I am sure most readers of the website are familiar with ASX reporting requirements, so apologies if I am “teaching grandmother to suck eggs”..(really weird phrase ).
If you look at Section 4 of the above link you will see that Mesoblast is required by the Listing Rules of the ASX to make a quarterly cash flow statement 4C by the end of the month following the quarter end date. Now comes the fun bit .....when you’re a biotech receiving royalties from third parties, you have numerous timing differences, owing to the way, not just royalties from net sales, but also milestone payments are received.
In my post 39835910 I provided the link to another “gold source” of data....SEC filings...which clearly laid out in Section 4.2 the timelines for notifications and payments of milestones and although the net royalty of sales percentages were redacted in the document we do receive a pretty detailed explanation of the notification and payment schedules in Section 6.1 Royalty Payments. Here it clearly states that :
”all royalty payments due hereunder shall be paid quarterly within sixty days of the end of each calendar quarter. “
(We are also able to see from Section 3.4 Reporting : a) within 60 days after the end of each calendar half year , JCR shall provide to OSIRIS (Mesoblast) a project status report with the status of all regulatory approvals and product pipeline.)
Now we have established that Mesoblast is unlikely to have received notification of the current quarterly royalties until AFTER its obligation to make its 4C filing..it becomes obvious that we are effectively seeing the cash received ($1.0m ) reflecting the payment from the prior quarter. This would be even more complicated in situations where companies have different accounting reference dates meaning a further lag in timing of receipts. In an previous conference call with analysts, the issue of timing differences was addressed, when an analyst couldn’t reconcile his numbers between the 4C and the numbers in one Comapny presentations.
To complicate things further we then have to contend with clause 4.2 (f) which discloses that payments of $0.5m need to made to MSB for each five million dollars of cumulative sales up to US $30m dollars...payable within 30 days of the event ( irrespective of any quarter dates ! ) . Indeed i have been led to understand that certain payment obligations accrue but do not become payable for over 6 months !
So , whilst you can rest assured that you tables are correct , you should have paid more attention to the commentary accompanying them. Biotech analysts are well versed in timing differences and investors in general are well aware of the need to monitor cash flow conversion in a report and accounts. For that reason you have every right to be cynical and challenge assumptions..but the Company clearly states in the Appendix to the latest 4C under the heading Royalty Receipts the following:
”Royalty receipts received from sales of Temcell in Japan for the treatment of aGVHD were $1.0m for the fourth quarter”...but then discloses that “royalty income received as revenue for the fourth quarter was $1.7m” ...but the cash for this income will not be received by the Company until July 2019.
Conclusion. Your chart was a statement of fact with regard to cash flow receipts but failed to distinguish that net royalties to Mesoblast had dramatically risen to a record level of $1.7m in the last quarterly report. Maybe you did not see or understand the accompanying data but to leave out such an important piece of information was unfortunate to say the least. Quarter on quarter increases of 70% are to be celebrated not ignored.
If i have time, i will try to prepare a little note of the upside potential of our Japanese partnership with JCR. My previous forecasts which i have expressed on this website are now looking too conservative ..and i will explain why. Whilst these numbers are no way near as meaningful as our CHF or CLBP potential sales they could still be significant . Do not forget that 25,000 people in the US are thought to suffer from EB and 500,000 worldwide...i believe JCRs treatment (which we have the right to use in other territories ) is used in the more severe cases which constitute approx 50% of the total. I have been led to believe that Temcell has a rapid therapeutic effect in clinical trials and this will be a cause of celebration to so many sufferers who typically get diagnosed with various skin cancers before the age of 35, as a further complication from this horrendous disease. I will let the derampers amongst us reflect on this fact over the weekend . Good luck all.
MSB Price at posting:
$1.47 Sentiment: Buy Disclosure: Held
(20min delay)