The company recently announced that is has received $5.8 million from the government for research and development activities. Mesoblast anticipates that it will continue to receive Australian Government funds for ongoing R&D activities undertaken during the 2015 financial year, including for development of next generation cell based product candidates. However this $5.8 million does not cover the entire R&D budget of MSB. During 2014 the group received revenues of $8.6 million for R&D program from the Australia Government as part of tax incentive to promote innovation.


Mesoblast Product Development Strategy (Source - Company Reorts)
 
Research and development costs of the company increased by 16% in the year 2013 (to $47 million), which is an increase of $7.5 million. About one third of the increase ($2.5 million) related to the advancement of Tier 1 products, and in particular the clinical programs for Graft versus Host diseases and Crohn’s disease. Tier 2 and pipeline product development spend has a moderate increase of $1.1 million compared to last year. Product development support for all the programmes has increased by $2.4 million as compared to last year. Also included in R&D are intellectual portfolio property costs, which have increased by $1.2 million as compared to last year.


Bringing late satage product candidates to market (source - Company Reports)
 
As a result of strong performance of the company’s R&D unit, MSB is closer to its goal of commercializing its stem cell products in the worlds leading healthcare market. The company has a strong cash position, which allows it to invest money in R&D as and when the need arises. Over the past few years the company has substantially expanded its portfolio of innovative products and intellectual property covering compositions, manufacturing processes and indications based on the MLC technologies.
 
The corporate strategy of the company has five clear objectives. First is to create a portfolio of clinically distinct products. Second is to focus on bringing late stage products to market and portfolio prioritization. Third is to enable manufacturing scale up to meet demands on the portfolio. Fourth is to leverage expanding talent base to continue to establish a culture of shared leadership and accountability. Fifth is to continue to build strategic partnerships.
 
Within the portfolio, the company has created clinically distinct products by applying an approach called product by process. This involved varying the main components of manufacturing, formulation, dosage and routine of administration. The company has strategically prioritized its products into tier 1 and tier 2 based on the most advanced stages of development, largest market opportunities and nearest term revenue potential. This prioritization will continue to underpin the global leadership position in the emerging field of regenerative medicine as a late stage company with five products that are in active phase 3 trials or are phase 3 ready.


Mesoblast Daily Chart (source - Thomson Reuters)
 
Manufacturing scale up is the continuous focus of the company in order to meet the projected commercial demands and reduce costs for commercial supply. The use of three dimensional or 3-D bioreactor based cell production offers the potential to significantly increase efficiency and yields. The company has employed manufacturing techniques involving both 2D and 3D technologies that will enable production at commercial scale with reproducibility, batch-to-batch consistency, and well -defined potency and release essays.
 
MSB increased its global staff by 50% over the reporting year with many new employees brining substantial experience in clinical development, regulatory management and manufacturing from leading global leading pharmaceutical companies. The company is also building product focused commercialization team for late phase clinical execution and market launch.
 
The company is yet to show profits. In the year 2014, the loss after income tax increased by $19.3 million to $81 million as a result of company transitioning to a late stage clinical development company with multiple phase 3 or phase 3 ready programs. Revenue from continuing operations has decreased by $2.8 million to $26 million.
 
Of the $4.4 million increase in manufacturing spend compared to last year, $3.6 million is attributable to production of the ceMSC platform technology acquired from Osiris in October 2013. In support of the ceMSC production and transition of the company from research grade production to commercial production, the manufacturing department has grown from six to twelve employees in 2014 contributing $1.2 million of additional expense in 2014. The group continues to invest its cash resources in 3D bioreactor, to further establish its manufacturing process in Singapore, produce MPCs and MSCs to support clinical trial activities and to optimize clinical production processes.
 
The company is currently trading at a stock price of $3.940. The company has a market capitalization of 1.32 billion and 336.93 million shares of the company are currently trading in the market.
 
Given the promising R&D investments of the company, we believe that the stock is a buy at the current price of $3.940.

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