership of Our ADSs, Our Trading Market and This Offering

The market price and trading volume of the ADSs may be volatile and may be affected by economic conditions beyond our control.

The market price of the ADSs may be highly volatile and subject to wide fluctuations. In addition, the trading volume of the ADSs may fluctuate and cause significant price variations to occur. If the market price of the ADSs declines significantly, you may be unable to resell your ADSs at or above the offering price, if at all. We cannot assure you that the market price of the ADSs will not fluctuate or significantly decline in the future.

Some specific factors that could negatively affect the price of the ADSs or result in fluctuations in their price and trading volume include:

 

    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 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 stocks; and

 

    conditions in the U.S. or Australian financial markets or changes in general economic conditions.

 

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An active trading market for the ADSs may not develop in the United States and the trading price for our ordinary shares may fluctuate significantly.

Our ADSs began trading on the over-the-counter market in 2005. Since trading began on this market, our ADSs have not traded on many days and the highest trading volume recorded in a single day was 24,000 ADSs. If an active public market in the United States for the ADSs does not develop after this offering, the market price and liquidity of the ADSs may be materially and adversely affected. While we have applied for the listing of the ADSs on the NASDAQ Global Select Market, a liquid public market in the United States for the ADSs may not develop or be sustained after this offering. The initial public offering price for the ADSs will be determined by negotiation among us and the underwriters, and the price at which the ADSs are traded after this offering may decline below the initial public offering price, which means you may experience a decrease in the value of your ADSs regardless of our operating performance or prospects. 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. Investors purchasing the ADSs in this offering will suffer immediate and substantial dilution.

The public offering price for the ADSs will be substantially higher than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. If you purchase ADSs in this offering, you will incur substantial and immediate dilution in the net tangible book value of your investment. Net tangible book value per ordinary share represents the amount of total tangible assets less total liabilities, divided by the number of ordinary shares, respectively, then outstanding. To the extent that performance rights and options that are currently outstanding are exercised or converted, there will be further dilution in your investment. We may also issue additional ordinary shares, performance rights, options and other securities in the future that may result in further dilution of your ordinary shares. See “Dilution” for a calculation of the extent to which your investment will be diluted.

The dual listing of our ordinary shares and the ADSs following this offering may adversely affect the liquidity and value of the ADSs.

Following this offering and after the ADSs are listed on the NASDAQ Global Select Market, our ordinary shares will continue to be 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.

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 Singapore dollars, U.S. dollars and Australian dollars. Approximately 64% of our cash and cash equivalents as of June 30, 2015 were denominated in U.S. dollars and 36% 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 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.

Further, any significant change in the value of the Australian dollar may have a material adverse effect on the value of our ADSs in U.S. dollars. 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. To the extent that we need to convert U.S. dollars we

 

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receive from our initial public offering into Australian dollars for our operations, appreciation of the Australian dollar against the U.S. dollar would have an adverse effect on the Australian dollar amount we would receive from the conversion. Consequently, 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.

Future sales of our ordinary shares or ADSs, or the perception that such sales may occur, could depress the price of our ADSs.

After the completion of this offering, we expect to have 365,710,279 ordinary shares outstanding, including the shares underlying the ADSs we are selling in this offering, almost all of which may be resold in the public market immediately after this offering. We, all of our directors, our chief executive officer, our chief financial officer and Cephalon, Inc. have signed lock-up agreements for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release, material news or a material event relating to us and we have agreed with the underwriters that we will not release the lock-up on the shares owned by Celgene prior to its expiration in April 2016. See “Underwriting.”

The underwriters may, in their sole discretion and without notice, release all or any portion of the ordinary shares subject to lock-up agreements. As restrictions on resale end, the market price of our ADSs could drop significantly if the holders of these ordinary shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our ordinary shares, ADSs or other securities.

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, or 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

 

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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, or 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.

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 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 establish and 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, or the Sarbanes-Oxley Act, requires that, beginning with our annual report for the year ending June 30, 2017, 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. Although Section 404(b) of the Sarbanes-Oxley Act requires our independent registered public accounting firm to issue an annual report that addresses the effectiveness of our internal controls over financial reporting, we have opted to rely on the exemptions provided to us by virtue of being a foreign private issuer, and consequently will not be required to comply with SEC rules that implement Section 404(b) of the Sarbanes-Oxley Act until we file our second annual report with the SEC.

Our first Section 404(a) assessment will take place beginning with our annual report for the year ending June 30, 2017. As of the date of this filing, we have not designed and implemented controls to maintain appropriate segregation of duties in our manual and computer based business processes which could have a pervasive impact over the preparation of the financial statements. Specifically, we have limited accounting personnel to enable effective segregation of duties to allow for appropriate monitoring of financial reporting matters and internal control over financial reporting. Consequently we have determined there is a material weakness in the internal control over financial reporting. This material weakness did not result in material adjustments to the financial statements, however there is a reasonable possibility that a material misstatement of

 

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the annual financial statements would not have been prevented or detected on a timely basis due to the failure to design and implement appropriate segregation of duty controls.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, we will need to expend significant resources and provide significant management oversight. We have commenced the process of reviewing and improving our internal controls over financial reporting for compliance with Section 404(a) of the Sarbanes-Oxley Act. We have made efforts to improve our internal controls and accounting policies and procedures, including hiring new accounting personnel and engaging external temporary resources. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and divert management’s attention from other business concerns. These changes may not, however, be effective in maintaining the adequacy of our internal control.

If either we are unable to conclude that we have effective internal controls over financial reporting or, at the appropriate time, 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 will 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 be required to devote substantial time to new compliance initiatives.

As a company whose ADSs will be publicly traded in the United States, we will incur significant legal, accounting, insurance and other expenses that we did not previously incur. In addition, 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 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 will 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.

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.

 

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You 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.

We may be or become classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

Based on our business projections and the anticipated composition of our income and assets for the current and future years, we do not expect that we will be a “passive foreign investment company,” or PFIC, for the taxable year ending June 30, 2016. 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. 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 percentage 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 is 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. 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 this offering. 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 or any future taxable year. If we are treated as a PFIC for any taxable year, then U.S. holders

 

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generally would be subject to adverse U.S. federal income tax consequences (regardless of whether we continued to be a PFIC) unless a U.S. holder makes a “mark-to-market” election or a “Qualified Electing Fund” election. We intend to provide U.S. holders with the information necessary to make and maintain a “Qualified Electing Fund” election if we are treated as a PFIC for any taxable year. See “Taxation—Default PFIC Rules.”

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 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 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 ADSs will likely only occur if our ADS price appreciates. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchase the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

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.

Our management has discretion as to the use of the net proceeds from this offering, and such use may not produce income or increase the market price of our ADSs.

We intend to use the net proceeds of this offering to among other things, support commercial manufacturing requirements for our Tier 1 and Tier 2 product candidates, fund the costs of our ongoing clinical Tier 1 programs and for general and administrative expenses, working capital and other general corporate purposes, and general research and development expenses. However, our management will have considerable discretion in the

 

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application of the net proceeds received by us. For more information, see “Use of Proceeds.” You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds from this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. Moreover, the net proceeds from this offering may be placed in investments that do not produce income or that lose value.

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 no or 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. In the event securities or industry analysts initiate coverage, 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.

You may be subject to limitations on transfers of your ADSs.

Your 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 senior management and the experts named in this prospectus.

Several of our officers, directors and the experts named in this prospectus 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 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.

 

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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, or 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 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 and may further restrict the ability of our shareholders to obtain a premium from such transactions. See “Description of Share Capital—Change of Control.”

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. You should carefully review the summary of these matters set forth under the section entitled, “Description of Share Capital” as well as our Constitution, which is included as an exhibit to this registration statement to which this prospectus forms a part, prior to investing in the ADSs.

 

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FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements that relate to future events or our future financial performance and involve 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,” “targets,” “likely,” “will,” “would,” “could,” 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;

 

    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;

 

    our use of proceeds from this offering;

 

    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 prospectus 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 prospectus 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.

 

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This prospectus also contains third-party data relating to the biopharmaceutical market in Australia 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 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 prospectus relate only to events or information as of the date on which the statements are made in this prospectus. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We anticipate that the net proceeds from this offering will be approximately US$60.0 million, or approximately US$69.7 million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.10 per ADS would increase (decrease) the net proceeds of this offering by US$5.3 million, after deducting underwriting discounts and commissions.

The principal purposes of this offering are to increase our financial flexibility, create a U.S. public market for our ADSs in addition to our existing Australian public market thereby enhancing our access to public equity markets.

We currently intend to use the net proceeds from this offering as follows:

 

    approximately $24.0 million to support commercial manufacturing requirements for our Tier 1 and Tier 2 product candidates, through development and implementation of our proprietary manufacturing processes and expansion of our manufacturing capabilities and resources, including, but not limited to, finalizing the development and implementation of the 3D bioreactor-based manufacturing of our products, finalizing the development of our proprietary FBS-free media, and expansion of the scale of manufacturing to support commercial production of our products at our collaborator Lonza;

 

    approximately $26.0 million to fund the costs of ongoing Clinical Tier 1 Programs, including approximately $6.0 million for our Phase 3 clinical trial of MSC-100-IV for the treatment of aGVHD; approximately $9.0 million for our Phase 3 clinical trial of MPC-06-ID for the treatment of CLBP; and approximately $11.0 million for our Phase 2b/3 clinical trial of MPC-300-IV for the treatment of biologic-refractory rheumatoid arthritis and diabetic kidney disease; and

 

    approximately $10.0 million for general and administrative expenses (including personnel-related costs), working capital and other general corporate purposes, including funding general corporate overhead and the costs of operating as a public company, and general research and development expenses associated with our technology platform and earlier stage product development costs.

This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with certainty the particular uses for the net proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above. Due to the many variables inherent to the development of product candidates, we cannot currently predict the stage of development we expect the net proceeds of this offering to achieve for our clinical trials and product candidates.

As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds. Although we may use a portion of the net proceeds of this offering for the acquisition or licensing, as the case may be, of additional technologies, other assets or businesses, we have no current understandings, agreements or commitments to do so.

We are in the process of finalizing our financial closing and reporting process for the first quarter ended September 30, 2015. We reported that we had approximately US$77.8 million in cash and cash equivalents as of September 30, 2015. This number is unaudited and does not present all information necessary for an understanding of our financial condition as of September 30, 2015 and our results of operations for the three months ended September 30, 2015. PricewaterhouseCoopers has not audited, reviewed, compiled or performed any procedures with respect to these results and does not express an opinion or any other form of assurance with respect thereto. We anticipate making a public announcement of our results of operations for the first quarter ended September 30, 2015 on or about December 15, 2015. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments.

 

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PRICE RANGE OF OUR ORDINARY SHARES

The following tables present, for the periods indicated, the high and low market prices for our ordinary shares reported on the ASX under the symbol “MSB” for the periods indicated in Australian dollars and U.S. dollars. U.S. dollar per ordinary share amounts have been translated into U.S. dollars at a rate of A$1.00 to US$0.7103 based on the foreign exchange rates published by the Reserve Bank of Australia on October 29, 2015.

 

     Price per
ordinary share

(A$)
     Price per
ordinary share

(US$)
 

Period

       High              Low              High              Low      

Annual:

           

Fiscal Year Ended 30 June, 2011

     9.95         1.72         7.07         1.22   

Fiscal Year Ended 30 June, 2012

     10.04         5.44         7.13         3.86   

Fiscal Year Ended 30 June, 2013

     7.49         4.22         5.32         3.00   

Fiscal Year Ended 30 June, 2014

     6.80         4.18         4.83         2.97   

Fiscal Year Ended 30 June, 2015

     5.88         3.17         4.18         2.25   

Quarterly

           

Fiscal Year ended June 30, 2013:

           

First quarter ended September 30, 2012

     7.37         5.52         5.23         3.92   

Second quarter ended December 31, 2012

     6.88         4.22         4.89         3.00   

Third quarter ended March 31, 2013

     7.49         5.17         5.32         3.67   

Fourth quarter ended June 30, 2013

     6.43         5.14         4.57         3.65   

Fiscal Year ended June 30, 2014:

           

First quarter ended September 30, 2013

     6.22         5.19         4.42         3.69   

Second quarter ended December 31, 2013

     6.80         5.37         4.83         3.81   

Third quarter ended March 31, 2014

     6.13         5.15         4.35         3.66   

Fourth quarter ended June 30, 2014

     5.45         4.18         3.87         2.97   

Fiscal Year ended June 30, 2015:

           

First quarter ended September 30, 2014

     5.88         3.91         4.18         2.78   

Second quarter ended December 31, 2014

     4.59         3.64         3.26         2.59   

Third quarter ended March 31, 2014

     4.60         3.50         3.27         2.49   

Fourth quarter ended June 30, 2015

     4.16         3.17         2.95         2.25   

Fiscal Year ended June 30, 2016:

           

First quarter ended September 30, 2015

     4.06         2.91         2.88         2.07   

Most Recent Six Months:

           

Month ended April 30, 2015

     4.07         3.17         2.89         2.25   

Month ended May 31, 2015

     3.97         3.58         2.82         2.54   

Month ended June 30, 2015

     4.16         3.65         2.95         2.59   

Month ended July 31, 2015

     4.06         3.71         2.88         2.64   

Month ended August 31, 2015

     4.02         2.91         2.86         2.07   

Month ended September 30, 2015

     3.78         3.10         2.68         2.20   

 

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DIVIDENDS AND 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 “Description of American Depositary Shares—Ordinary Share Dividends and Other Distributions.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2015. Our capitalization is presented on:

 

    an actual basis; and

 

    an as adjusted basis to reflect the issuance and sale of 28,712,550 ordinary shares in the form of ADSs by us in this offering and our receipt of the estimated net proceeds from such issuance and sale in this offering, each based on an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2015  
     Actual      As adjusted(1)  
     US$      US$  
     (in thousands)  

Cash and cash equivalents

     110,701         170,738   
  

 

 

    

 

 

 

Liabilities:

     

Non-current liabilities

     265,372         265,372   

Current liabilities

     48,407         48,407   
  

 

 

    

 

 

 

Total liabilities

     313,779         313,779   
  

 

 

    

 

 

 

Equity:

     

Issued capital (336,997,729 ordinary shares (no par value) issued as of June 30, 2015; 365,710,279 ordinary shares (no par value), pro forma as adjusted)

     709,191         769,228   

Reserves

     22,756         22,756   

Accumulated losses

     (263,960      (263,960
  

 

 

    

 

 

 

Total equity

     467,987         528,024   

Total capitalization

     781,766         841,803   
  

 

 

    

 

 

 

 

(1) A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.10 per ADS would increase (decrease) total cash and cash equivalents, equity and total capitalization by US$5.3 million, after deducting the estimated underwriting discounts and commissions payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

The table above excludes:

 

    the exercise of employee options outstanding at June 30, 2015 to purchase 18,369,078 fully paid ordinary shares issuable upon at a weighted average exercise price of A$5.25 per ordinary share.

The table above includes:

 

    an aggregate of 3,500,000 ordinary shares at a weighted average exercise price of A$6.78 held in trust as part of our LFSP.

 

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DILUTION

As of June 30, 2015, our net tangible book value was US$(0.54) per ordinary share and US$(2.70) per ADS. Net tangible book value per ordinary share represents total tangible assets minus total liabilities divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

Without taking into account any other changes in net tangible book value after June 30, 2015, other than giving effect to our sale of 5,742,510 ADSs in the offering at an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015) and after deducting underwriting discounts and commissions and estimated expenses of the offering payable by us, the net tangible book value per ordinary share would increase to US$(0.33) per ordinary share (or US$(1.65) per ADS), or US$(0.30) per ordinary share (or US$(1.50) per ADS) if the underwriters’ over-allotment option is exercised in full. This represents an immediate increase in net tangible book value of US$0.21 per ordinary share (or US$1.05 per ADS) to our existing shareholders (or US$0.24 per ordinary share (or US$1.20 per ADS) if the underwriters’ over-allotment option is exercised in full), and an immediate dilution of US$2.75 per ordinary share (or US$13.75 per ADS) to purchasers of ADSs in the offering (or US$2.72 per ordinary share (or US$13.60 per ADS), if the underwriters’ over-allotment option is exercised in full).

The following table illustrates this dilution on a per ordinary share basis and a per ADS basis assuming that all ADSs are exchanged for ordinary shares:

 

     Per ordinary
share
     Per ADS  

Assumed initial public offering price

     2.42         12.10   

Net tangible book value as of June 30, 2015

     (0.54      (2.70

Increase attributable to the sale of the ADSs

     0.21         1.05   

Pro forma as adjusted net tangible book value after this offering

     (0.33      (1.65

Dilution to purchasers of ADSs in the offering

     2.75         13.75   

A US$1.00 increase (decrease) in the assumed public offering price of US$12.10 per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$0.01 (US$0.02) per ordinary share and US$0.05 (US$0.10) per ADS, respectively, and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.19 (US$0.18) per ordinary share and US$0.95 (US$0.90) per ADS, respectively, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions.

The following table summarizes, on a pro forma basis as of June 30, 2015, the differences between our existing shareholders as of such date and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary shares paid at an assumed initial public offering price of US$12.10 per ADS (the U.S. dollar equivalent of the closing price of our ordinary shares on the ASX on October 29, 2015) before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Ordinary shares
purchased
    Total consideration     Average
price per
ordinary
share
     Average
price per
ADS
 
     Number      Percent     Amount      Percent       
     (in millions, except percent and share data)  

Existing shareholders

     336,997,729         92.1   US$ 709.20         91.1   US$ 2.10       US$ 10.52   

Purchasers of ADSs

     28,712,550         7.9     69.50         8.9   US$ 2.42       US$ 12.10   
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     365,710,279         100.0     778.70         100.0     

A US$1.00 increase (decrease) in the assumed initial public offering price of US$12.10 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by existing shareholders by US$5.7 million, US $5.7 million and US$Nil, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions.

 

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The number of ordinary shares to be outstanding following the offering is based on 336,997,729 fully paid ordinary shares outstanding at June 30, 2015, and excludes:

 

    the exercise of employee options outstanding at June 30, 2015 to purchase 18,369,078 fully paid ordinary shares issuable upon at a weighted average exercise price of A$5.25 per ordinary share;

and includes:

 

    an aggregate of 3,500,000 ordinary shares at a weighted average exercise price of A$6.78 held in trust as part of our LFSP.

To the extent all options outstanding at June 30, 2015 are exercised and all LFSP outstanding at June 30, 2015 are exercised and paid, the number of ordinary shares to be outstanding immediately following the offering would increase to 384,079,357 and the total consideration would increase to US$871.3 million. Our existing shareholders would hold 355,366,807 ordinary shares or 92.5% of the number of ordinary shares outstanding immediately following the offering for which they paid US$801.8 million or 92.0% of the total consideration. The purchasers of ADSs in the offering would hold 7.5% of the number of ordinary shares outstanding immediately following the offering and would experience immediate dilution in net tangible book value of US$2.50 per ordinary share (or US$12.50 per ADS). In addition, we may in the future elect to raise additional capital as a result of favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our shareholders. See “Risk Factors—Risks related to Ownership of Our ADSs, Our Trading Market and This Offering—An active trading market for the ADSs may not develop in the United States and the trading price for our ordinary shares may fluctuate significantly.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data presented below as of and for the years ended June 30, 2015, 2014 and 2013 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated financial data presented below as of and for the years ended June 30, 2012 and 2011 has been derived from our consolidated financial statements not included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected in the future. The summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

Our financial statements are presented in U.S. dollars and have been prepared in accordance with IFRS.

 

    For the Year Ended June 30,  
      US$ 2015         US$ 2014         US$ 2013         US$ 2012         US$ 2011    
    (in thousands, except per share information)  

Consolidated Income Statement Data:

         

Revenue:

         

Commercialization revenue

    15,004        15,004        18,685        28,771        15,513   

Milestone revenue

    2,000        —          —          —          —     

Interest revenue

    2,757        8,386        10,616        10,821        4,739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue from continuing operations

    19,761        23,390        29,301        39,592        20,252   

Other income:

         

Foreign exchange gains

    10,478        —          —          —          —     

Research & development tax incentive

    4,418        7,775        5,495        —          —     

Other revenue

    407        —          —          —          —     

Rental income

    96        —          —          —          —     

Release of excess provision for services

    —          2,344        —          —          —     

Government grant revenue

    —          —          —          134        —     

Gain on revaluation of investment to fair value

    —          —          —          —          88,357   

Share of losses of equity accounted associates written back on acquisition

    —          —          —          —          14,306   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income

    15,399        10,119        5,495        134        102,662   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue from continuing operations

    35,160        33,509        34,796        39,726        122,914   

Expenses from continuing operations:

         

Research and development

    (62,649     (50,929     (48,513     (37,840     (12,359

Manufacturing commercialization

    (23,783     (25,434     (23,082     (25,295     (3,483

Management and administration

    (29,636     (24,403     (22,899     (24,816     (12,199

Finance costs

    (8,506     (4,078     —          —          (15

Share of losses of equity accounted associates

    —          —          —          —          (1,557

Other expenses

    (6,830     (4,195     (952     (1,067     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses from continuing operations

    (131,404     (109,039     (95,446     (89,018     (29,614
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Profit before income tax

 

 

 

 

 

 

(96,244

 

 

 

 

 

 

 

 

(75,530

 

 

 

 

 

 

 

 

 

 

(60,650

 

 

 

 

 

 

 

 

 

 

 

(49,292

 

 

 

 

 

 

 

 

 

 

 

93,301

 

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

 

 

 

 

—  

 

  

 

 

 

 

(4

 

 

 

 

 

 

 

(1,470

 

 

 

 

 

 

 

 

(22,782

 

 

 

 

 

 

 

 

(1,692

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Profit attributable to the owners of Mesoblast Limited

 

 

 

 

(96,244

 

 

 

 

 

(75,534

 

 

 

 

 

 

 

(62,120

 

 

 

 

 

 

 

 

(72,074

 

 

 

 

 

 

 

 

91,609

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

(Losses)/Earnings per share from continuing operations attributable to the ordinary equity holders:

    Cents        Cents        Cents        Cents        Cents   

Basic—(losses)/earnings per share(1)

    (29.99     (23.65     (21.02     (25.48     42.26   

Diluted—(losses)/earnings per share(1)

    (29.99     (23.65     (21.02     (25.48     40.22   

 

(1) Please refer to Note 20 to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for a calculation of basic and diluted losses per share.

 

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    As of June 30,  
    US$ 2015     US$ 2014     US$ 2013     US$ 2012     US$ 2011  
   

(in thousands)

 

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

    110,701        185,003        292,449        209,518        278,946   

Total current assets

    122,460        191,931        307,789        220,716        281,348   

Total assets

    781,766        847,153        819,663        734,247        808,828   

Total current liabilities

    48,407        40,199        46,921        45,344        32,634   

Total liabilities

    313,779        308,594        235,071        246,223        262,180   

Equity:

         

Issued capital 336,997,729, 321,640,094, 316,468,901, 285,835,106, and 280,345,258 ordinary shares (no par value) issued as of June 30, 2015, 2014, 2013, 2012 and 2011, respectively)

    709,191        662,722        642,378        467,760        459,771   

Reserves

    22,756        43,553        34,396        50,326        44,864   

Accumulated loss

    (263,960     (167,716     (92,182     (30,062     42,012   

Total equity

    467,987        538,559        584,592        488,024        546,648   
    Year Ended June 30,  
    US$ 2015     US$ 2014     US$ 2013     US$ 2012     US$ 2011  
   

(in thousands)

 

Cash Flow Data:

         

Net cash (outflows)/inflows in operating activities

    (101,036     (74,906     (55,746     (64,575     112,247   

Net cash (outflows)/inflows in investing activities

    (5,064     (38,202     (4,801     (4,355     1,946   

Net cash inflows by financing activities

    45,852        2,196        174,415        4,980        127,488   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data,” and our consolidated financial statements included elsewhere in this prospectus. We present our consolidated financial statements in U.S. dollars and in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, or IFRS.

For us and our subsidiaries that use a functional currency that is not U.S. dollars, the assets and liabilities have been translated at the closing exchange rate, while the income and expenses have been translated at the exchange rate at the transaction date. The resulting exchange differences are recognized in our consolidated statement of comprehensive income. See note 21(d) in the notes to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for more information.

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements” in this prospectus. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our fiscal year ends each year on June 30. Reference to a year relates to the fiscal year, ended in June 30 of the year indicated, rather than the calendar year, unless indicated by a specific date. “FY2015” refers to the year ended June 30, 2015, “FY2014” refers to the year ended June 30, 2014 and “FY2013” refers to the year ended June 30, 2013.

Overview

We are a global leader in the field of regenerative medicine. We have leveraged our proprietary technology platform, which is based on specialized cells known as MLCs to establish what we believe to be the most advanced regenerative medicine product portfolio in the industry. We have what we believe to be an extensive safety profile for our product candidates, with over 1,340 patients treated. Based on outcomes in Phase 2 trials across multiple indications, we now have five MLC product candidates that are in active Phase 3 trials or are Phase 3-ready.

In September 2015, our licensee JCR Pharmaceuticals Co. Ltd, or JCR, received full approval for the first “allogeneic” cell-based product in Japan, meaning a product containing cells from a single donor expanded and used in many unrelated patients. We believe we are well positioned to have the first industrially-manufactured allogeneic stem cell product approved in the United States.

We have incurred net losses during most of our fiscal periods since our inception. For the year ended June 30, 2015, we had a comprehensive loss of US$122.0 million.

Mergers and Acquisitions

On October 11, 2013, we acquired all of Osiris Therapeutics, Inc.’s business and assets related to culture-expanded mesenchymal stem cells, or MSCs, for US$126.9 million in cash, securities and contingent consideration. See Note 12 to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for more information regarding the acquisition consideration. We believe the acquisition is complementary to our business in its nature with many commercial and strategic benefits. The acquired assets included:

 

    MSC-100-IV for aGVHD;

 

    broadened late-stage clinical programs in other strategic areas of focus, including Crohn’s disease and acute myocardial infarction, or AMI;

 

    long-term clinical data from approximately 1,000 patients treated with MSCs, including safety, efficacy and repeat dosing data; and

 

    MSC-focused intellectual property and know-how.

 

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Financial Overview

We have incurred significant losses since our inception. 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 have never generated any sales revenues ourselves or royalty revenues from sales of our products by our collaborators and we may never be profitable.

We expect our future capital requirements will continue as we:

 

    continue the research and clinical development of our product candidates, including our MPC-150-IM (Class II-IV CHF), MPC-06-ID (CLBP), MSC-100-IV (aGVHD) and MPC-300-IV (inflammatory conditions) product candidates;

 

    initiate and advance our product candidates into larger and more expensive clinical studies, including a Phase 3 clinical trial for our MPC-25-Osteo (spinal fusion) product candidate;

 

    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 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;

 

    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 that our Research and development and Management and administration expenses will continue to increase and, as a result, 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. We may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our products and to continue as a going concern. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates.

Revenue from Continuing Operations

We derive revenue from continuing operations as follows:

Commercialization Revenue. Commercialization revenue refers to upfront and milestone payments received under development and commercialization agreements.

In the year ended June 30, 2015, we recognized as revenue US$2.0 million from JCR for the completion of a milestone pertaining to the filing of TEMCELL for regulatory approval in Japan. This amount was recorded in revenue as there are no further performance obligations required in regards to this item.

 

 

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In the year ended June 30, 2011, we received upfront payments of US$130.0 million under a development and commercialization agreement, or the DCA, with Teva. See “Business—Our Strategic Alliances—Teva/Cephalon, Inc.—Cardiovascular, Neurological and Bone Marrow Collaboration.”

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 estimated development period. As management cannot readily estimate the costs required to complete the development program pursuant to the DCA, management has concluded that the revenue is earned over the estimated development period of MPC-150-IM. Therefore, revenues are being recognized on straight line basis over the development period of this product candidate. If we were to shorten or lengthen the development period then we would be required to change the amount of revenue we recognize.

Interest Revenue. Interest revenue is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable.

Other Income. Other income primarily comprises tax incentive payments from the Australian Government’s Innovation Australia Research and Development Tax Incentive Plan for research and development activities conducted in Australia in relation to our qualifying research that meets the regulatory criteria. A refundable tax offset is available to eligible companies with an annual aggregate turnover of less than A$20.0 million. The commercialization revenue is not subject to inclusion in the determination of the annual aggregate turnover measure. Eligible companies can receive a refundable tax offset for a percentage of their research and development spending. Up to June 30, 2013, the rate of the refundable tax offset was 45% and after that date the rate is 43.5%.

Other income also includes unrealized foreign exchange gains on U.S. dollar deposits plus realized gains on any foreign currency payments to our suppliers. Foreign exchange gains of US$10.5 million and US$Nil were recorded for the year ended June 30, 2015 and June 30, 2014, respectively. For the year ended June 30, 2014, the net result of foreign exchange movements for us was a US$4.0 million loss, and this loss was recorded in Other expenses. Other income also includes rental income from subleasing our office space.

Expenses from Continuing Operations

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 comprise all external expenditure on our Research and development programs such as fees paid to Contract Research Organizations, or 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 consist 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); and

 

    intellectual property support costs comprise payments to our patent attorneys to progress patent applications and all costs of renewing of our granted patents.

Our R&D 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.

 

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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.

Finance Costs. Finance costs relate to the unwinding of contingent consideration items pertaining to the MSC assets of Osiris. We did not have any borrowings outstanding as of June 30, 2015.

Other Expenses. Other expenses comprise remeasurement of contingent consideration and foreign exchange losses.

Remeasurement of contingent consideration pertains to the acquisition of assets from Osiris. This remeasurement expense is as a result of changes to the key assumptions of the contingent consideration valuation such as market population, market penetration, product pricing and developmental timelines. The net result of changes to the key assumptions was an increase in the valuation of contingent consideration payable to Osiris on royalties from sales and on the achievement of certain pre-determined milestones as we draw closer to potential product approval. Remeasurement of contingent consideration was US$6.8 million for the year ended June 30, 2015 compared with US$0.2 million for the year ended June 30, 2014.

Other expenses comprise unrealized foreign exchange losses on our U.S. dollar deposits plus realized losses on any foreign currency payments to our suppliers. Any unrealized foreign exchange gains on our U.S. dollar deposits or realized gains on any foreign currency payments to our suppliers would be included in Other Income. Foreign exchange losses was $Nil for the year ended June 30, 2015 compared with US$4.0 million for the year ended June 30, 2014. The US$4.0 million foreign exchange losses recognized in the year ended June 30, 2014 was due to movements in exchange rates as the A$ appreciated against the US$ during the year ended June 30, 2014.

 

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Results of Operations

Comparison of Our Results for the Year Ended June 30, 2015 with the Year Ended June 30, 2014

The following table summarizes our results of operations for the years ended June 30, 2015 and 2014, together with the changes in those items in dollars and as a percentage.

 

     For the Year Ended
June 30,
    Dollar
Change
    %
Change
 
     US$ 2015     US$ 2014      
     (in thousands except
per share information)
       

Consolidated Income Statement Data:

        

Revenue:

        

Commercialization revenue

     15,004        15,004        —          0

Milestone Revenue

     2,000        —          2,000        NM   

Interest Revenue

     2,757        8,386        (5,629     (67 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue from continuing operations

     19,761        23,390        (3,629     (16 %) 

Other Income:

        

Foreign exchange gains

     10,478        —          10,478        NM   

Research & development tax incentive

     4,418        7,775        (3,357     (43 %) 

Other revenue

     407        —          407        NM   

Rental income

     96        —          96        NM   

Release of excess provision for services

     —          2,344        (2,344     (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income

     15,399        10,119        5,280        52
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue from continuing operations

     35,160        33,509        1,651        5

Expenses from continuing operations:

        

Research & development

     (62,649     (50,929     (11,720     23

Manufacturing commercialization

     (23,783     (25,434     1,651        (6 %) 

Management and administration

     (29,636     (24,403     (5,233     21

Finance costs

     (8,506     (4,078     (4,428     109

Other expenses

     (6,830     (4,195     (2,635     63
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses from continuing operations

     (131,404     (109,039     (22,365     21
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (96,244     (75,530     (20,714     27
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     —          (4     4        (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss attributable to the owners of Mesoblast Limited

     (96,244     (75,534     (20,710     27
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses per share from continuing operations attributable to the ordinary equity holders:

        

Basic—losses per share(1)

     (29.99     (23.65     (6.34     27

Diluted—losses per share(1)

     (29.99     (23.65     (6.34     27

 

* NM = not meaningful.

(1) Please refer to Note 20 to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for a calculation of basic and diluted losses per share.

 

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Revenue from Continuing Operations

Revenues were US$19.8 million for the year ended June 30, 2015, compared with US$23.4 million for the year ended June 30, 2014, a decrease of US$3.6 million. The following table shows the movement within revenue for the year ended June 30, 2015 and 2014, together with the changes in those items.

 

     For the Year Ended
June 30,
     Dollar
Change
    %
Change
 
     US$ 2015      US$ 2014       
     (in thousands)        

Revenue:

          

Commercialization revenue

     15,004         15,004         —          0

Milestone revenue

     2,000         —           2,000        NM   

Interest revenue

     2,757         8,386         (5,629     (67 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenue from continuing operations

     19,761         23,390         (3,629     (16 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

There has been no change in commercialization revenue in the year ended June 30, 2015 when compared with the year ended June 30, 2014.

The US$2.0 million increase in milestone revenue has been recognized upon our partner, JCR, achieving a substantive milestone being the filing for marketing approval of MSC product TEMCELL in Japan. We have no further performance obligations in relation to this revenue.

The US$5.6 million decrease in interest revenue from the year ended June 30, 2015 compared with June 30, 2014 is driven by a decline in cash reserves and since we held a higher proportion of cash reserves in U.S. dollars compared with Australian dollars in the year ended June 30, 2015, when compared with the year ended June 30, 2014. These changes in cash reserve holdings decreased revenue as yields on U.S. dollar cash deposits are lower than yields on Australian dollar cash deposits. We increased the proportion of cash reserves held in U.S. dollars to reduce currency risk. Currency risk is minimized by matching cash reserves for each currency with the expected rate of spend of each currency.

Other Income

Other income was US$15.4 million for the year ended June 30, 2015, compared with US$10.1 million for the year ended June 30, 2014, an increase of US$5.3 million. The following table shows movements within other income for the year ended June 30, 2015 and 2014, together with the changes in those items:

 

     For the Year Ended
June 30,
     Dollar
Change
    %
Change
 
     US$ 2015      US$ 2014       
     (in thousands)        

Other income:

          

Foreign exchange gains

     10,478         —           10,478        NM   

Research & development tax incentive income

     4,418         7,775         (3,357     (43 %) 

Other revenue

     407         —           407        NM   

Rental income

     96         —           96        NM   

Release of excess provision for services

     —           2,344         (2,344     (100 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Other income

     15,399         10,119         5,280        52
  

 

 

    

 

 

    

 

 

   

 

 

 

US$10.5 million of foreign exchange gains were recognized for the year ended June 30, 2015, compared with US$Nil for the year ended June 30, 2014. For the year ended June 30, 2015 we recognized a foreign exchange gain due to movements in exchange rates as the A$ depreciated against the US$ during the year ended June 30, 2015. Within our Australian company, we hold certain cash and term deposit balances in US$, resulting in foreign exchange gains on the revaluation of foreign currency denominated monetary assets and liabilities into our functional currency of A$. As of June 30, 2015, in addition to our A$ cash reserves, we held a total of US$70.6 million of our cash reserves in US$. For the year ended June 30, 2014 the net result of foreign exchange movements was a US$4.0 million loss and this loss was recorded in Other expenses.

 

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Research & development tax incentive income decreased by US$3.4 million from US$7.8 million for the year ended June 30, 2014 to US$4.4 million for the year ended June 30, 2015. We have recognized incentive income pertaining to the eligible expenditure undertaken in each of these periods. At each period end management estimates the refundable tax offset available to us based on available information at the time. This estimate is also reviewed by external tax advisors. Of the US$4.4 million Research and development tax incentive recorded in other income for the year ended June 30, 2015, US$0.5 million relates to a change in the original estimate of the Research and development tax incentive income we estimated we would receive from the Australian Government for the year ended June 30, 2014.

Other revenue increased by US$0.4 million for the year ended June 30, 2015 as we recognized a one-off insurance recovery. Rental income increased by US$0.1 million for the year ended June 30, 2015 as we entered into a sublease agreement for a portion of the Melbourne office space in December 2014.

For the year ended June 30, 2014, other income includes a one off release of a provision of services that has been settled during the year. The settlement was US$2.3 million less than the recorded provision.

Research and Development

Research and development expenses were US$62.6 million for the year ended June 30, 2015, compared with US$50.9 million for the year ended June 30, 2014, an increase of US$11.7 million. The US$11.7 million net increase in Research and development expenses reflects the continued clinical development of the MSC assets acquired from Osiris, the clinical advancement of our MPC programs as they transition to late-stage development, and our continued investment in resources to execute our clinical programs.

 

     For the Year Ended
June 30,
     Dollar
Change
     %
Change
 
     US$ 2015      US$ 2014        
     (in thousands)         

Research and Development expense:

           

Third party costs

     30,612         19,114         11,498         60

Product support costs

     29,361         29,202         159         1

Intellectual property support costs

     2,676         2,613         63         2
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

     62,649         50,929         11,720         23
  

 

 

    

 

 

    

 

 

    

 

 

 

Third party costs, which consist of all external expenditure on our research and development programs, have increased by US$11.5 million for the year ended June 30, 2015 compared with the year ended June 30, 2014.

Within this US$11.5 million, there was a US$12.8 million increase in third party costs for the period relates to the advancement of our Tier 1 products, and in particular the clinical programs for CLBP and aGVHD. Third party costs for the MPC-150-IM product for CHF are predominantly funded by our collaborators, Teva (advanced heart failure) and the NIH (end-stage heart failure with mechanical support). This increase in Tier 1 costs was offset by a US$1.3 million decrease in third party costs for our Tier 2 and pipeline products for the year ended June 30, 2015, compared with the year ended June 30, 2014 as the Tier 1 programs were prioritized ahead of Tier 2 clinical trials and pipeline activities.

Product support costs, which consist primarily of salaries and related overhead expenses for personnel in research and development functions, have increased by US$0.2 million for the year ended June 30, 2015 compared with the year ended June 30, 2014. This increase is across all programs primarily reflecting the costs of the additional resources required to run the MSC-100-IV product late-stage programs acquired in October 2013, together with increased development costs for our MPC-06-ID product for CLBP as we progress to Phase 3 clinical development. In the year ended June 30, 2015, full time equivalents in our research and development group increased by 18 from 64 for the year ended June 30, 2014 to 82 for the year ended June 30, 2015.

Also included in research and development expenses are intellectual property support costs, which consist of payments to our patent attorneys to progress patent applications and all costs of renewing our granted patents, which have risen by US$0.1 million in the year ended June 30, 2015 compared with the year ended June 30, 2014. This increase reflects the purchase of MSC patent families from Osiris.

 

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We expect that our Research and development expenses will modestly increase as we continue to fund our programs through to market. We believe these increases will likely include increased costs paid to CROs and increased costs related to laboratory supplies.

Manufacturing Commercialization expenses

Manufacturing commercialization expenses were US$23.8 million for the year ended June 30, 2015, compared with US$25.4 million for the year ended June 30, 2014, a decrease of US$1.6 million.

 

     For the Year Ended
June 30,
     Dollar
Change
    %
Change
 
     US$ 2015      US$ 2014       
     (in thousands)        

Manufacturing Commercialization expenses:

          

MSC-based manufacturing commercialization

     11,388         3,330         8,058        242

MPC-based manufacturing commercialization

     8,855         18,583         (9,728     (52 %) 

Manufacturing commercialization support expenses

     3,540         3,521         19        1
  

 

 

    

 

 

    

 

 

   

 

 

 

Manufacturing Commercialization expenses

     23,783         25,434         (1,651     (6 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

MSC-based manufacturing commercialization expenses, which consist of fees paid to our contract manufacturing organizations and laboratory supplies used in manufacturing commercialization of our MSC-based products, increased by US$8.1 million for the year ended June 30, 2015 compared to the year ended June 30, 2014. This increase reflects a full year of expenditure, whereas in the prior year, expenditure only commenced after the acquisition of the MSC assets in October 2013. In the year ended June 30, 2015, expenses related to production and the manufacturing development process in anticipation of upcoming clinical and commercial production requirements were incurred.

This abovementioned increase was offset by a decrease of US$9.7 million on MPC-based manufacturing commercialization expenses. MPC-based manufacturing commercialization expenses consist of fees paid to our contract manufacturing organizations and laboratory supplies used in manufacturing commercialization of our MPC-based products. The decrease in these expenses was due to a reduction in clinical grade production for MPC-based products as we focused on establishing the manufacturing process for our acquired MSC-based products.

Manufacturing commercialization support expenses, which consist primarily of salaries and related overhead expenses for personnel in manufacturing commercialization functions, increased by US$0.1 million for the year ended June 30, 2015, compared with the year ended June 30, 2014, as full time equivalents increased in this group by 2 from 8 for the year ended June 30, 2014 to 10 in the year ended June 30, 2015.

In addition to the above, we continue to invest cash to (i) further establish our manufacturing processes in Lonza’s Singapore facility, (ii) produce MPCs and MSCs to support clinical trial activities, (iii) optimize clinical production processes, including transitioning away from bovine serum, and (iv) continue bioreactor manufacturing development.

We expect that our Manufacturing commercialization expenses will remain relatively consistent as we continue to develop our manufacturing processes in anticipation of commercial and clinical demands, and further invest in bioreactor manufacturing development.

 

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Management and administration

Management and administration expenses were US$29.6 million for the year ended June 30, 2015, compared with US$24.4 million for the year ended June 30, 2014, an increase of US$5.2 million.

 

     For the Year
Ended June 30,
     Dollar
Change
     %
Change
 
     US$ 2015      US$ 2014        
     (in thousands)         

Management and administration:

           

Labor and associated expenses

     14,309         12,573         1,736         14

Corporate overheads

     9,803         7,530         2,273         30

Legal and professional fees

     5,524         4,300         1,224         28
  

 

 

    

 

 

    

 

 

    

 

 

 

Management and administration

     29,636         24,403         5,233         21
  

 

 

    

 

 

    

 

 

    

 

 

 

Labor and associated expenses increased by US$1.7 million from US$12.6 million for the year ended June 30, 2014, to US$14.3 million for the year ended June 30, 2015, as a result of increased full time equivalents during the year ended June 30, 2015. Corporate overhead increased by US$2.3 million from US$7.5 million for the year ended June 30, 2014, to US$9.8 million for the year ended June 30, 2015, primarily as a result of increased full time equivalents, in this group, and to a lesser extent due to rent and depreciation expenses. Full time equivalents increased by 5 from 22 for the year ended June 30, 2014 to 27 for the year ended June 30, 2015.

Legal and professional fees increased by US$1.2 million from US$4.3 million for the year ended June 30, 2014 to US$5.5 million for the year ended June 30, 2015, on intellectual property management and associated legal, taxation and accounting compliance advice.

We expect that our Management and administration expenses will remain relatively consistent as our product candidates develop towards commercialization.

Finance Costs

Finance costs increased by US$4.4 million from US$4.1 million for the year ended June 30, 2014 to $8.5 million for the year ended June 30, 2015, primarily due to a full 12 months impact in the year ended June 30, 2015, compared with a partial year impact in the year ended June 30, 2014. The Finance costs in the years ended June 30, 2015 and June 30, 2014 represent the change in fair value of contingent consideration financial liabilities pertaining to the acquired MSC assets of Osiris. These costs relate to the unwinding of the risk adjusted discount as the time period shortens between the valuation date and the potential settlement date of the contingent consideration. With respect to future milestone payments, contingent consideration will be payable in cash or shares at our discretion. With respect to commercialization, product royalties will be payable in cash which will be funded from the profits generated.

We expect that these Finance costs will continue to increase as we continue to develop towards commercialization of the MSC-based products as the discounting of the contingent consideration unwinds with time and/or achievement of milestones.

Other Expenses

Other expenses were US$6.8 million for the year ended June 30, 2015 compared with US$4.2 million for the year ended June 30, 2014, an increase of US$2.6 million.

Remeasurement of contingent consideration was US$6.8 million for the year ended June 30, 2015 compared with US$0.2 million for the year ended June 30, 2014, an increase of US$6.6 million. The US$6.8 million remeasurement of contingent consideration recognized in the year ended June 30, 2015 pertains to the acquisition of assets from Osiris. This remeasurement expense is as a result of changes to the key assumptions of the contingent consideration valuation such as market population, market penetration, product pricing and developmental timelines. The net result of changes to the key assumptions was an increase in the valuation of

 

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contingent consideration payable to Osiris on royalties from sales and on the achievement of certain pre-determined milestones as we draw closer to potential product approval.

Foreign exchange losses was $Nil for the year ended June 30, 2015, compared with US$4.0 million for the year ended June 30, 2014, a decrease of US$4.0 million. The US$4.0 million foreign exchange losses recognized in the year ended June 30, 2014 was due to movements in exchange rates as the A$ appreciated against the US$ during the year ended June 30, 2014.

We expect that Other expenses will continue to fluctuate as a result of the movement in the Australian dollar to U.S. dollar exchange rate going forward.

Net Operating Losses

 

     For the Year Ended
June 30,
    Dollar
Change
    %
Change
 
     US$ 2015      US$ 2014      
     (in thousands)        

Loss before income tax

     96,244         75,530        20,714        27

Income tax expense

     —           (4     (4     (100 %) 
  

 

 

    

 

 

   

 

 

   

 

 

 

Loss after income tax

     96,244         75,534        20,710        27 % 
  

 

 

    

 

 

   

 

 

   

 

 

 

Loss after income tax was US$96.2 million for the year ended June 30, 2015 compared with US$75.5 million for the year ended June 30, 2014, an increase of US$20.7 million. This increase reflects the continued clinical development of our programs as they transition to late-stage development and our continued investment in resources to execute our clinical programs.

As of June 30, 2015 and 2014, our cumulative operating losses have a potential tax benefit of US$69.9 million and US$57.0 million at local tax rates, 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.

 

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Comparison of Our Results for the Year Ended June 30, 2014 with the Year Ended June 30, 2013

The following table summarizes our results of operations for the years ended June 30, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

 

     For the Year
Ended June 30,
    Dollar
Change
    %
Change
 
     US$ 2014     US$ 2013      
     (in thousands except per share information)  

Consolidated Income Statement Data:

        

Revenue:

        

Commercialization revenue

     15,004        18,685        (3,681     (20 %) 

Interest Revenue

     8,386        10,616        (2,230     (21 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenue from continuing operations

     23,390        29,301        (5,911     (20 %) 

Other Income:

        

Research & development tax incentive

     7,775        5,495        2,280        41

Release of excess provision for services

     2,344        —          2,344        NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income

     10,119        5,495        4,624        84
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue from continuing operations

     33,509        34,796        (1,287     (4 %) 

Expenses from continuing operations:

        

Research & development

     (50,929     (48,513     (2,416     5

Manufacturing commercialization

     (25,434     (23,082     (2,352     10

Management and administration

     (24,403     (22,899     (1,504     7

Finance costs

     (4,078     —          (4,078     NM   

Other expenses

     (4,195     (952     (3,243     341
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses from continuing operations

     (109,039     (95,446     (13,593     14
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (75,530     (60,650     (14,880     25
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (4     (1,470     1,466        (100 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss attributable to the owners of Mesoblast Limited

     (75,534     (62,120     (13,414     22
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses per share from continuing operations attributable to the ordinary equity holders:

        

Basic—losses per share(1)

     (23.65     (21.02     (2.63     13

Diluted—losses per share(1)

     (23.65     (21.02     (2.63     13

 

* NM = not meaningful
(1) Please refer to Note 20 to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for a calculation of basic and diluted losses per share.

Revenue from Continuing Operations

Revenues were US$23.4 million for the year ended June 30, 2014, compared to US$29.3 million for the year ended June 30, 2013, a decrease of US$5.9 million. The following table shows movement within revenue for the years ended June 30, 2014 and 2013, together with the changes in those items:

 

     For the Year Ended
June 30,
     Dollar
Change
    %
Change
 
     US$ 2014      US$ 2013       
     (in thousands)        

Revenue:

          

Commercialization revenue

     15,004         18,685         (3,681     (20 %) 

Interest revenue

     8,386         10,616         (2,230     (21 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenue from continuing operations

     23,390         29,301         (5,911     (20 %) 
  

 

 

    

 

 

    

 

 

   

 

 

 

The US$3.7 million decrease in commercialization revenue from FY2014 to FY2013 is based on the increase in the estimated development period of the upfront milestone payment from Cephalon, Inc. (a wholly-owned subsidiary of Teva), or Cephalon.

 

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The US$2.2 million decrease in interest revenue is due to a decline in market interest rates over the period, and a move towards investing in shorter term deposits. We have also held a higher ratio of U.S. dollars to Australian dollars in FY2014 compared with FY2013, which decreased revenue as yields on U.S. dollar bank accounts were lower than yields on Australian dollar bank accounts.

Other Income

Other income was US$10.1 million for the year ended June 30, 2014, compared to US$5.5 million for the year ended June 30, 2013, an increase of US$4.6 million. The following table shows movement within other income for the years ended June 30, 2014 and 2013, together with the changes in those items:

 

     For the Year Ended
June 30,
     Dollar
Change
     %
Change
 
     US$ 2014      US$ 2013        
     (in thousands)         

Other income:

           

Research and development tax incentive scheme

     7,775         5,495         2,280         41

Release of excess provision of services

     2,344         —           2,344         NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income

     10,119         5,495         4,624         84
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* NM = not meaningful

The US$2.3 million increase in research and development tax incentive, from US$5.5 million for the year ended June 30, 2013 to US$7.8 million for the year ended June 30, 2014, is due to additional research and development tax incentive income being received in FY2014 for qualifying research and development. The change in estimate was due to the fact that research and development tax incentives were estimated based on the level of qualifying research and development expenditures made during the year, which was higher than estimated.

Of the US$7.8 million research and development tax incentive recorded in other income for the year ended June 30, 2014, US$3.1 million relates to the incentive we received from the Australian Government for the year ended June 30, 2013 following a change in the original assessment. The change in estimate was due to the fact that research and development tax incentives were dependent on the level of qualifying research and development expenditure and as such we estimated amounts we deemed probable of collection in the year ended June 30, 2013 until we had better information related to the implementation of the relevant regulations with the assistance of our tax advisors.

Other income includes a one-time release of a provision regarding a dispute with a service provider that has been settled during FY2014. A provision of US$7.8 million had been taken up in 2010 and, on finalization of this matter in April 2014, the excess provision of US$2.3 million was recorded as other income.

Research and Development

 

     For the Year Ended
June 30,
     Dollar
Change
    %
Change
 
     US$ 2014      US$ 2013       
     (in thousands)        

Research and Development expenses:

          

Third party costs

     19,114         21,040         (1,926     (9 %) 

Product support costs

     29,202         25,952         3,250        13

Intellectual property support costs

     2,613         1,521         1,092        72
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Research and Development expenses

     50,929         48,513         2,416        5
  

 

 

    

 

 

    

 

 

   

 

 

 

Research and development expenses were US$50.9 million for the year ended June 30, 2014, compared to US$48.5 million for the year ended June 30, 2013, an increase of US$2.4 million. The US$2.4 million net increase in Research and development expenses reflects the clinical development of the MSC assets acquired

 

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from Osiris, the clinical advancement of our MPC programs as they transition to late-stage development, and our continued investment in resources to execute our late-stage clinical programs.

Third party costs have decreased by US$1.9 million in FY2014 compared with FY2013. Within this US$1.9 million decrease, third party costs for our Tier 1 products increased US$0.9 million. This increase for the year relates to the advancement of our Tier 1 products, and in particular the clinical programs for aGVHD and Crohn’s Disease. These programs form part of our MSC-100-IV product portfolio acquired from Osiris. The third party costs for our Tier 1 product MPC-06-ID for the treatment of CLBP are consistent with the prior year, while Third party costs for the MPC-150-IM product for CHF are predominantly funded by our collaborators, Teva (advanced heart failure) and the NIH (end-stage heart failure with mechanical support).

Tier 2 and pipeline product third party costs in FY2014 decreased by US$2.8 million compared to FY2013. FY2013 included significant expenditures on site start-up and study initiation costs of our MPC-25-IC product candidate that were not repeated in FY2014. This was offset by increased expenditures on patient recruitment, which we undertook during FY2014 for our three programs within the MPC-300-IV product (which has since been elevated to Tier 1), in particular, the treatment of glucose control in patients with type 2 diabetes, diabetic nephropathy and rheumatoid arthritis.

Product support costs in FY2014 across all programs increased by US$3.3 million compared to FY2013, primarily reflecting the costs of the additional resources required to run the MSC-100-IV product late-stage programs acquired during FY2014, together with increased development costs for our MPC-06-ID product for chronic low back pain as we progress to Phase 3 clinical development.

Also included in Research and development expenses are intellectual property support costs, which have risen in FY2014 by US$1.1 million compared with FY2013. This reflects the purchase of MSC patent families from Osiris.

Manufacturing Commercialization

Manufacturing commercialization expenses were US$25.4 million for the year ended June 30, 2014, compared with US$23.1 million for the year ended June 30, 2013, an increase of US$2.3 million. US$3.3 million of the US$2.3 million net increase in Manufacturing commercialization expenses is attributable to production of MSC-100-IV. This also includes the purchase of MSC master cell banks from Lonza, as well as review and transfer of the MSC production process from the Lonza facility in the U.S. to the facility in Singapore.

In support of MSC production and our ongoing transition from research grade production to commercial production, the manufacturing department has grown in employees from six as of June 30, 2013 to twelve as of June 30, 2014, resulting in a US$1.2 million increase in salaries, share-based compensation and associated expenses for FY2014.

The increases mentioned above were offset by a decrease US$2.2 million on MPC-based manufacturing commercialization expenses. MPC-based manufacturing commercialization expenses consist of fees paid to our contract manufacturing organizations and laboratory supplies used in manufacturing commercialization of our MPC-based products. The decrease in these expenses was due to a reduction in clinical grade production for MPC-based products as we focused on establishing the manufacturing process for our MSC-based products.

We are also continuing to invest in bioreactor manufacturing processes. During FY2013, this development work was partially funded by a third party supplier in anticipation of future work being carried out with such supplier, hence our expenses were relatively low compared to the work performed. During FY2014 the funding from the third party supplier decreased and the arrangement will be completed by December 2014.

Management and Administration Expenses

Management and administration expenses were US$24.4 million for the year ended June 30, 2014, compared with US$22.9 million for the year ended June 30, 2013, an increase of US$1.5 million. The US$1.5 million increase in Management and administration expenses is primarily the result of additional costs incurred as a result of the increased head count of 116 staff at June 30, 2014 compared with 75 at June 30, 2013, such as rent costs due to increased office space, information technology support and general compliance.

 

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Finance Costs

Finance costs of US$4.1 million in FY2014 represent the change in fair value of contingent consideration financial liabilities pertaining to the acquisition of the MSC assets of Osiris. These costs relate to the unwinding of the risk adjusted discount as the time period shortens between the valuation date and the potential settlement date of the contingent consideration. With respect to future milestone payments, contingent consideration will be payable in cash or shares at our discretion. With respect to commercialization, product royalties will be payable in cash which will be funded from the profits generated.

Other Expenses

Other expenses were US$4.2 million for the year ended June 30, 2014, compared with US$1.0 million for the year ended June 30, 2013, an increase of US$3.2 million. US$3.0 million of this increase is attributable to foreign exchange losses on revaluation of foreign currency denominated monetary assets and liabilities, mostly due to the appreciation of the Australian dollar relative to the U.S. dollar during the second half of FY2014. US$0.2 million of this increase is due to remeasurement of contingent consideration pertaining to the acquisition of assets from Osiris.

Net Operating Losses

As of June 30, 2014, our cumulative operating losses have a potential tax benefit of US$57.0 million at local tax rates 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.

Liquidity and Capital Resources

Sources of Liquidity

We have incurred losses from operations since our inception in 2004 and as of June 30, 2015, we had an accumulated deficit of US$264.0 million. We expect that the net proceeds from this offering and our existing cash and cash equivalents will be sufficient to fund our current operations through at least the next twelve months. We expect that our Research and development and Management and administration expenses will continue to increase and, as a result, 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.

From our inception through June 30, 2015, we have funded our operations principally with US$709.2 million in proceeds received from the sale of our ordinary shares including receipt of US$45.0 million upon signing of a stock placement agreement with Celgene Corporation during the financial year ended June 30, 2015. In April 2015, we entered into an agreement with Celgene Corporation, under which Celgene purchased 15.3 million of our ordinary shares for US$45 million and received a six-month right of first refusal with respect to our product candidates for the prevention and treatment of aGVHD, certain oncologic diseases, inflammatory bowel diseases, and organ transplant rejection. On October 16, 2015, we announced that we have agreed with Celgene to extend Celgene’s right of first refusal for an additional six months. In addition to proceeds received from the sale of ordinary shares, we received US$130.0 million upon signing a development and commercialization agreement with Cephalon during the financial year ended June 30, 2011. As of June 30, 2015 we had cash and cash equivalents of US$110.7 million. Cash in excess of immediate requirements is invested primarily in money market funds in order to maintain liquidity and preserve capital.

We are in the process of finalizing our financial closing and reporting process for the first quarter ended September 30, 2015. We reported that we had approximately US$77.8 million in cash and cash equivalents as of September 30, 2015. This number is unaudited and does not present all information necessary for an understanding of our financial condition as of September 30, 2015 and our results of operations for the three

months ended September 30, 2015. PricewaterhouseCoopers has not audited, reviewed, compiled or performed

 

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any procedures with respect to these results and does not express an opinion or any other form of assurance with respect thereto. We anticipate making a public announcement of our results of operations for the first quarter ended September 30, 2015 on or about December 15, 2015.

Cash Flows

The following table sets forth the significant sources and uses of cash for the periods set forth below:

 

     For the Year Ended June 30,  
     US$ 2015     US$ 2014     US$ 2013  
     (in thousands)  

Cash Flow Data:

      

Net cash (outflows) in operating activities

     (101,036     (74,906     (55,746

Net cash (outflows) in investing activities

     (5,064     (38,202     (4,801

Net cash inflows in financing activities

     45,852        2,196        174,415   
  

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (60,248     (110,912     113,868   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Operating Activities. Net cash outflows for operating activities were US$101.0 million for the year ended June 30, 2015, compared with US$74.9 million for the year ended June 30, 2014, an increase of US$26.1 million. Outflows increased by US$9.4 million due to an increase in payments to suppliers and employees for the advancement of our clinical programs and manufacturing commercialization costs for our MPC and MSC programs, as they transition to late-stage development and our continued investment in associated resources. Outflows increased by US$4.1 million due to payments to Osiris related to fair value in excess of amounts originally recorded for contingent consideration subsequent to the business combination measurement period. Inflows decreased as interest receipts reduced by US$8.5 million due to a decline in cash reserves and because we held a higher proportion of cash reserves in US$ compared with A$ in the year ended June 30, 2015, when compared with the year ended June 30, 2014. Inflows decreased as receipts for the research and development tax incentive were US$4.3 million lower due to the receipts of both the FY2012 and FY2013 claims occurring in the year ended June 30, 2014, while only the FY2014 claim was received in the year ended June 30, 2015.

Inflows increased by US$2.0 million due the receipt of a US$2.0 million milestone payment. The milestone was received upon the filing for marketing approval in Japan for MSC product TEMCELL. Inflows decreased by US$2.3 million due to a tax refund of overpaid US taxes in the year ended June 30, 2014 which was not repeated. Other inflows increased by US$0.5 million due to increased rent income received and receipts from other operating revenue items which included receipts from insurance settlements.

Net cash outflows for operating activities were US$74.9 million for the year ended June 30, 2014, compared with US$55.7 million for the year ended June 30, 2013, an increase of US$19.2 million. Outflows increased by US$27.7 million due to an increase in payments to suppliers and employees for the advancement of our clinical programs and manufacturing commercialization costs for our MPC and MSC programs, as they transition to late-stage development and our continued investment in associated resources. Inflows increased by US$8.7 million due to the both the FY2012 and FY2013 research and development tax incentive claims being receipted in the year ended June 30, 2014, while there was no claim received in the year ended June 30, 2013. Receipts from other operating revenue items reduced inflows by US$0.2 million.

Cash Flows from Investing Activities. Net cash outflows for investing activities were US$5.1 million for the year ended June 30, 2015, compared with US$38.2 million for the year ended June 30, 2014, a decrease of US$33.1 million. US$31.3 million of the decrease was due to a reduction in payments for business combination. US$1.9 million decrease due to payments for deposits on commencement of leases in the year June 30, 2014 for our New York and Melbourne offices.

 

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Net cash outflows for investing activities were US$38.2 million for the year ended June 30, 2014, compared with US$4.8 million for the year ended June 30, 2013, an increase of US$33.4 million. US$31.8 million of the increase was due to an increase in payments for business combinations. US$1.6 million of the increase was due to payments for deposits on commencement of leases in the year ended June 30, 2014 for our New York and Melbourne offices.

Cash Flows from Financing Activities. Net cash inflows for financing activities were US$45.9 million for the year ended June 30, 2015, compared with US$2.2 million for the year ended June 30, 2014, an increase of US$43.7 million. Celgene Corporation, a global biopharmaceutical company engaged in the development and commercialization of innovative therapies for the treatment of cancer and immune-inflammatory related diseases, bought Mesoblast stock for US$45.0 million in a private placement. This increase was offset by a US$0.9 million decrease in receipts from the exercise of the employee share options. US$0.4 million decrease was due to an increase in transaction costs arising on share issues.

Net cash inflows for financing activities were US$2.2 million for the year ended June 30, 2014, compared with US$174.4 million for the year ended June 30, 2013, a decrease of US$172.2 million. US$169.4 million of the decrease relates to the placement of shares in the year ended June 30, 2013. Mesoblast made a share placement of 26,970,979 shares to institutional and sophisticated investors in March 2013 at a price of A$6.30. Net of transaction costs this placement raised US$169.4 million. Additionally receipts from the exercise of the employee share options increase of US$2.8 million in the year ended June 30, 2014.

Operating Capital Requirements

To date, we have not generated any revenues from our product sales. We do not know when, or if, we will generate any revenue from our product sales. 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. 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 incident 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. Upon the completion of this offering, we expect to incur additional costs associated with operating as a U.S. public company. We anticipate that we will need substantial additional funding in connection with our continuing operations.

We expect that our Research and development and Management and administration expenses will continue to increase and, as a result, 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.

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 additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our ordinary shares. If we incur 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.

 

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Contractual Obligations and Commitments

Lease Commitments: Group as Lessee

We lease various offices under non-cancellable operating leases expiring within 1 to 6 years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Excess office space is sub-let to a third party also under a non-cancellable operating lease.

 

(US$ in thousands)    Total      Within one
year
     Later than one
year but no
later than
three years
     Later than
three years
but no later
than five
years
     Later than
five years
 

Operating leases

     14,116         2,592         7,448         4,076         —     

Total Commitments

     14,116         2,592         7,448         4,076         —     

Lease commitments include amounts in AUD and Singapore dollars which have been translated to USD as of June 30, 2015 using foreign exchange rates published by the Reserve Bank of Australia.

Sub-Lease Commitments: Group 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:

 

(US$ in thousands)    Total      Within one
year
     Later than one
year but no
later than
three years
     Later than
three years
but no later
than five
years
     Later than
five years
 

Operating sub-lease

     712         161         483         67         —     

Total commitments

     712         161         483         67         —     

Sub-lease commitment includes amounts in AUD which have been translated to USD as of June 30, 2015 foreign using exchange rate published by the Reserve Bank of Australia.

In addition to the obligations in the table above, as of June 30, 2015 we also had the following significant contractual obligations described below.

Contingent Liabilities

We will be required to make a milestone payment to Central Adelaide Local Health Network Incorporated, or CALHNI, of US$0.25 million on completion of each Phase 3 (human) clinical trial and US$0.35 million on each FDA marketing approval for products in the orthopedic field. We will pay CALHNI a commercial arm’s length royalty based on net sales by us of licensed products in the orthopedic field each quarter.

We may also be required to pay consideration to CALHNI upon successful completion of subsequent clinical milestones in fields other than orthopedic. These payments are not included in the table above due to the uncertainty of their timing.

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, 2015 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, 2015.

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 above, as defined under SEC rules.

 

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Certain Differences Between IFRS and GAAP

IFRS differs from GAAP in certain respects. Management has not assessed the materiality of differences between IFRS and GAAP. Our significant accounting policies are described in Note 21 to our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

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.

Interest Rate Risk

We are not exposed to typical interest rate risk, which is the impact of interest rates on the cost of servicing and repaying debt. Our exposure to interest rate arises through movements in regards to 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 date of our deposits across various periods. We ensure that sufficient funds are available, in at-call accounts, to meet our cash flow requirements.

Foreign Currency Exchange Risk

We have certain clinical, regulatory and manufacturing activities which are being conducted internationally. Our primary currency exposure is the clinical trial activities which are occurring in the United States of America and manufacturing activities occurring in Singapore. As a result of these activities, we have foreign currency amounts owing primarily in U.S. dollars and Singapore dollars, as well as some smaller amounts in various other currencies. 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 the trend of the relevant foreign currency rates, or FX rates, to the Australian dollar and making decisions as to the levels to hold in each currency by assessing our future activities which will likely be incurred in those currencies. We engage professional advice when considering forward foreign exchange contracts.

As of June 30, 2015, we held 64% of our cash in U.S. dollars, and 36% in Australian dollars. We have entered these financial derivative contracts to take advantage of enhanced interest rates yields available on Australian dollar deposit when compared to U.S. dollar deposits. We sell U.S. dollars and buy Australian dollars from the bank at a pre-agreed FX rate and agree to then sell those Australian dollars and buy U.S. dollars from the bank on maturity also at a pre-agreed rate. As these FX rates are known at the outset, there is no currency risk.

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 appearing elsewhere in this prospectus, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

 

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Revenue Recognition

Revenues comprise the fair value of the consideration received or receivable.

Commercialization Revenue

Development and commercialization revenue generally includes non-refundable up-front license and collaboration fees; milestone payments, the receipt of which is dependent upon the achievement of certain clinical, regulatory or commercial milestones; as well as royalties on product sales of licensed products, if and when such product sales occur; and revenue from the supply of products.

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.

Cephalon Arrangement

In December 2010, we entered into a development and commercialization agreement, or the DCA, with Cephalon, Inc., now a wholly-owned subsidiary of Teva, which allows for Teva to obtain world-wide rights to commercialize specific products based on our proprietary adult stem cell technology platform. As part of the DCA, we received US$130 million as a non-refundable up-front payment.

Further payments of up to US$1.7 billion may be received on achievement of certain regulatory milestones with respect to each product Teva may choose to commercialize. The milestones are based on approvals of the product for treatment in various territories. We would also be entitled to receive future royalty payments for supply of commercialized product as a percentage of net sales. No such payments have been received.

We analyzed the arrangement to determine whether the components which include a license, participation in a joint steering committee, a development program, and manufacturing and supply services, can be separated or must be treated as a single transaction in assessing revenue recognition criteria.

As our obligations in relation to the joint steering committee and the development program are substantive and cannot be readily separated from the initial license transfer, we have not accounted for the license as a separate component. As management cannot readily estimate the costs required to complete the development program, due to significant uncertainties relating to success of the development program, revenue has been recognized on a straight line basis over the estimated development period of MPC-150-IM. If we were to shorten or lengthen the development period then we would be required to change the amount of revenue we recognize.

For the years ended June 30, 2015, 2014 and 2013 we recognized US$15.0 million, US$15.0 million and US$18.7 million of revenue, respectively, being the amortization of the initial payment over the estimated development program term. No revenue has been recognized for any future development milestones or royalties specified in the agreement as we cannot reliably estimate whether we would become entitled to such payments. We changed our estimate for the development period in the year ended June 30, 2013 following the approval of the program protocol and associated program timelines by the Joint Steering Committee.

 

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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 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. With respect to the First JCR Field, we are 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, 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.

For the year ended June 30, 2015, we recognized US$2.0 million commercial milestone revenue upon our partner, JCR, filing for marketing approval of its MSC-based product TEMCELL in Japan, which is a substantive milestone. We have no further performance obligations in relation to this revenue. No milestone revenue was recognized during FY2014 and FY2013.

Government Grant Revenue

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 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. A refundable tax offset is available to eligible companies with an annual aggregate turnover of less than A$20 million. Eligible companies can receive a refundable tax offset for a percentage of their research and development spending. Up to June 30, 2013 the rate of the refundable tax offset was 45%, after that date the rate is 43.5%.

Our 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 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.

Business Combinations

We record business combinations in accordance with IFRS 3 Business Combinations.

IFRS 3 Business Combinations requires that the acquisition of business be accounted for under the acquisition method of accounting. The definition of a business in IFRS 3 Business Combinations is: a business consists of inputs and processes applied to those inputs that have the ability to create outputs.

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 business comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by us. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets

 

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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.

The excess of the consideration transferred over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts were to be less than the fair value of the net identifiable assets acquired and the measurement of all amounts has been reviewed, the difference would be recognized directly in the consolidated income statement 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 is determined based on required rates of returns of comparable companies (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.

In October 2013 we acquired the MSC business of Osiris. In accordance with the guidance in IFRS 3 Business Combinations management determined that, although no equity interests were acquired, the asset purchased in this acquisition did constitute a business under the definition.

In accordance with IFRS 3 Business Combinations the acquisition method of accounting was used to account for the business combination. An independent valuation expert provided the fair value of the consideration paid and assets transferred, the liabilities incurred and the equity interests issued by us.

The purchase agreement also included a component of contingent consideration which was made up of certain pre-determined milestone and royalties. At acquisition this contingent consideration was recognized as a financial liability at its fair value which was provided by an independent valuation expert. See Notes 5 and 12 of our consolidated financial statements and the related notes thereto included elsewhere in this prospectus for more information regarding the contingent consideration. This financial liability is subsequently remeasured to fair value with changes in fair value recognized in the consolidated income statement.

We recognized goodwill on acquisition which was the excess of the consideration transferred over the fair value of the net identifiable assets acquired.

An independent valuation expert calculated all valuations on the basis of fair value less costs to sell by using the income approach.

Goodwill

We have recognized goodwill as a result of two separate acquisitions. Goodwill of US$118.4 million was recognized on acquisition of Angioblast Systems Inc. in 2010 and US$13.9 million was recognized on the acquisition of assets from Osiris in 2013. In the year ended June 30, 2015, there was a US$2.1 million out of period adjustment to goodwill on finalization of the MSC business combination of Osiris. 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 on May 31. 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 elsewhere in this prospectus for more information regarding the assumptions used in determining the fair value less costs to sell.

In-Process Research and Development

IFRS requires that acquired in-process research and development be measured at fair value and carried as an indefinite life intangible asset subject to impairment reviews. We have recognized in-process research and

 

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development as a result of two separate acquisitions. In-process research and development of US$387.0 million was recognized on the acquisition of Angioblast Systems Inc. in 2010 and US$126.7 million was recognized on the acquisition of assets from Osiris in 2013.

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 at May 31 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.

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 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.

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 statements and the related note thereto included elsewhere in this prospectus 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 valuation are continually reviewed by management and consideration is given as to whether there are indicators of impairment which would warrant impairment testing.

The impairment testing completed at May 31, 2015 showed the recoverable amount of our cash generating unit, including goodwill and in-process research and development, exceeded the carrying amounts, and therefore no impairment was identified.

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);

 

    It must be subject to insignificant risk of change of value.

 

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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.

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).

Our level 3 asset consists of an investment in unlisted equity securities in biotechnology sector. Level 3 assets were 100% of total assets measured at fair value as of June 30, 2015. There were no level 3 assets as of June 30, 2014 and 2013.

Our level 3 liabilities consist of a contingent consideration provision related to the acquisition of Osiris’ MSC business. Level 3 liabilities were 100% and 99.6% of total liabilities measured at fair value as of June 30, 2015 and 2014. There were no level 3 liabilities as of June 30, 2013. 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:

 

     Fair value as of
June 30,
     Valuation
technique
   Unobservable
Inputs*
   Range of inputs
(weighted average) for
the year ended June 30,
    

Relationship of
unobservable
inputs

to fair value

Description

   2015      2014            2015      2014     
Contingent consideration provision      91,890         81,247       Discounted
cash flows
   Risk adjusted
discount rate
    

 

11%-13%

(12.5%)

  

  

    

 

11%-13%

(12.5%)

  

  

  

2015: A change in the discount rate by 0.5% would increase/decrease the fair value by 3%

 

2014: A change in the discount rate by 0.5% would increase/decrease the fair value by 3%

            Expected unit
revenues
     n/a         n/a      

2015: A 10% increase in the price assumptions adopted would increase the fair value by 8%

 

2014: A 10% increase in the price assumptions adopted would increase the fair value by 5%

 

* There were no significant inter-relationships between unobservable inputs that materially affect fair values.

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. We have had a history of net losses since inception, and as a result, we have not recognized our net deferred tax assets due to our plans to consolidate certain intellectual property assets and therefore taxable temporary differences will not be available to offset the deferred tax assets. If circumstances change and we determine that we will be able to realize some or all of these deferred tax assets in the future, we will record an adjustment for the recognition of deferred tax assets.

Currently, our pipeline is at various stages of development and our intangible intellectual property assets are held by a number of our entities across multiple jurisdictions. We are seeking to consolidate certain intellectual property assets and are currently contemplating the steps to achieve this objective.

As required under IFRS, we do not recognize the impact of any potential future corporate re-organizations to remeasure our deferred tax liabilities until they are in place. Our deferred tax liabilities are measured at the relevant rate in the relevant jurisdiction at each balance date. Any potential future changes arising from a re-organization could be material to our future operations.

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

 

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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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BUSINESS

Overview

We are a global leader in the field of regenerative medicine. We have leveraged our proprietary technology platform, which is based on specialized cells known as mesenchymal lineage adult stem cells, or MLCs, to establish what we believe to be the most advanced regenerative medicine product portfolio in the industry. We have what we believe to be an extensive safety profile for our product candidates, with over 1,340 patients treated. Based on outcomes in Phase 2 trials across multiple indications, we now have five MLC product candidates that are in active Phase 3 trials or are Phase 3-ready.

In September 2015, our licensee JCR Pharmaceuticals Co. Ltd, or JCR, received full approval for the first “allogeneic” cell-based product in Japan, meaning a product containing cells from a single donor expanded and used in many unrelated patients. We believe we are well positioned to have the first industrially-manufactured allogeneic stem cell product approved in the United States.

Our deep understanding of the fundamental mechanisms of action of MLCs and our proprietary manufacturing processes have been leveraged to create a portfolio of independent, non-interchangeable MLC-derived product candidates. Each of our product candidates has its own distinct technical characteristics, target indications, individual reimbursement strategy, separate commercialization potential, and unique partnering opportunities.

We have focused on significantly advanced stages of diseases where specific subpopulations of patients have high unmet medical needs, providing accelerated development pathway opportunities and the potential for attractive pricing. Our goal is to first gain broad acceptance of any approved products as treatment options for these severely ill patients, then expand the applications of such products over time to broader patient populations.

We expect a number of important clinical and commercial milestone events to occur over the next 12 to 24 months for our most advanced product candidates, including:

 

    By the end of 2015, we expect to announce 6 month results from the first cohort in the Phase 2 trial of our product candidate for RA. Results from the second cohort are expected during the first half of 2016. We believe positive results from this trial would support progression towards Phase 3 and potential partnering discussions.

 

    During the first quarter 2016, we expect that our licensee JCR will launch TEMCELL® Hs. Inj. (JR-031), or TEMCELL, its MSC-based product for aGVHD in Japan. Decisions by Japanese regulators on price reimbursement for JCR’s product TEMCELL are pending. Under our agreement with JCR, we are entitled to receive milestone payments on product regulatory approvals, escalating double-digit royalties in the twenties and other payments at pre-defined thresholds of cumulative net sales.

 

    During the first quarter 2016, we expect to announce the outcome of the first interim analysis of safety and efficacy from the Phase 3 trial of our product candidate for advanced CHF. We expect the second interim analysis for futility, resizing and possible overwhelming efficacy to occur in the first quarter 2017. Phase 2b trail results for our product candidate for end-stage CHF are expected in middle 2017. This product candidate is partnered on a global basis with Teva Pharmaceutical Industries, Ltd., or Teva.

 

    During the third quarter 2016, we expect to announce top-line results from an interim analysis of a Phase 3 trial of our product candidate for aGVHD. This interim analysis may support a BLA filing by the end of 2016. We expect to complete recruitment of this Phase 3 trial in the fourth quarter 2016 and to have top-line results of the trial in the first quarter 2017.

 

    During the second half 2016, we expect to complete enrollment of the first Phase 3 trial for our product candidate for CLBP.

 

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Proprietary Platform and Scalable Manufacturing

MLCs are present around blood vessels in all tissues, where they can respond to signals associated with tissue damage. This response includes the secretion of a variety of biomolecules that affect various reparative and immunomodulatory mechanisms responsible for maintaining tissue health. Understanding the mechanisms of action by which these biomolecules induce tissue restoration has broad applicability in treating diseases for which current standards of care are inadequate or for which no approved therapy currently exists. Our lead MLC product candidates have been developed through proprietary manufacturing processes to optimize expression of certain biomolecules. The expressed biomolecules are those implicated in the mechanisms of action by which the MLC product candidate is thought to modify outcomes for the target condition for which it is being developed.

MLCs have two additional distinct characteristics that, when combined with our proprietary manufacturing processes, enable allogeneic or “off-the-shelf” use of our product candidates. First, we have developed proprietary methods that enable the isolation of MLCs from healthy donors and their large-scale expansion while maintaining their ability to produce key biomolecules associated with tissue health and repair. In addition, unlike other categories of stem cells, MLCs are “immune privileged” in that they do not express specific cell surface co-stimulatory molecules that would otherwise initiate an immune response when administered to unrelated patients. These characteristics allow us to produce large quantities of off-the-shelf MLC-based product candidates from a few donors for use in thousands of unrelated recipients, with consistent, well-defined therapeutic properties, batch-release criteria and established potency assays, all with accompanying manufacturing and distribution economies-of-scale.

We have developed multiple distinct product candidates derived from our MLC platform by applying an approach that we refer to as “Product-by-Process” in which we modify the manufacturing, formulation, dosage and route of administration for each product to optimize an MLC-derived product for a specific target condition. For example, products for treating systemic inflammatory or immunologic conditions are delivered intravenously, while products for tissue repair and regeneration are delivered locally, and differences in formulation give rise to distinct disc repair and spinal fusion product candidates. This allows for the development of independent, non-interchangeable products, each of which has distinct pricing and strategic partnering opportunities. We have also established what we believe to be a leading intellectual property position covering compositions, uses and methods of manufacturing of MLCs, which we believe provides us with substantial competitive advantages for the commercial development of regenerative medicine products.

Lead Product Candidates

We have prioritized our portfolio into tiers based on stage of development, largest market opportunities and anticipated time to market. Tier 1 programs represent our lead programs where we focus the majority of our time and resources. Tier 2 programs are also in development and may advance to Tier 1 depending on the merit of newly generated data, market opportunity or partnering options. Additionally, we have a significant pipeline of earlier-stage programs.

We expect a number of important clinical milestone events to occur over the next 12 to 24 months for our most advanced product candidates in both Tier 1 and Tier 2. By the end of 2015, we expect to report data from our ongoing Phase 2 trial in patients with biologic-refractory rheumatoid arthritis. In 2016, we expect to report outcomes from two Phase 3 trials and a Phase 2 trial.

For each product candidate, we evaluate whether to pursue development and commercialization on our own or with a strategic collaborator who can provide the appropriate resources and expertise to maximize each opportunity. Teva is our global collaborator for the late-stage clinical development and commercialization of certain cardiovascular, central nervous system and bone marrow transplant fields, and is currently enrolling a Phase 3 program in patients with advanced CHF. JCR is our collaborator in Japan for the treatment of aGVHD.

 

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A summary of our lead programs, their corresponding stage of development and our strategic collaboration status, are captured in the tables below.

Tier 1 Programs

 

Product

Candidates

 

Programs

 

Collaborator/
Geographic
Rights

 

Stage of Development

 

Anticipated Milestones

MPC-150-IM

  Class II/III CHF   Teva (Global)  

•    Phase 2 trial completed

•    Phase 3 trial enrollment ongoing

•    Enrollment of the patients for first interim analysis completed

 

•    Outcome of first Phase 3 interim analysis for safety and efficacy in first quarter 2016

•    Second interim analysis for futility, resizing and possible overwhelming efficacy in first quarter 2017

•    Phase 3 trial complete in 2018 with potential to accelerate based on second interim analysis

  End-stage CHF  

Teva

(Global)

 

•    Phase 2a trial completed

•    Phase 2b trial ongoing, funded by the NIH

 

•    Phase 2b trial results expected in middle 2017

MPC-06-ID

  CLBP  

Proprietary

(Global)

 

•    Phase 2 trial completed

•    Phase 3 trial enrollment ongoing

 

•    Design being finalized for interim analysis in second half 2016

•    Complete enrollment of first Phase 3 trial in second half 2016

•    Phase 3 program complete in first half 2018

TEMCELL/MSC-100-IV

 

Acute GVHD

 

JCR (Japan)

 

•    JCR received full approval in September 2015

 

•    Launch in Japan in first quarter 2016

  Acute steroid-refractory GVHD   Proprietary (Global, ex-Japan)  

•    Enrollment ongoing for U.S. pediatric Phase 3 trial

 

•    U.S. Phase 3 pediatric trial top-line results from an interim analysis in third quarter 2016, positive results may support BLA filing by end of 2016

•    Complete recruitment of Phase 3 trial in fourth quarter 2016

•    Top-line results of Phase 3 trial in first quarter 2017

MPC-300-IV   Rheumatoid arthritis (biologic refractory)   Proprietary (Global)  

•    Phase 2 trial ongoing

•    First cohort enrollment completed

•    Second cohort enrolling

 

•    6 month data for first cohort by the end of 2015

•    Second cohort results in first half 2016

  Diabetic kidney disease   Proprietary (Global)  

•    Phase 2 trial ongoing, enrollment completed

 

•    Phase 2b/3 trial design ongoing

 

All time periods refer to calendar year periods.

Tier 2 Programs

 

Product Candidates

  

Programs

  

Collaborator/
Geographic
Rights

  

Stage of Development/

Anticipated Milestones

MPC-25-IC

   Acute cardiac ischemia   

Teva

(Global)

  

•    Phase 2 trial ongoing

MPC-25-Osteo

   Spinal fusion   

Proprietary

(Global)

  

•    Phase 2 trial completed

•    Phase 3 trial design ongoing

MPC-CBE

   Bone marrow transplantation (BMT)   

Teva

(Global)

  

•    Phase 3 trial ongoing

MSC-100-IV

   Crohn’s disease (biologic refractory)   

Proprietary

(Global)

  

•    Phase 3 trial ongoing

 

All time periods refer to calendar year periods.

For product registration purposes, Phase 3 programs may require more than one trial.

 

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Our Competitive Strengths

We have a leadership position in regenerative medicine due to our MLC platform, broad portfolio of product candidates targeting attractive markets, stem cell manufacturing capabilities, intellectual property portfolio, key strategic alliances and experienced management team.

Disruptive technology platform

Our proprietary MLC platform allows us to develop product candidates that have the potential to significantly improve the treatment of a number of serious and debilitating conditions due to the MLCs’ ability to secrete biomolecules that induce tissue repair through multiple diverse mechanisms. Regenerative medicines aim to restore affected cells and tissues, and therefore may have broad applicability in treating diseases where current standards of care are often inadequate or where no approved therapy currently exists.

Our MLC platform has two additional technical advantages that are not shared by other cell types. The first is that we use proprietary processes to isolate MLCs from a few healthy donors and significantly expand them in culture, while maintaining their innate therapeutic characteristics. The second is that MLCs do not materially activate the immune system. Together, these two unique characteristics enable MLCs to be used as allogeneic, off-the-shelf therapies that can be developed from a small number of donors and administered to many patients, with batch-to-batch consistency, commercial scale capabilities and predictable therapeutic properties, all without any material immune responses in patients.

Broad portfolio of distinct and advanced product candidates

While all of our product candidates are based on our MLC platform, our Product-by-Process approach allows for the development of distinct, non-interchangeable products, each of which has distinct pricing and partnering opportunities. Using this approach, we have created a broad portfolio of product candidates that target a wide range of diseases, including five Phase 3 or Phase 3-ready product candidates, and potentially the first industrially manufactured culture-expanded allogeneic stem cell product to be approved in the United States. We have an extensive patient safety data file on our MLC-based product candidates.

Target markets with high unmet needs where technology shows greatest prospects

Our strategy is to develop product candidates that target significantly advanced stages of certain diseases where specific sub-populations have high unmet needs. These include advanced CHF, moderate to severe CLBP, aGVHD, and rheumatoid arthritis and diabetic kidney disease. As a result, if our clinical trials prove successful at demonstrating improved safety and efficacy against existing treatment options, we believe we may benefit from accelerated development pathways, potentially attractive pricing and reimbursement, and enhanced likelihood of entering into commercial partnerships. As any of our products obtain market approval and acceptance in the medical community, we believe we will have the opportunity to expand over time into broader patient populations with less severe stages of a targeted disease.

Scalable manufacturing capabilities

We have developed proprietary manufacturing processes that we expect will enable production at commercial scale with reproducibility and batch-to-batch consistency, supported by robust quality assurance procedures and lot release assays. Our manufacturing processes have met stringent criteria required by international regulatory agencies, including the FDA. We have built an internal team with significant experience in the production of cell therapy products and the commercial production of approved biopharmaceuticals.

We have established a strategic alliance with Lonza, a global leader in biopharmaceutical manufacturing, which includes exclusive access to their large-scale biologics production facility in Singapore, a major international hub for biopharmaceutical development and manufacturing, for cell therapy products. Our exclusive long-term access to this Singapore facility allows us to utilize our proprietary manufacturing processes in a controlled environment.

 

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Intellectual property leadership

We have a large patent portfolio of issued and pending claims covering compositions of matter and methods of use for MLCs, irrespective of the tissue source for donated MLCs (e.g., our patents cover MLCs from bone marrow, adipose, placenta, umbilical cord and dental pulp tissues). Our patents also cover elements of our manufacturing processes. As of August 31, 2015, we had 72 patent families, including 661 patents or patent applications. We maintain trade secrets covering a significant body of know-how and proprietary information related to our core product candidates and technologies. As a result, we believe we have a leading intellectual property position in the MLC space that provides us with substantial competitive advantages for the commercial development of regenerative medicine products.

Strategic alliances

We have established strategic relationships with several industry leaders to support the development and potential commercialization of our product candidates. Our collaborators provide clinical development, manufacturing and commercial capabilities as well as financial support to enhance the potential for the success of our product candidates, which mitigates our capital obligations and commercial risk.

Teva is our global collaborator for the late-stage clinical development and commercialization of certain cardiovascular, central nervous system and bone marrow transplant fields, and is currently enrolling a Phase 3 program in patients with advanced CHF. JCR is our collaborator in Japan for the treatment of aGVHD. Lonza is our collaborator for cell therapy manufacturing. Our relationship with the Singapore Economic Development Board, or EDB, provides us with various financial incentives associated with our activities in Singapore.

Experienced management team

Our CEO, Dr. Silviu Itescu, is a pioneer in the study and clinical development of stem cell therapeutics, and a globally recognized leader in the field of regenerative medicine. Our broader management team, through prior employment at leading drug development companies and regulatory agencies, has substantial experience in the clinical development, manufacturing, regulatory management and commercialization of biopharmaceuticals.

Our Strategic Alliances

We have established strategic alliances to provide clinical development, manufacturing and commercial capabilities, which mitigates our capital obligations and commercial risk. Key terms of these strategic alliances are summarized below. We will evaluate and, where appropriate, enter into additional collaborations with biopharmaceutical or other organizations to further advance our product candidate portfolio and to gain access to scientific expertise or funding support.

Teva/Cephalon, Inc.—Cardiovascular, Neurological and Bone Marrow Collaboration

In December 2010, we entered into a development and commercialization agreement, or DCA, with Cephalon, Inc., now a wholly-owned subsidiary of Teva. We refer in this discussion to Cephalon and Teva together as Teva. Under the DCA, which will continue in existence for so long as Teva or its affiliates or sublicensees are developing any product covered by the DCA, we and Teva are collaborating to develop certain MPC-based product candidates, including MPC-150-IM for CHF. The collaboration is limited to certain specified indications within cardiovascular, central nervous system, and BMT. Teva has the right and responsibility to fund late-stage clinical development (Phase 2b and Phase 3 clinical trials) and to commercialize certain of our product candidates for specified indications throughout the world. The most advanced of the programs is our CHF program, and Teva is currently enrolling a Phase 3 trial in this indication.

In conjunction with signing the DCA, Teva has paid us US$130 million and purchased A$197 million of our ordinary shares. Under the DCA, Teva has agreed to pay us up to an additional US$1.7 billion in milestone payments for certain of our product candidates that are approved in specified indications in certain major jurisdictions. In addition, Teva agreed to pay us a transfer price for our supply of commercial quantities of certain of our product candidates equal to a percentage of its global annual net sales, commencing in the twenties and up to 40%, based on achieving over US$2 billion in annual global net sales.

 

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In September 2013, we and Teva amended the DCA. As a result of the amendment, the ongoing Phase 3 clinical trial for MPC-150-IM in CHF, which Teva is conducting and funding, now includes two interim analyses of efficacy and/or safety. Subject to the trial reaching specified enrollment rates, Teva is obligated to conduct and fund the Phase 3 clinical trial for CHF at least until the first interim analysis is completed.

All activities under the DCA are overseen by a joint steering committee with an equal number of representatives appointed by us and Teva. Generally, we are responsible for development costs for product candidates through Phase 2a clinical studies, except that Teva is obligated to reimburse us for a certain portion of our costs related to the development of such product candidates for the central nervous system field. Generally, Teva is responsible for development costs beyond Phase 2a clinical studies. We are the exclusive supplier for each of our product candidates for development and commercialization activities for the specified indications. Teva is responsible for obtaining and maintaining regulatory approvals as well as for all commercialization costs.

During the term of the DCA, we and Teva agreed to mutual non-compete obligations with respect to stem cell therapeutic products in the specified indications. However, any entities that we may acquire or may acquire us may continue any existing competing activities subject to certain requirements to keep those activities separate from our collaboration with Teva, and in such circumstances, Teva would have the right to take over sole control of the development of our covered product candidates for the specified indications under the DCA.

With the exception of the cardiovascular field, in which Teva committed to conduct and fund the Phase 3 clinical trial in CHF at least through the first interim analysis, Teva has the right to terminate the DCA upon advance notice to us. We have the right to terminate the DCA in the event Teva materially breaches the DCA and has not cured within certain time periods, except that once Teva has received regulatory approval for any covered product in any of the U.S., the EU or Asia, we may not terminate with respect to that same geographic location.

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, or the 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.

The Japanese Pharmaceuticals and Medical Devices Agency granted TEMCELL orphan drug status in December 2013. JCR received full approval in September 2015. TEMCELL is the first allogeneic cell-based product to be approved in Japan. Decisions by Japanese regulators on price reimbursement for JCR’s product TEMCELL are pending. During the first quarter 2016, we expect that JCR will launch TEMCELL in Japan.

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 payments of up to US$6.5 million in the aggregate when JCR reaches certain development and 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.

 

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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.

Under the MSA, as long as we continue to meet certain annual spending commitments with respect to activities in Singapore, Lonza agreed not to supply third parties with allogeneic cell therapy products from Singapore, including from its existing biologics production facility, subject to certain exceptions. During the term of the MSA, we will have access to this facility, which allows us to utilize our proprietary manufacturing processes in this controlled environment.

We have agreed to order a certain percentage of our clinical requirements and commercial requirements 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, 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

 

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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.

Cell-Based Therapeutics

We are a global leader in the development of regenerative medicine product candidates due in large part to the therapeutic and commercial advantages offered by our MLC-based platform.

Introduction to Mesenchymal Lineage Stem Cells

Stem cells can be characterized as either embryonic or adult in origin. Embryonic stem cells, or ESCs, are pluripotent, and differentiate during embryonic and fetal development into all specialized tissues in the body, including nerve, muscle, skin, blood, and bone. ESCs and the related induced-pluripotent stem cells have two characteristics that complicate use as therapeutic products. First, ESCs have a relatively high proliferative capacity that can give rise to certain cancers called teratomas. Secondly, ESCs can activate the immune system of treated patients and may require co-administration of immunosuppressive agents. In contrast, we develop products based on MLCs, which are adult stem cells that play an important role in tissue repair and organ maintenance throughout life, have less proliferative potential, are more restricted in their differentiation properties, and to date have not been shown to cause teratomas. The number and quality of MLCs progressively decline with advancing age, which we believe may be associated with the development of degenerative conditions. As such, we obtain our MLCs from young, healthy adults.

MLCs 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 by MLCs 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. The coordinated beneficial effects of these biomolecules on damaged tissues include:

 

    Blood vessel function and regeneration. MLCs 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. MLCs 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, that 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, MLCs 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 MLC technology platform enables development of a broad product range based on distinct cell types derived from or that are the progeny of the earliest precursors of the mesenchymal cell lineage in adult tissues. Mesenchymal precursor cells, or MPCs, constitute the earliest known cell type in the MLC lineage in vivo. MPCs can be isolated using monoclonal antibodies and culture-expanded using methods that enable efficient expansion without differentiation. Mesenchymal stem cells, or MSCs, are defined biologically in culture following density gradient separation from other tissue cell types and following culture by plastic adherence.

 

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MSCs presumably represent culture-expanded in vitro progeny of the undifferentiated MPCs present in vivo. The different functional characteristics of each cell type enables distinct product development for different targeted diseases.

Mechanisms of Action Underpin Product Development

The unique combination of properties based on secretion of diverse biomolecules underscores the importance of MLCs as a platform for the development of cell based regenerative medicine therapies.

Our lead MLC product candidates have been developed through proprietary manufacturing processes optimized to express certain biomolecules implicated in the mechanisms of action by which the MLC product candidate is thought to modify outcomes for the target condition for which it is being developed. Examples of these biomolecules as they relate to characterization of our products are as follows:

 

    MPC-150-IM: this product candidate is designed for local delivery to damaged heart muscle and to allow our MLCs to secrete biomolecules involved in enhanced myocardial neovascularization, cardiomyocyte survival, cardiomyocyte precursor migration and proliferation, and reduction in fibrosis and myocardial scar. These biomolecules include stromal cell-derived factor 1, or SDF-1, Angiopoietin-1, vascular endothelial growth factor, or VEGF, hepatocyte growth factor, or HGF, and matrix metalloproteinases, or MMPs.

 

    MPC-06-ID: this product candidate is designed for local delivery to degenerating intervertebral discs and to allow our MLCs to secrete biomolecules involved in enhanced migration and proliferation of intervertebral disc progenitor cells, and in enhanced proteoglycan and collagen synthesis in the disc nucleus and annulus. These biomolecules include Angiopoietin-1 and transforming growth factor beta, or TGF-beta.

 

    MPC-300-IV, TEMCELL and MSC-100-IV: these product candidates have been designed for intravenous delivery in systemic conditions of excessive inflammation, and to allow our MLCs to secrete biomolecules involved in immunomodulation, particularly prostaglandin E2, or PGE2, and indoleamine 2, 3-dioxygenase, or IDO, in response to activation by pro-inflammatory cytokines such as tumor necrosis factor-alpha, or TNF-alpha, and interleukin-1, or IL-1. Release of immunomodulatory biomolecules by these MLC products acts to polarize pro-inflammatory M1 monocytes to anti-inflammatory M2 monocytes, and to switch activated T helper cells 1 and 17, or Th1 and Th17, respectively, to Th2 cells and FOXP3 T regulatory cells.

 

    MPC-25-Osteo: This product is designed to allow our MLCs secrete biomolecules involved in osteoblast migration and bone vasculature, both features of new bone formation; these biomolecules include various bone morphogenic proteins, or BMPs, and VEGF.

While our MLCs play very active roles in tissue repair, our products have what we believe to be a uniquely extensive safety profile. We have an extensive patient safety data file on our MLC-based product candidates as a result of having now treated approximately 1,340 patients.

Allogeneic, Off-the-Shelf, Commercially Scalable Products

Our proprietary MLC-based products have two distinct technical properties that enable their use for allogeneic purposes, meaning cells from one donor can be expanded to treat many unrelated recipients.

 

    Expansion. We have developed proprietary methods that enable the large scale expansion of our MLCs while maintaining their ability to produce key biomolecules associated with tissue health and repair. This allows us to produce a cellular product with consistent, well-defined therapeutic properties, batch release criteria and established potency assays, all with accompanying manufacturing economies of scale.

 

    Immune Privilege. Unlike other categories of stem cells or mature cell lineages, MLCs are immune privileged, in that they do not express specific cell surface co-stimulatory molecules that would otherwise initiate an immune response when administered to unrelated patients.

 

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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 are vulnerable to significant patient-to-patient variability, resulting in a corresponding variability in the results derived from clinical use.

Despite these weaknesses, many autologous products have been advanced into clinical trials by academic and industry developers, who may understand the therapeutic potential of MLCs, but who may not have the requisite intellectual property or manufacturing capabilities and infrastructure needed to facilitate cost-effective allogeneic product development.

Our 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. 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. These product candidates will be discussed in detail below. We are developing additional product candidates that have the potential to advance into Tier 1 and Tier 2 going forward.

We expect a number of important clinical milestone events to occur over the next 12 to 24 months for our most advanced product candidates in both Tier 1 and Tier 2. By the end of 2015, we expect to report data from our ongoing Phase 2 trial in RA. In 2016, we expect to report outcomes from two Phase 3 trials and a Phase 2 trial.

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This chart is figurative and does not purport to show individual trial progress within a clinical program. For product registration purposes, Phase 3 programs may require more than one trial.

 

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Tier 1 Programs

MPC-150-IM for the Treatment of Advanced and End-Stage Congestive Heart Failure (CHF)

Overview

MPC-150-IM for the treatment of chronic CHF is our product candidate partnered with Teva. MPC-150-IM consists of 150 million MPCs administered by direct cardiac injection in patients suffering from chronic heart failure 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 scarring and fibrosis, and regeneration of heart muscle through activation of 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, and a Phase 2 dose-ranging study in patients with heart failure of either ischemic or non-ischemic etiology which 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 death.

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.

The American Heart Association reports 5.7 million adults in the United States with diagnosed CHF, or about 2% of the adult population, with 870,000 new cases diagnosed each year. CHF prevalence is expected to grow 46% by 2030, affecting more than 8 million Americans. The estimated annualized cost for CHF care in the United States is approximately $32 billion, and is projected to grow to approximately $77 billion by 2030.

CHF is classified in relation to the severity of the symptoms experienced by the patient. The most commonly used classification system for severity of heart failure, established by the New York Heart Association, or NYHA, is as follows:

 

    Class I (mild): patients experience no 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

Risk for recurrent heart failure-related hospitalizations and death increases progressively with increase in left ventricular volumes, reduction in ejection fraction, and progression in NYHA grade. About 30% 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 disease 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, or BNP, levels, have been reported to have an incidence of death or cardiovascular hospitalization approaching 50% over a median period of 16.6 months.

 

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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 transplant, due to limited supply there were only 2,378 transplants performed in the United States in 2012.

Results from our Phase 2 trials in patients with Class II/III CHF and in patients with end-stage CHF requiring assisted mechanical assist devices have shown that our MPCs appear to have the greatest efficacy in patients with the most advanced forms of CHF. We believe that targeting advanced heart failure patients with the most unmet need can provide us with the shortest Phase 3 program, the fastest time to market, and the opportunity for the most attractive pricing.

Current Status and Anticipated Milestones

Teva is conducting a double-blinded, 1:1 randomized, placebo-controlled Phase 3 trial to evaluate a single dose of MPC-150-IM in advanced CHF patients across multiple sites in North America. The enrollment criteria for this trial, including a prior heart failure hospitalization within the previous 9 months and high levels of NT-proBNP, a protein used in diagnosis and screening of CHF, are expected to result in enrichment for patients with substantial left ventricular contractile abnormality, advanced heart failure and higher risk of recurrent hospitalizations and death. The ongoing Phase 3 trial continues to recruit well.

Teva recently completed discussions with the FDA, during which important changes to the Phase 3 program for advanced CHF using MPC-150-IM were agreed to. In particular, the total number of subjects to be recruited for the ongoing Phase 3 trial, using a time to first event analysis of HF-MACE as the primary endpoint, will be reduced from approximately 1,730 to 1,165. Additionally, a second interim analysis will be performed in the ongoing Phase 3 trial when 50% of the HF-MACE have occurred. We expect this second interim analysis for futility, resizing and possible overwhelming efficacy to occur in the first quarter of 2017.

A confirmatory study is planned to be conducted in parallel in a similar patient population of approximately 500 subjects using recurrent HF-MACE as the primary endpoint. The use of recurrent HF-MACE as a primary endpoint in the confirmatory study is supported by a new analysis of the completed Phase 2 trial, where patients treated with MPC-150-IM had no HF-MACE over 36 months of follow-up, compared with 11 recurrent HF-MACE in the control group (p<0.001, log rank test). Based on our discussions with the FDA, we believe that positive clinical data from these two studies will be sufficient for product approval.

We have completed enrollment of the patients to be evaluated in the first interim analysis of the ongoing Phase 3 trial. This interim analysis will be conducted after these patients complete six months of follow-up and will include results for changes in left ventricular volumes and ejection fraction as surrogate parameters of heart failure. We expect the outcome of this first interim analysis in the first quarter of 2016. We believe that positive results from this interim analysis will reinforce and validate the Phase 3 trial design assumptions that we made based on our Phase 2 trial results. We expect that our Phase 3 trial of 1,165 patients will be complete in 2018, subject to a potential early stop based on overwhelming efficacy.

A Phase 2b trial in patients with end-stage advanced heart failure whose circulation is supported mechanically by a left ventricular assist device, or LVAD, has commenced enrollment and will be funded by the NIH. We expect that results from this trial will be available in mid-2017. This trial will be conducted by a multi-center team of researchers within the NIH-funded Cardiothoracic Surgical Trials Network, or CSTN, led by Icahn School of Medicine at Mount Sinai, New York. The same investigative group conducted an earlier pilot trial in MPCs for this patient population.

Program for Advanced CHF

Completed Phase 2 Trial in NYHA Class II/III CHF Patients

Trial Design

The primary objective of the Phase 2 study was to evaluate the safety and tolerability of 3 increasing doses (25, 75, or 150 million cells) of MPCs in patients with heart failure due to left ventricular systolic dysfunction of either ischemic or non-ischemic etiology. The secondary objectives were to look at efficacy via multiple parameters, and to identify an optimal effective dose and the optimal target population for MPC treatment.

 

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Patients with NYHA Class II or III heart failure who had a left ventricular ejection fraction, or LVEF, of less than 40% by baseline screening echocardiogram were recruited across multiple sites. All patients were between 20 and 80 years old, had either non-ischemic or ischemic cardiomyopathy that was not amenable to further percutaneous or surgical revascularization, and were on a prescribed regimen of maximally tolerated heart failure medications.

Patients were randomized to either an injection of 25, 75 or 150 million MPC by endomyocardial catheter or scripted mock injections (control group) in the catheterization laboratory. MPCs were administered into the left ventricle (approximately 15-20 injections of 0.2ml/injection) using the J&J Myostar™ injection catheter and NOGASTAR™ Mapping Catheter system that identifies viable/hibernating myocardium based on electrical voltage, theoretically making targeting of healthy but at risk tissue easier. We believe this catheter has the largest safety profile for this application and has been used in over 1,000 patients across multiple trials. Measurement of functional efficacy involved left ventricular end systolic volume, or LVESV, and left ventricular end diastolic volume, or LVEDV, measurements as well as left ventricular ejection fraction, or LVEF. An additional time-to-first event analysis of heart failure-related major adverse cardiac events, or HF-MACE, was performed. HF-MACE was defined as a composite of cardiac related death or resuscitated cardiac death, or non-fatal decompensated heart failure events.

Trial Results

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 HF-MACE long-term. More specifically:

 

    There was a dose-related effect on both LVESV and LVEDV, with the 150 million cell dose showing the greatest effect compared to controls for LV remodeling (LVESV and LVEDV both p<0.02) at month 6 post treatment and functional exercise capacity as measured by six minute walk test (6MTW: p=0.062) at month 12 post treatment. A p-value is a probability, ranging in value from 0 to 1, which indicates the likelihood that the results of a study are different between treatment and control groups. The lower the p-value, the harder it would be to see the results by chance alone. P-values below 0.05 are typically referred to as statistically significant.

 

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    An independent blind adjudication of potential HF-MACE was conducted post-hoc. Over 36 months of follow up, the 150 million cell dose was associated with a significantly greater probability of remaining free of HF-MACE events compared to the control group (0% versus 33% HF-MACE by Kaplan-Meier, p=0.026 by log-rank). The 25 and 75 million doses were not statistically different than controls with respect to this measure. On the basis of these results, the optimal dose for therapeutic benefit was considered to be the 150 million MPC dose.

HF-MACE by Kaplan-Meier Curve-36 Months Post-Treatment

 

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In order to identify the most appropriate target population for the 150 million MPC dose, we evaluated whether optimal responders to MPC therapy were in the groups with more or less advanced heart failure. A further post-hoc analysis was performed in a blinded manner stratifying controls or 150 million MPC treated patients into those with a baseline LVESV of either less than or greater than 100 ml as a surrogate for significant myocardial contractile abnormality and advanced heart failure. The 100 ml LVESV threshold was chosen because it falls more than 3 standard deviations above normal LVESV. In the Phase 2 trial, 60% of patients met this criterion. A further sensitivity analysis across every decile in baseline LVESV between 70 ml and 120ml confirmed the findings seen in the stratification using a LVESV greater than 100 ml.

This analysis demonstrated that:

 

    the therapeutic benefit of the 150 million dose on parameters of LV remodeling were markedly amplified by focusing on the target population with substantial baseline LV contractile abnormality and advanced heart failure (LVESV greater than 100 ml).

Comparison of All Subjects versus Subjects With LVESV > 100 mL (ITT, or intention to treat population)

 

         Change
(Entire Cohort)
Baseline to Month 6
     Change (LVESV > 100 mL Cohort)
Baseline to Month 6
 
        

Control

(n=15)

    

MPC-IM-150

(n=15)

    

Change
Relative to
Control

    

Control

(n=7)

    

MPC-IM-150

(n=11)

    

Change
Relative to
Control

     P-values  
 

LVESV (mL)

     +20         -7         -27         +46         -8         -54         <0.02   
 

LVEDV (mL)

     +20         -10         -30         +41         -10         -51         <0.03   
 

LVEF (%)

     -2.3         +0.6         +2.9         -6.4         +1.7         +8.1         <0.05   

 

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    control patients with advanced heart failure (baseline LVESV > 100 ml) were the fastest progressors over 6 months in terms of significant worsening in LVESV and LVEDV volumes, and loss of LVEF.

 

    over a 6 month follow-up period, the 150 million MPC dose had a substantial cardioprotective effect on LVESV (p<0.02), LVEDV (p<0.03) and LVEF (p<0.05) in Class II/III patients with substantial baseline LV contractile abnormality (i.e. those with baseline LVESV > 100 ml).

 

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    all of the HF-MACE events over 36 months of follow-up occurred exclusively in the controls with advanced heart failure.

 

    the annualized HF-MACE rate in these fast progressors was 24%, compared with 11% in all of the controls in the Phase 2 trial.

 

    more specifically, among 18 Class II/III CHF patients with baseline LVESV > 100 ml, 5/7 (71%) placebo-treated versus 0/11 150 million MPC-treated experienced one or more HF-MACE events over 36 months (p=0.0007).

 

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    therefore, the effect of the 150 million MPC dose on overall HF-MACE in the Phase 2 trials was markedly amplified in those patients with advanced heart failure and a high rate of progression and this may represent the optimal target patient population for MPC therapy.

 

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Ongoing Phase 3 Clinical Trial

The Phase 3 trial is being conducted by our partner Teva and is actively enrolling in the United States. The clinical protocol was designed after consultation with both the FDA and the European Medicines Agency. The Phase 3 trial design is a double-blinded, 1:1 randomized, sham-procedure-controlled study evaluating a single dose of 150 million MPCs, delivered via endomyocardial injection catheter to the left ventricle, in NYHA Class II/III heart failure patients with an ejection fraction of less than 40%.

The primary efficacy endpoint of the trial is a time-to-first-event analysis of HF-MACE, defined as a composite of cardiac related death or resuscitated cardiac death, or non-fatal decompensated heart failure events. These non-fatal decompensated heart failure events require use of intravenous diuretics during an in-hospital stay or during an outpatient visit. Adjudication of HF-MACE will be performed by an independent, blinded clinical endpoint committee. The trial is an event-driven trial.

In order to enrich the trial for advanced heart failure patients, additional enrollment criteria for this trial are high NT-proBNP levels, and a heart failure-related hospitalization within the past nine months, two inclusion criteria known to predict adverse outcomes in CHF. This enrichment is expected to result in the majority of enrolled patients having LV systolic dysfunction, baseline LVESV>100 mL and high rates of HF-MACE. While initially powered for an estimated annualized HF-MACE event rate of 20%, we expect that the annualized HF-MACE event rate in this enriched population is in fact likely to be closer to the 24% seen in our own Phase 2 trial and contemporary cohorts in other studies.

Teva recently completed discussions with the FDA, during which important changes to the Phase 3 program for advanced CHF using MPC-150-IM were agreed to. In particular, the total number of subjects to be recruited for the ongoing Phase 3 trial, using a time to first event analysis of HF-MACE as the primary endpoint, will be reduced from approximately 1,730 to 1,165. Additionally, a second interim analysis will be performed in the ongoing Phase 3 trial when 50% of the HF-MACE have occurred, which will include a test for superiority allowing for the possibility of stopping of the trial early based on overwhelming efficacy.

 

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A confirmatory study is planned to be conducted in parallel in a similar patient population of approximately 500 subjects using recurrent HF-MACE as the primary endpoint. The use of recurrent HF-MACE as a primary endpoint in the confirmatory study is supported by a new analysis of the completed Phase 2 trial, where patients treated with MPC-150-IM had no HF-MACE over 36 months of follow-up, compared with 11 recurrent HF-MACE in the control group (p<0.001, log rank test). Based on our discussions with the FDA, we believe that positive clinical data from these two studies will be sufficient for product approval.

The ongoing Phase 3 trial is enrolling according to plan. We have completed enrollment of the patients to be evaluated in the first interim analysis of MPC-150-IM for the treatment of advanced CHF. This interim analysis will be conducted after these patients complete six months of follow-up and will include results for left ventricular volumes and ejection fraction as surrogate parameters of heart failure.

If MPC-150-IM is successful in this difficult-to-treat population facing high risk of hospitalization or death, we should be well-positioned for potential product approval and a target population that remains underserved despite maximal standard of care. If our clinical trials prove successful at demonstrating improved safety and efficacy against existing treatment option, we believe this may also lead to attractive pricing and reimbursement.

Program for End-Stage CHF

Completed Pilot Phase 2a Trial in Patients With Advanced Heart Failure Requiring Mechanical Support

Trial Design

A multi-center, randomized, double-blind, sham-procedure controlled trial evaluated 30 patients 2:1 randomized to endomyocardial injection of 25 million MPCs or medium (control) during LVAD implantation for either bridge-to-transplant or as a destination therapy. The primary safety endpoint was incidence of infectious myocarditis, myocardial rupture, neoplasm, hypersensitivity reaction, and immune sensitization (90 days post-randomization). The key efficacy endpoints are functional status and ventricular function, while temporarily weaned from LVAD support (90 days post-randomization). Patients were followed until transplant or 12 months post-randomization, whichever came first. The two treatment groups were similar with respect to baseline characteristics. The mean age was 57.4 years (±13.6) and 83.3% were male. The mean LVEF was 18.1% (± 4.3), 36.7% had ischemic cardiomyopathy, and all patients were implanted with HeartMate II® LVADs (Thoratec Corp.), 66.7% of which were implanted for destination therapy indication.

Trial Results

The preliminary results of this trial were presented at the American Heart Association Scientific Sessions 2013 and published in Circulation in June 2014.

No patients developed a primary safety event at the trial’s 90-day primary endpoint, nor during the 12-month follow-up period.

At the 90 day primary endpoint analysis of the trial, 50% of MPC treated patients were able to successfully tolerate weaning off of LVAD support for 30 minutes compared to 20% in the control group. At 90 days, there were three deaths (30%) in the control group and none in the MPC group. Over the 12 month follow-up period, eighty-five percent (85%) of MPC patients tolerated one or more temporary LVAD weans, compared to 40% of control patients.

Based on these results, the posterior probability that a single injection of the 25 million low-dose of MPCs increased the likelihood of successful weaning is 93%. The duration of temporary LVAD wean, for those who tolerated it, was greater in MPC than control patients at each time point.

This trial has to date demonstrated feasibility and safety, and suggested that a single low-dose MPC injection improved cardiac function and had an early benefit on survival. We hypothesize that a higher MPC dose may further enhance the ability to wean LVAD recipients off support, and may show a more prolonged survival benefit and which is the basis of the Phase 2b study discussed below.

 

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Phase 2b Trial of MPC-150-IM in Patients With Advanced Heart Failure Requiring Mechanical Support

A 120-patient trial, to be conducted by the NIH-funded CSTN, will evaluate the effects of a single injection of MPC-150-IM into the hearts of patients with end-stage heart failure. This is a prospective, multi-center, double-blind, 2:1 randomized, single dose cohort, sham procedure controlled 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 either bridge-to-transplant or destination therapy may be eligible to participate in the trial. All patients will be followed until 12 months post randomization.

The primary objectives of this trial are to evaluate the safety and efficacy of injecting 150 million MPCs into the native myocardium of LVAD recipients. The primary efficacy endpoint of this study is survival over six months, and the co-primary endpoint is functional status, while temporarily weaned from LVAD support, over the six months post randomization. Functional status is defined by the ability to tolerate wean from LVAD support to low flow for 30 minutes. Secondary endpoints will include physiological parameters (which include echocardiography assessment of cardiac function and remodeling) and neurocognitive assessments.

CSTN is currently completing submissions and interactions with the FDA and Health Canada. CSTN has initiated enrollment for the trial, and results are expected in mid-2017.

MPC-06-ID for the Treatment of Chronic Low Back Pain

Overview

MPC-06-ID is our proprietary Phase 3 product candidate for the treatment of CLBP caused by DDD. MPC-06-ID comprises a unit dose of 6 million MPCs by injection directly into a targeted 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 that results in chronic pain. The 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. These effects together offer the potential to strengthen the load bearing function of the disc by increasing its water content, improving disc anatomy, and improving disc stability, while also reducing inflammation and pain.

Market Opportunity

Approximately 5.7 million patients in the U.S. alone suffer from CLBP caused by DDD. After failure of conservative measures (medication, injections, physical therapy, etc.), there is no treatment that prevents progression of disc degeneration, reduces pain and improves function over a sustained period of 6 to 12 months. When disc degeneration has progressed to a point that pain and loss of function can no longer be managed by conservative means, major invasive surgery such as spinal fusion is the only remaining option.

All therapies for progressive, severe and debilitating pain due to degenerating intervertebral discs treat the symptoms of the disease, but are not disease-modifying and thus do not address the underlying cause of the disease. Surgical intervention is not always successful in addressing the patient’s pain and functional deficit. Surgeons estimate that between 50% to 70% of patients ultimately fail back surgery, with failure defined as either not achieving at least a 50% reduction of symptoms within four months or experiencing new-onset pain and spasm. Total costs of low back pain are estimated to be between US$100 billion and US$200 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 reverse, halt or slow the progression of the disease. MPC-06-ID is being developed to target the population of patients suffering from moderate to severe chronic low back pain due to moderately degenerated discs. The target patient population has exhausted conservative treatment options, may

 

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have failed epidural steroid injections to alleviate pain and has no treatment option other than invasive and costly surgical interventions.

Current Status and Anticipated Milestones

We originally filed an investigational new drug, or IND, application to begin a Phase 2 trial for CLBP in 2011. In September 2014, after an end of Phase 2 meeting with the FDA where full 12 month results were presented, we amended the IND and filed our Phase 3 clinical study protocol. This Phase 3 program was initiated in the fourth quarter 2014.

At the start of the first quarter 2015, we announced 24-month results from the Phase 2 trial of MPC-06-ID. These results demonstrated that the treatment benefit seen at 12 months largely persists for 24 months. We believe this evidence of sustained clinical treatment effect for 24 months against existing treatment options should support attractive pricing and reimbursement, and our ability to enter into a commercial partnership.

Enrollment of the first of two Phase 3 trials is expected to be completed in the third quarter of 2016. We expect to complete the Phase 3 program in the first half of 2018.

Phase 2 Clinical Trial

The primary objective of our Phase 2 study 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. Full 6, 12 and 24 month data are now available.

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. 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.

Phase 2 Clinical Trial Results

With respect to the primary endpoint, allogeneic MPC treatment, including MPC-06-ID, was well tolerated with the most frequently reported adverse event, back pain, occurring across all patient groups.

With respect to primary efficacy endpoints, the FDA has provided guidelines on how to evaluate patient response, utilizing a composite endpoint based on achieving minimally important clinical differences, or MICD, in both pain and function from baseline. Such a composite endpoint for restorative or replacement disc therapies is different than that typically used by pharmacologic agents developed solely for palliative improvement in symptoms, such as analgesics, where short term improvement in mean pain scores between groups is sufficient to support a label for short term pain reduction. The FDA and key opinion leaders, or KOLs, have deemed that for restorative or replacement disc therapies the MICD for pain reduction should be at least a 30% improvement from baseline and for functional improvement at least a 30% improvement or 10 point improvement from baseline using a 100-point functional scale. We believe that achieving success in long-term improvement in both pain and function using even higher threshold levels than the MICD with durable outcomes for up to two years from a single dose should support a broad label for disc restoration and attractive pricing and reimbursement from payors.

 

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We have utilized this composite-based endpoint and associated guidelines, among other measures, in the evaluation of our Phase 2 results.

 

    Improvement in chronic low back pain. At 12 months, a responder analysis showed that there was clear separation between both treatment groups and both control groups at every decile increase in response beyond the MICD of 30% reduction in pain from baseline. In line with guidance from KOLs and from payers, a responder analysis was performed targeting at least 50% reduction in pain from baseline. At both 6 and 12 months, a reduction in pain from baseline of 50% or more, without any additional intervention, was seen in 59.3% of the MPC-06-ID group, 44.8% of the 18 million MPC group, 18.8% of the saline group, and 15.8% of the HA group, as measured by visual analog scale, or VAS (p = 0.006 across all four groups, p=0.023 for 6 million MPC against saline and p=0.006 against HA). Statistical significance denotes the mathematical likelihood that the results observed are real and not due to chance.

MPC groups have a greater proportion of patients with at least a 50% improvement in back pain at both 6 and 12 months relative to controls

% patients with 50% VAS reduction from baseline and no intervention

 

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    Improvement in function: At 12 months, a responder analysis showed that there was clear separation between both treatment groups and both control groups at every decile increase in response at or beyond the MICD of 30% improvement in function from baseline. In line with historical FDA preference for spine fusion and artificial disc replacement marketing application approvals, a responder analysis was performed targeting at least a 15 point improvement in function through 24 months from baseline. At both 6 and 12 months, an improvement in function from baseline of 15 points or more, as measured by Oswestry Disability Index, or ODI, without any additional intervention, was seen in 50.0% of the MPC-06-ID group. 48.3% of the 18 million MPC group, 31.6% of the HA group, and 17.7% of the saline group (p=0.05 MPC-06-ID versus saline, p=0.06 18 million MPC versus saline).

 

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MPC groups have a greater proportion of patients with at least a 15 point improvement in function from baseline as measured by ODI at both 6 and 12 months, relative to controls

% patients with 15 point ODI improvement and no intervention

 

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    Reduced need for additional surgical and non-surgical interventions: MPC-treated patients had a significantly reduced need for additional interventions at the treated disc level, including surgical intervention (spinal fusion, discectomy or artificial disc replacement) or injection (epidural steroid injection, rhizotomy or transforaminal injections), than saline controls. By 12 months, 25% of patients in the saline control group had undergone an additional intervention, compared with 15% of patients in the HA control group, 6.9% of patients in the MPC-06-ID group and only 3.3% of patients who received 6 or 18 million MPCs. By Kaplan-Meier analysis of time to a first additional treatment intervention, treatment with either MPC-06-ID or 18 million MPC significantly reduced the need for additional interventions compared with saline treatment (p=0.024 and p=0.010, respectively).

 

    Radiographic measurements: In patients with early disc degeneration (Pfirrmann MRI degenerative grades below 5), increased translational movement of the disc is a potential indicator of instability associated with early disc degeneration and annular fissures seen on MRI and pathologic examination. This is an FDA validated measurement that has previously been used in Phase 3 trials of surgical devices for discogenic back pain. At 12 months, MPC-treated patients demonstrated a reduction in radiographically-determined translational movement of the disc, suggesting a treatment effect on disc degeneration, anatomy, and improved disc stability. The 18 million MPC group had a mean translational movement of only 1.3%, the MPC-06-ID group 2.0%, the HA group 2.5%, and the saline group 3.5% (p=0.021 between groups). In this study, 85% of patients had early disc degeneration as evidenced by Pfirrmann grade <5 on MRI. At 12 months, no significant differences were seen between groups in overall Pfirrmann grade by MRI.

 

    Composite endpoint: Based on precedent and FDA feedback from our end-of-Phase 2 meeting, we developed a composite endpoint requiring at least a 50% improvement in low back pain, 15 point improvement in ODI and no treatment intervention (surgical or injection) that we believe would be sufficient to meet FDA’s requirements for approval. Utilizing this composite endpoint in a post-hoc analysis of Phase 2 data, separation between treatment and control arms was first seen at 3 months, maximal at 6 months, and sustained for at least 12 months. More specifically, the MPC-06-ID group, the 18 million MPC group, the HA control and the saline control groups had 44.4%, 37.9%, 15.8% and 11.8% of subjects meet the composite endpoint criteria at both 6 and 12 months. (MPC-06-ID vs. saline p<0.05). Moreover, the MPC-06-ID group had three times (3x) the proportion of patients achieving treatment success at both 12 and 24 months compared with saline controls (37.0% versus 11.8%, p=0.09).

 

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Proportion of patients with 50% VAS reduction, 15 point ODI reduction and no intervention over 24 months (treatment success)

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This sustained treatment benefit in the MPC-06-ID group suggests a disc regenerative mechanism of action rather than a simple analgesic effect, which would not have been sustained without repeated treatment. We believe the ability to meet this composite endpoint at both 12 and 24 months would demonstrate a robust and durable benefit for the patient consistent with a potential disease modifying mechanism of action.

Phase 3 Design

Based on an end-of-Phase 2 meeting with the FDA, the first of two Phase 3 clinical trials has been initiated, and will use a composite primary end point of pain relief and improved function, consisting of a 50% reduction in lower back pain as measured by VAS and a 15 point improvement in ODI with no intervention. Our Phase 3 program will evaluate a single 6 million MPC dose either alone or with HA carrier against saline control. The studies will be double-blinded, and include approximately 330 patients each. The Phase 3 program is planned to be international in scope including sites in the U.S., Australia, Canada and potentially Europe. A first interim analysis is expected to be performed in the second half of 2016. Each study is expected to enroll in 18 months, with up to 24 months of follow-up.

TEMCELL/MSC-100-IV for the Treatment of acute Graft versus Host Disease (aGVHD)

Overview

In a BMT, donor cells may 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 is often fatal.

MLCs are thought 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 steroid-refractory graft versus host disease, or SR-aGVHD, in the U.S., and off-label options have demonstrated mixed efficacy with high toxicity. As such, we believe there is a significant need for effective treatment with a favorable risk/benefit profile.

TEMCELL, an intravenously administered MSC-based product, has been developed in Japan for the treatment of aGVHD by our partner, JCR. TEMCELL received full approval in Japan in September 2015. Mesoblast is developing an intravenously delivered MLC product candidate for the treatment of aGVHD

 

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globally, outside Japan. Mesoblast’s product candidate, MSC-100-IV, has been used for the treatment of aGV