Mesoblast Ltd Q1 FY2020 Earnings Call

Hello, and welcome to Mesoblast’s Financial Results Webcast for the Quarter Ended September 30, 2019. An announcement and slide presentation have been lodged with the ASX. These materials will also be available on the Investor page at www.mesoblast.com. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Before we begin, let me remind you that during today’s conference call, the company will be making forward-looking statements that represent the company’s intentions, expectations or beliefs concerning future events. These forward-looking statements are qualified by important factors set forth in today’s announcement and the company’s filings with the SEC, which could cause actual results to differ materially from those and such forward-looking statements. In addition, any forward-looking statements represent the company’s views only as of the date of this webcast and should not be relied upon as representing the company’s views of any subsequent date. The company specifically disclaims any obligations to update such statements. With that, I would now like to turn the call over to Dr. Silviu Itescu, Chief Executive of Mesoblast. Please go ahead.

Thank you. Good morning, good afternoon, and thank you for joining us in the financial results call for the first quarter ended September 30, 2019. Joining me is our Chief Financial Officer, Josh Muntner. We’ll go to Slide 4, fast-forward the snapshot of our corporate history, demonstrating over a decade of scientific manufacturing, clinical development, and corporate highlights and experience targeted at bringing to market our allogeneic, off-the-shelf cellular medicines. Now cellular medicines are underpinned by three pillars: our innovative technology platform, our late-stage pipeline, and our ability to commercialize these products. Our technology targets some of the most severe disease states that are refractory to conventional therapies. We understand and have characterized well the multimodal mechanisms of action of our cells, which is key to the unifying mechanism of action concerning how these cells work. Each of our lead indications has very strong and potent anti-inflammatory capabilities, which concurrently target multiple arms of the immune system, thereby resulting in improved outcomes in very refractory diseases. Our late-stage pipeline is exemplified by our graft versus host disease product candidate, for which we have initiated and are in the final stages of completion with a rolling Biologics License Application, or BLA, to the FDA for potential product approval in the U.S. Two Phase 3 product candidates, one for heart failure and another for back pain, have near-term trial readouts in the U.S. The back pain Phase 3 product candidate has already shown positive results in Europe and Latin America with Grünenthal, and our Phase 3 heart failure product candidate has been positive in China with Tasly. In terms of commercialization, we are focusing on bringing the graft versus host disease product to market ourselves, and we’re building a U.S. sales force targeted for that product launch. We have industrial-scale manufacturing that is now building an inventory in anticipation of our first product launch. In Europe, we’re proud to say that the first approved product candidates using mesenchymal lineage technology have been commercialized by our licensees in Europe and in Japan, and the growth in royalty from our Japan partner continues to demonstrate strength, and you’ll hear a lot more about that in our financial results shortly. Slide 6 speaks to the commercial scale manufacturing capability that we have put in place. We have a scalable, allogeneic, off-the-shelf cellular medicine platform. The manufacturing capabilities meet stringent criteria set out by international regulatory agencies, including the FDA and the European Medicines Agency. We have robust quality assurance processes that ensure final products are consistent from batch to batch, which is a very important capability that ensures consistency of final products and ultimately consistency of commercial products. The expansion capabilities are scalable and meet our commercial needs. Furthermore, we possess proprietary xeno-free technologies, which will enable sufficient yields for our long-term global commercial projections. We also have in place next-generation processes, including three-dimensional bioreactors to significantly reduce labor costs and drive down the cost of goods. Slide 7 speaks to the very strong global intellectual property estate that we’ve built with over 1,000 patents and patent applications across all major jurisdictions. These cover compositions of matter, manufacturing, and therapeutic applications using mesenchymal lineage cells for a wide range of disease states. The strategy of the company is to license our strong IP estate to third parties once those parties have demonstrated clinical and commercial capabilities. In areas that we see as core to our commercial growth, we will use our IP to provide strong global protection against competitors seeking to develop products that compete with our core commercial focus. Now, moving to Slide 8. This slide is a snapshot of our commercial and late-stage product pipeline. As I mentioned earlier, the two commercial products, TEMCELL in Japan and Alofisel in Europe, are the first products to have received approval by major regulatory bodies using allogeneic mesenchymal lineage cell technologies. We are very pleased with our partnerships with JCR in Japan and Takeda in Europe and the U.S. for Alofisel. In terms of our late-stage product pipeline, the remestemcel-L product represents the entry point into the U.S. market for our mesenchymal stem cell first-generation product. It successfully completed a Phase 3 trial in children with severe steroid-refractory graft versus host disease, and we are in the final stages of completing our submissions to the FDA for potential approval in the United States. That product has additional follow-on potential in areas such as Crohn’s disease and knee osteoarthritis, and we’ll discuss those other potential indications in due course. Our second-generation suite of products are derived from mesenchymal precursor cells, the MPC suite of products, and includes Revascor, our product for heart failure, which is in the midst of Phase 3 for patients with advanced chronic heart failure. It’s also being developed for patients with end-stage heart failure with a left ventricular assist device, more on that shortly. In China, this product has been partnered with Tasly, one of China’s premier companies in the cardiovascular space. MPC-06-ID is a proprietary product candidate for chronic inflammatory lower back pain. It’s also in the midst of Phase 3 and is partnered in Europe with Grünenthal, which is Europe’s leading pain development and commercialization company. Finally, our Phase 2 assets in biologic refractory rheumatoid arthritis and diabetic nephropathy are in Phase 2, and the effectiveness of delivering MPC products has demonstrated successful clinical outcomes. Slide 9 is a summary of the partnerships and license agreements we have in place, and we will discuss those as they relate to our operational highlights. Now, I’d like to turn it over to Josh, who will update you on our first quarter financials. Josh?

Thank you, Silviu. Let me start by saying how glad I am to report on the financial progress we’ve made. Today, we’re pleased to report an improved cash position and strong consistent revenue growth. Looking at Slide 11, we’ve laid out our Q1 results from the prior two years, and we see solid growth in both milestone revenue and commercialization revenue. Overall, revenue increased by $5.4 million, a 46% increase to $17 million for the first quarter of fiscal 2020, compared to $11.6 million for the prior year period. Of course, the revenue includes a $15 million milestone payment from Grünenthal, driving milestone revenue up by 43% over the prior year period. Moving to commercialization revenue, which is to say royalties received, we’re again reporting record royalty revenue received from JCR Pharma from sales of TEMCELL to treat GvHD in Japan. As shown on Slide 11, royalties from TEMCELL increased to $1.9 million for the quarter from the prior year period, reflecting an 85% increase. We continue to be pleased with the growth JCR has had with TEMCELL to treat acute GVHD in Japan, as it provides an important guide for how we may perform if our product, remestemcel-L, is approved by the FDA as a treatment for acute GVHD. Furthermore, JCR has expanded their license to seek potential label extensions in two more settings. We may consider such uses for remestemcel-L or other allogeneic stem cell products in the future. The growing sales and potential future use of remestemcel provides us great confidence in the future for that product. On Slide 12, I’ll walk through the remainder of the income statement. We’ve discussed the growth in revenue. Now, moving down the line, you can see a significant reduction in R&D expenses from the prior year, with a 33% decrease from $18.5 million to $12.4 million. The $6 million decrease was due to reduced activity levels around our Phase 3 clinical trials, as enrollment has now been completed, and we’re anticipating readouts in calendar 2020. Also, in this quarter, we saw an increase in finance costs due to our loan arrangement with Hercules, which resulted in higher interest expense. Overall, the results presented on Slide 12 show an after-tax loss of $5.5 million, a 72% reduction compared to the after-tax loss of $19.5 million in the prior year period. Moving to Slide 13, we’re pleased to report a strengthened cash position. At September 30, 2019, we had $34.5 million of cash on hand. On October 1, we received $15 million from Grünenthal as an upfront milestone payment. Additionally, in early October, we secured gross proceeds of $50.5 million, equivalent to AUD75 million from a capital raise, in which we issued $37.5 million new ordinary shares at a price of AUD2 per share. These two items, Grünenthal and the capital raise, bring our pro forma cash on hand to $100 million, which is adequate funding for several near-term milestones. Over the next 12 months, we may receive up to an additional $30 million in milestone payments under the strategic partnership with Grünenthal and a further $35 million of non-dilutive financing under the arrangements with Hercules and NovaQuest, subject to the achievement of certain milestones. That concludes the financial portion of the presentation. For more information on our financial results, please see our filed reports with the ASX, SEC, or on our website. I’d like to hand the call back to Silviu.

Thanks, Josh. If we can move to Slide 15, I’ll begin with our operational highlights. We’re very much focused on the acute graft versus host disease market because it represents a significant market opportunity for our lead product candidate, remestemcel-L, and addresses a substantial medical unmet need. Steroid-refractory graft versus host disease has mortality rates as high as 90%, particularly in patients with severe disease, involving the gut and liver. Treatment options are very limited. Only one drug is approved for treating steroid-refractory graft versus host disease, which is not approved for children under 12 years outside of Japan. In Japan, the only product approved for children and adults is TEMCELL, marketed by our licensee, JCR. The market opportunity is large. Over 30,000 allogeneic bone marrow transplants are performed globally, with about 20% to 25% of these in children. We believe that steroid-refractory GVHD in the U.S. market, in particular, represents a substantial commercial opportunity. Slide 16 speaks to the U.S. regulatory and commercial strategy for our product candidate, remestemcel-L. First and foremost, our U.S. strategy is informed by the outcomes we’re seeing with TEMCELL in Japan. The sales, uptake, and adoption are all informative concerning the potential that we see in the U.S. market. We are in the final stages of our rolling BLA submission to the FDA, which is obviously our number one focus as a company. We already have fast track designation for the product, providing eligibility for priority review by the FDA. Our commercial strategy is in place for product launch, with plans for inventory build and building out an efficient targeted sales force. We maintain control of sales and launch capabilities, which is particularly important for the pediatric launch, as 15 centers in the U.S. account for approximately 50% of all patients with this disease. Many of these centers are already comfortable using our product under the expanded access program. The burden of illness is significant, particularly in children in the United States. As shown on slide 17, about 50% of children develop graft versus host disease, and about half of these develop steroid-refractory disease, which is not responsive to steroids. The average all-cause cost of treating a child in the United States with steroid-refractory graft versus host disease is about $500,000, on top of the reimbursed cost of a bone marrow transplant. This is mainly due to extended periods of stay in intensive care for children with severe forms of the disease. Slide 18 details the clinical and pharmacoeconomic advantages we’ve observed in our clinical trials with remestemcel-L, informed by input from key opinion leaders and payers in the U.S. market. The significant value drivers for remestemcel-L include superior day 28 overall response rates observed in Phase 3 trials, particularly in Grade C/D disease, where response rates are low, and mortality rates are high. We’ve also noted excellent day 100 and day 180 survival rates. We have a robust safety profile and have not seen any increase in infections, despite a strong immunomodulatory effect on the immune system. Our large body of clinical data supports the claims of safety and efficacy. Importantly, our ability to offer outpatient therapy will significantly reduce hospital stays, resulting in substantial pharmacoeconomic benefits, as published recently. Slide 19 presents our strategy for the lifecycle management of remestemcel-L. We are targeting the initial launch of remestemcel in the U.S. in 2020 for pediatrics, followed by expansion for adults with severe disease predominantly Grade C/D, where a high unmet need persists with high mortality. We are gathering evidence in adult studies to demonstrate that our cells are most effective in these patients. We also plan to extend the indication into chronic graft versus host disease and seek additional label extensions in Crohn’s disease and knee osteoarthritis, for which we have preliminary safety data and evidence of efficacy. A comprehensive growth strategy is being developed for remestemcel-L in the U.S. market. Recent highlights and key milestones for the product candidate are shown on Slide 20. As you heard from Josh, there continues to be growth in revenues from royalties on TEMCELL sales in Japan. The product adoption and reimbursement seen in the Japan market bode well for our strategy for remestemcel in the GVHD context in the U.S. We believe that the addressable U.S. market is approximately eight times larger than in Japan, given the number of patients with the disease, the higher incidence of GVHD in the diverse U.S. population, and the increased pharmacoeconomic benefits in the U.S. healthcare market. In line with our expectations for GVHD, we’ve entered into an agreement with Lonza for commercial product manufacturing to facilitate inventory build ahead of the planned product launch next year. Therefore, the key milestones are the upcoming filing of the completed BLA submission to the FDA, which, within 60 days of submission, will inform us of the acceptance and whether the BLA has received priority review under fast track designation. If approved, remestemcel’s launch is anticipated to occur next year. Let’s move on to the heart failure product indication on Slide 21. This slide illustrates the treatment pathway for progressive heart failure from Class I on the left to Class IV on the right. There are numerous generic drugs for Class I and II heart failure, such as ACE inhibitors or beta-blockers. Recently, new types of drugs have emerged addressing Class II heart failure, like the combination of ACE inhibitor and ARB sacubitril/valsartan, known as ENTRESTO. As patients progress and become refractory to existing medications, they reach Class III and Class IV, facing significant deterioration, frequent hospitalizations, and ultimately, death. Mortality rates in these stages are closely comparable to those seen in several cancers. At Mesoblast, we specifically target patients with Class III and IV heart failure who are refractory to all standard care therapies, as these patients are currently being evaluated in our Phase 3 trial, where we previously demonstrated promising efficacy outcomes during Phase 2 trials. This market represents a large unmet need, with even a small percentage of patients in Class III and IV reflecting a multibillion-dollar commercial opportunity for us. Slide 23 details our Phase 3 program in advanced heart failure. The trial design is a one-to-one randomized controlled, double-blinded trial conducted across 55 sites. The primary endpoint focuses on reducing total heart failure-related major adverse cardiac events, including hospitalizations. The key secondary endpoint investigates reductions in terminal cardiac events, which include death from cardiovascular disease, the need for a heart transplant, or the requirement for a left ventricular assist device. Crucially, the patient population is enriched for those at greatest risk of hospitalizations and death, as these patients demonstrated the best response to Revascor therapies in Phase 2. Upcoming key milestones in this program include achieving full accrual of primary endpoint events in the Phase 3 trial, expected by the end of this year, and the data readout planned for early next year, with results considered pivotal for supporting regulatory approval both in the U.S. and through our partnership with Tasly in China. Moving on to end-stage heart failure on Slide 25, this is an orphan indication characterized by an extremely high unmet need. Patients with no alternative options, aside from having an artificial heart or a left ventricular assist device, face over a 50% one-year mortality rate. Currently, there are approximately 4,500 to 5,500 LVADs implanted in the United States annually, but there could be more, as at least 60,000 patients with late-stage heart failure die each year, of whom half die without a transplant or LVAD. The complication rates associated with these devices limit their uptake; inflammation related to surgery causes gastrointestinal bleeding, necessitating repeated hospitalizations and transfusions. We are focused on severe gastrointestinal bleeding due to inflammation, as we have evidence showing our cells can reduce the inflammatory-related vascular abnormalities in the gut. As seen on Slide 26, two randomized, placebo-controlled trials, funded by the National Institutes of Health, demonstrated that a single injection of Revascor into the left ventricle at the time of LVAD implantation led to a 70% reduction in major gastrointestinal bleeding, linked to reduced hospitalization rates. The results from these trials have been consistent, providing strong confidence that we can replicate outcomes in a pivotal trial reducing gastrointestinal bleeding events. Slide 27 presents the highlights of this program. We have reached an agreement with our colleagues at InCHOIR at Mount Sinai School of Medicine on the protocol for a confirmatory Phase III trial in this challenging patient population. In line with FDA guidance, the primary endpoint will focus on reducing major mucosal bleeding events, specifically gastrointestinal bleeding, while key secondary endpoints will assess improvements in cardiovascular function metrics. Revascor is being developed under the existing FDA regenerative medicine advanced therapy designation and orphan drug designation, with a key upcoming milestone being the initiation of this confirmatory Phase 3 trial. We anticipate these results will serve as pivotal evidence for supporting regulatory approval in the U.S. On Slide 28, I’ll address our back pain candidate, MPC-06-ID. Chronic inflammatory low back pain due to inflammatory intervertebral disc disease is a major issue that continues to lack adequate treatment options. Once patients fail to respond to non-steroidal drugs or even epidural steroids, there is little available that provides long-lasting, durable relief or modifies the disease. Currently, there are no alternatives beyond opioid therapy, which poses risks of further escalation of use. In the U.S., approximately 4 million patients and 3.2 million patients in Europe could potentially benefit from our therapy. We have initiated a well-considered Phase 3 program to target this significant unmet need. The development strategy for the U.S. and Europe is outlined on Slide 29. The Phase 3 trial for chronic low back pain completed enrollment in March 2018, with 404 patients randomized to receive MPC-06-ID or a placebo. This trial is intended to recruit patients across the U.S. Together with our partner, Grünenthal, we are planning to initiate a confirmatory Phase 3 trial in Europe. We have begun commercial manufacturing to support product launches in both the U.S. and Europe. The results of these confirmatory trials are expected to facilitate regulatory approvals in both regions. I’d like to highlight key terms of the strategic partnership with Grünenthal, which we recently entered into. Slide 30 summarizes these terms. Grünenthal has secured an exclusive license for Europe and Latin America to develop and commercialize MPC-06-ID for treating chronic low back pain due to degenerative disc disease—an inflammatory condition that we believe our cells can address effectively. Mesoblast will receive up to $150 million in upfront milestone payments prior to product launch, along with further commercialization milestone payments. Payments include up to $45 million within the first year, consisting of $50 million upon signing (already received), $20 million upon receiving regulatory approval for the confirmatory Phase 3 trial in Europe, and $10 million for meeting certain additional clinical and manufacturing milestones. Cumulative milestone payments could exceed $1 billion, depending on the ultimate success of Phase 3 studies and patient adoption. Mesoblast will also receive double-digit royalties on product sales while retaining rights for the rest of the world, including the U.S. and Japan markets. This transaction has numerous benefits for Mesoblast, including a strong commercial partner and support for sales, marketing, and manufacturing expertise, particularly in the segmented European market. It also provides funding for the confirmatory Phase 3 trial in Europe, minimizing cash outflow for Mesoblast while enabling collaboration on study design and commercial manufacturing efforts necessary for regulatory approval across both regions. Finally, this agreement underscores third-party validation of our entire technology platform. So where do we stand regarding upcoming milestones for this product? The last patient, last visit in the Phase 3 trial for chronic low back pain will occur during the first half of the upcoming year, with the primary endpoint focusing on a composite outcome of pain and function durability through 12 and 24 months. This coming calendar year, we aim to secure clearance from European regulatory authorities for the European Phase 3 trial, marking a significant milestone in our Grünenthal partnership. Results from the trials will be pivotal for securing regulatory approval in both the U.S. and Europe in association with the Grünenthal partnership. On that note, I’ll stop, and Josh and I would be happy to take any questions.

Thank you. Your first question comes from Louise Chen with Cantor. Please proceed.

Hi. Thanks for taking my question here. So ahead of the launch of remestemcel here in the U.S., assuming approval, just curious how we should think about launch costs in 2020. Do you expect the uptake to be fast or slow in your opinion? And is there anything else we need to consider as you prepare for this? Thank you.

Thanks, Louise. We’ve budgeted the costs for both inventory build and a small targeted sales force of up to 15 people. The specific costs are confidential. From what we have observed in our expanded access program, where our cells are regularly used by key opinion leaders at major transplant centers, we believe that this targeted sales force will sufficiently meet our commercial needs for rapid adoption. We base this conclusion on the performance of our EAP and the continued increase in royalties from TEMCELL sales in Japan. So, I hope that answers your question.

Yes, it does. I don’t know if you’re able to comment on pricing for your products or what you’re thinking there?

Let me address that. We know the price for the product in Japan is roughly $165,000 for a four-week treatment course, and the cost is based on weight. This means it functions as an average price point. The Japanese pricing method is a bottom-up approach linked to cost of goods, certain margins, and the innovation component, which differs from the U.S. cost structure, where pricing is highly correlated with pharmacoeconomic benefit. As mentioned earlier, treating a steroid-refractory child with graft versus host disease costs about $500,000 on top of the reimbursement for a bone marrow transplant. This cost reflects the high expenses in the U.S. when treating severe illness. Our analysis indicates we can save approximately 60 days of intensive care stay for the child with the severe disease, offering insight into potential savings that would factor into pricing. Our new Chairman, Joe Swedish, is experienced in reimbursement matters, having served as CEO of Anthem, one of the largest healthcare insurance companies in the U.S. Joe is collaborating closely with our commercial team to devise a reimbursement strategy involving payers and hospitals.

Okay, great. Thank you very much.

Thank you. Your next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Hi, Silviu and Josh, how are you?

Good. How are you?

Hey, Jeff.

Great. Could you walk us through the thought process regarding the lower back confirmatory trial in Europe, specifically the start, potential win, projections for the patient count, and secondary endpoints?

Yes. Thanks for asking. Guidance from the FDA and EMA indicates that the two trials need not have the same endpoint or duration. The second trial may last as little as 12 months, depending on the results from the initial trial. If we observe durable results in the initial trial through 24 months and gather meaningful signals by 12 months matching Phase 2 outcomes, we aim to work with both European and American regulators to conduct a shorter Phase 3 trial replicating the 12-month dataset.

I was looking for clarity on your thinking between 24 months versus 12 months, so that’s helpful. One more quick question for Josh: I was expecting the Grünenthal milestone in the next quarter, being the December quarter. Can you provide updates on the $20 million milestone occurring or not occurring this quarter?

Sure. We recorded the milestone in the first quarter since we signed the deal earlier that quarter, although it was paid on October 1. Regarding future milestones; we anticipate needing some of them during this quarter, although we can't provide detailed guidance on which ones. I don’t think we’ll necessarily meet the $20 million milestone this quarter, as we are just starting our relationship.

No, I was referring to calendar 2020.

Oh, yes. We certainly believe that we can achieve the remaining $30 million milestones within the first 12 months of the deal, providing us ample time during calendar 2020.

Terrific. Very helpful. Thanks for the insights.

Thank you. Our last question comes from Tanushree Jain with Bell Potter Securities. Please go ahead.

Hi, Silviu and Josh, thanks for taking my questions. Could you provide insights into how Takeda’s launch with Alofisel is progressing in Europe and their plans for the U.S., including timing for milestones from Takeda for you?

Yes. At this point, it’s too early for us to provide insights into European sales. We’ll provide updates to the market once we have further information. Regarding the U.S. Phase 3 program, we know as much as you know; the program is underway and recruiting patients, but we don't have further updates beyond public domain information. Their focus remains on local delivery into the fistula for Crohn’s disease patients, which complements our work focusing on remestemcel for active Crohn’s disease in resistant patients.

All right, thanks. I have another question regarding the China pathway for your product. After the results from the ongoing U.S. trial, what seem to be the likely regulatory pathway in China regarding trials and discussions?

We maintain a strong relationship with Tasly and are providing considerable support in their discussions with the Chinese FDA in regard to our clinical data and manufacturing. While we don't have concrete updates, they are currently discussing with the Chinese FDA what type of bridging study is necessary to obtain approval in China using our U.S. dataset as support. As soon as we have clarity from the Chinese FDA, we will update the market accordingly.

Great. Thank you.

Thank you. That brings us to the end of today’s call. I’ll now hand back to Dr. Itescu for closing remarks.

Thank you, everybody, for joining us. We are very pleased with our financial results during the quarter and hope to update the market shortly on some additional milestones as they arise. Thank you very much.