Mesoblast Limited (NASDAQ:MESO) Q4 2020 Earnings Conference Call August 26, 2020 6:00 PM ET

Company Participants

Silviu Itescu – Chief Executive Officer and Managing Director

Josh Muntner – Chief Financial Officer

Fred Grossman – Chief Medical Officer

Conference Call Participants

Louise Chen – Cantor Fitzgerald

Jeffrey Cohen – Ladenburg Thalmann & Co. Inc.

Tanushree Jain – Bell Potter Securities

Jason Folger – Dawson James Securities Inc

Swayampakula Ramakanth – H.C. Wainwright & Co., LLC

Operator

Hello, and welcome to Mesoblast 2020 Full-Year Financial Results and Corporate Highlights Webcast. An announcement and presentation have been lodged with the ASX and are also available on the Home and Investors 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 call is being recorded.

Before we begin, let me remind you that during today’s conference call, the company will be making forward-looking statements that represent the company’s intentions, expectations or beliefs concerning future events. These forward-looking statements are qualified by important factors set forth in today’s announcement and the company’s filings with the SEC, which could cause actual results to differ materially from those and such forward-looking statements. In addition, any forward-looking statements represent the company’s views only as of the date of this webcast and should not be relied upon as representing the company’s views of any subsequent date. The company specifically disclaims any obligations to update such statements.

With that, I would now like to hand the call over to Dr. Silviu Itescu, Chief Executive of Mesoblast. Please go ahead.

Silviu Itescu

Thank you very much, and good afternoon and good morning to everybody to the call on the operational and financial highlights for the year ended June 30, 2020. It’s been a tremendous year, very important year for Mesoblast and the next few months are certainly going to be transformational for the company.

If we could go to Slide 4 of the presentation, please. The allogeneic cellular medicines that we’re developing are based on three pillars. We have an innovative technology platform. We have a very clearly defined lead product candidate, and we have a number of Phase 3 product candidates that will have short-term readouts.

In terms of our innovative technology platform, we have a well-characterized immunomodulatory mechanism of action. We’re targeting severe and life-threatening conditions, and the technology is underpinned by an extensive and global intellectual property estate.

Our lead product candidate is RYONCIL. It has a targeted market. If approved, the launch for this product is planned in 2020. It has been filed with the FDA for pediatric steroid-refractory acute GVHD and is currently undergoing the final stages of the review process under a priority review. We have a PDUFA date for September 30, and we have industrial scale manufacturing in place to meet the commercial demand as we expect to move forward.

In addition, we have well-established plans for life cycle expansion of remestemcel in pediatric and adult inflammatory diseases. We have a Phase 3 trial ongoing in patients with acute respiratory distress syndrome from COVID-19, and we have two additional product candidates in Phase 3 trials for heart failure and back pain with near-term U.S. readouts.

We could move to the next slide. Slide 5 shows the platform technology mechanism of action. The cells that we’re developing mesenchymal lineage cells are found in every vascularized tissue around blood vessels. They express a number of receptors for various inflammatory cytokines, including TNF-alpha receptor, IL-1 receptor, IL-6 receptor, interferon gamma receptor.

So when they find themselves in the middle of a cytokine storm, they’re able to be activated, and they respond by releasing a variety of anti-inflammatory mediators that switch off the severe inflammatory response by regulating and controlling multiple arms of the immune system that are responsible for the damage to tissues that are the basis of the diseases that we are targeting.

We go to the next slide, Slide 6. This slide summarizes the clinical programs and the advanced stage of development of our product candidates. Remestemcel is our most advanced product candidate. It’s being developed for pediatric and adult systemic inflammatory conditions.

And as you can see, the most advanced indication is for pediatric acute steroid-refractory graft versus host disease. It is also being developed for adult steroid-refractory acute GVHD, chronic GVHD and is in the midst of Phase 3 for acute respiratory distress syndrome caused by COVID-19. It’s also being developed for biologic refractory Crohn’s disease.

Our products for localized inflammatory diseases include REVASCOR, based on rexlemestrocel platform, an MPC-06-ID on the same platform. These products are in Phase 3 and we’ll have readouts during the upcoming quarter for heart failure and for chronic low back pain.

If we go to the next slide, please. Slide 7. This slide summarizes our commercial scale manufacturing capabilities. We have a scalable allogeneic platform technology that we call off the shelf. The manufacturing capabilities meet stringent criteria of the international regulatory agencies we are working with.

The processes need robust quality assurance, with final product, consistency and reproducibility. We have sufficient capacity to meet our RYONCIL GVHD launch plans, and we have the ability to increase and plans underway to increase our capacity requirements for our maturing pipeline, including for GVHD label extensions and for COVID-19 ARDS program.

The basis for our ability to increase our capacity lies in our proprietary xeno-free technologies, which will allow us to increase yields and output and our ability to move to three dimensional bioreactors to reduce the labor costs and improved manufacturing efficiencies. These innovations will significantly reduce our cost of goods.

On the next slide, we depict the most important aspect that underpins the value chain for Mesoblast, our global IP estate. This is an extensive patent portfolio with protection extending through 2040 in all major markets. We have over 1,100 patents and patent applications that cover compositions of matter, manufacturing and therapeutic applications of mesenchymal lineage cells. These patents provide us with very strong global protection in areas of our core commercial focus.

But when outside of our core commercial areas, we will grant rights to third parties who require access to our patent portfolio to commercialize their products. An example of this is that relationship with TiGenix, a wholly owned subsidiary of Takeda, who – from whom we received royalty income for the treatment of complex perianal fistula in adult patients with Crohn’s disease, as well as milestone payments.

Let me move to the recent highlights. On Slide 9, remestemcel for children is a major objective and has achieved some very important highlights. Very recently, we had a successful meeting with the FDA Oncologic Drugs Advisory Committee, ODAC, who voted overwhelmingly 9:1 in favor that the availability – available data support the efficacy of RYONCIL in pediatric patients with steroid-refractory acute graft versus host disease.

The biologics license application for RYONCIL was under priority reviewed by the FDA, and we have an action date of September 30 under the Prescription Drug User Fee Act, PDUFA. If approved by the PDUFA date, we plan to launch RYONCIL during the fourth quarter in children and adolescents up to 18 years old. Preparations are very advanced for our potential launch with product inventory and commercial team in place.

A second major opportunity and plan is to use remestemcel in children with COVID-19 multisystem inflammatory syndrome, or MSIS. We have established an expanded access program in the U.S. for compassionate use of remestemcel in the treatment of COVID-19 affected children with cardiovascular and other complications of MSIS, a life-threatening disease.

The first patient has received treatment under the EAP and has been discharged from the hospital. We will continue to monitor all patients who receive this treatment for this severe life-threatening condition.

Next, let’s look at the recent highlights for remestemcel in adults, Slide 10. The FDA cleared an IND application to treat patients with COVID-19 acute respiratory distress syndrome, providing a pathway for use under both EAP and in the randomized controlled trial.

Under the emergency compassionate care of Mount Sinai Hospital earlier this year in New York, 75% of patients with moderate-to-severe ventilator dependent ARDS, who received two infusions of remestemcel were successfully taken off ventilator and discharged from hospital within a median of 10 days.

As a result of that positive pilot data, we initiated a Phase 3 trial, randomized placebo-controlled of remestemcel in up to 300 ventilator dependent patients with moderate-to-severe COVID-19 respiratory distress syndrome, with an objective to reduce the mortality rate within 30 days. The trial is enrolling well and is expected to complete recruitment during the fourth quarter of this year.

In the meantime, an independent Data Safety Monitoring Board has set a review date of early September for the first interim analysis of the Phase 3 trial from the first 90 patients after they’ve completed 30 days of follow-up, and we will, of course, update the market as we receive that interim analysis.

In addition, we have plans to move forward in adults with steroid-refractory acute graft versus host disease. These patients with the most severe forms of the disease continue to have a high unmet need and poor survival.

Just this month, we convened an advisory meeting with key opinion leaders to develop a clinical trial design for a post-market study evaluating remestemcel in these high-risk patients.

Now, I’d like to ask our Chief Financial Officer, Josh Muntner, to take you through the financials. Josh?

Josh Muntner

Thanks, Silviu. That was a terrific review of our recent highlights and some of the important activities in Mesoblast.

Turning to the financials, Slide 12. Slide 12 includes highlights from our income statement, where we see growth in revenue and reduction in our operating loss for our fiscal year ended June 30, 2020. Total revenue grew by nearly 100% to $32.2 million from $16.7 million.

The key components of total revenue were milestone revenue and commercialization revenue. Milestone revenue from our strategic partnerships grew 127% in fiscal 2020 to $25 million from $11 million a year earlier. The milestone revenue reflects the $50 million upfront payment from Grunenthal received as part of the partnership we established with them and also recognizes $10 million in revenue from our license agreement with Tasly.

Commercialization revenue, which is royalty revenue collected from JCR Pharmaceuticals for their product, TEMCELL, grew 32% in the period-over-period comparison going to $6.6 million for fiscal 2020 from $5 million for the year earlier period.

Regarding non-revenue highlights, we had a 13% reduction in loss after-tax. The reduction in loss after-tax was partially driven by the increased revenue, but also reduced spend on our clinical trials. The impact of the reduced spending on clinical trials was offset by significant investments we’ve been making in manufacturing and building out the commercial team in anticipation of the near-term launch.

Slide 13. In Slide 13, we review our relationship with JCR Pharmaceuticals, a Japanese company focused on commercializing products for rare and orphan disease markets in Japan. JCR has exclusive rights to our MSC technology for acute GVHD in Japan, which they commercializes TEMCELL They introduced the product in 2016 and steadily grew sales in Japan, which lead to a consistently rising royalty paid to us.

As shown on the chart on the right, during our fiscal year ended June 30, 2020, we recognized $6.6 million of royalty revenue. This is 32% higher, as I noted, than the year earlier period.

I’d be remiss if I didn’t note that when compared to the trailing 12-month period that ended March 31, 2020, the royalty we received declined a little bit by about 13%. The decline was actually driven by outstanding success that TEMCELL had since its launch as JCR Pharma has encountered some product supply issues.

In fact, JCR has stated that they have taken steps to increase production capacity for TEMCELL, as they have received orders far in excess of their initial forecasts. We’re pleased to see the continued demand for TEMCELL and believe it bodes well for our product, if approved.

As noted on Slide 13, the addressable U.S. market for acute GVHD in children and adults is approximately eight times larger in the U.S. and Japan. This is driven by population size differences, incidence rates, as well as pharmacoeconomics differences between the two countries. We continue to benefit from our relationship with JCR and we look forward to their planned increasing capacity in order to meet patient demand in Japan.

Moving to Slide 14, we find the entire income statement for the year ended June 30, 2012. I’ve already covered the growth seen when comparing 2020 to 2019. We want to reiterate the reduction in loss after-tax, despite the significant investment we’re making in commercial readiness for potential U.S. launch of RYONCIL.

Finally, on Slide 15, I’d like to mention one of the most important items on our balance sheet, which is our cash position. Cash on hand at June 30, 2020 was $129.3 million. We raised $90 million in May 2020 from existing and new institutional investors. The proceeds from the offering will be used for commercial launch of RYONCIL for acute GVHD, will also support a scale-up of manufacturing for our maturing pipeline, including GVHD label extensions and for COVID-19 ARDS and also support the clinical programs underlying those.

In addition to our cash position, up to an additional $67.5 million may be available through existing strategic partnerships and our ongoing financing facilities over the next 12 months. We believe that our cash and available cash positions as well as we look forward to transitioning to a commercial organization with our own product sales.

Additional information regarding the company and our financial results have been posted to the ASX and the SEC, as well as our website.

I’d like to hand the call back to Silviu now to review our operational and corporate highlights.

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Silviu Itescu

Thank you, Josh. We can now move to Slide #17. I’ll talk about our programs and various other product highlights. Acute graft versus host disease is a serious and fatal complication of an allogeneic bone marrow transplant. It’s considered in three phases.

Phase 1 is the host tissue damage that occurs following bone marrow transplant conditioning. Phase 2 is the immune cell activation and the cytokine storm that ensues. The cytokine storm is a very important components, because the cytokines that ultimately result in tissue destruction, which is Phase 3, the inflammation in the organ damage of the skin, the gut and the liver.

Next slide, please. Children with steroid-refractory acute graft versus host disease are particularly high-risk of treatment failure and death, because there is nothing approved in children under 12. More than 2,000 allogeneic bone marrow transplants are performed annually in children and adolescents in the U.S. Despite prophylaxis, 50% will develop acute graft versus host disease.

First-line treatment is with steroids, but more than 50% of patients will be refractory and failed to respond to steroids. And as I said, children under 12 have no approved treatments. Acute graft versus host disease primarily affects skin, gut and liver. You can detect the problems through large volumes of diarrhea through increasing levels of bilirubin. And when you start to get gut and liver disease, the mortality approach is 90% when involving these organs.

Next slide, please. The immunomodulatory activities of remestemcel are highlighted in this particular slide. When the inflammatory cytokines from a cytokine storm produced by cells called M1 macrophages, or T-cells are in train, and you put remestemcel in that microenvironment. The receptors on remestemcel, such as TNF-alpha receptor, TNFR1 is activated, resulting in the cells’ ability to respond to creating factors that then turn off these damaging cytokines of switch off the inflammatory cells that produce these cytokines, notably the macrophages and the T-cells.

Ultimately, next slide, the outcome is a responder rate, a response rate that translates into a switching off of the disease itself and improvement in clinical outcomes. We call that the day 28 overall response. The importance of the day 28 response, which was the primary endpoint of the Phase 3 trial is that, it’s a surrogate and a predictor of overall survival.

What you can see here on this slide on the left-hand side in red is a recent publication 2020 from MacMillan et al, who show the current standard – best standard of care and survival outcomes in children with steroid-refractory acute graft versus host disease.

As you can see, the survival outcomes are very dismal. At six months, only 49% of patients are alive. By two years, 35% are alive. In contrast, if you can see the figure on the right, is the survival outcome in the Phase 3 trial of remestemcel study 001, where at six months, we had a 69% overall survey.

So not only did this study achieve its primary endpoint of day 28 overall response successfully. But when you look at the overall survival, which is really what counts, you see that at a six-month time point, we have 20% absolute increase in children who are alive compared to the best available standard of care that’s out there today. That means for every 100 children, who received treatment remestemcel, 20 would survive, who otherwise would have died.

Next slide, please, Slide 21. So what is our anticipated FDA approval and plan for RYONCIL. The results from that – from RYONCIL demonstrated consistent outcomes across three distinct trials. The Phase 3 trial that I’ve just referenced, a prior expanded access program in 241 children, with majority of whom had severe Grade C-D disease, and an earlier randomized-controlled trial in children that also demonstrated significant benefit.

Looking at these three consistent outcomes was the basis of the BLA that was filed with the FDA. The recent ODAC meeting with the FDA voted overwhelmingly favor 9:1 of the available data support the efficacy of remestemcel in pediatric patients with steroid-refractory acute GVHD, and the FDA has set a Prescription Drug User Fee Act, PDUFA action date of September 30, by which they need to give us a decision. If approved, RYONCIL is planned to be launched during the fourth quarter of this year.

In the next slide, we summarize here is the regulatory and commercial strategy for the launch. Much of the strategy has been informed by the success of himself TEMCELL in Japan. The FDA PDUFA date, as I said, is September 30. And in order to be prepared for potential approval, our commercial strategy has put in place an inventory build and an efficient targeted sales force that is prepared – well-prepared for the potential approval. 15 centers account for about 60% of the transplant patients across the U.S. And so we believe that our targeted sales force will clearly meet that capability.

In addition, beyond approval, we have plans for label extension in the treatment of adult steroid-refractory GVHD, and we have beyond that a very fulsome lifecycle strategy for the product.

In terms of the post-marketing study in adults, we plan to utilize remestemcel manufactured using an optimized manufacturing process. The same process that went into the successful Phase 3 trial in children with acute steroid-refractory GVHD. We have convened an expert panel just several weeks ago to discuss the clinical trial protocol and endpoints.

And currently, we have a plan underway for a randomized controlled trial of remestemcel versus standard of care in the high-risk steroid-refractory adult patients, designed to demonstrate improved overall response and survival. And with a focus on those adults, who have a continued high unmet need despite approved therapies or who have not responded to existing therapies.

Slide 24 shows the more fulsome life cycle extension strategy for remestemcel beyond the initial pediatric acute GVHD launch. And note that very shortly thereafter, we have plans for the launch of positive of COVID-19 in ARDS, which takes us to the next slide.

Let me tell you a little bit about our potential new treatment paradigm in adults and children with COVID-19, very important focus for the company as it should be during this dreadful pandemic.

Slide 26, please. COVID-19 is a respiratory virus with a very high mortality rate due to severe inflammatory inflammation of the lungs, a disease called acute respiratory disease syndrome, ARDS. ARDS is caused by cytokine storm in the lungs in these patients, an exuberant immune response to the virus.

The extensive safety data of remestemcel and its anti-inflammatory effects in the setting of acute graft versus host disease makes a compelling rationale for evaluating remestemcel in COVID-19 ARDS, a disease that is driven by similar cytokine storm as acute GVHD.

In addition, we know that intravenous infusion of remestemcel results in selective migration and homing to the lungs, making inflammatory lung disease an ideal target for this therapy. So we believe that remestemcel has the potential to tame the cytokine storm in ARDS and may offer a life-saving treatment in those patients suffering with COVID-19 disease.

The next slide is a complex slide. And I think really, there’s just a couple of take-on points from this. Firstly, that the pathophysiology of ARDS is complex, driven by immune disease, immune inflammation ultimately results in fluid, filling up the sacs of the lungs, cell death and influx of inflammatory cells.

This is a disease that is well-established and not – and well-established in – as a cause by other viruses and bacteria, including influenza. So it’s a disease well beyond COVID-19, with mortality rates anywhere between 40% to 80%, a very, very important unmet needs today that we’re now addressing.

So on Slide 28, what makes us think that our approach is going to work. But we’ve seen promising pilot data in ventilator dependent patients with COVID-19 ARDS. In a compassionate use program under an emergency IND early this year at Mount Sinai Hospital in New York, 12 patients with moderate or severe ARDS received two infusions of remestemcel within five days. Nine of these 12 patients successfully came off ventilator support at a median of 10 days and were discharged from hospital.

At the time, this contrasted substantially with what was being seen in the rest of the patients in that city, where only about 9% of COVID-19 ventilator patients were able to be extubated and a survival rate that was of the order of 12% for 30 days.

These pilot data informed the design of the ongoing 300-patient randomized controlled clinical trial, our objective, of course, being to demonstrate in a randomized way that the therapeutic benefit that we saw in the pilot would be confirmed and a trial that is sufficiently powered to support FDA approval if the results are positive.

Slide 29, please. The primary endpoint is all-cause mortality to – at 30 days, with a key secondary endpoint being patients alive off the ventilator within 60 days. Recruitment is expected to complete during Q4, with several interim analyses being planned, which could result in early stoppage for efficacy or futility.

What are the key milestones for remestemcel in COVID ARDS, Slide 30. The interim analysis – first interim analysis is due in early September, it’s imminent after 30% of patients have reached the primary endpoint. Once the full trial reads out or earlier if results support, we will seek expedited regulatory approval subject to positive results.

In the – in parallel, we are manufacturing scale-up to meet the projected increase in capacity requirements should the results be positive. We are able to implement proprietary xeno-free technologies and we certainly have plans to move into 3D bioreactors to allow us to have sufficient capability to meet this large unmet need. In addition, we are in discussions with various potential partners to support manufacturing and commercialization plans.

What about remestemcel children with COVID-19? Slide 31. Children hospitalized with COVID-19 developed both ARDS and a life-threatening inflammation called multisystem inflammatory syndrome, or MSIS, which involves multiple critical organs in their vasculature.

In approximately 50% of cases, this disease is associated with significant cardiovascular complications that is directly involved the heart muscle and may result in reduced cardiac function and can be fatal. These children often show no evidence of active infection, but have been infected and have antibodies against COVID-19, which suggests an autoimmune process as the primary cause.

Mesoblast has established an expanded access program with the FDA, which provides physicians with access to remestemcel in these patients and children aged two months to 17 years with heart disease as a complication of MSIS. The first patient has received treatment under the EAP and has been discharged from the hospital.

Mesoblast will continue to monitor the outcome of this first child, as well as all children with MSIS treated under the EAP in order to establish the safety and effectiveness of the protocol in children with this potentially life-threatening complication of the disease.

Now, let me move on and give you updates on our other Phase 3 candidates, heart failure and chronic low back pain.

Slide 33, please. Both of these product candidates are in established partnerships under regional relationships, MPC-06-ID is our product candidate for inflammatory intervertebral disc disease. We have a partnership with Grunenthal that covers Europe and Latin America and subject to positive readouts. We are able to – we will be leveraging the strength of the partnership in terms of sales, marketing distribution in the regions with – of the partnership.

With respect to REVASCOR for heart failure, we have a regional partnership in China with Tasly and, again, subject to positive readouts. That partnership is likely to deliver a substantial distribution channel in a very large market opportunity.

Slide 34, REVASCOR for advanced and end-stage heart failure. In December 2019, the trial surpassed the number of primary endpoints required for trial completion. We’ve – all study visits have completed during the course of the year. There was – there has been ongoing quality review of all data completed at the study sites.

There was a delay of about a quarter in accessing the data due to COVID-19-related issues. All of that has now been completed and data readout is expected during the fourth quarter of this year. The results may support regulatory approval in the U.S.

In March, results from a sub-study of 70 patients with end-stage ischemic heart failure and a Left Ventricular Assist Device were presented at the American College of Cardiology Scientific Sessions. The results from that sub-study of 150 randomized patients, whether the MPCs had a beneficial effect on the ability to wean off an LVAD reduction in major mucosal bleeding and readmissions in these heart failure patients.

Importantly, the end-stage ischemic heart failure patients with LVADs are older and have comorbidities, such as diabetes and closely resembled the majority of patients in our 566 patient Phase 3 trial in advanced chronic heart failure.

Let’s move on to our back pain Phase 3 trial, Slide 35. This Phase 3 trial of MPC-06-ID for chronic low back pain in 404 patients also has completed all study visits, ongoing quality review of all data was – has been completed at the study sites. Again, there was a delay of about a quarter due to COVID-19-related restrictions, and the data readout is expected in the fourth quarter of this year.

We continue to have excellent operational progress with our strategic partner, Grunenthal, in – Grunenthal in Europe will complete clinical protocol design, regulatory input and receive clearance from the European regulated – regulatory authorities to begin a second trial in Europe. And those plans are all underway and meetings have been held for the European regulators. Results from both trials, the U.S. trial and the European trial will be considered pivotal to support regulatory approvals in both the U.S. and Europe.

And finally, Slide 36 are the major operational milestones that we expect to see in the next 12 months. Many of these are actually in the – in a very short period of time. Remestemcel for acute GVHD, as I’ve mentioned several times, it’s under priority review with a PDUFA date set for September 30. If approved, we have a whole plan in place for the U.S. launch planned for later this year.

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Beyond that, of course, we – as I said, we will initiate a study in adults with refractory – steroid-refractory GVHD in order to expand the label. For acute respiratory distress syndrome, the ongoing recruitment of Phase 3 trial of remestemcel is ongoing. The trial completion is expected during the fourth quarter. And we assume that we will be establishing a strategic partnership for manufacturing commercialization for this indication.

REVASCOR for advanced and end-stage heart failure, the data readout, as I mentioned, is in the next quarter, and we will initiate a confirmatory trial in end-stage heart failure subject to the results read out.

Finally, for chronic low back pain, again, the data readout for Phase 3 trials in the next quarter, and we expect to obtain clearance from the European regulatory authorities shortly to begin a European Phase 3 trial.

And on that note, I’d like to thank you for listening to this presentation to open it up for questions. And in addition to myself and Josh Muntner, I’d like to introduce also our Chief Medical Officer, Dr. Fred Grossman, who is with us to answer any appropriate questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Louise Chen with Cantor. Please go ahead.

Louise Chen

Hi, thank you for taking my question and follow-up here. So my question for you is, how should we think about modeling fiscal year 2021? It looks like there’s a lot of moving parts. So how should we think about the sales progression for RYONCIL assuming approval? Any milestones that you expect if the chronic low back pain and heart failure data are positive, and then SG&A and R&D expense in 2021 versus what we saw in fiscal 2020? Thank you.

Silviu Itescu

Thanks, Louise. Those are a lot of questions.

Louise Chen

Sorry.

Silviu Itescu

So we, of course, have a planned trajectory for sales of RYONCIL. I think a lot of that obviously depends on agreements with payers around pricing and reimbursement. And those discussions are actively ongoing by our commercial team. They – the pricing reimbursement details, of course, will be in place after the product launch as required.

But really the most important way to look at this is lessons learned from the TEMCELL experience in Japan. So in Japan, the reimbursement based on pharmacoeconomics and the healthcare costs is sort of as a rule of thumb for most drugs, of the order, say, 50% of what one would expect to see in the U.S.

And having seen that – having seen the market adoption that has occurred in the last three years in Japan, which has ultimately resulted in the requirement for JCR to expand their manufacturing capabilities. In other words, they underestimated the demand. Putting those two together gives us pretty clear line of sight around how we see the roll out and the revenue generation and the number of patients that are likely to adopt this treatment for which, if we get approval, we’ll be the only approved to therapy for children under 12.

So I’m not sure how specific I can be beyond that. But I think that’s the way we see the roll out for pediatric GVHD. Beyond pediatric, pediatric transplants account for about 25% of all bone marrow transplants in the U.S. So clearly, we have a major focus on the adult GVHD market as well, which obviously, then is three times larger than the pediatric.

And in order to address that patient population, we have a plan in place for a randomized controlled study in those patients with the most severe forms of the disease, where existing therapies, the approved therapies don’t do particularly well. And so our plan would be a head-to-head against best existing therapy in order to expand the label from pediatric to adult. That’ll be a step-wise progression.

I think you also asked me how do we see revenues coming from some of the milestones around our Phase 3 assets. With respect to the back pain asset, we have a partnership with Grunenthal that anticipates a positive readout and anticipates the commencement of a second Phase 3 in Europe. And both of those linked to milestone payments based on achieving those successful deliverables. And we expect that both of those would be milestones that we would see in the next – over the next six months.

With respect to other milestones, we have certain milestones linked to a partnership with Tasly on cardiovascular outcomes, such as positive results and approvals in the Chinese territory. And we certainly intend to enter into new strategic partnerships for both the heart failure asset globally in the U.S. and other territories, as well as the back pain asset in the U.S. market, subject to positive readouts. And we are in discussions with other strategic partners in areas, such as COVID-19 ARDS.

Does that address your question, Louise?

Louise Chen

Yes. Thank you. And then just on the OpEx, how should we think about the year-over-year increase for R&D and SG&A, if there is any?

Silviu Itescu

Yes. Josh, can I ask you to address that?

Josh Muntner

Sure. So in this current year, which just ended, we actually are not carrying anything under SG&A. That will start to shift into that category as we have sales revenue. And we believe that we’ll be able to have – so we’ll be able to shift some of the costs into a separate category. Right now, we’ve been carrying it a bit in R&D. And that’s why, although I mentioned the trials spend slowing down.

If you look at the income statement in the press release, you see only about a $3 million difference, $4 million difference. And that’s because some of the investment in commercial is sitting in there, it’ll move to a separate category called SG&A.

Manufacturing commercialization includes inventory until we have a high certainty of approval and we’re confident. But from an accounting standard, we’re not at that high certainty level. We are still expensing product we’re linking for potential launch. That will be reversed and carried on to our balance sheet as inventory within approval. And so you’ll see actually the manufacturing commercialization come down significantly and be more like 2019. There will still be spend, but it’ll be capitalized as inventory.

Overall, Louise, for…

Louise Chen

Okay. Thank you very much.

Josh Muntner

…yes. So – and overall, just for the end of the last quarter, we had a pro forma cash balance of about $150 million. We just reported a cash balance of $129.3 million. So a use of about $20 million of cash during the quarter just over $20 million. There was a little bit of revenue – a little bit of cash received from JCR. But otherwise, that’s about the cash burn, and we expect to see for the coming quarter.

Operator

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann & Co. Incorporated. Please go ahead.

Jeffrey Cohen

Oh. Hi. Silviu, Josh and Fred, how are you?

Silviu Itescu

Hi.

Jeffrey Cohen

Just a recap from last week as far as the ODAC panel on RYONCIL for adolescents, what was the average age of the treated patients? And I assume that was up to 12 or 14 in age and it sounding like the label would be up to 18. Could you just clarify them and talk about that for a moment, please?

Silviu Itescu

Yes. I’d like to have Dr. Fred Grossman address the details of the trial and what we think maybe in the label. Fred?

Fred Grossman

Yes. So the label will follow the trial and the trial enroll patients up to and through the age of 17. The mean age was about between five and seven. So we enroll the full gamut of the ages in that study. And I expect that the label, if approved, will follow that pivotal trial.

Jeffrey Cohen

Okay. So you’re expecting the label up to 18 as you referenced?

Fred Grossman

That’s what I would expect, because it will follow the pivotal trial.

Jeffrey Cohen

Okay. And my second question – thanks for that. As a follow-up as far as what you found learning more about the JCR experience in adults and children, as far as the composition of use. Can you give us any flavor on the composition of use, and talk a little more about where they stand on production and backlog and then perhaps how that may relate to your fiscal 2021 revenues as compared to 2020? Thank you.

Silviu Itescu

Yes. I would say that, we just don’t have that information around the specifics on use in children versus adults, number one. Number two, the details around backlog and strategic plans are something that are obviously JCR’s. So I would refer you to their public statement at this point.

But, Josh, perhaps you could address the projected royalties we expect in the next 12 months from TEMCELL cells?

Josh Muntner

Sure. So JCR has put out some guidance for the – for their current fiscal year, which carries through to March 2021 that showed about a 30% drop in TEMCELL sales was their expectation. And then more recently, at the end of July or early August, they published their first quarter results and they actually exceeded their estimate of a third drop and they dropped by 60 some odd percent, 67% in TEMCELL sales for that quarter. That’s potentially impacted by reduction in usage due to COVID. Although, I think it’s largely driven by their restrictions around patient access. But we – we’re going with the one-third as their sort of long-term forecast and one-third drop.

Jeffrey Cohen

Okay. Got it. And I’m going to squeeze in one more if I can. As far as Grunenthal and their Phase 3 and your Phase 3 readout. Is there a trial going to be dependent on your Phase 3 readout? Does it feel like they’re going to pursue and proceed, regardless of the outcome? Or the second would be partly based upon how your Phase 3 reads out in the fourth quarter?

Silviu Itescu

Oh, so I can tell you that we’re considering a second – and we’ve spoken about this before. We’ve considered that the second trial would have a 12-month primary endpoint, not a 24-month primary endpoint, right? So the second trial is using the 12-month component of the 24-month overall outcome of the current trial to have a confirmatory to trial data set for both the European and the U.S. regulators.

And so really, it’s the totality of the data that will come out in this current trial that will support the specifics of the second trial. And those discussions are active and ongoing with the European regulators already. And so, more than that, I can’t speak specifically for Grunenthal. They’re running their strategy and their program. But I would say, there are many components and considerations as to the second trial in Europe beyond simply yes or no on a 24-month primary endpoint.

Jeffrey Cohen

Okay. Got it. Thanks for taking questions. A lot going on between now and the end of the year. Thanks very much.

Operator

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

Tanushree Jain

Hi, Silviu, Josh and Fred, thanks for taking my questions.

Silviu Itescu

Hi.

Tanushree Jain

…and it truly was a monumental milestone achieved for you guys in this month. Just a couple of firstly, on the adult GVHD trial. I’ve got two questions on that. Anything that you can tell me about what that trial may look like in terms of sizing or costs? And the other thing, Silviu, you mentioned that we’re really going to be focusing on the high-risk adults there. Can you perhaps talk to me about any biomarkers, et cetera, that you might use to actually select these patients?

Silviu Itescu

Yes. It’s a great – that’s a great question. I’ll defer to Fred in terms of the thought process right now around specific patients size, et cetera, which I think probably a little bit early. But in terms of biomarkers, what I will say is that, in the pediatric Phase 3 trial, we’ve clearly identified in vivo biomarkers that are both reflective of the mechanism of action of the therapy that are being impacted over time.

And secondly, validated biomarkers of disease severity that can stratify patients at baseline based on maximal unmet medical need and the worst possible survival. And in that type of stratification, we have seen that remestemcel was effective, at least, in the children, so stratified in – with acute GVHD. And those type of biomarkers are certainly going to be helping us in design the adult study.

Fred, would you like to add to that?

Fred Grossman

Yes, sure. As mentioned before, the unmet need in these – in adult patients is very considerable, especially in the severe steroid-refractory acute GVHD patients. In particular, the treatments that are available have safety liabilities and toxicities. So we’re moving into a population of great unmet needs, and we’ll be focusing on those most severe patients those that have stages C and D or three and four, who are steroid-refractory acute GVHD.

As mentioned before, we’ll be doing a randomized placebo controlled trial that compares treatment of remestemcel to – versus best available treatment. And we’re in the process now of designing the trial. We look forward to having discussions with the FDA regarding that design. And so we’re not disclosing at this point the size. But it’ll be powered to detect the difference and to allow us to extend the label into adults as positive.

Tanushree Jain

Right. And assuming you guys get approved and launched in the market in fourth quarter for pediatric. How soon do you think we’re looking at starting an adult trial?

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Silviu Itescu

Fred?

Fred Grossman

Yes. Well, this is eminent. We’re at this point, designing the trial. And the start date will really depend on the discussions we have with the FDA, so that we have complete agreement on the path forward.

Tanushree Jain

Right. And then just one last question on that. With the adult trial, Silviu, what would be your preference, I guess, to go market strategy? Would you consider going direct as you’re doing for pediatric? Or would you consider involving a partner debt?

Silviu Itescu

No, no, for the adult GVHD market?

Tanushree Jain

Yes.

Silviu Itescu

No, I think we have embarked on a clear strategy. We’ve built out a commercial team that that’s being led internally by Eric Strati. And then we’ve recently appointed a new COO, Dagmar Bjorkeson, who will lead our overall strategy and business unit growth. This is the adult GVHD’s part of that whole strategy, pediatrics and adults market, we will build our own – on our own.

Tanushree Jain

Great. And just a question in terms of the COVID-19 trial, can you perhaps tell me how many of the 20 sites are already recruiting patients?

Silviu Itescu

Fred?

Fred Grossman

Yes. I mean, all of the sites are recruiting patients. But as you know, there are hotspots around the country and that’s why we’re focusing on all of the region, because those hotspots change. So clearly, in the Southeast and the West during these last peak times, we were recruiting primarily in those areas in those regions. But now things are starting to bump up in the Midwest. And unfortunately, I suspect that things will start to increase in the Northeast as well. So we’re covering all of the regions at this point.

Tanushree Jain

And you’re happy with the rate of enrollment?

Fred Grossman

Yes. We’re on track as expected at this point.

Tanushree Jain

Great. That’s all for me. Thank you.

Silviu Itescu

Thank you.

Operator

Next question comes from Jason Folger with Dawson James. Please go ahead.

Jason Folger

Hi, guys. Congratulations on all the progress. I’d just like to ask a little bit about the powering assumptions and the effect size assumed in the COVID trial? Thanks.

Silviu Itescu

Fred, would you like to take that question?

Fred Grossman

Yes. So I think, as mentioned before, the mortality rate remains high, despite some of the advances and changes in the way patients are treated once on ventilation, they’re still ranging from 60% to 80%. We’ve assumed a very conservative mortality rate for the control group of much lower than that.

So it’s powered based on that. And we’re powered to 90% – between 80% and 90%. It’s powered to allow us to get this an indication if we succeed at the end of the trial. It’s a very efficient trial, and it also – that efficiency allows us to do the interim analysis.

Jason Folger

Sorry, I was really looking for the effect size in those calculations?

Silviu Itescu

Yes. So I think we have – you’re asking for a lot of detail, which I don’t think is something that we’ve previously made public. But I think what Fred is saying that, obviously, if the mortality rate in the controls is between 60% to 80%, then you can simply look at our pilot data, where we had a something like a 20% mortality. And you can make your own assessment of what the delta could be used to power such a study. What Fred is saying is that it’s well and truly strongly powered, given the very conservative approach to what we think the controls are likely to be. Does that correct, Fred?

Fred Grossman

Yes.

Jason Folger

Well, I understand what you’re saying. But without – I’m sure you’re not assuming the effect size that you saw on the pilot study, if you will. But what I think you’re saying is that you’re assuming a much more conservative effect size and a very conservative control rate. So you’re powered for that delta. So if you’ve come anywhere near what you saw on the pilot program, it would be a home run. Is that fair?

Silviu Itescu

I would say that’s very fair.

Fred Grossman

Yes. And I think not only is that fair, I think, if we were to see the kind of data that we saw in the pilot, we would not need anywhere near 300 patients to succeed, right? We would be a fraction of that 300-patient number would be what would be needed to show a significant out.

Jason Folger

So you’ve given the number of therapeutics that are in development, how do you zero out for all of those different therapeutics across the control arm?

And second part is, on good data, what happens given project work speed and the U.S. government’s intense focus on the acquisition of product?

Silviu Itescu

Well, I would say that both the control and the treatment arms are being offered every available standard therapy that’s being used. And I would expect right now that most patients who are on ventilators would have been exposed to steroids to probably remdesivir, right? Those are used most broadly.

Despite that, in most recent publications out of the U.S., the mortality rate appears to have remained a constant 60% to 80% in patients who are of the severity that are being enrolled in this trial. That makes us very comfortable that despite new changes in therapeutics, they’re evenly balanced between the treatment and control arms.

The second question you’re asking is, what is likely to happen should the results be positive, I think, of the trial? So we see that the potential approval for GVHD supports the initial label of the product, and it’s built around a very large safety database. Should the COVID-19 trial also be positive several months thereafter, for example, we would leverage the extensive safety database of remestemcel for GVHD, and be in discussions with the agency around a potential label extension for COVID-19.

If we were in that position, we then have to be prepared to substantially scale up manufacturing, which is currently have invested in and are currently investing in to be in a position next year to make sufficient quality of product to start to meet some of this – the unmet need. And really the unmet need is dependent obviously on the success or otherwise of the vaccines at the front end.

I think if there’s a successful one or more vaccines, as we all hope, there will be then really the incidence of patients getting infected or the proportion of patients progressing to requiring ventilation will become more manageable. We are planning for, obviously, a long-term therapy to patients with viral-induced ARDS.

Today, the number of patients who died from influenza related to ARDS in ICUs across the U.S. is around 60,000 to 70,000 patients a year. That’s a very large number. And if we overlay on top of that, a steady state number from COVID-19 that provides us with a substantial market opportunity, but also substantial challenge for our rapid scale-up in manufacturing, and that’s exactly what we’re working towards.

Jason Folger

Yes. Good problems. I would like to…

Fred Grossman

Yes. I would like to just add that this trial before initiating it was based on discussions with the FDA. So I would fully expect that if we had a positive outcome, we would move forward with an indication.

Operator

Your next question comes from Swayampakula Ramakanth with H.C. Wainwright & Co. Please go ahead.

Swayampakula Ramakanth

Thank you. This is RK from H.C. Wainwright and good morning, gentlemen. In terms of MIS-C, I mean, it’s great that you have established an EAP and have actually a successful first patient. So how should we think about the progression on this indication? Do you – should we assume you’re going to do something similar to what you did with adult patients in the sense – look at like the first dozen or so patients and see where the data falls and progress from there?

I’m just trying to understand what could be a potential timeline for this to become a real indication for you?. And on top – additionally, with the current data that you have in the pediatric patients with the acute GVHD, is there anything that you can draw from the anti-inflammatory properties that you’ve seen that acute GVHD into the MIS-C?

Silviu Itescu

Yes. These are great questions. Okay. Thank you very much. A really important question. So first of all, with extensive safety database in children having treated something like at least several hundred children or at least 1,000 overall patients with steroid-refractory GVHD, but the database in children is unique in terms of the extent of any therapeutic in this large patient population with severe inflammatory disease.

The mechanism of action of ourselves in acute GVHD is the use of surface receptors to sense high levels of inflammatory cytokines and the ability thus then to dampen down the cytokine storm by switching off the production of the cytokines by the inciting inflammatory cells. That’s a mechanism that we think is pervasive and present in the setting of COVID-19, both ARDS and the more systemic manifestations that involve vascular inflammation and cardiovascular complications, renal, CNS complications.

What happens particularly in these children with multisystem disorder is that, they don’t necessarily have such a big problem with the lungs and, in fact, seems to clear the virus better than adults do. But then develop an autoimmune process that is due to excessive cytokine production and inflammation of multiple vessels in various organs. And the heart is very significantly involved at 50% of cases.

An so since the mechanisms appear to be quite similar between systemic GVHD involving the gut and liver and systemic COVID-19 evolving major organs, we think that if we’re able to get the cells delivered to those types of inflammation, they can respond in a similar way and hopefully result in similar beneficial outcomes.

So I think with respect to the MIS-C children, you’re quite right, we are selecting an initial group of children, who will be traded under the EAP, we will be reviewing both the safety, but more importantly, the efficacy if we see it. And that’s fairly easy to read out. These children have a requirement to have cardiac dysfunction.

And so if we see cardiac functional recovery that is rapid and that leads to discharge home, it’ll be quite quite evident in a very short amount of time. And I guess, how we would then be in a position to have a therapy for the larger population would be a discussion that we’d want to have with the agency around what kind of pivotal studies need to be in place to support the use of the cells more broadly beyond initial FDA approval for these children at high-risk.

Fred, do you have anything else you would like to add to this?

Fred Grossman

Yes. I would add- look, given our mission in treating those most severe patients where there’s an unmet need, this certainly meets that definition. There are no available modern treatments for these patients. They’re usually given IVIG and steroids. And sometimes it works.

But in this case, because this is affecting the myocardium and these kids are getting pericarditis, myocarditis and have vascular components, this is a problem. And the larger problem is that now with schools opening, I think, many hospitals are expecting to see more cases.

So we’re making ourselves available based on everything that was just mentioned in terms of the mechanisms of action. And, as noted, we’re monitoring safety and, of course, efficacy. And based on those signals, we’ll determine what the next steps are.

Swayampakula Ramakanth

Okay. As a follow-up, in the patient – in the kid that was recorded, obviously, he had a severe cardiac function issue. But based on the definition of the syndrome, it could be any other system. Was anything else affected for this patient? And also, what do you think remestemcel could do if it is not the cardiac tissue, but if it’s something else like the liver or the kidney. Could you – are you, including such patients in the EAP? Or is it only the patients who have a cardiac issue?

Silviu Itescu

No, we are focusing on the cardiac issue. And many of these patients have cardiac, as well as liver, kidney at times. It can also affect the brain. So what do we expect the cells to do? We expect the cells to perform the same way that they did in GVHD, which also can have multiple organs involved.

So I would expect that we would see improvement if other organs are involved. But we’re focusing on the cardiac involvement, because these are the most severe cases, some of whom are in the ICU, some of whom wind up on mechanical ventilation. In the last large cohort that occurred in the U.S., there were 20% on mechanical ventilation and 2% died. And these are otherwise healthy children.

So an answer to your question, we’re focusing on cardiac involvement, because that’s the area of greatest need. And if there were other organs involved, and sometimes there are, we would expect that remestemcel could have the potential to reduce the inflammation in those organs as well.

Swayampakula Ramakanth

Thank you. Thank you, gentlemen, for taking my questions. Thanks.

Silviu Itescu

Thank you.

Operator

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

Silviu Itescu

Great. Well, thank you very much, everybody, for joining this call. It’s been a very important year for us that we’ve just reported on. But I think the next few months are going to be momentous for the company, and we look forward to updating everybody in due course. Thank you.



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