Mesoblast Ltd Q1 FY2023 Earnings Call

Good morning, good afternoon to the operational highlights and financial results for the quarter ended September 30, 2022, as well as our upcoming Annual General Meeting. Apologies for the slight delay due to technical difficulties; beyond our control. Joining me here today is Dr. Eric Rose, our Chief Medical Officer; and Andrew Chaponnel, our Interim Chief Financial Officer. If we could go to the first slide. If we go to Slide No. 4, please. Survival outcomes have not improved over the past 2 decades, for children or adults with the most severe forms of steroid-refractory acute graft-versus-host disease. In particular, the lack of any approved treatment for children under 12 means that there's an urgent need for a therapy that improves the dismal survival outcomes in children. In light of the unmet need, remestemcel-L has been granted fast track designation and BLA priority review from the FDA. A major milestone in the company's complete response to the FDA was our submission at the end of the last quarter of substantial new information on clinical and potency assay items to the IND file for remestemcel in the treatment of children with steroid-refractory acute GVHD as has been guided by the FDA. Mesoblast has optimized the potency assay that was in place at the time of the Phase III trial and which demonstrates a relationship between the product's activity in vitro and its effect on survival in the Phase III trial. Additionally, Mesoblast has now generated data from the expanded access program, EAP 275 in 241 children, which confirmed the ability of the in vitro potency assay to measure product activity relevant to survival outcomes. Next slide, please. Today, Mesoblast provided new results from a 4-year observational survival study performed by the Center for International Blood and Marrow Transplant Research, CIBMTR, on 51 evaluable patients, with steroid-refractory acute GVHD, who are enrolled in Mesoblast Phase III clinical trial of remestemcel-L. Overall survival in the remestemcel cohort was 63% at 1 year, 51% at 2 years and 49% at 4 years. Across 4 recently published studies of children or adults with steroid-refractory acute GVHD, one-year survival of just 40% to 49% and 2-year survival of just 25% to 38% was seen after best available therapy or the only FDA-approved agent for adults, ruxolitinib. The new long-term survival data provide assurance that the short-term day 28 responses and early survival for 180 days in the 54 patient Phase III trial in children with acute GVHD previously presented to the FDA in the original BLA submission are unlikely to have arisen by chance. These long-term survival outcomes are a cornerstone of the BLA resubmission. Next slide, please. This slide is a snapshot of our late-stage clinical pipeline. As you can see, we have 2 platform technologies. In red is our lead technology platform, remestemcel-L. And in blue is our second-generation technology platform, rexlemestrocel using immunoselection to isolate stromal cells. Our remestemcel platform is more advanced and our lead product is currently in the approval phase for acute graft versus host disease in children. I will be talking more about this product shortly, as well as updating on rexlemestrocel for chronic low back pain and chronic heart failure from reduced ejection fraction, both conditions due to severe inflammation. Now we move to the financial results for the quarter for the period ended September 30, 2022. Andrew, over to you, please.

Thanks, Silviu. Now turning to Slide 8. We have the financial highlights for the quarter. As at September 30, 2022, cash on hand was $85 million, up to an additional $40 million may be drawn from existing financing facilities subject to certain milestones with current discussions to extend the period for the drawdown option. Net cash usage for operating activities in the quarter was $14.3 million. This represented a 22% reduction of $3.9 million on the comparative quarter in FY 2022, and a 47% reduction of $12.5 million on the comparative quarter in FY 2021. Revenue from royalty on sales of TEMCELL in Japan for the quarter was $1.4 million and $1.8 million on a constant currency basis. For the 12-month period ended September 30, 2022, royalties were $7.7 million, and on a constant currency basis $9 million, which was a 9% increase on the comparative period. Turning to the next slide, which is Slide 9, please. We can see the P&L results for the 3 months ended September 30. Within revenue, the majority of the change was due to one-off licensing milestone in the prior period and the impact of currency movements. There is a reduction in expenditure for R&D, manufacturing and management administration, totaling a decrease of 23% or $5.2 million for the period ended September 30, 2022, on the comparative quarter. During the quarter, we continued prelaunch manufacturing activities and product testing for remestemcel to support the potential commercial launch. On FDA approval, remestemcel inventory will be recognized on the balance sheet, currently valued at $28 million. Within finance costs, we include actual cash interest paid of $1.2 million for the quarter ended September 30, 2021, and also quarter ended 2022. The increase in our reported finance costs was primarily due to the recognition of a noncash gain on the revaluation of our borrowings in the comparative year. And turning to the last finance slide, Slide 10. This slide highlights our reduction in burden, which has reduced 33% or $30 million on a rolling 12-month basis. Now I'd like to turn the call back to Silviu.

Thank you, Andrew. Let's move to Slide 12, which outlines our pipeline. I will concentrate on the updates regarding our product candidate remestemcel for treating acute graft versus host disease in children. This condition remains a significant unmet need with a high mortality rate in children under 12, as there are currently no approved treatments. The disease burden is substantial, and mortality can reach up to 90%, resulting in considerable hospital stay expenses. Next, please proceed to Slide 13. The data summarized on Slide 14 reflects the improvements in early survival rates among children affected by steroid-refractory graft-versus-host disease, gathered from four separate studies. This includes 27 children involved in a controlled Phase III trial of 260 mostly adult patients with the same condition. Additionally, we have a second Phase III study with 54 children, where 89% had grade C/D disease, compared to 30 propensity-matched children from the magic cohort. An expanded access protocol analysis involved 241 children treated with remestemcel as a salvage therapy after the failure of steroids and other biologics. Furthermore, we have a controlled study focused on a subset from that expanded access protocol against children in the CIBMTR database with similar characteristics. In all these studies, the short-term survival rate at day 100 for all cohorts treated with remestemcel was high, including those patients with just Grade D classification in the expanded access protocol. The matched controls exhibited significantly lower short-term survival, as detailed in the slide. Let’s move to Slide 15. This slide highlights the long-term survival results for children with steroid-refractory graft versus host disease from our open-label single-arm Phase III trial which included 54 children. Here, remestemcel was administered as a first-line option after steroid failure, with 89% of these patients having grade C-D disease. After four years, among the 51 children available for follow-up, the one-year survival rate was 63%, two-year survival was 51%, three-year survival was 49%, and the four-year survival rate remained at 49%. The table illustrates survival rates at one and two years for this remestemcel-L cohort in light blue compared to recent studies from 2019 and 2020 involving children or adults with steroid-refractory acute graft-versus-host disease. The McMillan study involved 128 children, with 22% classified as Grade 3/4, while the Rashidi study included 203 adults, 54% of whom had grade 3/4 disease. The REACH2 study compared ruxolitinib to the best available therapy, with about 63% of participants experiencing Grade 3/4 disease. An open-label ruxolitinib study supporting product approval involved 71 adults, with 68% classified as grade 3/4. The overall one- and two-year survival statistics for these studies are displayed. Proceeding to the next slide, Slide 16, we compare the Kaplan-Meier results on the left for two-year survival outcomes in children with steroid-refractory acute graft versus host disease treated with the best available therapies. The data indicates that the six-month survival rate with the best available therapy is 49%, while the 24-month survival drops to 35%. In contrast, the Kepler-Meier curve on the right demonstrates that the six-month survival in the remestemcel cohort is 69%, and at 24 months, survival stands at 51%, showing a substantial improvement. Now, let’s advance to the next slide, Slide 17. Data published in bone marrow transplantation last year further indicates that in the most severe cases treated with remestemcel, particularly those with high MAP scores, which signal very severe disease, we see a remarkable difference in survival compared to propensity-matched controls with similar biomarker severity. Here, the remestemcel cohort exhibited a 64% survival rate versus only 10% for those receiving the best available therapies. This evidence supports that remestemcel-L therapy provides significant survival advantages both short-term and long-term in a population with poor survival rates and no approved treatment options. This data will be central to our BLA resubmission. Moving on, please, to the rest of our late-stage pipeline, I will highlight some of our other advanced indications that we believe will result in valuable opportunities for the company. Rexlemestrocel is our second-generation product based on immuno-selected STRO-3 stromal cells. I would like to draw attention to our primary indication for chronic low back pain in patients with inflammatory degenerative disc disease. This condition presents a major unmet need, with inflammatory back pain being the leading cause for opioid prescriptions in the U.S., accounting for 50% of prescriptions being for discogenic back pain. The market potential is immense, with approximately 6 to 7 million patients in both the U.S. and the EU5 suffering from inflammatory chronic low back pain stemming from degenerative disc disease. Besides opioids and nonsteroidal anti-inflammatory drugs, there are currently no effective treatments. On Slide 20, we illustrate the patient journey when conservative treatments fail; the next options typically involve interventional therapies and potentially surgery. We believe that rexlemestrocel precisely targets the moderate to severe patient population before moving to opioids. Let’s move to Slide 21. In our first Phase III trial, we demonstrated that in a subset of patients suffering from relatively early disease or severe debilitating pain lasting up to five years, our product, delivered with a hyaluronic acid carrier, resulted in a significant pain reduction at 12 months compared to controls receiving saline. The difference amounted to around 20 points on a VAS score from 0 to 100, indicating a remarkable and sustained impact throughout the follow-up period of 36 months. These findings were highly significant and were aligned with various secondary endpoints regarding quality of life and functional improvements. Next, please proceed to Slide 22. This slide details pricing points for different agents typically used for pain management, particularly back pain, showcasing on the left various abuse-deterrent opioids and on the right different biologic agents such as Humira, utilized for ankylosing spondylitis in the back. We believe that a biologic targeting inflammatory discogenic back pain will be well-received, provided we can replicate our findings of pain reduction and functional enhancements at the 12-month mark. On Slide 23, we had a productive meeting with the FDA where there was clear alignment on how to bring this product to market. The OTAT agreed with our suggestion that the primary endpoint for a follow-up confirmatory trial would be the reduction in pain at 12 months, which would suffice for product approval. Functional improvement and a potential decrease in opioid usage are set as secondary outcome measures. The planned upcoming trial in the U.S. aims to include 20% of subjects from the EU to assist submissions to both the FDA and EMA. We are finalizing the protocol with our key investigators and await clearance from the FDA to launch the trial shortly. Next, let's discuss our final indication in the pipeline. On Slide 24, we present Rexlemestrocel for chronic heart failure with reduced ejection fraction, which represents a major unmet medical need. Turning to Slide 25, cardiovascular disease remains the leading cause of mortality in the U.S., impacting up to 6.5 to 7 million patients annually. Despite the introduction of several new medications that alleviate heart failure symptoms and lower hospitalizations linked to shortness of breath, they do not address significant issues such as cardiovascular mortality or complications like heart attacks and strokes. We believe our product can differentiate itself within the competitive landscape. Moving to Slide 26, we depict the continuum of heart failure across Classes 2, 3, and 4, asserting that a single intervention with our cells could alter the disease's natural progression. Slide 27 outlines our findings to date. In a study with 537 patients suffering from low ejection fraction heart failure, we observed a 50% greater increase in left ventricular ejection fraction at the 12-month mark among those who received a single injection of rexlemestrocel compared to control patients. Although both groups had similar baseline ejection fractions, the substantial difference was notable at 12 months. Particularly for those with inflammation identified via CRP measurement, there was an 86% greater increment in ejection fraction at 12 months compared to controls. Advancing to the next slide, those short-term improvements in ejection fraction and systolic volume appear to predict long-term outcomes in this condition. The left side illustrates time to first events linked to three-point MACE, represented by the reduction in cardiovascular death, nonfatal heart attacks, or nonfatal strokes. In the presence of inflammation, the right side highlights an overall 45% reduction in long-term three-point MACE in patients treated with rexlemestrocel as opposed to control patients. That concludes our presentation, and we are particularly excited about the long-term survival data from our acute graft-versus-host disease study, which will form the foundation of our BLA resubmission. We welcome your questions and are happy to respond to inquiries from those on the call today. Thank you.

Our first question today comes from Louise Chen from Cantor.

This is Carvey on for Louise from Cantor. Congrats on the progress. First, on remestemcel-L commercial front, can you comment how quickly you could launch the product after approval in acute GVHD? And when do you expect a potential approval? What are the remaining steps to get there? I have a follow-up question after this.

Sure. Thank you. So of course, we have a priority review designation for the product. We are working towards a complete response to the FDA that addresses their issues around the clinical survival data, potency assays and the relationship between potency and survival. And all of those data have been provided in a submission to the IND to the FDA about 6 weeks ago, and these new survival data will be the cornerstone of the rest of the documentation to the FDA. We would expect that somewhere between the statutory requirement is to complete the review between 2 to 6 months. And we are building out our commercial capabilities to put in place with the team that will lead the interactions with the payers and with the key opinion leaders at the end users to the hospital, and we should be in a position to launch the product immediately after approval.

Got it. Awesome. Our second question is on your heart failure opportunity. What does the pathway to approval look like in this opportunity?

We expect to be meeting with the agency over the next couple of months. And the data before them is the totality of data in patients in Class II, III heart failure from the DREAM trial, as well as in patients with end-stage heart failure that previously generated in patients with LVADs. What we're seeing is a continuum of improvement in systolic function in patients with inflammation, whether they're Class 2, 3, or 4 disease. So I think that's the basis of the discussion. We already have an RMAT in place that focuses on the LVAD population. So we will be having a discussion around it. The continuum of the data set, not just in the LVAD population, but in the broader class of patients with high CRP.

Our next question comes from Edward Tenthoff from Piper Sandler.

Great. Thank you very much. So Silviu I'll not split hairs, but I really want to just understand the exact process under the new survival data that you included in the IND, does that constitute the response to the CRL? And does this 2- to 6-month clock kind of start ticking from October 3? And then I have a follow-up there.

No. The survival data we've just provided today has just become available to us. So today's announcement is the new data that has been generated by CIBMTR completely independently. That has not yet been provided to the FDA and will now be filed with the FDA. So the clock is not starting until these data are in the hands of the FDA.

And how long that will take weeks or something like that pretty short term.

Very short term.

Okay. Excellent. Just with respect to launching the lower back pain study. What are plans to advance that into Phase III? And kind of, I guess, similar question for heart failure. Is the goal still to partner heart failure and develop quite a lower back pain on your own? Or what's the kind of latest on that?

I'll address the question about heart failure first, and then I'll ask Eric Rose to discuss the back pain program. Regarding heart failure, you are correct. Once we have our meetings with the FDA and clear pathways, we plan to collaborate with partners to finalize the commercialization of the heart failure program. Eric, would you like to share our plans for the confirmatory Phase III trial in back pain?

Silviu. Sorry to interrupt, Eric, sorry to interrupt before you start on lower back pain. But Silviu, have the FDA meetings regarding FRAP in scheduled phase?

We're waiting for specific dates.

With regard to back pain, our expectation is to do two trials, which we hope to begin in the second quarter, the third quarter of '23. We're finalizing that trial design with pain as the primary endpoint at a year. As a secondary, we'll be using a scale and quality of life, but it will not be a co-primary. It will be secondary endpoint. We believe that we will show a quality of life benefit using this scale as well. It's a scale with which we have familiarity, and we expect to finalize the design with the agency in the next few weeks, actually. So the final trial design will be submitted to them in accordance with the discussion that we had on what it should be in the past. But again, with that, we expect to start that trial in the second quarter of 2023.

I might add that the U.S. trial will start quickly. A second trial is likely to focus on Europe so we can potentially engage with both the FDA and EMA at the same time.

And with that, that brings us to the end of today's call. I'd now like to turn the floor back over to Dr. Itescu for closing remarks.

Great. Again, thank you to everybody for joining us this morning. We're extremely excited by the long-term survival data, which really are unparalleled, and we'll have a lot more to say at our upcoming AGM. Thank you very much.