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Hello, and welcome to the financial results for the period ending September 30, 2020, from Mesoblast. An announcement and presentation have been lodged with the ASX, and are also available on the home and investor pages 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 must represent the company's views only as of the date of this webcast and should not be relied upon as representing the company's view of any subsequent dates. The company specifically disclaims any obligations to update such statements.With that, I would now like to turn the call over to Dr. Silviu Itescu, Chief Executive of Mesoblast. Please go ahead.
Thank you. Good morning and good afternoon to the financial results for the first quarter ended September 30, 2020. On the phone with me is our Chief Financial Officer, Josh Muntner. We would also like to focus today on the strategic collaboration we've just announced with Novartis.If we could move to Slide 4, please. In early 2020, Mesoblast recognized that the extensive safety data of remestemcel and its anti-inflammatory mechanism of action made a compelling rationale for evaluating its potential to reduce the high mortality due to the severe inflammation that's associated with COVID-19 ARDS, acute respiratory distress syndrome. The capital that was raised in May 2020 allowed an increased investment in both clinical development and manufacturing to facilitate the potential availability of remestemcel for patients with COVID-19 ARDS.Our ongoing Phase III randomized placebo-controlled trial of remestemcel in up to 300 ventilator-dependent patients with moderate to severe COVID-19 ARDS aims to show reduction in mortality within 30 days. The trial's independent data safety monitoring board recommended continuation of the trial after each of 2 interim analyses, and enrollment has now surpassed 180 patients.Novartis will provide the commercial and manufacturing strength to bring this important cellular medicine to the many patients with COVID-19 and its life-threatening complication of ARDS. The collaboration establishes a new respiratory focus for the company, targeting inflammatory lung conditions.Next slide, please. This slide focuses on the overview of the collaboration we've just announced with Novartis for remestemcel. We've entered into a worldwide license and collaboration agreement with Novartis for the development, manufacture and commercialization of remestemcel-L. The initial focus of the collaboration is on the treatment of ARDS, including that associated with COVID-19 as well as other respiratory conditions.ARDS is an area of significant unmet need with a high mortality rate despite current standard of care, which includes prolonged intensive care unit treatment and mechanical ventilation. Novartis intends to initiate a Phase III study in non-COVID-19 related ARDS after the anticipated closing of the license agreement and successful completion and outcome of the current COVID-19 ARDS study.Mesoblast will retain full rights and economics for remestemcel-L in the treatment of graft versus host disease, and Novartis has an option to, if exercised, to become the commercial distributor outside of Japan. For most non-respiratory indications, the parties may co-fund development and commercialization on a 50-50 profit share basis.Next slide, please. One of the key terms of the collaboration, Novartis will make a $50 million upfront payment, including $25 million in equity. Mesoblast may receive a total of $505 million pending achievement of pre-commercialization milestones for ARDS indications. Mesoblast may receive additional payments post-commercialization of up to $750 million based on achieving certain sales milestones as well will receive tiered double-digit royalties on product sales. From the initiation of a Phase III trial in all-cause ARDS, Novartis will fully fund global clinical development for all-cause ARDS, and potentially other respiratory indications.Mesoblast will be responsible for clinical and commercial manufacturing, and Novartis will purchase commercial product under agreed pricing terms. Novartis will reimburse Mesoblast up to $50 million on the achievement of certain milestones related to the successful implementation of its next-generation manufacturing processes using its proprietary media and 3-dimensional bioreactors aimed at delivering substantial manufacturing efficiencies. Novartis will be responsible for any capital expenditure required to meet increased capacity requirements for manufacture of remestemcel-L.Next slide, please. This slide identifies our product pipeline, including the focus on ARDS respiratory conditions as part of the collaboration with Novartis.Next slide, please. We have a platform technology that has a well-understood mechanism of action. Our mesenchymal precursor and stromal cells respond to and are activated by multiple inflammatory cytokines to surface receptors, resulting in orchestration of an anti-inflammatory cascade that ultimately impacts on multiple arms of the immune system relevant to the severe inflammation that occurs in diseases such as ARDS.Next slide, please. The commercial scale manufacturing capabilities. Allogeneic off-the-shelf platforms are scalable and manufacturing meets stringent criteria of regulatory agencies. We have a robust quality assurance processes that ensure final product with batch-to-batch consistency and reproducibility. And we have the capacity to meet the projected increase of requirements of our maturing pipeline, including those for COVID-19 ARDS. We are developing proprietary xeno-free technologies to increase yields and output. We are moving towards 3-dimensional bioreactors to reduce labor and improve manufacturing efficiencies. And ultimately, these innovations will significantly reduce cost of goods as they improve yields and capacity.Next slide. Ultimately, the strength of the company rests on the global IP estate which provides substantial competitive advantages. We have an extensive patent portfolio with protection extended through 2040 in all major markets. We have over 1,100 patents and applications across all the major jurisdictions to cover compositions of matter, manufacturing and therapeutic applications. The IP provides strong global protection areas of our core commercial focus. But from time to time, in certain areas that are not core to our commercial focus, we may grant rights to third parties who require access to our patent portfolio to commercialize their particular products when outside of our core commercial areas.Next slide, please. Now I'd like to move to the financial results for the quarter.
Thanks, Silviu. I want to reiterate our excitement throughout the organization about the newly announced transaction with Novartis. We're looking forward to building a strong relationship with them. And I also want to make sure to thank our operational and executive teams for their hard work as we've evolved our corporate strategy, which led to the strategic collaboration.Now getting to the financials on Slide 12. On September 30, our cash at quarter-end was $108 million. On this slide, we also show a pro forma cash balance of $158 million, which takes into account the initial $50 million that we expect to receive under the Novartis collaboration. Silviu has already brought us through the total Novartis deal in a highlighted way. But I also want to note that over the next 12 months, we may receive additional milestone payments from Novartis, depending on achievement of certain milestones in addition to the initial payment of $50 million that I just mentioned. We also have the potential to receive cash through our existing financial facilities and strategic partners such as Grunenthal.Moving to Slide 13 and reviewing the income statement, we can see the evidence of the investments that we've been making in R&D and manufacturing that led to this Novartis collaboration. Before we jump into a discussion regarding our expenses for the quarter, I want to note that we had $1.3 million of commercialization or royalty revenue due to sales of [ remestemcel ] in Japan by our Japanese partner JCR Pharmaceuticals. While this is lower than a year ago at this time due the temporary shutdown in production at JCR as they expanded their capacity to meet increasing demand, it's approximately double the Americanized last quarter. So we're hopeful to see our commercialization revenue getting back on track.Looking to expenses. We've been making targeted investments over the last 2 quarters in R&D and manufacturing as we launch this new focus in respiratory disease, such as ARDS due to COVID-19. During the quarter, we ramped our R&D expense to $19.3 million from $12.3 million [ $12.4 million ] a year earlier, specifically spending an increased amount on our COVID-19 ARDS Phase III trial and also increased expenses related to our pre-commercial activities for remestemcel-L. Additionally, our R&D expense includes noncash share-based payments to employees and consultants.We also increased our manufacturing spend to $11.9 million for this quarter compared to $2.7 million in the first quarter of last fiscal year due to increased expenditure on clinical supply for our COVID-19 ARDS Phase III trial and also inventory for the potential launch of RYONCIL. These increases were partially offset on the income statement by a noncash change in our contingent consideration. Basically, we've decreased the liability that we may owe to Smith & Nephew, the parent company of Osiris Therapeutics related to our 2013 transactions with them.The increases in spend for R&D and manufacturing, combined with reduced revenue for the quarter resulted in a net loss before tax for the quarter of $25.3 million compared to a net loss before tax of $5.5 million a year earlier. Additional information about this statement and the rest of the financials can be found in our filings made with SEC and ASX.I'd like to now return the call to Silviu.
Thank you, Josh. Now I'd like to go into greater detail in some of our operational focus. First and foremost, let me talk about the potential new treatment paradigm for using remestemcel in inflammatory respiratory conditions.If you'd go to Slide 15, please. This slide highlights the overview of why we think remestemcel is an appropriate therapy for ARDS due to COVID-19. COVID-19 is a respiratory virus with a high mortality due to severe inflammatory condition of the lungs called ARDS. This is caused by a cytokine storm in the lungs of the patient affected with COVID-19 and has been in fact the primary cause of death in this disease. The extensive safety data of remestemcel and its anti-inflammatory effects in patients with acute graft versus host disease makes a compelling rationale for evaluating the product in COVID-19 ARDS, where there were similarities in the cytokine storm seen in the disease states.Moreover, intravenous delivery of remestemcel is well-known to result in selective migration to the lungs, making inflammatory lung disease an ideal target for this therapy. Remestemcel-L has the potential to tame the cytokine storm in ARDS in a way that single agent inhibitors do not and may therefore offer a lifesaving treatment for those suffering from COVID-19.Next slide, please. This slide summarizes the pathophysiology of ARDS due to COVID-19 and other causes such as influenza and bacterial infection. This is a major unmet medical need. Acute respiratory stress syndrome or ARDS is a major area that remains an unmet medical need globally. Multiple infectious triggers, viral, bacterial infections, coronavirus and influenza in particular are known to cause ARDS. Typically, this requires extended ICU hospitalization and intervention with ventilators. At the low end, in influenza ARDS, there's a mortality of approximately 40%. And at the high end, particularly in COVID-19, it can reach as high as 80%.The physiology of the disease is that immune cells in the lungs, macrophages, are activated as a result of the local infection, and they release severe cytokines that result in influx of other immune cells and then result in leakage of fluid and effectively almost a grounding of the lungs. The interstitial edema, cell death in inflammatory cells result in destruction of the bystander lung tissue, almost a drawing and a storm in conjunction with the infectious virus in the first place.Next slide. The mechanism of action of our cells is well-understood in this scenario. When our cells, remestemcel is -- find itself in the middle of the cytokine storm via specific surface receptor, the cells are activated by the cytokines, including TNF alpha, interleukin-1, interleukin-6. And on activation, remestemcel releases several well-characterized anti-inflammatory molecules that turn off the very immune cells that are secreting the aberrant cytokines. And ultimately, the multiple arms of the immune system that are aberrantly activated are then turned off.Next slide. We evaluated the theoretical potential for remestemcel in this condition in a pilot study several months ago. Under compassionate use emergency IND at New York's Mt. Sinai Hospital, 12 patients who were ventilator-dependent with COVID-19 ARDS received 2 infusions of remestemcel intravenously within 5 days in a similar protocol to that which is used in acute graft versus host disease. Of these 12 patients, 9 were successfully treated and came off ventilator support within a median of 10 days and were discharged from hospital. This was at a time when the New York City surge was overwhelming hospitals. And at that point in time, in March, April, only 9% of COVID-19 patients were able to be extubated, and there was only a 12% survival rate.Clearly, things settled down for several months and now are coming back to a major surge all across the U.S. In addition to adults with COVID-19 ARDS, we have under expanded access program established the ability to provide ourselves to children with the principal complication of COVID-19 called Multisystem inflammatory Syndrome or MIS-C. This occurs in about 50% of infected children but appears to be a post-viral immune-mediated complication, and in as many as 50% of cases involves the heart muscle and results in heart failure. We've already treated 2 children with significant cardiac dysfunction, and this again was normalized after just 2 infusions with both children discharged from the hospital within 30 hours.Next slide, please. So as a result of the promising pilot data in the first 12 adult patients with COVID ARDS, we established a multicenter, randomized, controlled, double-blind study to assess safety and efficacy of remestemcel versus placebo in ventilator-dependent patients with moderate to severe ARDS due to COVID-19. This is a trial of up to 300 patients across 20 sites or more in the United States. The patients are randomized 1:1 to receive either placebo or 2 infusions of remestemcel within 3 to 5 days.The primary endpoint is all-cause mortality within the 30-day period. The key secondary endpoint is days alive off a ventilator within 60 days. The trial is designed to have 3 -- up to 3 interim analyses for potential stoppage due to futility or overwhelming efficacy and full recruitment is expected to complete during Q1 2021.Next slide, please. The key milestones for this -- for remestemcel in COVID-19 ARDS is highlighted in this slide. The DSMB has recommended continuation of the trial after reaching the first and second interim analyses. Trial enrollment to date has surpassed 180 patients. Our plan is to seek emergency use authorization subject to positive data readout. In parallel, we have invested in manufacturing scale-up to meet projected increase in capacity requirements of remestemcel for our pipeline, specifically for ARDS due to COVID-19. To this end, we've increased manufacturing footprint for capacity expansion.We are in the process of implementing our proprietary xeno-free technologies to increase yield and output, and we have initiated a plan for long-term movement towards 3D bioreactors to reduce labor and improve manufacturing efficiencies.Now let's move on to our second major indication for remestemcel acute graft versus host disease. Slide 21. This slide highlights the similarities between the severe inflammatory cytokine storm that occurs in ARDS specifically due to COVID-19 and the cytokine storm that occurs in acute GVHD. GVHD has 3 phases. The first is post-tissue damage by the conditioning regimen prior to bone marrow transplant. The second phase is after the bone marrow transplant, where the donor bone marrow, particularly 2 elements, the macrophage and the T-cells, are activated and see the recipient as foreign and incite a major cytokine storm with the release of cytokines, including TNF IL-1 and IL-6 in a similar way as the cytokine are seen in the setting in the lungs of patients with ARDS. Ultimately, the severe and ongoing inflammation results in end organ damage in this disease, particularly the gut, the liver and the skin.Next slide, please. Children with steroid-refractory acute GVHD are at high risk of treatment failure and death and have no approved treatments under the age of 12. It's an extremely high unmet medical need. Over 2,000 allogeneic bone marrow transplants are performed annually in the U.S. and despite prophylaxis, 50% will develop acute GVHD. First-line treatment are steroids, and the response rate is only about 50%. And as I've mentioned, there are no approved therapies for children under 12. Mortality can be as high as 70% to 90% when involving the gut and the liver, which is in a large number of patients.Next slide. The consistent efficacy and safety outcomes in a total of 309 children treated with remestemcel from 3 studies have been presented. In a first study in a randomized controlled trial of 260 patients, 27 were children. And in following steroid-refractory status we have -- we saw significant improvement in day 28 response in children treated with remestemcel versus placebo. Secondly, remestemcel was used as salvage therapy in 241 children who had failed multiple biologics, 80% of whom had the most severe forms of Grade C/D disease.And thirdly, most recently, we completed a single-arm Phase III trial in 54 children, 89% of whom had the most severe form of steroid-refractory GVHD Grade C/D disease. And the cells were used after steroids but prior to any other biologics being used. And as you can see in the table on this slide, both day 28 overall response primary endpoint and day 100 survival are very consistent in the remestemcel-treated children across each of the 3 trials in yellow. And in each of these studies, both the day 28 response and the day 100 survival was substantially higher than those seen in children who received either placebo or other maximal standard of care in the MAGIC cohort study.Next slide, please. And when one looks at the overall survival in children with steroid-refractory graft versus host in a study published just this year, 370 children treated with maximal standard of care, you can see on the left-hand side in red, the dismal survival outcome in these children, 49% at 6 months and it's 35% at 2 years. In contrast, in the slide on the right is a survival outcome in our Phase III trial of 54 treated children, where you can see that at 6 months 69% of these children are alive. So in comparison to maximal standard of care for every 100 children treated with remestemcel, 20 would survive who otherwise would have died receiving other standard of care. That is an extremely important consideration.Next slide, please. So what is the status of the regulatory and commercial update of remestemcel for acute graft versus host disease? As part of the broad license and collaboration agreement with Novartis for remestemcel, Mesoblast will retain full rights and economics for GVHD. On August 13, results from the 309 children that I've just showed you, treated with remestemcel, were presented to the Oncologic Drugs Advisory Committee, the ODAC, of the U.S. FDA. The ODAC panel voted 9 to 1 that the available data support the efficacy of remestemcel in pediatric patients with steroid-refractory acute GVHD.However, despite the overwhelming ODAC vote, on September 30, the FDA provided Mesoblast with a complete response letter. On November 17, a Type A meeting was held with the FDA to discuss the review of the biologics license application for remestemcel and a potential pathway for accelerated approval with a post-approval requirement to conduct an additional randomized controlled study in patients 12 years and older. At the current time, it appears that the FDA review team will not agree to accelerated approval.However, the definitive outcome of the Type A meeting will not be known until Mesoblast receives the formal minutes, which are expected within 30 days of the meeting. If the current review team does not agree to accelerated approval, Mesoblast will request a further Type A meeting to initiate the well-established FDA dispute resolution pathway. Under the terms of the license and collaboration agreement, Novartis has an option to become the commercial distributor for remestemcel in steroid-refractory GVHD outside of Japan.Next slide, please. Slide 28 provide an overview of the relationships and partnerships that are in place for our rexlemestrocel product candidates, MPC-06-ID and REVASCOR. Our partnership with Grunenthal for MPC-06-ID was established about a year ago. Grunenthal is our partner for Europe for this very large unmet medical need. And with respect to REVASCOR for heart failure, Tasly is our partner for that product for heart failure across China.Next slide, please. REVASCOR for advanced and end-stage heart failure has completed a Phase III trial in December 2019. We expect to read out these results over the next couple of weeks, and we are especially excited by the results from a sub-study of 70 patients with end-stage ischemic heart failure presented earlier this year with the American College of Cardiology Virtual Scientific Sessions where these patients, who resemble in many ways the majority of the patients in our Phase III heart failure trial, demonstrated that whilst they were end-stage on LVADs in response to a single intramyocardial injection of mesenchymal precursor cells had a significantly increased ability to be weaned of their mechanical devices, had a reduction in hospitalizations, and most importantly, had a reduction in gastrointestinal bleeding suggestive of an improvement in the field dysfunction in the peripheral.Next slide, Slide 30 is an overview of the state of our chronic low back pain program. We've completed a Phase III trial 404 patients. We expect to read out this trial in -- over the next couple of weeks as well. We continue to have excellent operational progress in our strategic partnership with Grunenthal and the results from the Phase III trial in the U.S. and potentially a further Phase III trial in Europe will allow us to have confirmatory data sets for subsequent regulatory submissions.And on that note, I'll say thank you, and we'll be happy to open this presentation up for questions and answers. Thank you.
[Operator Instructions] Your first question comes from Kennen MacKay with RBC Capital Markets.
First off, congratulations on the Novartis agreement and the partnership. Now this collaboration is initially based around all-cause ARDS and not limited to COVID-19 ARDS. Is there any reason to think that this trial won't be predominantly composed of COVID-19 patients? Or if this isn't the case, can you maybe walk us through any stratification of patient collection in that all-cause ARDS trial or talk through the relative incidence of ARDS etiology? And then I just have a quick follow-up.
So the current trial is focused entirely on COVID-19 ARDS. However, the all-cause ARDS is a well-established major unmet medical needs caused by other viruses, such as influenza and bacterial infections, nosocomial pneumonia and sepsis. And Novartis has a major focus in respiratory medicine and has a clear interest in all-cause ARDS well beyond COVID-19 ARDS. The agreement is that following closing and following the readout of the COVID-19 study, Novartis may initiate a large global Phase III program for non-COVID all-comer. Does that address -- does that clarify the point?
Just so I understand, that trial is all-comer ARDS excluding COVID-19 or including?
It would be a separate program. So the COVID-19 trial will read out, and we hope that it will have a positive readout. How we take that to market may depend on the strength of the data and may depend on the ability to, for example, get an EUA pathway in the U.S., and then we will evaluate how to bring that program into Europe and other jurisdictions. Separately, all-comer ARDS is a much larger area of focus, and it covers other viral and bacterial triggers of ARDS, and that is a program that Novartis and Mesoblast will focus on, it's a very important program, as we move forward.
Got it. Okay. No, I was just trying to understand whether that was inclusive of COVID ARDS or exclusive of COVID ARDS. And then -- oh, go ahead.
Well, it's -- COVID ARDS is a subset of all-cause ARDS and how we take both of them to market and the clinical data that will support all these indications is something that we will work together with Novartis to develop over time.
Got it. And maybe just on the recent FDA Type A meeting, just given the proximity of that meeting to this collaboration and announcement and the shared interest in ARDS, can you I guess help us understand how that played into the partnering equation? Was Novartis sort of privy to this FDA meeting or granted access to it? And then I just have one housekeeping question. Is Novartis' equity investment, is that based on open market purchases? Or if it's not, what share price is that investment? I'm just trying to model share count and dilution. And congrats again.
So the question is relating to the Type A meeting. That is a pathway for which we are seeking accelerated approval in children with acute graft versus host disease. I think I was quite clear about how the pathway that's progressing on. And Novartis is fully aware of our strategy there. But beyond that, I can't speak to the thought process in strategically as to how it does or does not impact Novartis' decisions other than to reiterate that Mesoblast retains full rights and economics to the GVHD opportunity. With respect to the equity, I think that the details are in some of our filing documents with the ASX today.
Yes. So Kennen, in the press release and the financial -- in the press release, the financial results, there is a footnote that talks about the amount of equity and will be a 15% premium to a volume weighted average price calculated over 30 days as of today.
Your next question comes from Louise Chen with Cantor.
Congratulations on the Novartis deal. So I wanted to ask another question on this Novartis deal. What was Novartis' thought on the GVHD opportunity? And then how do they think about the sales opportunity for COVID ARDS in light of this positive vaccine data? And the other question I had for you was what are the next steps for your GVHD study in addition to dispute resolution? Are you going to start this trial? Are you going to hold on that until you hear more? And then last question I had for you was how does remestemcel-L fit into the treatment paradigm for inflammatory bowel disease? What is the unmet need here that you think you could address?
Louise, that is a lot of questions. I guess let me take some of them. With respect to -- I think you asked about the GVHD pathway. But it's clear that we're moving to a dispute resolution is where we think we're heading forward, which will require another Type A meeting. But that is of course subject to the final minutes from the current meeting. With respect to GVHD commercial opportunity. I can again only reiterate that we retain GVHD as a separate economic structure. Novartis does have the option to be our commercial distributor for the product, and that's something that we will discuss together over time. Did you -- you asked me about Crohn's disease as well, I think, inflammatory bowel disease.
Yes. And I was also curious what Novartis thinks on this COVID ARDS because of the Pfizer and Moderna vaccine data.
Look, again, I can't speak to how Novartis sees the unmet need following the discussions -- the announcements of the vaccines, but I can tell you what I think. It's -- we're all very excited to see vaccines provide such promising data. No doubt about that. However, it's well-established that the vaccines such as influenza work much less favorably in older patients and in younger patients. And of course I am aware that some of these data are in older patients as well. So there's certainly a hope that the elderly will respond as well as younger patients. But historically, with other vaccines, they just don't.What we also know of course is that those patients at highest risk of moving to ventilators and mortality are those 60 years and older. And in those patients, mortality continues to be over 60% despite dexamethasone, which appears to not work very well in precisely these patients who are older. Our trial does not select on the basis of age. However, it's clear that as this pandemic grows, the majority of the patients who are being enrolled are older and debilitated and with co-morbidity. That will continue to be a major unmet need. And we think that our therapy provide -- will provide, if successful, a real therapeutic option for precisely those people who either don't respond well to the vaccines or fall between the cracks and don't take the vaccine or need something beyond prevention of prophylaxis.This group of patients who are on ventilators with ARDS have failed in trials with using antivirals, have failed in trials using anti IL-6 therapies and have failed in trials using monoclonals to prevent viral effectivity. So there effectively is nothing for these people. And we think that the safety of remestemcel to date across multiple indications, and its broad-based effect on multiple arms of the immune system gives our therapeutic a unique opportunity to be potentially a life-saving therapy here.
Your next question comes from David Stanton with Jefferies Australia.
I mean I guess for my first question, what can Novartis add in terms of helping with an FDA approval process for remestemcel [indiscernible]?
Look, I think we're very excited to have Novartis as our strategic partner on many fronts, on many issues. I think, first of all, the fact that we have now opened a focus -- a major focus on respiratory medicine is, first and foremost, the real value to the strategic collaboration. 6 months ago, we didn't have any focus on respiratory medicine. We now -- this becomes a leading franchise for us. Novartis' deep expertise in this space, their strength in clinical development, their strength in regulatory development, their strength in cell and gene therapy and their know-how in manufacturing of cellular therapies are all going to be tremendous assets for us as a partner.We will continue to optimize the manufacturing, the potency assays, the attributes of the product and focus particularly as it needs to be on COVID-19 ARDS. And as partners, Novartis will assist us and provide us their input. And I think they will add greater to our interactions with the FDA on multiple fronts.
And then as a follow-up, what are the next steps for Mesoblast if the FDA doesn't give approval for remestemcel in a pediatric population? Do you think that should the COVID trial ultimately be successful for instance so that the FDA may use that as a de facto randomized controlled clinical trial for approval?
So we are -- first of all, we're proceeding on both parts simultaneously, the pediatric approval and the accelerated approval pathway based on the established criteria and based on precedents, and we're very confident as we proceed down that pathway. Secondly, we are proceeding on the COVID ARDS for remestemcel approval under an EUA, subject to of course a positive readout from this Phase III trial, and both are moving in parallel. The third approach of course is exactly what you raised, should the approval under a randomized controlled regimen for adults with COVID-19 be successful, then I would expect that that would support the requirement for a randomized controlled trial, and it will obviously be a review issue.And again, given that there's nothing available or approved for children under 12, I cannot imagine why randomized controlled data that's supportive for one inflammatory indication will not be sufficient to support approval in children with this devastating disease, given the safety and efficacy we've already established.
Understood. And final one for me, if I may. Can you give us some color on the issues that the FDA brought up in your recent meeting? I mean were the issues that the FDA brought up different to what you've already outlined publicly in terms of efficacy and consistent sell efficacy product?
No, the discussion was exactly the same, on the same line. Is a single-arm study in 55 children sufficient to establish certainty of efficacy in this indication? And the discussion focused on the fact that there is nothing approved in children under 12, the fact that the only approved drug in GVHD, Jakafi, was approved in a similar way with a single study, no controls but in adults. The fact that that drug appears to not have a safety, to have evidence of toxicity in children under 12, and that's why it has not been approved in children under 12.And the discussion around our commitment, should they grant us accelerated approval to a randomized controlled trial post-approval in adults. And I think we have general alignment on what that trial would look like with the agency. And we also have general alignment of how to add and optimize some of our critical quality attributes of the cells. So there was nothing new that was discussed. Predominantly, the focus was on the evidence to-date -- totality of the evidence that to support the open -- a single open arm study being sufficient for approval, particularly given the 9 to 1 vote by ODAC that was overwhelming in its consensus that the data are sufficient to demonstrate efficacy in these children.
Your next question comes from Jeffrey Cohen with Ladenburg Thalmann & Co. Inc.
Congrats on the announcement. And a few questions from us here. Firstly, Josh, could you talk about the $15 million addition on the income statement as reimbursement for contingent consideration? I think you made some commentary that stems from the Osiris Smith & Nephew deal?
Yes. So we carry contingent consideration on our balance sheet to reflect moneys owed to Osiris. Question is the Nephew under the federal transaction. They're set to receive royalties on sales from remestemcel when approved as well as certain milestone payments. And we adjusted those payments or the expected payments based on the recent outcome at FDA.
What was on the balance sheet prior to or currently?
So -- yes, so if you look at the financial statements, the numbers were adjusted downwards, and reflected both in current liabilities as well as noncurrent liabilities under provisions and then broken up further in the financial statements.
Okay. Got it. A question on MPC-06. So if when we see data of a positive outcome from the current study, what would you expect from Grunenthal as far as a Phase III and perhaps the timing on that decision?
I would expect that over the next few weeks we'll be meeting together with Grunenthal and really what would a second trial look like to be sufficient for European approval and also to help us in supporting our U.S. plans. And the endpoint may be quite different from the endpoint in this current trial, maybe shorter, maybe different. But I think those discussions need to be fleshed out.
Okay. And then lastly, could you talk a little more in detail about the -- what you've been doing over the past couple of quarters or few months on the manufacturing and scale-up of remestemcel as far as your processes and current throughput and potential throughput?
Well, I mean I've been generally transparent in terms of what we're doing about -- hard to go into tremendous detail on a short call like this. In general, we are obviously anticipating what the requirements would be to have a product that is -- that meets the capacity needs for COVID-19 ARDS, which are much, much larger obviously than GVHD. In order to be able to do that, we've had to put in place building blocks for a scalable product that brings a much greater yield and is able to deliver the larger volume needed within the same time frame.That -- the most important thing is capacity. And as you meet capacity, you reduce cost of goods, it's linear. And to achieve that, we have developed a proprietary animal-free media that contains recombinant growth factors. And that will change the final formulation from one that uses fetal bovine serum, which is obviously restrictive and limited on a global scale. So there are multiple improvements and optimizations that are currently ongoing, and we will clarify those over time, and they will form part of the developmental -- process development strategy that we'll be building out together with Novartis.
Okay. Congratulations again on the announcement.
[Operator Instructions] Your next question comes from Tanushree Jain with Bell Potter Securities.
Congratulations on the Novartis announcement. Silviu, just on the Novartis deal, I just wanted to understand a little bit more about the -- a reimbursement of $50 million on the achievement of certain milestones related to manufacturing. Is that in addition to the $505 million pre-commercialization milestones that you've spoken about?
Yes. Separate. Separate from.
Right. And then in terms of the capital expenditure, which you've mentioned that Novartis will be responsible. So should I assume that all the manufacturing scale-up activities that you just mentioned in answer to the previous questions from now on will basically be funded by Novartis?
Well, as they relate to footprint, as they relate to build-out. That's CapEx. That's different from process development, which I think is what the other figure relates to.
Okay. Okay. And then just on the COVID-19 ARDS trial. Obviously you've had recently a positive second interim analysis. Now we do have a final analysis at 60% of patients being enrolled in the trial and completing 30-day follow-up. Can you give us some sense of when we might expect that to happen?
Well, we've surpassed the 180 patient mark. So beyond that I think I can't say much more than that. But these analyses occur when 30 days a follow-up have occurred.
Your next question comes from Jason McCarthy with Maxim Group.
This is Michael Okunewitch on the line for Jason. And congratulations on the announcement today. So first one is more of a financing question. I'd like to see if you could give us a bit of a breakdown on where some of those -- that $505 million in regulatory milestones for ARDS? Specifically how much of that is for COVID versus general ARDS? And what are the triggers for those milestones?
Look, I don't want to go into specifics, but a substantial portion of those are around the COVID program and readout and potential EUA. So some of those in the nearer term. And a substantial portion of those relates to important deliverables with non-COVID ARDS. So I think there's a balance between the 2. The COVID-related ones are shorter, nearer term. The non-COVID ones are a little bit further out.
And then I'd also like to see if you could discuss a bit on the unmet need in inflammatory bowel disease because I know that a lot of the projections are saying that's expected to be a market as large as RA over this decade. And could you also discuss what the surgical option means for these patients where their medication isn't working anymore?
Yes. Look, I appreciate the question. And I think an earlier question I didn't fully address around this as well. We're targeting patients who've failed a single biologic, typically an anti-TNF. Some -- as many as 30% of patients who are put on anti-TNFs don't respond and perhaps even an additional 10% who have responded then lose their response. We think that ourselves have a specific area of an opportunity to make a difference in that segment, patients who have failed the first biologic. We don't think that we should be thinking about ourselves as last in line or after other biologics.And the reason I say that is because after you sell an anti-TNF, the other biologics that are available at best give outcomes that take months to achieve. Where there is a real unmet need is in remission, achievement of remission within the first 28 days. And none of the other agents are able to achieve that substantially. So we are evaluating ourselves, both intravenously as well as now locally delivered by an endoscope visually to the site of inflammation in colitis caused by either Crohn's or ulcerative colitis in specifically patients who failed to respond to the first biologic and anti-TNF agent. We'll be updating the market in short cause about how we're seeing the patients respond to local delivery. But we're -- we see this as a huge opportunity for us, and obviously for our collaboration with Novartis.
That brings us to the end of today's call. I'll now hand back to Dr. Itescu for closing remarks.
Thank you very much. And I'm very excited this morning to talk about this tremendous collaboration with Novartis. It opens up a raft of new opportunities for Mesoblast in unmet needs, particularly in respiratory medicine, but in other areas as well. And I think this will be a very, very important collaboration moving forward for Mesoblast and hopefully for Novartis as well. Thank you, everybody.
That does conclude our conference for today. Thank you for participating. You may now disconnect.