Mesoblast Ltd Q3 FY2023 Earnings Call

Thank you all for standing by. Hello and welcome to the Mesoblast Financial Results for the period ended March 31, 2023. An announcement and presentation have been lodged with the ASX and will also be available on the home and investor pages 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 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 filing with the SEC, which could cause actual results to differ materially from those in 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 dates. 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 Officer of Mesoblast. Please go ahead.

Thank you, operator. Good afternoon, good morning to everybody on the call to our operational highlights and financial results for the quarter ended March 31, 2023. If we could, go to Slide 4 please. On the call with me today is our Chief Medical Officer, Dr. Eric Rose; and our Interim Chief Financial Officer, Andrew Chaponnel. Slide 4 shows a snapshot of the investment highlights. We have a novel allogeneic cell therapy platform with two lead candidates both being platforms for multiple products and indications. Remestemcel-L, rexlemestrocel-L, each have specific indications and I’ll be talking in detail in this presentation on both of those platforms. Financially, we have substantial cash on hand and there’ll be a detailed presentation by Andrew Chaponnel on our finances for the quarter. Next slide please, Slide 5. This slide is a summary of our late-stage clinical pipeline based on our mesenchymal stromal cell platforms. As you can see, remestemcel-L for pediatric steroid refractory GVHD graft-versus-host disease is the most advanced, and it’s currently before the FDA with the review of the BLA with a PDUFA goal date of August 2, 2023. The manufacturing inspection has been conducted and I’ll talk more about that shortly. Remestemcel-L is also being developed for adult steroid refractory graft-versus-host disease, acute respiratory distress syndrome, and inflammatory bowel disease. Rexlemestrocel-L second generation stromal cell platform is being developed for chronic inflammatory low back pain, discogenic low back pain and rexlemestrocel-L is also being developed for inflammatory heart failure. And for both these indications, the FDA has granted Regenerative Medicine Advanced Therapy designations. We can now go to the next slide and I’ll hand over to Andrew to talk about our financial results, please.

Thanks, Silviu. If you could, please turn to the financial highlights for the third quarter of FY 2023 on Slide 7. For the quarter, revenue from royalties on the sales of TEMCELL in Japan by our licensee were $1.8 million. On a constant currency basis, royalties grew 4% in the quarter to $2 million. For the 12-months we recognized revenue of $7.6 million from royalties on product sales. Net cash usage for operating activities in the third quarter was $16.2 million; this represented a 4% increase on the third quarter of FY 2022, and a 34% reduction of $8.3 million on the third quarter of FY 2021. In April, we successfully completed a global private placement of $40.0 million through existing major U.S., UK, and Australian shareholders. As of March 31, 2023, cash-on-hand was $48.8 million. We have a pro-forma cash of $88.8 million after adjusting for proceeds of $40 million raised in the April private placement. We also have up to an additional $40 million available to be drawn down from existing financing facilities subject to achieving certain milestones. Turning to Slide 8, you’ll see we are reporting an improved loss before tax for the quarter. Revenue is predominately from royalties on sales of TEMCELL in Japan and despite an increase in underlying sales volume of 4% in the third quarter of FY 2023 compared to the third quarter of FY 2022, reported revenue decreased slightly given that the Japanese yen has depreciated against the U.S. dollar. Our R&D expenditure was reduced by 14% for the quarter. Our R&D spend in the quarter was primarily to support the remestemcel-L BLA re-submission and preparation for pivotal studies of rexlemestrocel-L. We continued our investment in manufacturing activities to support the potential launch of remestemcel-L for the treatment of steroid refractory acute GVHD. On FDA approval, $31 million of remestemcel-L relaunch inventory will be recognized on the balance sheet. Finance costs for the quarter includes $3.8 million of non-cash expenditure comprising accruing interest and borrowing costs. Now, I’ll hand the call back to Silviu for the end of the presentation.

Thanks, Andrew. Slide 10, please. This slide summarizes the mechanistic process that this acute graft versus host disease, a fatal complication of an allogeneic bone marrow transplant, essentially following chemotherapy leads to extensive tissue damage in the patient who subsequently receives an unrelated donor bone marrow transplant. The transplant then attacks the body through defined pathways that are driven by T cells. T cells are activated; they orchestrate the production of multiple cytokines by other cell types, resulting in a cytokine storm, which is destructive for the gut, the liver, the skin, and other organs. In those patients who have the most severe organ disease, mortality approaches 90%. If we could go to Slide 11, please. So the market opportunity for Mesoblast is large, more than 30,000 allogeneic bone marrow transplants are performed globally. Of these, about 20% are pediatric cases. We are targeting the most severe cases, initially focusing on pediatric GVHD while also intending to target the more severe adult cases as well. Next slide, please. Slide 12 summarizes the survival data across three different studies involving more than 300 children treated with remestemcel-L. These studies were designed to demonstrate whether remestemcel-L provided an early survival benefit. Three studies outlined here include a randomized controlled subset of 27 children within an earlier study called Protocol 280. The second study was a pivotal Phase 3 trial called Study 001, and the third study was an expanded access protocol of 241 children who received remestemcel-L after failing other available therapies. What you can see here is that in each of the three studies, there is a substantial early survival benefit from 66% in the sickest children treated with remestemcel-L as salvage therapy to 79% in the randomized controlled subgroup study. The comparators for each of these outcomes showed substantially lower survival outcomes at day 100 from 54% to 57%. In the EAP 275 study, a subset analysis comparing outcomes in Grade D disease, the most severe form of the disease, against survival in the database at the International Bone Marrow Transplant Registry, showed a significant survival benefit of 51% in those who received remestemcel-L versus just 31% in those who received the best available therapy. So across all of these studies, there’s evidence of early day 100 survival benefit using remestemcel-L. If we go to the next slide, newer data now before the FDA is analyzing survival through day 100 and day 180, six months in the pivotal Phase 3 trial in patients with the highest risk for mortality. Those with MAP biomarkers scores above 0.29 demonstrated a significant survival benefit compared to a propensity matched control cohort. In the control children treated with the best available therapy, only 10% were alive beyond three months compared to 67% alive in those who received remestemcel-L. Next slide, please. Slide 14, so what is the status of our BLA for remestemcel-L in pediatric patients with steroid refractory acute GVHD? The new data under review by the FDA are outlined on this slide. The BLA was resubmitted on January 30. The BLA file was considered by the FDA to be a complete response, accepted for review, and we were given a PDUFA goal date of August 2, 2023. The new data under review shows durable long-term survival of patients in the Phase 3 trial, increased survival in high-risk patients compared with propensity matched controls and a positive correlation between in vitro potency assays and survival. Additional data that the FDA is reviewing shows that the valid data potency assay has low variability and can adequately demonstrate manufactured consistency and reproducibility. Next slide, please. In addition, today we announced that the manufacturing inspection of the remestemcel-L process has been conducted by the FDA. The FDA inspection did not result in the issuance of any Form 483. Form 483 is always provided at the conclusion of an inspection if investigators have observed any conditions that in their judgment may constitute violations of the FDA Cosmetic Act and related Acts. So we were very pleased that no issuance of a Form 483 was provided. The Establishment Inspection Report or the EIR is expected to be issued by the FDA in the coming weeks, which will provide a detailed summary and a final assessment of the inspection. Next slide, please, Slide 16. Mesoblast provided new results from a full year observational survival study performed by the Center for International Blood and Bone Marrow Transplant Research on 51 valuable patients with acute GVHD who are enrolled in our Phase 3 clinical trial remestemcel-L. These data provide a cornerstone of our BLA resubmission. Overall survival in the remestemcel-L cohort was 63% one year, 51% two years, and remained roughly at that level through at least four years and beyond. In other words, approximately 50% of children with this very fatal disease of whom almost 90% were Grade C/D disease are alive not just at two years, but for as long as the follow-up has allowed us to evaluate the outcomes. These data provide assurance that the short-term responses and early survival through 180 days previously shown to the FDA in the BLA submitted earlier are unlikely to have risen by chance. These long-term survival outcomes are critical to our BLA resubmission. Next slide, Slide 17. This slide shows a comparison between two-year outcomes on the right with remestemcel-L from our Phase 3 trial, 51% survival against the largest pediatric cohort study published to date which is the MacMillan study on the left from the University of Minnesota showing just 35% survival in children with steroid refractory disease. It’s important to note that in the MacMillan study on the left, children treated with the best available therapy only 22% had Grade 3/4 disease, whereas 89% of our study on the right had Grade C/D disease at the same level of severity. So very different patient populations, much more severe in the remestemcel-L treated group, yet survival for 24 months was substantially improved. We can go to the next slide, please, Slide 18. This summarizes again the long-term survival data in the column with dark blue over four years against four studies recently published between 2020 and 2022. The MacMillan study I’ve already described, but in addition, there are four other studies that relate to adults with steroid refractory acute graft versus host disease. And while they all have lower levels of severity in terms of patients with Grade 3/4 disease in comparison to our Phase 3 trial, the relative survival in Grade D disease within those studies ranges from 25% to 38%, compared to 51% of two-year outcomes in our Phase 3 trial. Therefore, we believe that the long-term survival we’re seeing in GVHD001 treated patients with remestemcel-L provides a durable long-term outcome that is incomparable with any of the recently performed studies, including those featuring ruxolitinib. Next slide, please, Slide 19. Moving from new clinical data to the new data around potency, which is part of the BLA submission, it’s important to note that the primary mechanism by which GVHD progresses is due to alloreactive T-cell activation, T-cell proliferation, and orchestration of inflammatory cytokine production. An in vitro assay measuring inhibition of T-cell activation was established during development of remestemcel-L prior to the Phase 3 trial as a measure of product potency. This assay was employed to measure the ability of individual remestemcel-L lots to inhibit T-cell activation prior to their use in both the expanded access protocol and the Phase 3 trial. We therefore evaluated and established correlations between survival outcomes in these two pediatric studies with potency of the lots received by the children based on T-cell activation inhibition. These correlative analyses have been presented to the FDA. Slide 20. The next slide represents some of these potency data, which were presented earlier this year at the tandem meetings of the Bone Marrow Transplant Society. As you can see in the Kaplan-Meier slide on the right, there was an association between higher levels of inhibition of T-cell activation by product lots received and day 180 survival outcomes, such that those patients who received product above the median had 85% survival, versus those who received product below the median. In further subgroup analyses, looking at patients by higher risk severity including the Minnesota high-risk category, the magic algorithm score above 0.29, and Grade D disease, in these analyses product lots with potency above the median were associated with higher survival than those with potency below the median. I think it’s important, however, to note that even with Grade D disease, lower potency products yielded survival outcomes of 50%, which is substantially higher than the expected survival for Grade D disease noted in the CIBMTR registry using the best available therapy, where that survival outcome is only 30%. Therefore, even a lower potency product shows substantially higher survival than best available therapy, and the relationship between potency and survival has been established through the Phase 3 trial. If we go to Slide 21, we then reevaluated survival outcomes in the EAP study, one single study by the presence of our newly established improved manufacturing product called Ryoncil. With the product produced prior to 2008, known as Prochymal, the lower potency product had an inferior survival rate. On the left-hand side of this slide, you can see survival for 100 days in those children who had failed all other therapies in our EAP program with Prochymal versus Ryoncil treatment. As you can see, Ryoncil achieved a significantly higher survival rate of 74% compared to the 56% achieved with Prochymal. Even more importantly, in patients with the highest risk of mortality who had Grade D disease, among 106 patients with Grade D disease, Ryoncil achieved 72% survival, while Prochymal, the lower potency product, achieved only 44% survival. These studies and analyses within a single protocol demonstrate not only that we have a potency assay that predicts survival at the level of T-cell activation, the primary mechanism of action in GVHD but it’s able to also delineate higher potency products from lower potency products and their relationship to improved survival. Next slide, please, Slide 22. Having summarized those data, let’s talk now about our go-to-market strategy with the assumption that the PDUFA after August yields a positive outcome. The pre-launch activities that are active and ongoing include engagement of the highest transplant volume centers with experience using Ryoncil. Non-promotional activities encompass profiling of the centers, education on disease awareness, unmet needs, and support for payer engagement. We are currently hiring select positions to build out a small commercial team. The key activities of this team will involve market access, initiating payer outreach, providing education to payers, corporate leadership engaging with the top 15 centers, and regional sales directors leading center profiling. Importantly, manufacturing preparations have been ongoing throughout, with $31 million of remestemcel-L pre-launch inventory secured. Slide 23 outlines post-approval launch activities, which are intended to be a staged approach initially targeting the highest transplant volume centers. These are not only the highest volume centers but also those with experience with our product. The plan is to build out an efficient, targeted sales force, recognizing that the 15 highest volume transplant centers account for about 50% of all patients. Key post-approval activities will include initiating commercial onboarding and logistics, MSLs engaging the centers around medical and scientific needs, and providing logistical and reimbursement support as needed, with center certification on a case-by-case basis for remestemcel-L administration. Having now covered where we are with remestemcel-L, let’s move to Rexlemestrocel-L, our next-generation product for chronic low back pain and inflammatory heart disease. Slide 25. We’ve previously stated that discogenic back pain impacts a large number of patients both in the U.S. and the EU. In the U.S. alone, it affects approximately 7 million patients in each of the U.S. and EU5. That’s our target market—clearly defined patients who have underlying degenerative disc disease as the cause of their chronic pain. It’s worth noting that 50% of opioid prescriptions are for chronic lower back pain due to this condition. We expect that if we have a successful treatment option here, we could greatly impact the opioid epidemic. Let’s move to Slide 26. The summary of the program is outlined on this slide. We’ve aligned with the FDA on the appropriate pivotal Phase 3 study, which aims to replicate the significant reduction in pain observed as early as 12 months and through 36 months in our first Phase 3 trial. The FDA has agreed that pain reduction through 12 months will be the primary endpoint of the pivotal trial, with functional improvement and reduction in opioid use as key secondary endpoints. The planned Phase 3 program will recruit an additional 20% of patients across the EU to support regulatory submissions simultaneously or in close sequence to both the FDA and EMA. We have received an RMAT designation for discogenic back pain from the FDA earlier this year in February, and we expect to commence patient enrollment in the third quarter of this year. Next slide, please, Slide 27. The RMAT designation we received from the FDA offers all the benefits of both breakthrough and fast track designations, including a rolling review and eligibility for priority review upon filing a BLA. The objective of the pivotal trial is to replicate data obtained from the first Phase 3 trial, which demonstrated that a single injection of rexlemestrocel-L into the lumbar disc led to significant pain reduction relative to saline controls as early as 12 months, continuing through 24 and 36 months in a trial with 404 patients. The pain reduction across 36 months was also noted in a subset of patients who were utilizing opioids at baseline. This group was significant at 168 patients. In this group, there was substantially greater pain reduction at all time points compared with saline controls. Notably, at the end of 36 months of follow-up, 28% of patients who received rexlemestrocel-L along with its carrier HA were no longer taking opioids, compared to only 8% of saline-treated controls. This is a critical observation that we plan to evaluate again prospectively in the pivotal trial. Slide 28 provides a snapshot of the pain reduction we observed in the first study, which was most pronounced in patients reporting pain duration below the median of approximately 68 months throughout the trial. Consequently, this target group of patients with pain duration of up to five years represents a critical unmet medical need where we believe the likelihood of treatment response is greatest. Finally, I would like to address our cardiac program concerning inflammatory heart disease. Again, cardiovascular disease remains a leading cause of death in the U.S., particularly among patients with advanced forms of heart failure, and those who ultimately progress to mortality or require an LVAD or transplant. We currently possess an existing regenerative medicine advanced therapy designation that covers the use of our cells in the most severe patients, specifically those who have an LVAD in place. However, we believe that there exists a continuum of disease that rexlemestrocel-L is likely to impact beneficially. This continuum spans from patients in Class II, Class III, and Class IV, characterized by significantly high levels of biomarkers of severity such as NTproBNP and markers of inflammation such as CRP to patients who transition into end-stage disease with an LVAD in place. Slide 32 summarizes new data published this quarter in the Premier Journal, Cardiovascular Journal, Journal of American College of Cardiology, from the 537 patient Phase 3 trial called DREAM Heart Failure, which observed severely advanced patients with heart failure over a follow-up period of up to 30 months. The key outcomes from this pivotal publication highlighted that left ventricular ejection fraction significantly improved from baseline through 12 months. In these patients, particularly those exhibiting evidence of inflammation, major complications such as heart attacks or strokes were reduced by 57% among all treated patients, and by 75% among those with inflammation. Additionally, the three-point MACE (Major Adverse Cardiac Event) rate in patients, which includes the endpoint of cardiovascular death reduction, decreased by 37% among patients with inflammation. These results are extraordinary and we are very excited about their implications for patients facing severe disease. If we go to Slide 33, the overall totality of data from 159 patients in LVAD study number two and 537 patients in DREAM Heart Failure are now being evaluated comprehensively for a continuum of mechanistic data that may allow us to structure a pivotal trial in coordination with the FDA regarding pathways toward approval. With that, I will stop and open this to questions, please.

Thank you. Your first question comes from Edward Tenthoff from Piper Sandler. Please go ahead.

Great. Thank you guys, and thanks for the detail on the presentation. So my friend Mike was wondering what still has to be done ahead of the NDA? Are there any remaining pieces that need to be filed or any interactions with the FDA, or are we really just waiting for the PDUFA date? Thanks.

Well, having completed the manufacturing inspection, which was the biggest item still outstanding, we continue to engage with the FDA on various questions, corresponding back and forth regarding the review. Other than that, the major item that remains outstanding is a discussion around the specifics of the label. We’re very excited as we proceed toward the PDUFA date.

Absolutely. Well, excited for the upcoming approval. And then when it comes to lower back pain, what are the steps in order to initiate that base rate? Is that such an exciting opportunity today?

So we have alignment with the FDA on the protocol itself. We’ve already manufactured the product for the trial. We will be having discussions with the FDA under the RMAT designation to ensure our approach is aligned in terms of manufacturing potency and related aspects. We will proceed in parallel with the study commencement. We expect to initiate enrollment across about 40 sites in the U.S. in the third calendar quarter. So we’re on track to get things going.

Awesome. Great news. Thanks, Silviu.

Thank you. Your next question comes from Louise Chen from Cantor. Please go ahead.

Hello, everyone. This is Carvey on behalf of Louise Chen from Cantor. Thank you for taking our questions. First, your PDUFA date is fast approaching. If approved, how quickly can you commercialize the product? Secondly, how are you thinking about OpEx for the rest of 2023 and 2024 fiscal years? Thank you.

We have the commercial team currently in place and building. It will not require a very large footprint. We expect approximately 15 salespeople at the time of launch. The launch will focus on the highest volume transplant centers, and we should be ready to initiate as soon as we receive approval. We have inventory secured, and discussions with payers are ongoing. Reimbursement will take some time, of course. However, we should be in a position to initiate our launch upon approval, although the pace will be staged. Regarding OpEx, we don’t foresee short-term changes in quarterly spending. Following product approval, we will pursue label extension, especially in adult GVHD as the first priority. Our funding options include access to additional capital through existing financial structures or discussions around royalty-based structures. However, we plan to maintain our current quarterly OpEx.

Got it. Thank you. Looking forward to the PDUFA date. Congrats on progress. Thank you.

Thank you. Your next question comes from Sami Corwin from William Blair. Please go ahead.

Hi there. Thanks for taking my questions. I was curious if there are any possible alternatives regarding the outcome of the EIR other than the FDA just giving you guys a thumbs up. Also, concerning the study in steroid-refractory aGVHD in adults, how exactly could that trial differ from study 001 and 280 in terms of design and potential endpoints? Thank you.

Okay, thank you. The first question was about the expected EIR in the next couple of weeks on the manufacturing inspection. It’s hard to anticipate the FDA’s observations and final determinations regarding the manufacturing inspection. However, I will say that a Form 483 can only be provided at the end of the inspection when the FDA and the facility, along with the company, meet face-to-face. Since no 483 Form was issued, we are very pleased. This means there are no official outcomes that would have necessitated improvements under a Form 483. There may be small issues in the EIR, which is the final document, but the significant concerns from the 483 will not be present. Regarding the adult program, I might ask Eric. Eric, would you like to comment on how you see an adult program progressing?

Can you hear me?

Yes, we can.

Good. We have had tremendous interest from adult oncologists facing similar challenges as pediatric oncologists. Currently, we are in discussion with members of CIBMTR regarding conducting a trial for adults to potentially extend the label to that demographic, but the trial design is still in development.

Yes. We have flexibility regarding the severity degree in adults, whether we use a randomized control design or a propensity matched control design. All options will be part of our ongoing discussions with the FDA.

Great. And then just one more if I can. Considering you plan on running two Phase 3 trials and potentially launching the aGVHD product, do you believe you have sufficient cash on hand to achieve all near-term milestones? Thank you.

Yes. As mentioned earlier, there are various alternative ways to fund these trials. These include collaborations with academic groups like the NIH or registries like CIBMTR, which would significantly impact our resource allocation. Additionally, we are in discussions with financial entities interested in potential royalty-based arrangements, which would defer our spending requirements. Furthermore, we have access to up to an additional $40 million in pre-arranged debt structures through our existing facilities, which can become available following FDA approval, should we choose to access them.

Great. Thank you, and congrats on the progress.

Thank you.

Thank you. Your next question comes from John Hester from Bell Potter. Please go ahead.

Yes. Good morning, Silviu. Just want to take you back to Slide 21, which discusses the Grade D expanded access program and indicates a survival rate of 72%. This is for the sickest patients. Just to confirm, is that Ryoncil product, which was used in your clinical trial, correct?

That is correct.

Yes. So what’s the difference between that survival rate of 72% and the low 51% or 53% shown in the data on Page 18?

That 51% survival rate refers to two-year data in our Phase 3 trial, while the 72% rate in the EAP pertains to 100-day survival data. Even a 51% two-year survival rate is considerably greater than survival rates in the mid-20s to mid-30s associated with best available therapy, which includes ruxolitinib from other studies.

Is there any confusion regarding the potency levels of the product that has been manufactured in recent years? This analysis shows a significant difference between the earlier Prochymal product and the newer products.

That’s precisely the point. The clarification from our analysis indicates that improvements in manufacturing have led to a more potent current product, distinguishing it clearly from the less potent Prochymal product that failed in earlier studies. We believe these product enhancements are the reason we’re observing improved clinical outcomes in our studies.

To what extent has this new data on potency been available over the last two years since the complete response letter? Or has it always been available?

No, these data originated from the BLA resubmission process in alignment with our potency assay optimization. However, the assay was in place when products were employed in both the EAP and Phase 3 trial. Thus, this provides insight into how enhancements in manufacturing have resulted in a more potent product, which correlates with better survival outcomes.

During the inspection of the plant in Singapore, were the inspectors able to witness product manufacturing at that time? I assume they were.

Yes. The purpose of the inspection was for four inspectors to be on site and observe the entire manufacturing process from beginning to end over a 10-day period, meticulously reviewing every detail of the manufacturing process.

Excellent. That’s all from me. Thank you.

Thank you.

Thank you. As there are no further questions at this time, that brings us to the end of today’s call. I’ll now hand back to Dr. Itescu for any closing remarks.

Great. Thank you everyone for joining us today. We’re very excited about how the process is evolving with the BLA resubmission and our collaborative interactions with the FDA. We look forward to the upcoming PDUFA decision date. As we build out our plans for hopefully a successful outcome and post-approval launch, thank you everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.