Mesoblast Ltd

ASX:MSB

Earnings Call Transcript 2021-Q4

[Operator]

Hello, and welcome to the Mesoblast 2021 Full Year Financial Results. An announcement and presentation have been lodged with the ASX and are 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 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 turn the call over to Dr. Silviu Itescu, Chief Executive of Mesoblast. Please go ahead.

[Silviu Itescu]

Thank you very much, operator, and welcome, everybody, to Mesoblast's operational highlights and financial results for the year ended June 30, 2021. With me today is Dr. Fred Grossman, our Chief Medical Officer; and Andrew Chaponnel, who has recently been promoted to Interim Chief Financial Officer. We thank Josh Muntner, who is moving on to other opportunities, for his terrific support over the last few years.If we can move to the presentation please, straight to Slide 4. Slide 4 is a snapshot of our platform and pipeline. We have 2 platforms: the remestemcel platform technology, which is being developed for pediatric and adult systemic inflammatory diseases; and the rexlemestrocel platform technology for localized inflammatory conditions. Both are derived from stromal mesenchymal cell lineage cells.Remestemcel is being developed for pediatric and adult acute graft versus host disease as well as acute respiratory distress syndrome due to COVID-19, influenza and other causes and refractory inflammatory bowel disease. Rexlemestrocel is being developed for advanced heart failure and for chronic low back pain. And as you can see, both platforms have commercial partners regionally and globally.Next slide, please. Slide 5 shows the mechanism of action of our mesenchymal lineage stromal cells. These cells respond to and are activated by multiple inflammatory cytokines in diseases of inflammation through surface receptors, which result in an orchestration of an anti-inflammatory cascade through a release of multiple anti-inflammatory factors that target the various cells that are critical to the inflammatory process.Next slide, please. Slide 6 shows our global intellectual property estate, which provides substantial competitive advantages. We have over 1,000 patents and patent applications across all the major jurisdictions. These patents cover compositions of matter, manufacturing and therapeutic applications of mesenchymal lineage cells, and they provide us with global strong protection in areas of our core commercial focus against competitors. When outside of our core commercial areas, we may consider granting rights to third parties who require access to our patent portfolio to commercialize their particular products.Slide 7. We have commercial scale manufacturing capabilities. Our scalable allogeneic cellular platforms are off the shelf. The manufacturing meets stringent criteria to international regulatory agencies. We have robust quality assurance processes that ensure final product with batch-to-batch consistency and reproducibility.And we have in place our second-generation technologies to allow us to meet our projected increase in capacity requirements for our maturing pipeline, in particular, our animal-free technologies will increase yields and output. We're able to move towards 3-dimensional bioreactors to reduce labor and improve manufacturing efficiencies. And together, these innovations significantly will reduce cost of goods.Now let's move to the financial results on Slide 9. Andrew Chaponnel, would you please take the next few slides?

[Andrew Chaponnel, Head of Finance]

Thanks, Silviu. Now turning to Slide 9, let's review the financial highlights for the year ended June 30, 2021. As at June 30, our cash reserves were USD 136.9 million. In regards to sales of GVHD in Japan, our licensee, JCR, have increased their plant capacity to enable them to meet ongoing demand. For the year, we recognized a royalty income of $7.2 million, reflecting growth of 10% on the prior year. We have amended the terms of our senior debt facility to extend the interest-only period to January 2022, and we are in active discussions to refinance this line.In the year, we continued our ongoing investment in our remestemcel platform to support both the regulatory pathway to potential approval and manufacturing scale-up as well as life cycle management. To date, we have produced $21.9 million of prelaunch inventory. If we receive FDA approval, we expect to recognize this prelaunch inventory balance of $21.9 million on our balance sheet.Turning to Slide 10, let's review sales growth of TEMCELL for GVHD in Japan. The chart on the right highlights the ongoing year-on-year growth in royalty income since launch in 2016. The chart clearly illustrates the strong product adoption of TEMCELL for GVHD in Japan. We are pleased to see this sort of adoption as we plan for the potential launch of remestemcel in the U.S. The addressable market for GVHD in children and adult in the U.S. is eightfold larger than Japan.Now let's move to the profit and loss statement for the year on Slide 11. This slide provides granularity on the P&L for the year ended June 30, 2021. Within revenue, we're seeing growth in commercialization revenues due to the growth in TEMCELL. Within milestone revenue in the prior year, the P&L included $25 million of revenue in relation to rexlemestrocel for upfront and milestone payments from Grunenthal and Tasly.Moving further down the P&L, the key observation is that 54% of spend within research and development and 92% of spend within manufacturing related to remestemcel, as we focused our efforts on this platform in anticipation of potential resubmission and approval. More specifically, within manufacturing, I note we produced $13.1 million of prelaunch inventory in FY 2021 year. Over the last 2 years, we produced $21.9 million of prelaunch inventory. If we receive FDA approval, we expect to recognize this balance on the balance sheet.A full set of our financial statements are available in today's ASX filing. I'd now like to return the call to Silviu. Thanks, Silviu.

[Silviu Itescu]

Thank you, Andrew. Now if we could turn to Slide 13 where we will talk about an update on remestemcel for acute graft versus host disease. This is a serious and fatal complication of allogeneic bone marrow transplantation. Following the host tissue damage by the bone marrow transplant conditioning, the therapeutic agents used in the underlying disease, after a bone marrow transplant, there is significant and severe immune cell activation, whereby, the donor, the host, the immune system, the T cells and the macrophages are activated. And they produce a large number of cytokines, the so-called cytokine storm, that ultimately results in damage and destruction of the gut, the liver and the lung and, to a lesser extent, the skin.If we go to Slide 14, please. This is a particular concern, especially in children who remain at high risk of treatment failure and death from this disease. The unmet need continues to be extremely high. More than 2,000 bone marrow transplants in children and adolescents are performed in the U.S. alone. And despite first-line treatment as well as prophylaxis, a large number of these children develop graft versus host disease with a response rate of less than 50%. In children under 12, there are no approved treatments for the treatment of steroid-refractory graft versus host disease. And in these children, the target organs being the gut and the liver, in particular, mortality rate is as high as 70% to 90%.Next slide, please. Over the past few years, across more than 3 studies and more than -- 309 children have received remestemcel for steroid-refractory acute graft versus host disease, and the results have been consistent across each of these studies in terms of overall day 28 response and day 100 survival. And as you can see in the table below, in yellow, those results are outlined across 3 different studies using remestemcel, either in a randomized controlled study in salvage therapy in children who felt multiple biologic agents and most recently, in a Phase III trial where remestemcel was used as first line after steroid failure. The numbers are very similar and very consistent across all of these studies.In comparison, in a MAGIC -- in a cohort called the MAGIC cohort of children who were matched by disease severity and inclusion criteria to the recently completed 001 study, the day 28 overall response and the day 100 survival are clearly worse than is seen in the patients who received remestemcel.Next slide, please, Slide 16. In this slide on the left is shown the 2-year survival from a single center historically looking at pediatric patients with acute graft versus host disease and treated with steroids. As you can see at 6 months, the overall survival is 49%. And by 2 years, it's a dismal 35%.In contrast, in the Phase III trial completed 001/002 on the right with remestemcel, survival outcomes at 6 months were substantially higher at 69%.Next slide, please, Slide 17. So this slide summarizes the regulatory and commercial update for remestemcel in steroid refractory acute GVHD in children. We were disappointed, obviously, last year when we had a setback in our regulatory interactions and where we received the complete response letter. Subsequently, we've continued an active dialogue with the FDA, and we continue to be in discussion through a well-established regulatory process that may include a BLA resubmission with a 6-month review aiming to achieve approval.Following the recommendation of FDA's Center for Biologics Evaluation and Research, CBER, Mesoblast, as our next step, will discuss with OTAT, the Office of Tissue and Advanced Therapies, our approach to address certain outstanding chemistry, manufacturing and controls, including potency assay validation. We expect to meet with OTAT in the fourth quarter of this year. to address potency assays and other outstanding CMC items.Now let's move to the next slide, which is an overview of the use of remestemcel in acute respiratory distress syndrome due to COVID-19. COV19 is a respiratory virus with a high mortality due to severe inflammatory condition in the lungs called ARDS, acute respiratory distress syndrome. This is -- this disease is caused by a cytokine storm in the lungs of patients infected with COVID-19 and remains the primary cause of death in this disease.Extensive safety data of remestemcel and its anti-inflammatory effects in acute graft versus host disease makes a compelling rationale for evaluating remestemcel in COVID-19 ARDS. Intravenous delivery of remestemcel results in selective migration to the lungs, making inflammatory lung disease an ideal target for this therapy. And we believe, based on understanding the mechanism of action of the cells, that remestemcel has the potential to tame the cytokine storm in ARDS and may offer a life-saving treatment for those suffering from COVID-19.Slide 19. What we have learned over the past 12 months in this pandemic is that age greater than 65 is associated with reduced T cell responses to the virus, delayed viral clearance and greater disease severity. In fact, age greater than 65 is the single greatest predictor of poor outcome and high mortality in this disease. As you can see in the bottom-left figure, under normal circumstances, when an individual is infected with the SARS-CoV-2 virus, there's an initial innate immune response and then an adaptive T cell immune response, CD4 T cells and CD8 T cells, which rapidly control the virus, reduce the viral load and limit disease severity in conjunction with antibodies.In contrast, in older people, over 65 or those who are immunocompromised, the ability to mount a normal T cell response is diminished, viral load is substantially higher, and clearance of virus is significantly delayed. This results in the figure on the right, a substantially higher peak disease severity in patients who are older than 65. And this is now being established and well validated across many studies globally.So moving to Slide 20. We move forward in the midst of this pandemic in evaluating whether remestemcel could make a difference in this very severe outcome in patients infected with the virus. Initially, we performed an emergency IND. We evaluated under emergency IND the outcomes of 11 patients in Mount Sinai Hospital in New York about a year ago, early in the pandemic. These patients were all on ventilator, on ventilators for COVID ARDS.Notably, 10 out of these first 11 patients were young, under the age of 65. These patients received 2 infusions of remestemcel, 2 million cells per kilogram within the first 5 days. Nine of these patients successfully came off the ventilator within 10 days and were discharged from the ICU. The experience under this emergency IND informed the dosing regimen for the randomized controlled Phase IIb/III trial.Notably, however, no data from -- on this dosing regimen was available in patients who are older than 65. We commenced the randomized controlled trial, multicenter, randomized, blinded to assess the safety and efficacy of remestemcel versus placebo in up to 300 patients, ventilator dependent with moderate or severe ARDS to COVID-19. The protocol was to randomize 1:1 and to receive either placebo or 2 infusions of remestemcel within 3 to 5 days. Unfortunately, the Data and Safety Monitoring Board terminated the study early, after 222 patients were enrolled. This was because they determined that the study was unlikely to meet its primary endpoint of 43% overall reduction in mortality.Notably, during the conduct of this trial, the median age increased from 59 in the first half of the trial to 67 in the second half, more than a decade. So over time, the patients enrolled in the trial were substantially older than earlier in the study. The preliminary results were based on 60-day outcomes, and prespecified analyses were generated by stratification on age, younger or older than 65. 125 patients were younger than 65, and 97 patients were older than 65.Next slide, please, Slide 21. In the control population in this study, as expected, age was the major factor that predicted mortality. As you can see here in red, patients who were younger than 65 had a significantly lower mortality, 42% through 60 days, than those who were older than 65, 70% at -- through 60 days. Nonetheless, the 42% mortality in the under 65 is a very worrisome and continues to be a worrisome trend as the new Delta virus starts to make much greater inroads into the younger patient populations more generally.Next slide, please. So here, we see, on the left-hand side, in the intent to treat -- modified intent to treat population of 217 patients who received either remestemcel or placebo, an overall mortality risk reduction of 14%, which, as I said earlier, did not meet our targeted primary endpoint requirement.On the right-hand side, however, in the prespecified group under 65, which accounted for the majority of the patients in this study, you can see that remestemcel reduced the risk of mortality for 60 days by 46%.Next slide, please. We then look at a number of key secondary endpoints. And here on this slide, we looked at the overall improvement in our severity from severe to moderate, from moderate to mild, et cetera, by at least 1 category at each of the prespecified time point, 7, 14, 21 and day 30. As you can see on the left-hand side, in patients under the age of 65, there was a -- remestemcel was associated with improved ARDS severity at every time point. So it was a durable improvement in ARDS score severity.In contrast, on the right-hand side, in patients over 65, we see a substantial improvement in ARDS severity at day 7 after the first 2 doses were administered but not beyond day 7. So what this suggests is that in those patients over 65, there is a requirement for higher or more prolonged dosing regimen in order to achieve the same sort of outcomes as we see on the left-hand side in patients under the age of 65. And this increased requirement for dosing goes along with the known observation that patients over 65 have much greater levels of inflammation, and we will be exploring higher dosing in that patient population.Slide 24. In an exploratory subset analysis in patients who were on dexamethasone, which accounted for about 3/4 of the study, remembering that about 1/4 of the way through into this trial, dexamethasone became the standard of care in ventilator-dependent patients. In this exploratory population, we see an even greater effect of remestemcel on top of standard of care.So on the left-hand side in patients under 65 years old, through 90 days, we see a 77% overall risk reduction to mortality in those treated with the combination of remestemcel plus dexamethasone compared to dexamethasone alone. And again, on the right-hand side, you see that the combination relative to patients on dexamethasone alone substantially increased the likelihood of improving the ARDS severity score at every time point from baseline to 30 days.If we can now move to Slide 25. We've recently had a meeting with the FDA on the regulatory pathway for an emergency use authorization in COVID ARDS for remestemcel based on the data that I've just highlighted. The outcomes from the meeting included as follows: the FDA have told us that an additional clinical study would be required, which, if statistically positive, could provide a data set in conjunction with the recently completed study that might be sufficient to support an emergency use authorization. The existing COVID ARDS IND file and future submissions for remestemcel in this indication may continue to cross-reference manufacturing information in the BLA 125706 for pediatric steroid-refractory acute graft versus host disease.Potency assays must be established and agreed prior to commencement of this proposed Phase III clinical trial. Potency assays that are currently in development appear to be reasonable based on in vitro results provided in the briefing document to the FDA. The in vitro activity of the product appears to be relatively well established, though the relationship between in vitro activity and the product's actual mechanism of action remains theoretical.Mesoblast intends to meet with FDA's OTAT, Office of Tissue and Advanced Therapies, in this coming fourth quarter to address potency assays for remestemcel in relation to steroid acute -- steroid-refractory acute graft versus host disease. And we believe that the attributes that we're presenting for that indication will also be relevant to COVID ARDS.Now let's move to Slide 27 to focus on updating the market on the programs for our second platform technology, rexlemestrocel. Chronic heart failure continues to be a major problem in the Western world. As many as 26 million patients globally and more than 6 million patients in the U.S. suffer with chronic heart failure. This disease has a mortality that approaches 50% at 5 years, as high as many cancers. And patients with heart failure remain at risk of recurrent major adverse cardiac events, including mortality, heart attacks and strokes. Existing therapies appear to reduce recurrent hospitalizations due to the compensation and volume overload but do not have a material impact on cardiac mortality or major vascular events such as heart attacks.Slide 28. The DREAM heart failure Phase III trial, the overview. This was a randomized placebo-controlled trial in -- conducted across 55 sites in North America, comparing 1:1 local delivery by catheter of 150 million cells intramyocardially versus controls in 565 patients. The primary endpoint was reduction in hospitalizations related to decompensation events, and the key secondary endpoints were a reduction in ischemic vascular events such as heart attacks and strokes or reduction in mortality. We looked in a post hoc analysis also the composite of these prespecified major events.Slide 29. The results of this trial showed that rexlemestrocel may provide a major breakthrough in reducing heart failure progression and mortality when used early in Class II disease, and they provide durable protection from heart attacks or strokes in high-risk patients.We saw a 60% reduction in the incidence of ischemic MACE, heart attacks or stroke, across the entire 537 patient study population who received either an injection of cells or placebo, irrespective of New York Heart Association class and irrespective of ischemic or non-ischemic etiology.We saw a 30% reduction in the incidence of the so-called 3-point MACE, cardiac death, heart attack or stroke, across the entire 537 patient population. We saw a 55% reduction in the incidence of the 3-point MACE in Class II patients. And in particular, in this Class II population, we saw a 60% reduction in cardiac death. This indicates that this therapy may change the natural history of this disease, particularly when instituted earlier in the disease pathway in patients who are in advanced Class II before they get to end-stage Class III or Class IV disease.Based on the observed reduction in mortality and morbidity in this trial, Mesoblast expects to receive feedback in the next quarter from the FDA on potential pathways towards approval.If we can move now to Slide 30. This slide summarizes the unmet need and the potential treatment paradigm for using rexlemestrocel in patients with chronic low back pain due to degenerative disc disease. This continues to be a major unmet need. And it is important to remember that for patients with this type of chronic severe inflammatory back pain, the only type of therapies beyond conservative nonsteroidal agents are the use of opioids to diminish the pain. And 50% of opioid prescriptions in the U.S. are for the use of opioids in the treatment of chronic low back pain.Over 7 million patients are estimated to suffer from this disease in each of the U.S. and EU5. And our MPC-06-ID development program targets approximately equal numbers of patients in each of these, the U.S. and the major jurisdictions in Europe.Next slide, please, Slide 31. The Phase III trial of rexlemestrocel in these patients was a randomized, placebo-controlled 3-arm trial in patients with more than 6 months of chronic discogenic low back pain, not responsive to conservative measures. The diagnosis of degenerative disease was made by MRI. We excluded non-discogenic causes. And 404 patients were enrolled randomized to a single intra-discal injection of either saline, cells alone or cells together with a hyaluronic acid carrier.Slide 32 is a summary of the results from this study. We saw substantial and durable reductions in chronic low back pain through 24 months across the entire study population of 391 patients who received either treatment or placebo. The greatest pain reduction observed was in those patients with shorter duration than the study median of 68 months, suggesting that earlier intervention is important in patients with active inflammation.Significantly greater pain reduction in the prespecified patient subset of opioid users at all time points was seen compared with saline controls. And by 24 months, there was a 40% reduction in opioid use. We concluded that rexlemestrocel may provide a safe, durable and effective opioid experience therapy for patients with chronic inflammatory back pain due to degenerative disc disease.Based on the above results from this trial, Mesoblast expects to receive feedback in the next quarter from FDA on potential pathways towards approval.For the last slide, if we could look at Slide 33, are the key initiatives and upcoming milestones for the next 12 months. With remestemcel for children and adults with systemic inflammatory diseases, we continue to be in discussion with the FDA through a well-established regulatory process for potential approval of remestemcel in the treatment of steroid-refractory GVHD in children. During the next quarter, we plan to meet with the FDA to address certain outstanding CMC items, including potency assay development, which are required for a potential BLA resubmission and a 6-month review. We intend to reach agreement with the FDA on the final protocol and potency assay required for an additional Phase III trial in COVID ARDS, with the objective to obtain an emergency use authorization.And I'll remind folks of the license and collaboration agreement between Mesoblast and Novartis for the development, manufacturing and commercialization of remestemcel with an initial focus on the development and treatment over the development of the treatment for ARDS remains subject to certain closing conditions, including the time needed to analyze results from the COVID-19 ARDS trial.With respect to rexlemestrocel, our programs for chronic heart failure and chronic low back pain, we expect to receive feedback from the FDA in the next quarter on potential pathways to U.S. regulatory approval following the recently completed trials, and we will update the market in due course.And on that note, I'd like to thank you very much for allowing us to give this presentation. And operator, please open up to questions.

[Operator]

[Operator Instructions] Your first question comes from Carvey Leung with Cantor Fitzgerald.

[Carvey Leung, Research Analyst]

Congrats on the progress. This is Carvey in for Louise today. First of all, on COVID-19, given the outcome of the FDA meeting, how long should the final protocol and potency assay require in an additional Phase III trial? And what is the go-forward strategy here?Secondly, are you still expecting to have clinical results from the investigator-led study in Crohn's disease and also ulcerative colitis? What's the market potential here for inflammatory bowel disease? And how will this shift the treatment paradigm?

[Silviu Itescu]

Thanks very much. Look, I might start with the Crohn's disease question first and then ask Dr. Grossman to give us a more detailed response on the next program for COVID ARDS. With respect to the Crohn's disease program, it is -- there is an active study that's ongoing at Cleveland Clinic. It's an investigator-initiated study. The unmet need that continues to be a major problem in inflammatory bowel disease is the need to induce remission within the first -- early remission within the first 4 weeks, and that's particularly in patients who failed other biologics such as anti-TNF therapy.The approach that has been taken by our investigator in this study is to identify by colonoscopy areas of inflammation directly in a large column visually and then inject the cells into the local inflammatory environment with a view to achieving early remissions. That study is still ongoing. We expect to be able to update the market later this year on preliminary data. And the unmet need is clearly there. And if we see the -- a signal of the type of efficacy that we'd like to see, which is early remission within the first 4 weeks, we will be moving this program towards a randomized controlled study for potential approval in this very large unmet population.Dr. Grossman, would you like to expand on the needs to move forward rapidly with a trial for potential emergency use authorization?

[Fred Grossman, Chief Medical Officer]

Yes. In fact, there is a very significant urgency to move forward as quickly as we can. There are surges that are occurring particularly in the United States right now, and you've vaccinated people with increasing breakthrough infections, some of whom are winding up in the ICU and on a ventilator. While there are therapeutic approaches to try to prevent infection, whether it be through vaccination or therapeutics, there are very few or no studies taking place or treatments for patients once they wind up on a ventilator. The only treatments that are available are supportive measures and steroids, such as dexamethasone. So there's a very significant unmet need, and we feel an obligation to move as fast as we can with the next study.The next study will be dependent on alignment with the FDA on the protocol and, as you heard before, potency measures. The FDA is equally motivated to move quickly because of the surges that are taking place. So we look forward to continuing to work with the FDA to get that alignment, so we can move forward.

[Operator]

Your next question comes from Jason Kolbert with Dawson James.

[Jason Howard Kolbert, Director of Research]

Dr. Grossman, can you just clarify something you said? Where exactly would monoclonal antibodies fit in the treatment scheme of a COVID patient? I assume that they're stopping or blocking viral replication. But it's -- you've already had the inflammatory cascade, and that's where this kind of therapy would come into play. Is that right?

[Fred Grossman, Chief Medical Officer]

Well, monoclonal antibodies have been shown to be effective if given within the first 7 to 10 days. So it's to prevent further infection and the cascade from going too far. What we're talking about here are those that go beyond that, those patients where either the therapeutics don't work or who have breakthrough infection and get severe cytokine reactions and wind up in the ICU. We hear now of ICUs being filled, particularly in the southern parts of the country. And those -- that's the target population, those at the moderate to severe COVID ARDS who wind up in the ICU on a ventilator. And those are the treatment who -- those are the patients for which there is a lack of adequate therapies. Those are the patients that we're targeting.

[Jason Howard Kolbert, Director of Research]

No, I understand and I mean, to the extent that steroids and dexamethasone, they're also blunting the body's ability to clear a virus, right? So if you could have a monoclonal antibodies as a background therapy, and this is really my question. That's something a little bit new because the original COVID trial that Mesoblast run wasn't dealing with a background of mAb therapy. But I think what you're saying is, look, they're already down the pathway. They've already experienced the inflammatory cascade. And this is a way to kind of get that cascade under control without blunting the positive aspects of the immune system and viral clearance. Is that right?

[Fred Grossman, Chief Medical Officer]

These are 2 separate parts of the disease. So the first is the viral load, and the duration of that viral load, which is then triggers a cytokine reaction. That's the war that takes place in the lungs. That's where...

[Jason Howard Kolbert, Director of Research]

Right. But they're going on simultaneously.

[Fred Grossman, Chief Medical Officer]

They are, but the monoclonals are treating the early phase to prevent the viral load from having great durability and increases. Whereas by the time people wind up in the ICU, it's in the cytokine, a part of this activity, which is doing damage to the lungs. And that's why treatments such as dexamethasone or steroids are used to try to attain that reaction. That's the area that we're treating, and that's the focus of that portion of the disease there.

[Silviu Itescu]

Yes. And I might -- sorry, I might add a bit to that as well. I think it's clear that monoclonal antibodies are really just an increased mechanism by which viral load is attempted to be controlled in those patients where remdesivir doesn't work well enough. And so the vast majority of patients who are exposed to these antibodies also break through and continue to require other therapies to reduce the inflammatory response to the high viral load.So we think that antibodies are going to be part of their armamentarium, but many patients will require additional approaches that specifically target the inflammatory cascade. Now we've seen that dexamethasone is one such approach. We -- in our particular study, dexamethasone did not have a particularly strong benefit in terms of reducing mortality. However, what we were extremely surprised by and pleased by is that there seems to be a synergy, at least in the exploratory analysis in our study, between dexamethasone and ourselves. So that the combination of the 2, presumably through similar pathways, augment the ability of our therapy to switch off the inflammatory cascade as a completely different mechanism of action than either antivirals or antibodies.

[Fred Grossman, Chief Medical Officer]

And [indiscernible]...

[Jason Howard Kolbert, Director of Research]

Hang on 1 second. A light just went off in something you said, which is patients who've been vaccinated who potentially already have mAb circulating, I didn't even think about that, but a suggestion that you could run down the COVID tree in an inflammatory cascade is not positive in those patients monoclonal antibody therapy which does report exactly what you're saying.

[Silviu Itescu]

Yes, that's exactly right. I mean breakthrough infections, of course, we're talking about patients have either already been vaccinated and have got some degree of neutralizing antibodies or patients who previously had natural infection they've got neutralizing antibodies. Despite all of that, the fact that there's a substantial number of breakthrough infections means that the problem is not addressable by further antibody approaches, but rather by reduction in the inflammatory cascade to protect the lungs. Exactly right.

[Jason Howard Kolbert, Director of Research]

Yes, Dr. Grossman, sorry, I interrupted you.

[Fred Grossman, Chief Medical Officer]

Yes. The other thing to add to this discussion is that the treatment for COVID-19 is probably going to be very similar to treatment for HIV, for example. No single drug or treatment is going to be adequate. So there are going to be antivirals, monoclonals, other kinds of treatments to try to prevent the progression. But once the progression occurs, there are going to be treatments that are needed, including with the potential for a remestemcel as well as any other treatments that quell the cytokine storm.

[Jason Howard Kolbert, Director of Research]

I hope what you're saying turns out to be true because I know HIV and HCV are very different virally than a coronavirus. So I'd love to see a direct acting antiviral there. But I'm not -- we haven't seen it yet. It may take a while, which further supports the need for the therapy.

[Fred Grossman, Chief Medical Officer]

The point is that there's going to be no single therapy. It's a complex disease, and it's going to require complex intervention, and we hope to be part of that intervention.

[Jason Howard Kolbert, Director of Research]

One quick question. It sounds like a lot of the bottleneck has to do with manufacturing CMC and/or if I want to be specific and pinpoint potency assay. And it seems like once you clear that road block that several clinical pathways get resolved. Are you feeling that same thinking that I'm -- am I on the right path?

[Fred Grossman, Chief Medical Officer]

Absolutely. We just had an excellent meeting with the FDA, very collegial and a very positive meeting that has delineated for us exactly where we're going. We have very precise potency assays that are being developed that we think support the mechanism and the action of these cells in both acute graft versus host disease and COVID ARDS. And we will be providing the FDA in a meeting over the next quarter with more details around this potency development, and we expect to be updating the market shortly after that.

[Jason Howard Kolbert, Director of Research]

Great. And my last couple of questions on Slide 10, which is a spectacular slide and shows the growth of TEMCELL in Japan. This is exactly what you want to see. How many patients are represented in, say, physical year '20?

[Silviu Itescu]

Look, the way to look at these slides is we -- the information that we receive from our partner is based on the therapeutic units sold as opposed to the numbers of patients. So we can talk to the revenue stream based on our royalty, which is based on the number of units that have been sold. We can make an assessment and take a guess given that we know that the protocol is 2 million cells per kilogram twice for about 4 weeks.We know the protocol. But the precise number of patients is hard to estimate. We would say that we think that looking at these numbers and knowing what the denominator is likely to be suggests that the penetration rate is of the order of around 30% of the addressable market, which, from our point of view, is a very important providing potent insight as to how a similar product would be adopted in the U.S. market. Remember, the U.S. market is about 8x bigger than the Japanese market, both in terms of numbers...

[Jason Howard Kolbert, Director of Research]

And that's exactly where I was going, right?

[Silviu Itescu]

As well as pharmacoeconomics, right? In other words, the reimbursement is higher in the U.S., and the number of patients is larger because of the outbred nature of the patients and the more -- so the incidence of GVHD is much lower in Japan than it is in the U.S.

[Jason Howard Kolbert, Director of Research]

Right. So that's where I was going, that really from this launch characteristic in Japan, which is less than optimum for a lot of complex reasons, but it's suggesting that the U.S. and/or EU markets could be significantly larger and maybe even a more compressed chart given that the launch dynamics and the concentration will be different, maybe improved in the U.S. and Europe.

[Silviu Itescu]

That's right. That's right. And in fact, we've done a lot of work, of course, on our potential commercial launch. And in fact, again, I'll restate that we were disappointed by the setback that we had last year. We were anticipating already to be in the market this year. We've had that delay now, but we've done a lot of the groundwork in terms of preparing payers and the end users. And assuming that we have a good meeting with the FDA upcoming, we will be in a position to, again, ramp up the commercial phase of this product for the U.S. market.

[Jason Howard Kolbert, Director of Research]

Yes. I mean it seems like once you have CMC and potency assay taken care of, that like I said, a lot of clinical pathways open up, and you combine that with the potential work that you're doing in COVID and in EUA, that could be -- these things positively reinforce each other, right? So if I'm looking at this -- what I'm trying to do as an analyst is determine that -- it seems like Mesoblast is on the precipice of an inflection point.

[Silviu Itescu]

Well, we thank you for that perspective, and we certainly feel that way, too.

[Operator]

Your next question comes from Kennen MacKay with RBC Capital Markets.

[Unknown Analyst]

It's [ Jack ] here for Kennen. I just want to focus on ARDS here. For this inflammatory biomarkers, you measured a baseline for the trial like IL-8, you have alpha, et cetera, et cetera. What are you -- when you will present this result? And which [indiscernible] the past represents the driver of this disease or even in measuring your treatment impact?

[Silviu Itescu]

Yes. That's an excellent question. Thank you for asking that. We have collected a lot of samples, and those samples for a variety of biomarkers, which are both inflammatory markers of the disease as well as cytokines that are produced by various immune cells, T cells and macrophages in particular. They've all been collected. They are being analyzed, and they'll take a little bit more time. But we expect to be able to update the market with those results as soon as they're at hand.I think it's important to -- that much has been learned in the last 12 months in terms of the mechanisms by which ARDS progresses and the type of biomarkers that one should look for. It's very clear now that the defects with age relates to loss of so-called naive T cells that are there to respond to the virus in the first place. Younger people have more of these cells; older people have less of these cells.As a result of that, viral load is greater and less likely to be eliminated in older people than younger people. As a result of that, the persistence and high levels of virus results in activation of a dysregulated immune arm that is ineffectual against the virus but highly effective, unfortunately, in destroying the lung tissue. And that also is greater in older than in younger people. But that's -- generally, that's the understood pathogenesis right now of COVID ARDS and the relationship between age and worse outcomes.So to understand the type of immune cells in the lung that are responsible for the disease and to measure the output of those cells, meaning the signature pattern of the inflammatory biomarkers of those cells in the lung and in the bloodstream, is really at the heart of understanding the biomarkers and whether or not our cells, remestemcel, has had an impact on improving those biomarkers as an underlying mechanism of action that explains the survival benefit. And that's what we will be fully analyzing and presenting in due course.

[Unknown Analyst]

Got it. That is super helpful. And just a quick follow-up to that point. Have you [ worked out with the ] FDA of a request such biomarker data when you were talking which is regarding in that set? And are you planning to share those data with them not only for the ARDS program but kind of like socialize the data with -- for other FDA groups for your other products?

[Silviu Itescu]

Look, as a general statement, we have an underlying shared mechanism of action that we postulate is the rationale for why remestemcel provides a survival benefit in the severe forms of GVHD with gut disease and in severe COVID ARDS with severe lung disease. We have a working mechanism of action that we believe brings the 2 together, and we've shared some of those with the FDA. They, of course, remain, at this point, theoretical and continue to -- we continue to generate data to support those mechanisms.But in general, they're not required for approval of the product. They support the rationale of the potency assays and the activity of in vitro quality attributes of the product. And of course, they will be important as we move forward in providing data to clinicians and people who are important in providing the therapy to their patients.

[Fred Grossman, Chief Medical Officer]

Yes. And I would add, look, Mesoblast is at the cutting edge of understanding and developing the science. And part of that understanding is to elucidate the mechanism. But we can't lose sight of the fact that the most important endpoints are the clinical endpoints. And they're the survival endpoint that we've seen in GVHD as well as in COVID ARDS, particularly in those that are younger than 65.

[Unknown Analyst]

Yes. Got it. And the last question, just want to clear what you'll be hearing maybe since COVID has been changing, now with certain recent variant with Delta. So will this make the ARDS different from the ARDS in the last trial, just thinking from this point? Or have you seen any studies, any biomarker studies and the [ new form stuff ]?

[Silviu Itescu]

Sorry, could you just explain again? You're suggesting -- are you asking whether we're seeing different outcomes according to the different variants? Was that the question?

[Unknown Analyst]

Yes. Yes.

[Silviu Itescu]

Yes. I think -- look, I think it's too early for us to be able to address that. We just haven't had enough patients. But I think it will be important to try to look at some of those questions. It's difficult today given that over 90% to 95% of patients who present with ARDS, they've got the Delta virus across the U.S. So it's shifted. I think there will be more variants. There will be variants that are fully resistant to the current vaccines. There will be variants that are more infectious than even if sensitive will result in greater numbers of patients with breakthrough infections.So I think all of those are variables, and unfortunately, it's a tough way to be conducting clinical trials as we saw with our own trial where age changed midway through the study as well as different therapeutic modalities were tried and tested during the conduct of the trial.Fred, do you have any views on that? Maybe we can -- so did that address the question?

[Unknown Analyst]

Yes. Yes. Yes. For sure.

[Operator]

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

[Tanushree Jain, Healthcare and Biotech Analyst]

Just a couple for me. Just on the COVID ARDS trial and the EUA part, can you advise what the plans are for alone in COVID ARDS indication? Will this trial also include some non-COVID ARDS patients? And if not, then what's the path forward with that?And then just secondly, on the Delta variant in question, we see a lot of news flow and studies by CDC where they're talking about how in vaccinated people, essentially, you're still seeing a lot of cases, but it's keeping people out of ICUs. It's reducing the severity. And I think we are seeing most of the cases in Australia at the moment also people who are in the hospital and ICUs being primarily unvaccinated people. So just on the basis of this, can you perhaps talk about what you see now as the market opportunity or the proportion of people getting COVID ARDS?

[Silviu Itescu]

Yes. Yes. Sure. I mean, look, it's a numbers game, right? I mean there's no doubt that the vaccines today are reducing both the numbers, perhaps not the numbers of patients getting infected -- and that's step number 1, is that even vaccinated people carry the same amount of virus as unvaccinated people. But they -- clearly, the vaccines have reduced the proportion of patients who, once infected, are hospitalized. And whether that's by 2/3 or that sort of number, I mean, if you look at the U.K. and Israel as countries that are almost -- have fully vaccinated their adult populations, those are the sort of numbers that we're seeing.However, when you're talking about such large numbers of patients being infected, then what does the 2/3 reduction in hospitalization rates mean? Well, it's very important, but that extra 1/3, 20% of patients who end up in hospital end up -- the number of those who are hospitalized that end up in the ICU on ventilators is about the same. So that's the target population for us. Those patients who will continue to be to require ventilation and ICU hospitalization either because they've had a serious breakthrough infection or because they've got a variant that is resistant or because they're in that sort of vulnerable window.We now know that after about 5 months -- 5 to 6 months, immunity to the vaccines wanes, and there's this window period where immunity to being -- and resistance to the infection is at its lowest. So that window is when patients are most likely when even having been vaccinated to respond poorly to a new infection, and there's a high risk of hospitalization and then ICU stay.So that's what Fred was saying. They will -- continue now that we're shifting from a pandemic to an endemic phase to a need for therapeutics as the proportion in the numbers of patients despite vaccination will continue to be there.You asked a separate question as to our focus on non-COVID ARDS. That will include, of course, influenza and bacterial pneumonia as triggers for inflammatory responses in the lung. Our main focus for an emergency use authorization is on COVID, COVID-related ARDS. That's where the FDA is focusing. That's where the unmet need is, and that's where one trial would, if positive, get us approval.Together with our strategic partnership with Novartis, of course, we're looking at how to move forward into the non-COVID ARDS space, what those trials need to look like, and that we will update the market together with the discussions with Novartis.

[Fred Grossman, Chief Medical Officer]

I would just say that whatever data -- when you look at various parts of the data, anywhere from 2% to 12% of patients wind up in the ICU. And that includes those that are vaccinated, and it includes the data out of Israel as well. So the problem is that there's always going to be breakthroughs. And given the large numbers, as Silviu mentioned, there's still going to be a need for those in the ICU.Regarding vaccination, until the world is fully vaccinated, and even in that case, which is sort of an implausible type of situation, there's going to be variants. And so there'll always be this catch-up between vaccinations. And that's why there's such an emphasis now on therapeutics that are required both early in the treatment and where we're studying late in the disease when people wind up in ICU.

[Tanushree Jain, Healthcare and Biotech Analyst]

Right. And just for Novartis' relationship, they're obviously obliged to fund next study with non-COVID ARDS focus. So in terms of, I guess, the next study for COVID ARDS that we're pursuing for EUA, am I correct to understand that the funding for this will rest on Mesoblast? Or are the -- or is that part of...

[Silviu Itescu]

I think that's too early to say. At this stage, all potential options are on the table. We will come back and be able to discuss that in more detail at a later time point.

[Operator]

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

[Silviu Itescu]

Thank you, everybody, for listening to our financial results for the year. It's been a difficult year, no doubt. We were disappointed by the initial setback. We had hoped that remestemcel would have gotten approval in the first instance. But nonetheless, we have regrouped, and we're very excited by where we are today with respect to the potential for remestemcel to be approved moving forward for both acute graft versus host disease and under an emergency use authorization potentially for COVID ARDS. And that is -- we will be able to update the market in short order on our ongoing discussions with the FDA and as well as our discussion with our potential strategic partners.Thank you very much, everybody.

[Operator]

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