Mesoblast Ltd Q4 FY2023 Earnings Call

Hello and welcome to the Mesoblast Financial Results for the Period Ended June 30, 2023. An announcement and presentation have been lodged with the ASX and are also available on the home and investor pages at www.mesoblast.com. At this time, all participants are in a listen-only mode. Later, we'll 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 in such forward-looking statements. In addition, any forward-looking statements represent the Company's views only as of the date of this webcast. They should not be relied upon as representing the Company's views on any subsequent date. The Company specifically disclaims any obligations to update such statements. With that, I would like to hand the call over to Dr. Silviu Itescu, Chief Executive of Mesoblast. Please go ahead.

Thank you, operator. Good afternoon and good morning to everyone. Today, we will discuss our financial results and operational update for the year ending June 30th, and I am joined by our Chief Medical Officer, Dr. Eric Rose, Interim Chief Financial Officer, Andrew Chaponnel, and Board member, Dr. Philip Krause. We'll focus on our regulatory engagements with the FDA, operational streamlining, and upcoming milestones related to our major Phase 3 programs, as well as our cost reduction strategies aimed at protecting our cash reserves. Now, let’s proceed to the slide deck. Slide 4 shows a snapshot of our late-stage clinical pipeline, which includes two cellular platforms based on stromal cells, remestemcel and rexlemestrocel. Remestemcel is being developed for pediatric and adult graft versus host disease (GVHD) and additional indications such as inflammatory bowel disease. I will provide an update on our pediatric GVHD regulatory filing and the upcoming Type A meeting with the FDA shortly. Additionally, we are expanding into the adult GVHD market, which is significantly larger than the pediatric indication. Rexlemestrocel is being explored for chronic inflammatory lower back pain and inflammatory heart failure, having completed its first pivotal Phase 3 programs in both areas. We will cover these later in the presentation. Next slide, please. As I mentioned, we are highlighting our investment potential by developing products using our novel allogeneic technology platforms, which let us control manufacturing and create scalable mesenchymal stromal cell products without requiring donor matching or immunosuppression, focusing on effectively reducing significant inflammatory diseases. The primary target for remestemcel, our first-generation platform, is pediatric and adult steroid-refractory acute GVHD. We've gathered substantial data presented to the FDA, and I will discuss this further shortly. Importantly, we have a Type A meeting with the FDA scheduled for mid-September to strategize towards product approval. For chronic lower back pain, rexlemestrocel has completed its initial Phase 3 trial and received regenerative medicine advanced therapy designation from the FDA, with established agreement on the primary endpoint for a second pivotal Phase 3 trial currently underway. We anticipate enrolling the first patient in the next quarter. The program for inflammatory heart disease with rexlemestrocel has also concluded its first Phase 3 trial with patients having reduced ejection fraction and end-stage heart failure with an LVAD. The FDA has granted RMAT designation for this product as well, and we plan to request a meeting to discuss extending this designation to patients prior to LVAD. Regarding our financials over the past year, we have experienced stable revenue from our royalties in Japan for TEMCELL through our partner in Japan. We reported cash reserves of $71.3 million at the end of the financial year, and we will share more details on our implemented cost containment strategies aimed at further conserving cash. Next slide, please. Slide 6 outlines the regulatory status for stem cell use in pediatric patients with GVHD, as well as the upcoming Type A meetings with the FDA. During the recent six-month BLA review, we made significant strides towards launching this advanced product, completing a thorough inspection of our manufacturing process and facility by the FDA. Unfortunately, in August, we received a complete response regarding our BLA resubmission for pediatric GVHD treatment, requiring that we demonstrate that the product used in the Phase 3 trial closely resembles the product intended for commercial release, measured through a standardized potency assay. We believe we can establish this link through further work utilizing potency data. The FDA has indicated that an additional trial would be necessary if we cannot link the Phase 3 product to the commercial product with the anticipated potency assays. The Type A meeting with the FDA is set for mid-September, where we will elaborate on our proposed strategies, including providing additional potency assay data to connect the Phase 3 product with the current commercial inventory. We also plan to present new clinical trial data for adults that could provide support for the pediatric indication. Next slide, what new clinical data are we proposing to generate? In alignment with our commercial strategy to move toward the adult indication, which is significantly larger than the pediatric market, we intend to conduct a targeted controlled study in adults at high risk of mortality. Survival rates in adults with steroid-refractory GVHD who have failed at least one additional treatment, like ruxolitinib, are low, ranging from 20% to 30% by day 100. However, a survival rate of 63% has been recorded after remestemcel treatment used under expanded access for 71 patients aged 12 and older, all experiencing steroid-refractory GVHD and failing to respond to at least one additional treatment. We are collaborating with leading investigators at the Blood and Marrow Clinical Trials Network, which oversees a significant portion of U.S. bone marrow transplants, and they have agreed to conduct the new clinical trial. Consequently, the costs for this targeted study are expected to be fully covered by the planned spending reductions that we will detail in the financial section. Now, let's proceed to Slide 8 for our financial results. Andrew, could you please take over for the next few slides?

Thanks, Silviu. Please turn to the financial highlights for the year on Slide 9. Revenue from royalties was US$7.5 million for the year. On a constant-currency basis, royalties on sales of TEMCELL in Japan by our licensee were $8.1 million compared with $8.7 million for the prior year. Net cash usage for operating activities for the year was $63.3 million. This represented a 37% reduction from FY 2021 and a 4% reduction from FY 2020. As of June 30, 2023, cash on hand was US$71.3 million with up to an additional $40 million from our existing financing facilities subject to certain milestones and the extension of availability. Turn to Slide 10, please. There you'll see we are reporting a reduction in expenditure and an improved loss before tax for the year ended June 2023. Our revenue of $7.5 million is predominantly from royalties on sales of TEMCELL in Japan. Our R&D expenditure was reduced by 17% from the prior year, primarily to support the remestemcel-L BLA resubmission and preparations for pivotal studies for rexlemestrocel. Our manufacturing expenditure reduced by 10% from the prior year, and our finance costs for the year end June 2023 include $15 million of non-cash accrued interest and borrowing costs. Now turning to Slide 11. I'll take you through the cost containment plan for the next 12 months. It's important to note that our net operating cash usage in FY 2023 was a 37% reduction compared to 2021 and a 4% reduction compared to 2022, but we are targeting a further 23% reduction of approximately $15 million in our projected FY 2024 annual net operating cash spend through reduced spending across research, marketing, commercial inventory, and payroll. This targeted reduction will be partially offset as we invest in our Phase 3 programs for steroid-refractory acute GVHD and CLBP. We are targeting a 40% annual reduction in payroll by February 2024. This reduction comes from decreases in base salaries, short-term incentive payments, and contractor fees in the coming year. The CEO and CMO have deferred their entire FY 2023 short-term incentives and have voluntarily reduced their base salaries for FY 2024 by 30% to preserve cash. Instead, they'll receive long-term non-cash incentives to further align with shareholders. Any grants of equity-based LTIs will be subject to shareholder approval. FY 2023 short-term incentives have been entirely deferred for all employees. Management are eligible to receive LTIs in lieu of a 30% reduction in salary, and non-executive directors have voluntarily deferred 100% of the cash payment of their director fees and agreed to receive 50% of their fees in LTIs. Again, any grants of equity-based LTIs will be subject to shareholder approval. For the coming year, we are shifting from quarterly to half-yearly reporting of financial statements. The next financial statements we will report will be for the half-year ended December 31, 2023. We will continue to report our quarterly cash burn via Appendix 4C and include a report on operational activities. This process is in line with the requirements for ASX-listed entities. Now, I'll hand the call back to Silviu for the remainder of the presentation.

Thanks, Andrew. If we go to Slide 13, please, this is a mechanistic slide, which I've addressed many times in the past, but I think just to summarize for those who don't know the disease. The devastating complication of a bone marrow transplant is acute graft versus host disease. It's mediated by the graft immune system attacking the gut and the liver in particular as well as the skin of the recipient, and the immune cells create a cytokine storm that results in organ destruction and ultimately death. What we aim to do with our mesenchymal stromal cell product is to target the precise mechanisms of the immune deactivation, turning off the immune cells and the destructive cytokines. Next slide please. Slide 14 addresses the market size and the opportunity for the Company. There are more than 30,000 allogeneic bone marrow transplants performed globally, and about 10,000 of those are performed annually in the United States, while approximately 1,500 are in children and the remaining are in adults, indicating that the adult GVHD market is about five times the size of the pediatric market. In Japan, we already have a product generating revenues for us; it's the only product that has been approved in Japan through our licensee in JCR Pharma. In the U.S., no products are approved for graft, steroid-refractory graft versus host disease in children. In adults, the only approved product is ruxolitinib. Next slide please. Slide 15 summarizes the short-term survival results across three distinct trials in pediatric GVHD, with children treated with remestemcel. In each of these trials, you see short-term survival outcomes that are significantly higher than those survival outcomes at three and six months reported in matched contemporaneous or historical controlled cohorts. These results have been extensively provided to the FDA as part of our BLA resubmissions. Next slide please. Slide 16 now shows the long-term survival outcomes for the children in our pivotal Phase 3 trial through to at least four years. You can see that, while one-year survival is 63%, at two, three, and four years, survival remains stable at around 50%. In contrast, the results of five published contemporaneous studies in children and adults show survival at one and two years is abysmally low, and no reports of survival outcomes in these high-risk patient populations beyond two years. These results were also provided to the FDA. Next slide please. Slide 17. We are now focusing in addition to the pediatric population on adults with steroid-refractory GVHD. As I mentioned earlier, this is a much larger market opportunity, and the only drug approved in this patient population is ruxolitinib after steroid failure. 45% of ruxolitinib-treated patients continue to be non-responders. The survival of these patients is 20% to 30% by 100 days—an abysmal outcome. In contrast, across 71 patients treated under expanded access who are 12 and older and have failed to respond to at least one additional agent, like ruxolitinib, we have seen a 63% survival— a terrific outcome. This is similar to the type of survival seen in high-risk pediatric patients. As a result of these very promising data, we are in late-stage discussions with the Blood and Bone Marrow Clinical Trials Network across the U.S., a body responsible for 80% of all U.S. bone marrow transplants, to have them conduct the new clinical trial, which will target patients who have failed steroids and at least one additional agent like ruxolitinib, with a primary endpoint designed to either reduce or improve early day 28 responses or demonstrate a survival benefit at 100 days. Importantly, the costs of this targeted study are expected to be entirely covered by the planned spending reductions, as outlined earlier in the financial section. Let’s move to the next few slides, which focus on the opportunities with rexlemestrocel, our second-generation stromal cell allogeneic product. Slide number 19, please. The market opportunity for inflammatory low back pain is huge, both in the U.S. and in the dominant European markets. Over 7 million patients in each of these jurisdictions are estimated to suffer from chronic low back pain due to degenerative disk disease, which is an inflammatory condition. Despite non-steroidal anti-inflammatory drugs and opioids, none of the existing treatments impact either the disease symptoms or disease progression in this large patient population. In fact, 50% of opioid prescriptions in the United States are precisely for this indication, representing a significant cause of the opioid epidemic that continues to result in poor healthcare outcomes. Slide 20 provides a summary of our program's status. We have regulatory alignment with the FDA on the appropriate pivotal Phase 3 study to confirm the results from the first Phase 3 trial that showed a significant reduction in pain at 12 and 24 months follow-up. The Phase 3 protocol for this pivotal trial design has been agreed upon with the FDA at a 12-month reduction in pain compared with a placebo. Secondary endpoints include functional improvement and reduction in opioid usage. Product manufacturing has been completed for the trial, and potency assays are in place for product release. The program has received RMAT designation from the FDA, and the pivotal trial startup activities have commenced, with recruitment expected to begin in the next quarter. Let me provide you a snapshot of the data that underpinned this pivotal trial and our regulatory interactions with the agency that resulted in RMAT and the agreements on the pivotal trial and its endpoint. Slide 21, please. The results from the first trial showed that a single injection of rexlemestrocel delivered together with hyaluronic acid as a carrier into the lumbar disk resulted in a significant reduction in pain compared with saline control at 12, 24, and in fact, up to 36 months across all subjects in the 404 patient study. That pain reduction was seen in the subset of patients who used opioids at baseline, equal to 168, representing a large subset that is at higher risk of opioid overuse and addiction. Among patients on opioids at baseline, despite instructions to maintain existing therapies throughout the trial, by three years, 28% of those who received the cell product were no longer taking opioids compared with just 8% of saline-treated controls. Slide 22, please. This slide summarizes the effect on pain through 36 months from a single intradiscal lumbar injection of our cells. As you can see, the green line on this slide represents the mean change in pain at every time point after a saline placebo injection. The small reduction in pain seen with saline approximates that typically seen with opioid drugs, indicating that even a saline rehydration of the disk has a small beneficial effect. In contrast, if you look at the red line, the reduction in pain observed with the single injection of our cells along with the hyaluronic acid carrier shows a substantial reduction in pain that is maximal at 12 months and durable through 36 months. The difference between the red and the green lines represents the anticipated results in the pivotal Phase 3 trial design in patients who are within a five-year period post-initiating pain—at a time when we can have an impact, not just on pain but also on the natural history of the disease before the disk is ultimately destroyed by the inflammatory process. Let’s move to the last indication that I want to focus on: our inflammatory heart failure program, also with rexlemestrocel. Slide 24, please. This slide is a snapshot of the current program summary. The significant need is evident, as inflammatory low ejection fraction heart failure continues to be a major unmet need, with mortality approaching 50% at five years. The data generated across two large programs is particularly promising, particularly in the DREAM Heart Failure Phase 3 trial, which was recently published in the Premier Journal in the Cardiovascular Field, the Journal of the American College of Cardiology, demonstrating an improvement in ejection fraction at 12 months, preceded by a long-term reduction in major adverse cardiovascular events defined by cardiac mortality, heart attacks, and strokes. Potentially, the LVEF is an early surrogate endpoint for reducing these major adverse event outcomes. We expect to meet with the agency to discuss the data from the large 500 patient DREAM Heart Failure study, along with data previously generated in LVAD patients for which the RMAT is already available. Our objective is to show that similar mechanisms exist in the continuum of these two indications in order to have a larger umbrella covering both LVAD patients and those with advanced disease prior to having an LVAD in place. Slide 25 summarizes, and I won’t go into too much detail, but it summarizes the continuum of this disease and where we think our mesenchymal stromal cell product can have significant benefits for both advanced heart failure patients and those who are end-stage and have an LVAD in place. This is the basis of the long-term program that we will discuss with the agency and potential strategic partners. Finally, Slide 26 provides a pictorial snapshot on the right of some of the data that emerged from the DREAM Heart Failure study. It shows the impact a single intramyocardial injection of our cells had on major adverse cardiac events in patients with inflammation, resulting in almost an 80% reduction over a five-year period in heart attacks and strokes. Major cardiac events are significantly affected in these patient populations. I believe that might conclude my remarks, and I will now open it up for questions. Thank you very much.

Your first question comes from Louise Chen with Cantor. Please go ahead.

I wanted to ask you a few things. Firstly, will you provide a public update after your FDA Type A Meeting? And secondly, what's the expiration date on the inventory that you have on remestemcel that was ready to go? Lastly, do you have any sense of what the cost and timing of your adult study will be? Thank you.

Sure. Thank you for the questions. Yes, we will be providing a detailed update post the Type A meeting to the market. Secondly, our inventory does not currently have an issue with expiration because, as long as it's tested, we're able to demonstrate a shelf-life that can be extended. I think our shelf-life at the moment is up to at least four years, but it can be extended as long as the tests continue to be performed. Thirdly, regarding the cost, we're projecting a relatively small targeted study in adults. The reason we're working with the bone marrow CTN network across the U.S. is that they have an established infrastructure in place. This relationship allows the CTN to conduct the trial in a manner that results in a very inexpensive clinical trial compared to what a trial would normally cost with a commercial CRO. That's precisely why we are collaborating with the CTN. They are developing the protocol together with us, and I am very excited to get this trial started in a patient population that frankly has no alternatives. This patient population consists of patients who have failed steroids and at least one other agent, where the only approved agent in the U.S. currently is ruxolitinib. Approximately 45% of patients treated with ruxolitinib have failed, and those patients have no approved or effective options available, with mortality rates resulting in a survival of only 20% to 30%. This is exactly the patient population we have been treating under expanded access, and we are observing a 63% short-term survival benefit. This is why the Bone Marrow CPN Network is very eager to conduct this trial. From our point of view, we will be providing the product we have already made, and the additional costs are quite low compared to a normal large trial, and certainly will be covered by the cost reductions outlined earlier in terms of reductions in research, payroll, and more.

Your next question comes from Edward Tenthoff with Piper Sandler. Please go ahead.

Thank you very much. I appreciate the update. I wanted to dig a little bit deeper into the last question. How large do you think the adult trial might be? Will the 23% cost reduction be offset by the adult trial so that costs will remain the same, or will the actual cost reduction be somewhat less than the 23% you mentioned? Thank you.

The size of this trial is relatively small. Again, until we have full agreement with the agency, we need to be somewhat conservative. But we are looking at per arm around 60 to 70 patients per arm. The overall cost, considering we are collaborating with the CTN, is expected to be in the mid-single-digits. So, we are talking about relatively inexpensive trial costs. To answer your question on the offset of the 23% cost reduction over the next six months, very little will offset that good reduction. I would say we are being fairly reserved, but obviously, I will be able to provide more details after the Type A meeting.

So, we kind of add that mid-single-digit millions for the Phase 3 trials back on top of the 23% cost reduction when it begins, got you.

And again, just remember that this is annualized. We are referring to the next six months in terms of trial costs.

Yes, absolutely. That was helpful clarification. Thank you, Silviu. Additionally, regarding chronic lower back pain, I understand that you will begin this trial next quarter, which is the fiscal first quarter. How much will this cost and how do you anticipate covering this? Is that included in the budget?

Again, the costs over the first six months are already in the budget. This is a relatively inexpensive trial, slightly more so than a network-based study, but the costs are already well covered by our existing budget.

And one for Andrew, if I may. How long do you anticipate the cash on hand will last?

The cost containment strategies that have been enacted will allow us to have sufficient cash through the end of the first calendar quarter at least next year. Our strategy to bring in additional cash involves three parallel approaches that we're currently pursuing: strategic partnerships in several areas for remestemcel and rexlemestrocel; active monetization of royalties—both real and synthetic royalty monetizations; and finally, accessibility to capital markets.

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

Hi, thanks for the update. I wanted to ask about the adult trial—have you considered what the control arm might be? Also, regarding the chronic lower back pain trial, could you confirm if the FDA is okay with you proceeding with saline as the control arm?

Yes, I'll take the second question first. The FDA is perfectly fine with saline as a control arm, absolutely yes. Regarding the GVHD program, one of the main reasons we're working with the CTN network is that they have access to investigators who have large contemporaneous controlled patient populations we can utilize as controlled arms alongside our treated arms. While we need to consider a randomization strategy, we have various current strategies for the appropriate control. Remember that there are no approved drugs for control patients, and whether they're randomized or contemporaneous, they will receive the best available therapy, which are unapproved drugs targeting inflammatory pathways that currently yield a 20% to 30% survival rate.

One more question, if I may. I know you mentioned that in the extended access protocol in adults, you've seen enhanced survival compared to patients treated with standard care. If I recall correctly, the adults treated in Study 280 didn't achieve their primary endpoint, so could you contrast the two studies and explain what gives you increased confidence that this adult study will achieve statistical significance?

That's a very good question. Study 280, conducted about 10 years ago by Osiris using a product called PROCHYMAL, was a first-generation mesenchymal stem cell product manufactured using a different process. When Mesoblast acquired this product from Osiris, we implemented substantial manufacturing modifications, leading to the improved Ryoncil product. Ryoncil has demonstrated superior efficacy to the old PROCHYMAL product in various pediatric studies. The data we have with Ryoncil in adults failing steroids plus a second line including ruxolitinib shows a 63% survival rate, which significantly differs from the PROCHYMAL results in trial 280. The potency of our product is a crucial measure of its efficacy, confirmed through potency assays already presented to the FDA. Additional potency assay work is underway, which we intend to show further to the FDA.

The next question comes from John Hester with Bell Potter. Please go ahead.

Good morning, Silviu. Referring back to your prepared comments, you mentioned intending to provide additional data on potency to the FDA. It sounded like you were leaving the door open with respect to their recent decision. Can you confirm that I understood correctly and elaborate on what you hope to prove?

Well, that's exactly right. The primary reason for the CRL was that the FDA wants to be convinced that the product in our current inventory for commercial launch is essentially the same as the product used in the Phase 3 trial. Our potency assay needs to be substantially similar to the one used in the Phase 3 trial to demonstrate that the two products are the same. We are currently developing this data, with some already in place and additional work expected in the next few months. This will be part of the discussions in the upcoming Type A meeting. Perhaps, Philip Krause could add some color to my comments. Philip?

Sure. Just a quick point here: while the CRL was disappointing, it did have two significant positive indicators. One was the favorable results from the inspection, and the other is that the CRL did not question the efficacy of the product as demonstrated in GVHD001, which had been the case with the previous CRL. However, the CRL continued to question the potency assays, particularly regarding the characterization and standardization of the product used in GVHD001, and its ability to produce future products similar to that used in GVHD001. This leaves open the possibility that by using the same assays employed to characterize the product in GVHD001 for our new commercial product, we might demonstrate sufficient similarity. Should this not be accomplished, the only path forward would be another clinical trial in either adults or pediatrics to establish the relationship between potency assay and clinical outcomes for future products.

One follow-up if I may. What are the fundamental changes between the product used in the 001 trial and the product you now attempt to register?

I can address that. There were no changes. The same exact manufacturing process and the same product went into the Phase 3 trial as what is currently in inventory and intended for release. That is what the process inspection concluded. Thus, there are no changes to the product. What we need to ensure is that we have a potency assay in place used precisely in that Phase 3 that confirms the same attributes as the existing inventory. Phil, would you add anything?

I would not. I think that's exactly right. The manufacturing process has not changed.

Thank you. That brings us to the end of today's call. I will now hand back for closing remarks.

Great. Thank you, everybody, for joining us today. We hope that we have been clear in providing details around our interactions with the FDA, our upcoming Type A meeting, our focus on finance and cost reductions, managing our cash runway, and laying out the upcoming milestones on some of our most important products and the value proposition for our shareholders. Thank you very much.

This concludes our conference for today. Thank you for participating. You may now disconnect.