Mesoblast Ltd (MESO) 2018 Q2 法說會逐字稿

Welcome to Mesoblast update and operational highlights for (inaudible) ended December 31, 2017. An announcement and slide presentation has been lodged with the ASX. These materials will also be available on the investor page at www.mesoblast.com. (Operator Instructions) 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 view only as of this 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.

Good morning, good afternoon to our operational highlights and financial results call for the half year ended December 31, 2017. With me is our Chief Financial Officer, Paul Hodgkinson.

If we could turn to Slide 4. Here is our investment proposition. Over the last 6 months, as you're about to hear, we've made tremendous progress in bringing our much needed sale of medicines to patients with serious or life-threatening conditions.

Next slide. We believe we have the most potent technology platform for regenerative medicine applications with mechanisms of action that are now well established and have been validated clinically across multiple disease states.

Next slide. Slide 6. Our manufacturing processes are capable of delivering highly scalable, industrialized products that are consistent and reproducible. We're proud that our teams' management know-how in regenerative and regulatory activities, and necessary for approval will underpin the positive Phase III results for graft-versus-host disease, which we hope will mean that our product candidate MSC-100-IV will be positioned to be the first allogeneic mesenchymal lineage cell product launched in the United States.

On Slide 7, we see highlighted our mature and diverse product line. We have 3 assets in Phase III, and multiple assets in Phase II. We believe that this is the most mature regenerative medicine product pipeline in the industry. United States continues to be the world's key market for our products. And the FDA has initiated a regulatory pathway for accelerated approval of regenerative medicine products, which address conditions that are serious or life-threatening. This is called the Regenerative Medicine Advanced Therapy Designation and it's within the 21st Century Cures Act. We believe that our portfolio of advanced product candidates is very well-positioned to access this -- the accelerated approval pathways under this act. Indeed, a major milestone for the company is our recent successful first RMAT designation for our product candidate MPC-150-IM for heart failure patients with end-stage disease and the left ventricular cyst device.

Mesoblast intends to meet as soon as possible with the FDA, regarding our development strategy and our upcoming readout in the 159-patient trial with end-stage heart failure and LVAD implantation. We will be discussing the potential eligibility for priority review and accelerated approval.

To reiterate, we have a very extensive intellectual property portfolio. Slide 11 summarizes a recent achievement with a -- with our intellectual property. The strength of our intellectual property portfolio and our strategy to protect our commercial rights were highlighted with the recent license to TiGenix of certain of their patterns. This license supports the global commercialization of their adipose derived mesenchymal stem cell product by Takeda. Mesoblast will receive payments and royalties on global net sales. When consistent with our strategic objectives, Mesoblast may consider providing other third parties developing mesenchymal cell products in areas that are outside of our core product focus, with licenses to our valuable patents.

Now I would like to move and talk to the specific pipeline of our medicines. Slide 14 speaks to our most advanced product, MSC-100-IV, and the market opportunity of this product for acute graft-versus-host disease. Steroid-refractory graft-versus-host disease continues to be a devastating condition, with mortality rates as high as 95% in 12 months. There are no regulatory approved treatments for this condition anywhere outside of Japan. There are about 30,000 bone-marrow transplants, originate transplants for globally. About 20% of these are in children, and we're targeting that this market outside of Japan, where our licensee JCR Pharmaceuticals has already received full approval and where their product TEMCELL is currently reimbursed for up to USD 195,000 for a treatment course.

Slide 15 speaks to our product development strategy for MSC-100-IV. We initially intend to target pediatric patients with steroid-refractory graft-versus-host disease, and this is to leverage the extensive safety and efficacy data published and generated over many years with this product, and to leverage the fast rate designation that we've already received, which will allow for priority review and a rolling review process. After that, we intend to seek label extension for the product in high-risk adult patients with steroid-refractory GVHD, where this product previously has demonstrated efficacy signals in high-risk subgroup analyses. And finally, we intend to have a lifecycle potential for the product in patients with chronic graft-versus-host disease, a chronic autoimmune-like condition that occurs in parallel with the acute GBSD setting.

Now I'd like to touch on some of the very exciting clinical data that have just been reported with this product. Phase III, multi-center pediatric trial has just read out its primary endpoints and we reported that last week. This trial in 55 pediatric patients tested a full induction course of this therapy in children who have severe disease and have failed an initial steroid course of therapy. The trial's primary endpoint was an overall response analysis at day 28; the key secondary endpoint is survival at day 100. Previously, an internal futility analysis have been positive in November 2016. The most important point here is that 75% of the children enrolled in the study had grave COD disease, the most severe form and that associated with the highest level of mortality.

Slide 17 summarizes the primary efficacy event outcome. Bottom line is that the overall response at day 28 was significantly increased at 69% against a historical control rate of 45%, prespecified with a P-value of 0.0003%. We were very, very excited by these results. Importantly, these results were consistent and were seen against all grades in the trial and against -- and with patients across all complications.

Equally as important on Slide 18 were the tremendous safety results. The infusions were well tolerated, there were no adverse events in different incidents that had been expected based on the extensive prior data, and importantly, mortality through day 100 was only 22%. And again, just to reiterate that the expected mortality in this severity of disease approximates at least 70% at day 100.

In conclusion, this study successfully met the primary endpoint of day 28 overall response in the most sick steroid-refractory pediatric population. The mortality rate was only 22% in the first 50 children, and the findings importantly are tremendously consistent with the overall historical control -- historical rates of response to this therapy in a -- in previously 241 subjects under an expanded access protocol.

Slide 20 now speaks to our commercialization plans for this product. At a clinical level, we have completed the day 28 overall response primary endpoint, successful. We will be reporting out the day 100 survival with key secondary endpoint in the second quarter. And we will follow those children out through day 180, again to ensure that there are continued safety and survival benefits. Importantly, in the Expanded Access Program, those children that would -- who have been treated with mesenchymal stem cells demonstrated a survival benefit through day 180 compared to matched controls in the bone marrow transplant database. That gives us great confidence that we should see similar kind of outcomes through day 180, a very important endpoint in this disease and the industry standard. We are completing commercial resonance in manufacturing. We are establishing pricing and reimbursement, and preparing the market through medical education, and our regulatory team is planning for pre-[BLA] meetings in the United States in order to request for rolling submission under approve Fast Track designation, planning for FDA submissions, and planning for registration of the Singapore manufacturing facility for product launch in Canada, where the product has already been approved. In the EU, we have orphan designation, and there is potential to get conditional approval based on current and existing clinical evidence. Importantly, there is potential for commercial partners to accelerate these regulatory efforts, our market preparation and our life cycle management for the product.

Now I want to move to our heart failure program. Slide 22 shows the continuum of the disease from Class I through to Class IV disease, is a progression over many years. We are developing MPC-150-IM to target those patients with low ejection fraction and the most advanced forms of heart failure, in stage heart failure and Class III and Class IV heart failure. For these patients, there are only very limited treatment options.

What is our product development strategy now that we have augment designation for heart failure in patients with LVADs? We will be leveraging the data for potential near-term market entry, for MPC-150-IM in end-stage heart failure patients who have had an LVAD implanted. We'll be intending to broaden that market potential to what's called Bridge to Recovery, which represents a high growth potential market for temporary LVAD use and possible ex-plantation in end-stage Class IV heart failure patients. And then we will seek to extend label through completion of our ongoing Phase III program in patients with advanced Class II and Class III heart failure.

What is the market opportunity for Class IV heart failure? There about 250,000 to 300,000 patients who suffer with Class IV heart failure and 50,000 patients per year move to end-stage disease. But despite optimal medical therapy, these patients have a 50% 1-year mortality, as high as any advanced cancer. Left ventricular cyst device improves survival, but comes at a significant cost burden with recurrent infections and bleeding of the gastrointestinal tract due to chronic inflammation. We believe that we can make a substantial difference in both quality of life and potential survival in these patients, using our cell therapy together with artificial heart.

Slide 25 speaks to where this program sits today. The 159-patient double-blind placebo-controlled 2-to-1 randomized trial is a value adding safety and efficacy of injecting a single dose 150 million cells, MPC-150-IM, into the native heart muscle of patients at the time of receiving a left ventricular cyst device. Enrollment of this trial was completed in the third quarter of 2017. The key efficacy endpoints are as follows: the primary endpoint of the trial is the number of temporary winds that are able to be tolerated with -- from the LVAD, meaning the ability to maintain the circulation without artificial support. This endpoint, we measured through the first 6 months. The key secondary endpoints measured through 12 months are time to recurrent hospitalization, survival and various quality of life measurements. Our arm at designation was precisely for this target patient population, end-stage heart failure with LVADs. And this trial will -- the 12-month readout will occur in the third quarter of this year. As I've stated earlier, we have ongoing discussions with the FDA as to how these results will support a potential accelerated approval pathway.

Moving onto the Class III heart failure market opportunity on Slide 26. Of course, this is a much larger market opportunity, perhaps 10x the size of end-stage heart failure. And yet again, these patients continue to have limited options and high mortality. The cost burden to society is tremendous here. The operational updates, we are enrolling up to 600 patients with advanced Class II, III heart failure. This trial continues to enroll well and we expect to complete enrollment towards -- in the second half of this year.

Now let's move on to the third of our key Q1 product candidates in Phase III. Slide 29, MPC-06-ID, a non-opioid alternative for chronic low back pain due to degenerative disc disease. This again is a potential blockbuster opportunity for Mesoblast. We are targeting at least 3.2 million patients in the United States alone with severe chronic low back pain, not responsive to all conservative therapy measures. Importantly, 50% of all opioid prescriptions are for this precise condition. And the opioid epidemic is a major, major objective for the health authorities in the United States today, and in Australia, and indeed worldwide, to target. A non-opioid solution for chronic low back pain is imperative. In fact, the 21st Century Cures Act concludes specific measures to combat opioid dependence. We believe that our product candidate MPC-06-ID can fit in this patient journey in a way that will precisely address this epidemic. Our Phase III trial in this condition, we're enrolling at least 360 patients in this Phase III trial across the United States, predominantly, as well as some Australian states. We expect that enrollment will be completed eminently. If the Phase III results replicate the Phase II results in pain and function, we intent to leverage this product candidate as a potential non-opioid treatment option for patients with severe chronic low back pain, a major unmet medical need and a serious condition.

Let's move forward with our inflammatory disease portfolio, on Slide 33. MPC-300-IV is a systemically administered product with a well appreciated mixes move action that allows the cells to respond to multiple inflammatory signals and then in turn, release very potent factors that modulate the immune response. We have now generated extensive phase II clinical data in multiple immune mediated diseases, in 60 patients with type 2 diabetes and inadequately controlled glucose, the 30 patients with diabetic kidney disease, and in 48 patients with biologic refractory rheumatoid arthritis. The overarching message here is that MPC-300-IV was well-tolerated in all 3 Phase II studies, and that we've seen evidence in -- clinical evidence of efficacy signals in all 3 studies that very much mirror and are consistent with the extensive preclinical data that we've previously published.

And to summarize on Slide 34 is that we see the most advanced opportunity here is in our inpatients with biologic refractory rheumatoid arthritis who failed anti-TNF agents and other biologics. We've previously presented 52-week data which demonstrated that a single infusion of MPC-300-IV has provided early and durable responses in a dose-dependent manner with results that we believe are very exciting and that support moving this program into Phase III, and evaluating even higher induction therapeutic doses to potentially achieve remissions.

On that note, I think we'll move on to the financials, which will be presented by Paul.

Thanks, Silviu. Turning to Slide 36. Let's just touch on the cash position and cash flow for the half year. So the top of the page, you can see the cash out -- net cash outflows, and you can see a significant benefit of $11.2 million over the comparative period. So we can see that there's a reduction of 24%. There's 2 real drivers for this: one is, we've been constraining costs and there's a reduction of $4.7 million in payments to suppliers and employees. And on the other side of the fence, in terms of inflows, as Silviu alluded to, we received $6.5 million on the upfront receipt from TiGenix, as part of the patent prices agreement with them. In terms of cash on hand, cash on hand is $47.4 million at the end of December, pretty consistent with the June position.

In Slide 37, let's look at the P&L in the next 2 or 3 slides. So topline revenue, revenue that's obviously a significant increase over the comparative period, and there's a number of factors within here. There's been a sharp increase in the TEMCELL royalties, going up 139% to $0.9 million through the income on sales increasing in Japan and the royalty derived from that. We also received sales milestones from the TEMCELL product as well during the period. And then the last area is the recognition of both the upfront that I just mentioned in the cash flow from TiGenix, as well as recognition of the second payment from TiGenix, which will be received within the next 12 months.

Looking further down the P&L on Slide 38. In terms of our cost management, we still continue to constrain our costs and you can see very clearly, in terms of the boxes, the items that I have outlined on that page, we've constrained costs with reductions in manufacturing, more than offsetting the increases in our continued Tier 1 R&D program. Management and admin over this period was relatively flat over the comparative period.

And then the last area on the P&L on Slide 39. 2 items are of note here. Whilst we can recognize a noncash income tax benefit of $26.2 million, this is due to the new changes in the U.S. corporate tax rates, which take the tax -- effective income tax rate down from 35% to 21%. Whilst this is noncash today, this is a very valuable change to our future to post tax cash flows, particularly as we begin to commercialize in the U.S. So this should be regarded as a very valuable forward indicator of our cash flow as a company. And then as a result of all the change I have talked to in revenue and tax and constrainment costs, we actually recorded a profit for the period of $6.7 million compared with a loss of the previous corresponding period of $39.8 million.

And with that, I think those were key points of the financials, I'll hand back to Silviu just to go through the milestones before we hand to questions.

Thank you, Paul. And as we've previously stated, in the milestone section, we actually got some very important upcoming monster in catalyst, linked to our key Phase III programs. The full at -- MSC-100-IV product, we've completed the day 28 primary endpoint readout, we expect to read out 100-day survival data in the second quarter, and the 180 safety and survival data in the third quarter of this year. For MPC-06-ID for chronic low back pain, we will imminently complete enrollment, and then we'll be in a position to then provide guidance on readouts for the program. For MPC-150-IM for advanced and end-stage heart failure, the Class IV heart failure program will have a 12-month readout in Q3, early Q3. And the Phase III trial for Class II, III heart failure targets enrollment completion by the end of this year. In addition of course, we continue to be in serious events with multiple potential corporate partners.

On that note, I think, we'd like to open to any potential questions. Thank you.

(Operator Instructions) Your first question comes from Mark Breidenbach with Oppenheimer.

Silviu, I have to ask, I think previously, you guys had been guiding that we would see a 6 months LVAD reading analysis sometime in the near term, I want to say, either at this quarter, or at least in the first half of 2018. What happened with that readout? Why the decision to go to a 12-month analysis in the third quarter?

Look, I think, this is a trial that has been run by the National Institutes of Health, with oversight by the FDA. And again, the decisions on how to unblind and when to unblind are their decisions. To provide a 6-month unblinding of the primary endpoint may potentially, potentially impact on -- and buy us the 12-month overall readout of the key endpoints of survival and hospitalizations. So at this point, the NIH is still considering whether there may be an early data readout, but I think ultimately, it's their decision, not our decision, and we'll be guided by them.

Okay. So what was the basis for the previous guidance that we might see that 6-month readout? I'm just trying to gain confidence here that, that there won't be another revisiting with the 12-month readout?

Well, no, the 12-month readout is the final full data readout for the whole trial. It includes the 6-month analysis of the primary endpoint and includes the full 12-month analysis of all survival and hospitalization readouts. The question was whether we could provide an earlier 6-month readout of the trial's primary endpoint? That remains a discussion point with the National Institutes of Health, but the overriding principle is to ensure that we do not disturb the integrity of the whole trial. So if at all possible, we may provide an update, but really that -- that's in the hands of the (inaudible), yes.

Keeping that control. No, that's -- I understand. It's just with these investigators respond to trials, I always worry that the investigator might choose to publish the full set somewhere and not even announce the results at a conference or...

Oh, no. I can tell you that there is -- first of all, there's an obligation to share the data with Mesoblast, number one. And number two, these data will be slated for presentation in full at the American Heart Association annual meeting later this year. The expectation is that, as soon as top level 12-month data are available, we will be making that information public. The issue here was whether 6-month data on the primary endpoint could be made public without disturbing the integrity of the 12-month outcome? And I think that remains an area for discussion between us and the NIH.

Okay, fair enough. And then, we just had a conversation recently about the GVHD results, I won't focus on them here. But I'm just wondering if you could tell us a little bit more about the nature of your agreement with TiGenix and your IT protection of radical is derived, doesn't come with stem cells. Now that Takeda is purchasing TiGenix, are you in a position to potentially see additional products or additional licensing revenue come from Takeda in 2018?

Well, I can speak to the licensing agreement that is in place. And it is specifically for the use of their adipose-derived product in the local administration into fistulae. And the license to our patents supported their ability to launch that product, both in Europe, which is where they have gotten positive responses from EMA, and their intention to launch the product subsequently in United States. To the extent that, that product may have applications beyond local administration to fistulae, we're open to have those discussions with Takeda. And look, I can't speak for what their plans are, but I think we're open and we have got patents that are very broad and that cover uses of mesenchymal lineage cells for wide number of indications, irrespective of their source. And that's -- their source could be, of course, adipose derived, it could be bone marrow, and it could even be IPS derived. So we have a very deep IP estate, and I think importantly, there are a number of other important companies that are developing mesenchymal lineage products and providing that those products are not in our core strategic focus, we're very much open to negotiating potential licenses of their intellectual property.

Your next question comes from Alethia Young with Crédit Suisse.

This is Irina on for Alethia here. Just on the LVAD cardiac trial, could you give us some contacts in your expectations on LVAD meeting, and results that you would view as clinically meaningful? And then, also how can we think about your RMAT designation playing into the heart failure regulatory process? Particularly for the approval timelines of different process after the [out ride] data?

That's a very broad question. With respect to the LVAD trial and clinical endpoint, the primary endpoint of the ability to sustained circulation off the pump, so-called weaning ability, is actually very important clinical endpoint, insofar as it is a reflection of both improvement in the function of the native heart, and an improvement in functional capacity of the patient in the -- which is often a measurement of the circulation. And we showed an over twofold increase in the proportion of patients who are able to successfully be weaned in this way in the pilot study, using 1/6 of the dose of cells. So those data are previously published in circulation, and were used by us in our successful submission to the FDA, to get the RMAT itself. So the primary endpoint has a real biologic and clinical meaning, if it's achieved. It is also, obviously, the pillar under -- on which we would hope to build, let's call a Bridge to Recovery opportunity, meaning that if we can increase the number of patients who can maintain the circulations successfully with the VAD turned off, then the next step of course to attempt to explant the VAD. And all physicians and surgeons in this field have a dream that the point of these LVADs is to be a temporary option and for them to be removed after 6 months with patients potentially moving from end-stage Class IV heart failure towards a much earlier stage, Class II or Class III. If we could achieve that, then we've achieved a huge outcome for these patients, who otherwise have a horrible demise. So that endpoint has great clinical importance. In addition to that, the use of the cells as an adjunct to the VADs, we expect will improve the quality of life and perhaps survival of these patients. As we saw in the pilot data, we significantly reduced the incidence of recurrent hospitalizations from bleeding in the GI tract, which is the No. 1 cause of recurrent hospitalizations. It's the No. 1 problem in these patients. And it's a result of aberrant vascularity in the gut due to the chronic inflammation that is set up with the artificial heart in place. So if we can reduce hospitalizations and perhaps reduce mortality, then that has an obvious benefit in and of itself in this target population. So those are sort of endpoint that I think underpins the RMAT and that we'll be having discussions with agencies around potential accelerated approval, should we see those outcomes in this current trial.

Beyond that, it has obviously very important relevance to the Class III programming -- Class III heart failure, because if we are demonstrating an increase in proportion of patients who can maintain circulation off the VAD, then what we're really doing is strengthening the native heart in a way that would have direct benefit to what is happening in the Class III program. We'll have a predictive nature on what the likelihood is of the primary Phase III endpoint in that trial, where the primary endpoint is around reduction in hospitalizations as the primary endpoint of direct consequence of strengthening of the native myocardium. So does that address your questions? Pretty extensive answer, I think.

Yes, yes, I agree. Should we be thinking about the LVAD data as having implications commercially or from a regulatory perspective, on the Class III patients, or should we be thinking about waiting for that data coming soon? It make sense that the translations should be clear but from your conversations with regulators?

Well, again, I think that this is a stepwise approach. We are focusing on the MPC-150-IM product for initial accelerated approval in end-stage heart failure patients, as a standalone commercial opportunity. And we will build -- we have built commercial models around the target market population; that is in itself is a very large commercial opportunity for us. If we're successful, then I think that what you're looking at is the potential for an extension of the label into Class III heart failure, on the back of positive results in the Class III trial. And we see this as a stepwise progression, and whilst we could build a relatively straightforward commercial team to launch the product for Class IV heart failure without the need for partners, it -- it's clear that for successful launch in Class III heart failure, it will be a requirement to have a major pharma company with a cardiovascular sales force to enter into a partnership to make that a successful launch.

Your next question comes from Ted Tenthoff with Piper Jaffray.

Silviu, just picking up on that, that is a good detailed explanation. When it comes to the commercial side, is there a way with kind of more targeted, more severe patients for you to retain some kind of co-distribution or something like that? Is that your aspiration? Or would it really be to partner out wholly and focus your commercial efforts on other programs?

Look, I think it's a little bit early to be definitive. I think the opportunities in the heart failure space are huge. And there is room to have alternative commercial arrangements, including co-promotion rights, including retention of certain geographical rights. I think all of those are on the table. And we're exploring each of those with different partners. So I think, let's see how things evolve, but I think the opportunity before us is tremendous and it's important to maintain optionality.

Yes, I agree totally. And to push just a little more, maybe take it at a higher level, I'm kind of trying to figure out what Mesoblast looks like when you grow up. Because you have got all these late stage programs. Obviously, it's going to be somewhat data dependent, but understanding sort of where you guys intend to focus, I think will be helpful. I guess, it really just comes down how the data rolls out, but trying to get a better sense of where you anticipate, being commercially focused versus where you will continue to seek new partnerships as you've done in the past.

So I think, this is the guts of the strategy, the Mesoblast strategy, as we grow, right. I think, we've got 3 assets right now, in the midst to having completed the Phase III trial, that's a very mature pipeline. It gives us, again, optionality. The first Phase III trial has read out and it's positive, and that puts us on a clear trajectory to being a commercial revenue-generating company. For the pediatric market alone, which is a substantial market for us, it does not require a very large investment in capital for building out a sales force. 50% of the -- of patients in our existing under PIP program and the Phase III, we're in 15 transplant centers across the U.S. It doesn't require a lot to service those sites. Having said that, I think time is critical and resources are critical, and even with GVHD, there will be a requirement to accelerate the adult label extension and even life cycle management into chronic GVHD, and that's where a strategic partner would make a significant impact. With respect to heart failure and chronic low back pain, both of those Phase III program are targeting multi-billion-dollar markets, which will require a substantial sales force, substantial commercial distribution capabilities. None of which are in the -- on the short horizon on -- in our plans because they require a lot of dedicated resources. So I would expect that even with successful readout in the heart failure program and the Beckman program, we will be partnering those with appropriate players that have existing footprint in those areas. It wouldn't take much at that point then for us to consider keeping one or more additional products, taking them through Phase III and into registration on our own and building our own biologic sales force, and that's really the way, I think, I see that over time. Mesoblast will grow up. We will have some of the largest products partnered, and some of the ones that are a bit more nimble in areas of high unmet need that we can keep and build a sales team around.

Your next question comes from Tanushree Jain with Bell Potter Securities.

Just a few quick ones for me. Paul, one for you. For the $5 million of your upfront receivable within 12 months from TiGenix, can you tell us what the figure for that is?

Thanks very much, Tanu. Yes, the reason it is recognized as a receivable as of today, even though it'll be received latest in 12 months’ time, is because there are no conditions that we have to satisfy today in order to receive that. So there is no risk of not having it. There's a chance of getting it earlier, if they get approval quickly in the market. So I'm fully expecting the cash to come through at worst, 12 months exactly from the date of signing. And potentially earlier for that, and that's why it was recognized today. And so, it's a very clear understanding from us and the audit team that the cash is without risk of being received.

Great. And Silviu, just for you, on the RE trial, though you've mentioned, I guess, the natural progression in the further development of that would be to have a higher induction dose and perhaps look at a higher durability benefit because of that. So in terms of Phase III development or a Phase IIb next for that, when do you see the timelines or your strategic priority there?

Yes, I think that the key item here is that efficacy is determined by early response, meaning within the first 12 weeks, that the 12 again point is an acceptable endpoint for all product approvals by the FDA. And in our own Phase II studies, we demonstrated peak responses within the first 4 to 8 weeks of certainly by 12 weeks. The durability was obviously very pleasing in that the durability was after 39 weeks. But the objective is to increase the proportion of patients achieving a low disease activity state, and perhaps even remission within that first 12-week period. So that's our focus, and that's where we would go with the next program evaluating even higher induction dosing or repeat dose therapy in that first 12-week period. And so, what we're considering is what a Phase IIb, III design would look like with an adaptive design around it that would allow us to evaluate additional induction regimens to allow them the ideal one to move into Phase III. Obviously, that is dependent on both additional resources and partnering.

Your next question comes from Marc Sinatra with Lodge Partners.

The first question from me. The manufacturing spend is obviously dropping quite quickly. Where do you guys see manufacturing at in terms of a final products sort of now, in the medium-term and in the longer term? I mean obviously, you think the technologies will improve over time. Just could you, I know it's a broad question, but if you could just give a little bit on that, that will be great.

I think, we'll both have our own -- we'll both have views on this. But I think the important point around the reduction in spend on manufacturing reflects the fact that we spent quite amount -- quite an amount of money in the previous few years to ensure that we make all the sufficient material necessary for our ongoing Phase III programs, No. 1, and No. 2, that we invested sufficient capital to optimize the manufacturing process. And I think, what you're seeing now is some of the results of that. So for example, we successfully transitioned the manufacturing process for MSC-100-IV from a very old process that had not been -- had not made product since 2009, and when we took over the product, we transferred its process into the Singapore facility, we optimized the manufacturing process. We made substantial changes and modernized the process, and as a result of that, the current process provides a very robust and reproducible and consistent product that we think underpins the great results that we just reported in Phase III. Same sort of robustness and consistency is across our whole pipeline and as an example of that, for example, we would -- we have achieved a high level of purity and consistency of the product. And that flows across the MPC product for heart failure, for disc repair, and for intravenous delivery for inflammatory conditions. Moving forward, I think that we're now into the commercialization phase and of course, there will be different levels of investment for commercial manufacturing, for inventory buildout and the like, but that's now a new phase, as we are moving into. Paul?

Yes, I've got a couple of comments to that. So in terms of manufacturing, you're absolutely right. We completed manufacture of the products for the current trials, the manufacturing spends come through. Obviously, as we said in the current commercial launch trajectory for GVHD, we've got commercialization readiness programs to do. That's, for example, spending money with our manufacturing partner, getting the ready -- the fight ready for an FDA inspection, that's a typical example, and actually preparing the CMC dossier would be a typical component of that program. So I will expect to see manufacturing to come up a little bit, but at the same time, trials such as GVHD is coming to a conclusion in terms of R&D spend. So overall, I'm not overly concerned about an increase in costs in the near term. And obviously, on top of that, as we get close to market, there will be working capital impacts. On us, as we start to produce more inventory in advance of launch. Okay?

Obviously, that's great. Now second and last question for me. You said that you're going to be meeting the FDA soon to discuss the LVAD trial and where that might head. Obviously, I mean, that discussion would be greatly helped by the 6-month weaning trials. I guess, Silviu, how do you see those discussions heading without that number?

No, I don't agree with that. In fact, the whole point of the discussions with the FDA are to agree before all the data have been read out, or any of the data have been read out, on what their expectation would be for accelerate approval, not after any of the data. This is a key pivotal trial, and any results that come out of this trial need to be prespecified to the requirements of the agency. The discussions that we are now having with the FDA are all built on the data that have already been generated in the prior early Phase II trial. Yes?

Yes, no I got it, that makes perfect sense to me.

Your next question comes from Dennis Hulme with Everson (sic) [Edison].

Can you in election to the process suppose to say that the approval in Europe, can you tell us a little about the anticipated timelines? And what the plans might be there?

Yes. So we've already had a previous interaction with the European agency, and it is clear to us that the data from the Expanded Access program, together with a new phase of data, would be sufficient for what they would call a conditional approval in Europe. I think there's a central body for approval, but then you need to proceed on a country-by-country basis for additional approvals, private launches. And that's quite a complex regulatory process. I think from Mesoblast's perspective, we're prepared to focus very much on the U.S. approval and launch, which is a central administrative body. I think with respect to Europe, we would -- our strategic focus would be to work with a partner that has already a major footprint and a regulatory infrastructure to address all of the potential markets in Europe.

Your next question comes from Elemer Piros with Cantor.

Silviu or Paul, I was wondering if you could help us understand a little bit about the -- how many patients have been actually treated in the Japanese market? So what does the 2.6 million or so royalty revenue correspond to in terms of numbers -- numbers of patients treated by JCR?

Thanks very much for the question. Yes, If I -- obviously, our data isn't provided explicitly by JCR, but if I -- if you work it backwards of the royalty rate and make an assumption that we're in the mid-20s on the royalty, which is a public number because it's described in the F1 perspective on our past U.S. lifting. You can back-calculate and you'll get to somewhere between 150 and 200 patients that have been treated lifetime to date.

So, during the last 6 months or so?

Lifetime to date, so the 6 quarters, yes.

Oh, okay, okay. And maybe just a little bit of follow up, Silviu, on the LVAD results. Do I understand it correctly that the NIH will actually conduct the 6 months analysis unwinding it, but won't make -- won't necessarily make the information public, in order to avoid bias? And then they move on and wait another 6 months until the entire cohort could be assessed that level?

Look, again, I can't speak precisely for the way they're going to do the analysis, but that's about right.

Okay. What I'm trying to understand is, if they don't conduct the 6 months analysis, but at 12 months, they look back, how is it -- how did it look at 6 months and now 12 months, what sort of use would that have?

The primary endpoint is 6 months.

Yes, Elemer.

That is the primary endpoint. So for winning, there's no primary analysis beyond 6 months. The question is, when do they provide us with those 6 months data?

That brings us to the -- the end of, apologies, of today's call. And I'll now hand back to Dr. Itescu for closing remarks.

Thank you very much for your presence today. We are very excited by the tremendous progress we've made in the last 6 months and we hope to update you all with further positive news in -- over the next few weeks and months.

Thank you very much.

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