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OCGN Ocugen

Participants
Jon Lieber CFO
Adam Gridley President and CEO
Don Haut Chief Business Officer
Lynne Kelley Chief Medical Officer
Stephen Kennedy COO
Chad Messer Needham & Company
Josh Jennings Cowen
Ryan Zimmerman BTIG
Swayampakula Ramakanth H.C. Wainwright
Call transcript
Operator

Good morning, and welcome to the Histogenics Second Quarter 2018 Financial and Operating Results Conference Call. At this time all participants are in a listen only mode. Later we’ll conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the call over to Jon Lieber, CFO of Histogenics. Please go ahead.

Jon Lieber

Thank you and good morning, everyone.

Joining me today on the call is Adam Gridley, our President and CEO; Don Haut, our Chief Business Officer; Lynne Kelley, our Chief Medical Officer; and Stephen Kennedy, our Chief Operating Officer. A press release announcing Histogenics' financial and operating results for the second quarter 2018 was issued this morning.

For those of you who have not yet seen it, you will find it posted in the Investor section of our website at www.Histogenic.com. On our call this morning, we will share with you a business update and our financial results, which will be followed by a question-and-answer session.

Before we begin our prepared remarks, I would like to remind you that various statements we make during the call about the Company's future results of operations and financial position, business strategy, and plans and objectives for our future operations are considered forward-looking statements within the meaning of the federal securities laws.

Our forward-looking statements are based upon current expectations that involve risk, changes in circumstances, assumptions, and uncertainties. These are described more fully in our SEC filings and are available on the SEC's EDGAR system and on our website. We encourage all investors to read our SEC filings. All if the information we provide on this conference call is provided only as of today and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise.

Finally, please be advised that today's call is being recorded and webcast. I will now turn the call over to Adam Gridley.

Adam Gridley

Thank you, Jon, and thanks to everyone for joining the call this morning.

Our focus and efforts in the second quarter of 2018 were directed primarily for the preparation of the topline data released from the NeoCart Phase 3 clinical trial. Consistent with our prior guidance, we expect to announce these data in the third quarter of 2018.

In addition, we made significant progress on the potential submission of the NeoCart Biologic License Application or BLA to the U.S. Food and Drug Administration or FDA. These efforts position us for a potential approval and launch of NeoCart in late 2019 or early 2020 if the data are positive and the BLA is approved.

As a reminder, the NeoCart Phase 3 trial is a 249-patient randomized clinical trial that is designed to show superiority of NeoCart at one year after treatment compared to microfracture, the current standard of care. The trial consistent with FDA guidance follows patients for three years after treatment in its largest prospectively enrolled trial of its kind and the only one to our knowledge with a one-year superiority end point.

In addition to the high-hurdle, one-year end point, we expect have a large majority of our patients with two-year data by the time of BLA approval and in fact, even today approximately 50% of the patients in the Phase 3 trial are already two years or more beyond their treatment with many patients from the Phase 3 clinical trial in our prior trials out more than five years. In the second quarter of 2018, we continue to work with our clinicians and advisers on activities to support a potential BLA filing. All the patients enrolled in the trial have now had their one-year follow-up visits and the data are being scrubbed and verified in preparation for the upcoming database lock.

On the technical front, we continue to develop additional data and complete various manufacturing and raw materials validation to support the planned BLA submission for NeoCart, which is targeted for the fourth quarter of 2018, or early 2019.

We have also had several productive conversations with the FDA regarding the NeoCart BLA submission with more conversations scheduled and believe this may make the review of the BLA more efficient.

As a reminder, our target market for NeoCart is large and growing with approximately 150,000 microfracture procedures performed in the U.S. each year. We believe that NeoCart may be a new and improved option for both patients and physicians in the vast majority of those cases. Because NeoCart is living cartilage tissue as opposed to cells only or cells heated on the scaffold, we believe we may be to provide patients with more rapid pain relief and return to activity than the current alternative treatment options.

Importantly, based on the clinical data generated to date, we also believe that NeoCart will have a long-term durability of native cartilage tissue, which may potentially delay or prevent the patient's progression of osteoarthritis in the knee.

Finally, it's clear that physicians and patients continue to seek better alternatives to the current treatment options. This sentiment is exemplified in a recent article in the Chicago Tribune to discuss the rapid decline in the use of microfracture as the treatment for players in the National Basketball Association. The article is published during the American Orthopedic Society for Sports Medicine's annual meeting in July 2018 and was accompanied by additional publications showing updated failure rate for microfracture greater than 60% at five years.

In fact, the median failure time for microfracture in these publications was approximately four years. This naturally was the topic of much discussion at the conference and a number of prominent surgeons publicly stated that they no longer view microfracture as an optimal treatment for knee cartilage damage, either for professional athletes or others with knee cartilage damage.

While many still use microfracture, it is viewed by some as the best in the class and suboptimal alternatives.

Given the positive feedback we continue to receive from the clinicians in the NeoCart Phase 3 clinical trial, we believe there is an opportunity not only to convert a significant portion of the microfracture market to NeoCart if approved but also to expand the market by offering a novel therapy that addresses the shortcomings of the current alternative. In preparation for the potential commercialization of NeoCart, we also made a number of important organizational changes including the appointment of Lynne Kelley as Chief Medical Officer in July 2018. Lynne is a member of the executive management team and responsible for leading Histogenics' medical affairs strategy in building a medical affairs team to support the potential launch of NeoCart if approved. We believe her experience as a surgeon, medical affairs executive, and educator across a wide variety of therapeutic areas will add significant value to Histogenics as we prepare for our topline data, potential BLA submissions, and FDA review of NeoCart.

We also expanded our Board of Directors in the second quarter with the appointment of Sue Washer in April 2018. Sue has been the CEO of Applied Genetic Technologies Corporation for more than 15 years and also served as the director of both the Biotechnology Industry Organization and the Alliance for Regenerative Medicine.

We have already been the beneficiary of Sue's insights and believe that she will continue to be a valuable addition to our organization.

We have also increased our industry outreach through our collaboration with the Advanced Regenerative Manufacturing Institute or ARMI. And for example in July, we announced Steve Kennedy's recent appointment to ARMI's Technology Advisory Subcommittee and believe that this reflects the Company's growing leadership position within the cell and gene therapy industry as it relates to manufacturing, biomaterials and tissue engineering discoveries.

Our involvement with ARMI has already provided Histogenics with significant value and we anticipate leveraging this relationship to enhance and expand our Restorative Cell Therapy platform including additional possible product development opportunities and improvements to the NeoCart cost to goods.

While our focus is squarely on advancing NeoCart through the BLA process and toward commercialization, we continue to believe that our platform may have broad applicability in other musculoskeletal conditions and may support multiple product offerings in the future. Once we have completed the submission of the BLA, we intend to begin preliminary work on the next indication for NeoCart. We've already received excellent feedback from many of the clinicians in the current Phase 3 clinical trial and will continue to engage with them as we plan for the potential expansion of NeoCart into other joints and indication.

Finally, we believe that we can utilize the platform along with the data we have generated to date to improve and automate certain aspects of the NeoCart manufacturing process with the goal of improving our long-term growth margins.

Turning briefly to commercialization, we continue to work on and plan for the potential commercialization of NeoCart in late 2019 or early 2020 by conducting additional market research, reimbursement related work to support our planned boutique launch. We provided additional detail in our commercialization plans at our first Annual Investor Day in June and intend to build upon our efforts in these areas once we have our Phase 3 data in hand. We've also made excellent progress with MEDINET, our NeoCart development and commercialization partner in Japan to support the initiation of a planned Phase 3 trial in Japan.

As a reminder, MEDINET is responsible for all development activities in Japan including the 30-patient Phase 3 clinical trial which is expected to commence by the end of 2018.

We also continue to evaluate additional partnership opportunities in other international markets such as Asia or Europe, which have potential to create near-term value to licensing payments and longer-term value through additional milestone payments and royalties on any sales of NeoCart in those markets. At this point, I'll turn the call over to Jon Lieber to discuss our financials.

Jon Lieber

Thanks, Adam.

For the quarter ended June 30, 2018, Histogenics reported a loss from operations of $7.3 million compared to $6.4 million for the quarter ended June 30, 2017, the increase in overall operating expenses was due to increases in both research and development and general and administrative expenses.

While we continue to focus on managing our burn rate, we have started to make the investments we feel are necessary to prepare for the potential commercialization of NeoCart, if approved.

Moving on to some specifics, the increase in research and development expenses in the second quarter of 2018 as compared to the second quarter 2017 was due to work to support the potential NeoCart BLA submission and was offset by a reduction in costs related to the NeoCart Phase 3 clinical trial for which enrollment was completed in June 2017. The increase in general and administrative expenses in the second quarter 2018 as compared to the second quarter of 2017 was primarily due to higher salaries and consulting expenses related to increased activities to support the potential commercialization of NeoCart. Net loss attributable to common stockholders was $3.7 million in the second quarter of 2018 or $0.13 per share compared to $5.5 million or $0.25 per share in the second quarter 2017. The year-over-year decrease in net loss attributable to common stockholders is primarily due to the conversion of convertible preferred stock issued in connection with the private placement we completed in 2016 into common stock and a change in the fair value of the warrant liability which generated income in the second quarter of 2018. These were partially offset by an increase in operating expenses.

As a reminder, the fair value of the warrant liability is dependent upon a number of factors including our share price.

For example, an increase in share price in a given quarter is likely to result in an increase in expense related to the change in the fair value of the warrant, while a decrease will likely generate income. There is no cash impact from the expense or income related to the change of warrant liability.

As a reference point, we currently have approximately 28.8 million primary shares outstanding and 45.5 million fully diluted shares outstanding. The fully diluted shares include 13.4 million shares underlying warrants with a strike price of $2.25 issued in connection with the 2016 private placement. These warrants do not have a cashless exercise provision, so should the holders exercises those warrants prior to their expiration, we will receive approximately $30 million in proceeds. At June 30, 2018, Histogenics had cash, cash equivalents, and marketable securities of $8.8 million compared to $8 million at December 31, 2017. Based on current operating plans and the expected timing of product development programs, we believe our current cash position will fund our operations into the fourth quarter of 2018. I will now turn the call back to Adam for our concluding remarks before we go to Q&A.

Adam Gridley

Thanks, Jon. The data generated to date in the NeoCart clinical trials and the anecdotal feedback from our investigators and collaborators continued to be compelling. Based on the data and feedback for example from our Investor Day in June 2018, we heard that NeoCart may provide an early and robust clinically meaningful response on pain and function in patients with knee cartilage damage with clear superiority to microfracture. If NeoCart is approved, we believe surgeons will finally be able to offer their patient's treatment that may restore their cartilage and potentially reduce the risk of developing osteoarthritis in the knee. This could get patients the treatment option with a very different performance and recovery profile than any procedure or product on the market or currently in development. We appreciate the effort from everyone who's helped us get to this point, and I want to express my sincere thanks to our employees, consultants and clinical sites for all of their hard work. I'd also like to thank the patients for their participation in this important and very unique clinical trial. We're encouraged when we hear from them about their NeoCart experience and honored to have helped restore their quality of life.

We are working diligently to transform that potential into reality and I look forward to sharing our progress with you in the months ahead. Thank you for joining today's call, we will now open up the line for any questions. Operator, please open up the line.

Operator

[Operator Instructions] Our first question is from Chad Messer with Needham & Company.

Your line is now open.

Chad Messer

It's getting pretty exciting guys, I just wanted to point out to you, you got seven weeks by my count are left in the third quarter, so we are darn close. My question to you is on commercialization. At your first analyst day, you kind of talked about it, tiered kind of roll out of your sales force and marketing effort that would initially focus on the 87 high-volume sites that participated in your clinical trial.

Just wondering if you could give us a little more detail, maybe paint a picture of if there is a typical, what a typical, one of these sites looks like, how many surgeons do they have kind on average? Are they all using NeoCart, is it just primarily one of them or some of them, are there opportunities to even do more within the sites and what kind of volume are they doing in terms of microfractures or other procedures.

Adam Gridley

Thanks, Chad, and great questions.

And something that we are thinking about quite a bit.

So I think the answer to that is it varies depending on the profile of the sites.

So let me paint a picture on let's say a couple of categories and then Don, our Chief Business Officer can join in with some more details.

So as we know from the mix of the sites that we've presented and have talked about, the plans that we put into place to enroll the trial, we will need a combination of some of, let's say your top KOLs at leading medical institutions that had a very strong link to for example, HHS, or Mayo, and then we also have a number of private practices that really helped us in certain regions, bring in the large volume of patients. When I look at it though, I think the profile of the sites are pretty similar where based on some of the market research that we have done, we are seeing in some cases, the opportunity to see as many as 10 to 20 patients a month at each of these sites whether they be at the large medical institution or at a private practice, for example, on San Diego or even in Bozeman. And the type of patient, of course, is going to come in based on insurance policies, based on sort of needs, but overall, we believe that for those roughly 90 surgeons across those 40 sites that we identified, there is up to about 1,300 patients a month of potential opportunity there.

Now, not all of the patients are going to go through, but on average, we are seeing these folks doing as little as 40 to 50 microfracture procedures a year to as much as 200 or 300 microfracture procedures a year. Don, do you want to add some color to the profile and some of the conversations you have been having with these sites in advance of that.

Don Haut

No, I mean, I would just kind of reiterate what Adam said, I would say on the low end, they are in the 40 to 50 microfractures per year and on the higher-end, they are at the 200 to 300 and we've had the larger institution and the teaching hospitals certainly 200 to 300, I think, is right in line with that they are seeing.

Adam Gridley

And then the second part of your question, Chad, was are there one or there many at each of the sites in terms of number investigators and some of the private practices have one primary investigator, and in fact may have significant volume there and some of the larger institutions or in areas where there's a large regional coverage, you may have two or three investigators.

So in the trial itself, we have 32 sites in the U.S. of which there are about 40 investigators but then when you broaden that out, for example, take the site in San Antonio, there are three or four more primary investigators that would then become trained, get very familiar, but the lead partner was doing all the surgery.

So they know about NeoCart and that will be part of our education program and our medical affairs strategy that Lynne, our new CMO, would lead.

Operator

Our next question is from Josh Jennings with Cowen.

Your line is now open.

Josh Jennings

I was hoping to just start off and clarify is NeoCart's potential in different sized lesions, I believe inclusion criteria in Phase 3 was 0.5 centimeter squared to 6 centimeter squared, and is that the range that you expect, of lesion size you expect NeoCart to be indicated for upon approval and commercialization?

Adam Gridley

Sure. Thanks for the question, Josh, and yes, based on the clinical data that we've generated, we've actually really created a full range there, our overall product profile when NeoCart was developed was to be able to treat up to about 6 square centimeter lesions which is what we believe probably 90% plus of the market, 6 square centimeters is actually a pretty big lesion, when you sort of look at that, it's about the size of a quarter. And we do know for microfracture which is our target primary focus here, clinicians really treat microfracture up to about 4 square centimeters, maybe 5 square centimeters, and then at that point, they're looking at other grafting and other tissue procedures when you get a much larger lesions.

So we would expect to be indicated right up to 6 square centimeters, we believe that the trial has a nice distribution from the small lesions which are often toughest to treat and certainly where microfracture is used all the way up to the 6 square centimeter range.

Josh Jennings

Great and just thinking about the smaller lesion size or less than 2 centimeter squared, I believe most of payers out there are now with positive decisions on ACI have a bottom floor of 2 centimeter squared, how do you expect that to play out and you said you had a nice distribution of different size lesions within the Phase 3 trial. Do you think you will need to do a subgroup analysis of the smaller lesions or just because of your inclusion criteria you can present the whole data set to payers and have the smaller lesions then open up for reimbursement.

Adam Gridley

I think that given the large body of evidence that we are going to have in the single largest trial ever conducted using the FDA guidance criteria, I think that that body of evidence will be more than sufficient. I believe that sort of the lower end of it and we have actually done quite a bit of work and Don will comment on this that it is actually much lower than the 2 square centimeters and the number of opportunities. The big issue is until this trial has been done, there hasn't been a lot of data because most of the other products don't go into the sweet spot of microfracture.

So I actually believe that 2 square centimeter lesion, so the framework is really an artifact of the technology and the lack of available alternatives with clinical data down in those lesions. The way the clinicians look at this is if you've got pain and if you have lost of function, there isn't a strong correlation that bigger lesions are more painful for example, and there's also sort of no evidence or there's evidence to contrary, but to some of these smaller lesions have equal opportunity to lead to a way, if not treated.

So it's much more about if you got a grade 3 or grade 4 lesion and you've got the pain and loss of function, if you finally have a product to treat it and the clinical data to support that, I believe that over time payers are very much going to look at that. And that is part of our strategy for taking that clinical data into the payers.

So this will be the first trial to really go after microfracture where it worked well in those small lesions. And then Don, I know you have been doing quite a bit of work with various reimbursement consultants on how payer policies are set up. Any additional thoughts that you would add?

Don Haut

No, I would just add to what you said by saying that, in our research, while there are some policy that cover only down to 2 square centimeters, there are a number that cover below that as well down certainly to 1.5 and 1 centimeter.

Josh Jennings

And just in terms of we have been trying to take a look at the less than 2 centimeter squared lesion segment and it seems like it's a fairly sizable chunk of the overall kind of procedure volumes for microfracture definitively but all cartilage lesions. Do you guys have any kind of market research where you can detail maybe the percentage of lesions that you think are less than 2 centimeter squared?

Adam Gridley

We don't right now, although we've got ample evidence from our clinical trial and we have disclosed this, of course, both in our past publications and then over the past couple of conference calls. At least in our trials, the average lesion size in the phase 2 was around 2 square centimeters, a little bit north of that. And then similarly, in the phase 3, similar demographics, so we know that the challenge has been that over the last 10 or 15 years, there weren't a lot of prospectively designed studies partly because the regulatory guidance wasn't clear.

So what we are now starting to see and this came out recently at the AOSSM meeting in July is some of that data is starting to come out both on sort of the poor outcomes for microfracture in both larger and small lesions, but then also what do the demographics look like for many of the patients that are coming in. And certainly our trial would indicate that you are seeing a whole bunch patient in that sort of 1 square centimeter to 2 square centimeter or 3 square centimeter range. And then the past literature, some of which has been published by Kohl and a couple of other leading KOLs when they've done retrospective analyses of all the clinical trials, whether it be microfracture, other autologous cell therapies, there's probably a significant number of those studies where in the 1 centimeter to 2 centimeter range, that's probably 30% plus of the lesions, and then you got a whole another 50%, 60% that are in the 2 square centimeter to 4 square centimeter range. When you start getting above 4 square centimeters, 5 square centimeters, that is just not where microfracture is done anymore and we saw more data most recently at that conference where the microfracture failure rates independent of size are just sort of growing and growing.

Josh Jennings

And just my last question is just on, it sounds like you're making progress in Japan on the Phase 3 trial, congratulations there. And you have historically talked about potential other international agreements and I was just wondering if there's anything on the front burner which could potentially get you an upfront payment to help with your cash position and also just thinking about your cash position, maybe you could help us think through kind of what the options are here in terms of generating capital on the balance sheet over the next few months? Thanks a lot, gentlemen.

Don Haut

Yes, I can talk -- this is Don, I can talk about the other geographies.

As we said before, we are actively out exploring potential partners in other geographies especially in Asia, I would say there are a lot -- there is a lot of ground to cover there, there are a lot of potential partners and we're encouraged by what we've seen so far. That said, it's still early days, we are still out actively having conversations.

Adam Gridley

And then Jon on the cash side.

Jon Lieber

Yes, on the cash side, Josh, we obviously we have cash as we disclosed into the fourth quarter of this year.

Just to make it clear, we are not being cute when we say the fourth quarter is not October 1st, not December 31st, so we do have cash to get us to good ways into the fourth quarter.

We are looking at -- as we have been doing for a while in all of the above financing strategies, so clearly we do need to bring some more capital onto the balance sheet, I think the capital requirements over the long-term are manageable especially when you take into account contracted business development inflows, plus the potential new inflows from BD deals perhaps in 2019 or 2020. The exercise of the warrants for example, but in the near term, we will probably look at some form of equity, we are also evaluating debt as well and so all of that would come likely after the Phase 3 data, but our objective is to sort of manage solution for the existing shareholders so that we can sort of preserve value and get people the upside that we think exists in the stock today.

Operator

Our next question is from Ryan Zimmerman with BTIG.

Your line is now open.

Ryan Zimmerman

So I just want to start on the trial itself. Adam, could you remind us and remind investors what the threshold is for the dual responder analysis on the Phase 3 and how that compares to the Phase 2 data or what you saw very early on in the Phase 2 data from a dual responder analysis? And then I have a follow up question.

Adam Gridley

Sure. Thanks for the question, Ryan.

And so the Phase 2 clinical trial that was designed many years ago looked at a dual threshold responder analysis of pain and function.

So all trials look at pain and function as endpoints, FDA, PMDA, EMA, have all been very clear that they want to see improvements on patient reported outcomes. We took it a step further and rather than looking at the improvements against baseline on each of the scores but on the average of all patients, we looked at every patient responding on both pain and function.

And so if patients made it past those clinically meaningful thresholds on both, they became a responder. And then we looked at the percentage of NeoCart responders versus microfracture. And then the Phase 2 trial at one year, even though it wasn't powered for any significance whatsoever, only 30 patients, we saw a highly statistically significant difference between the NeoCart responders and microfracture on the order of about 70% of the NeoCart patients being responders and only about 20% of the patients for microfracture being responders. And I think the agency and certainly clinicians believe that that's pretty germane outcome because patients will naturally accommodate their pain or function or vice versa, so if you are in a lot of pain, you are going to reduce your function, and that is where -- so the average all scores isn't so meaningful and this really is I think sort of a true leveler.

Going forward to your question on the Phase 3 then, it's really a bigger version of the Phase 2, largely the same inclusion, exclusion criteria, patient population and demographics. When we built out the statistical plan, what we did assume was that the result we saw on the Phase 2 would be similarly positive, but wanted to bake into that some conservatism.

So when we designed the Phase 3, we assumed that you'd have a similar roughly 70 percentage points responder rate for NeoCart patients, but we assume that microfracture would be a 50% responder rate. And that's where we think that the design of the Phase 3 has nicely accommodated what you would see in larger trials where the outcomes in the Phase 2 were amazing, but in larger trials, we wanted to make sure we're a bit more conservative.

So we would need to see about 15 to roughly 20 percentage point delta between the arms to hit that dual threshold responder analysis and as a reminder, that is at one year.

Of course the trial will go out to three years, but our endpoint is at one year.

Ryan Zimmerman

Very helpful. And then on the BLA submission, can you speak to some of the items that could potentially speed up that BLA submission and conversely, what in your view may take longer than you may initially expect or may expect.

Adam Gridley

Excellent question.

So on the opportunity to speed things up, of course, we are going to look at every opportunity to front end load any of the various conversations to the agency and certainly we're in regular dialogue with them.

I think the timeline is actually prescriptive though. Post BLA filing at least if we were to look at Vericel's MACI, which did a tremendous job getting that product approved, it's usually a roughly two-month time period for acceptance of the BLA for review. And then in the case of MACI, and so that's our best information, there was roughly a 10-month PDUFA review period, which because this is a biologic, you do have that statutory review and we would expect to see roughly a similar timeline.

So it may be under a year, probably around a year if everything goes well.

So given the statutory requirements, probably not a lot of opportunity to speed that up. On sort of the downside, we of course continue to look at how we mitigate any of those risks. Generally speaking, we believe that the data are positive, that is going to be a pretty straightforward review, clearly this trial is designed with the FDA guidance criteria in mind, the first to be prospectively enrolled since that guidance documentation came out, so I think we are right in that sweet spot. And then of course, we think about manufacturing, we think about the preclinical modules, and we are continuing to dialogue closely with the agency to hopefully take some risk off the table. But while the agency has been great to work with, there is always going to be some uncertainties and our goal is to try to front end load as much of these conversations with the agency as possible.

Operator

[Operator Instructions] Our next question is from Swayampakula Ramakanth with H.C. Wainwright.

Your line is now open.

Swayampakula Ramakanth

A couple of quick questions.

Just on the market, in your prepared remarks, you are talking about the market erosion especially for the microfracture guys.

So in your guesstimate, what kind of percentage of the market is eroding for them? And if that is true, how would you take advantage of that? And is there a different sort of a strategy that you need to apply for that?

Adam Gridley

Thanks, RK, for the questions.

So just to clarify, it was related to the microfracture market and given some of the recent data, certainly we are seeing less of that usage, was that the question and how we capitalize on that?

Swayampakula Ramakanth

Yes. Exactly.

Adam Gridley

Excellent.

Now, I think that is a great question and this is one where certainly, I think there was a great hope for microfracture as a technology and we do know in some patient population that they follow the rehab, you get good results. The big challenge is over time, when you are effectively making scar tissue which is what microfracture does, you don't see a durability of response that really provides for this to still be the gold standard.

And so here we are, 15, 20, 25 years later and you are starting to get a large body of clinical data now coming out saying hey this really isn't a great alternative and that's clearly what we heard in July at AOSSM, where there are some new data that was published to show that the failure rate is even greater at 5 years, it's as high as 60% with the median failure time of four years.

And so we have been hearing this from surgeons for a while saying: hey, I don't feel good about doing this in younger patients, for example, because I know it's not going to last. Certainly, when you get older patients, they have lower propensity to be able to regenerate tissue, high BMI patients, there's a lot of challenges where -- you are not really treating pain at the source and so we think that surgeons are really quite primed and waiting for an opportunity to bring in a product that is as simple to use as microfracture and particularly for a lot of these call them sort of weekend lawyers or working parents or people running to the train station, these procedures don't provide a satisfactory outcome for high demand patients, that's the big issue.

And so surgeons across the board direct quote from the conference a couple of months ago are saying this is sort of the best of the worst alternatives that we have.

And so they are just waiting for something that's easy, provides an earlier recovery and response and so I think NeoCart finally provides that. And that's how we got the clinical trial enrolled. We went to a lot of private practice folks that don't have a lot of time to do lengthy procedures and that would be our target market.

Swayampakula Ramakanth

And you were also talking about the four-year time point where it seems like the median time when microfractures kind of starts to fail.

So if that is true, what is the longest time point that you have with NeoCart now that you've been treating patients for a while now that you could point to so that when you get up to the BLA submission, you will have that -- could you include that data also within the package to show that you are as good or better than microfracture.

Adam Gridley

Absolutely, I think there is a couple of ways that I would address that.

So first is we've published five year data from our Phase 2 studies and studies that started probably about 12 to 13 years ago. In the ongoing Phase 3 study as a reminder, we're going to have a number of patients throughout six to seven years by the time we get to approval. And one of the things that Lynne is going to be working on with Don is various patient registries to get some of those longer term patients and track them outside of what is already going to be a robust three-year data set. And as a reminder that all of the studies that the FDA has sort of approved to move into clinical trials have three-year endpoints, but we will be able to file with one.

So at the time of potential approval, we will have almost all of our two-year data and would expect that is going to be part of a labeling discussion and then of course it would be augmented with all of the three-year data shortly thereafter.

So this is not just a large body of evidence, it's one year data, we're going to have a huge number of patients with three-year data as we move into commercialization.

Finally, we also expect to publish, and this has been our commitment and you will see the various publications that we have out on our website, we work with clinicians, this is level one evidence that we're constantly trying to bring out to our surgeon community. We would expect that we'll have additional registry information that we will publish in the future as well. And we heard in June, unbeknownst to us until we have the R&D day, one of the investigators who presented just happened to call those patients who he still new from the Phase 2 that was out 11 years.

So we hear this pretty regularly but not only do we get early response but it's consistent and durable out to 3, 4 and now we are hearing out to 10 or 11 years. And that's going to be a small number of patients initially, but our goal would be to continue to track those. And in certain patient populations at certain sites, the clinicians are in touch with the patients and have told us they can easily call them, have them come back in and that will be one of Lynne's big initiatives.

Swayampakula Ramakanth

The last question from me is just on the market potential and that is market potential outside of the United States, in terms of like Europe and China, which are the geographies that you are targeting, what sort of -- what is the current treatment for cartilage repair there and does it pretty much follow what we do here in the United States?

Adam Gridley

I will start with an overarching comment and then Don has actually been leading some of the market research in China, for example, but generally speaking, we've seen market consistency in what is used, while you may have a couple of others scaffolds or other products that has been tried in markets in Europe where let's say years ago, preclinical data sufficed. But overall, you still have a large volume of surgeons who are still doing microfracture despite the frustration level with it. We know that in Japan, the market research that we did, very, very strong congruence between the level of dissatisfaction with current procedures, roughly 75% in the U.S. and similarly in Japan. Surgeons said, we don't have a lot of options, microfracture is the best we have. And certainly in Europe in certain regions and then also in China, for example, and Japan, they also don't sort of allogeneic donor tissue available just ethically, that's not done, so you have even less options than you have in the United States.

So overall, I'd say while pricing or reimbursement may be different in each of the regions, the feedback and totality has been remarkably similar. And one of the reviewers, the PMDA, for example, when we were trying to negotiate the small confirmatory study that we'd do there, they were saying, look, let's not microfracture arm [ph] and they indicated that: yes, we know it doesn't work, but it's the best we have, so let's make sure that we can test this and show that this is a superior alternative so we can stop using microfracture as a comparator. Don, anything you would add on some of the new market research we are getting from China for example or are you seeing anything much different from what we hear here?

Don Haut

I think the only thing I would add in a place like China and markets where sports medicine is perhaps not as well developed as specialty as in the United States, while they still do microfracture there and I would say there is probably more frustration with it there because they're just beginning to build up their practices there, and again, build this up as a big specialty. And they look at the data from around the world and say to themselves: why are we going to what -- why would we want to establish this as a big procedure that's done a lot.

So I think what we found is very significant receptivity to alternatives to microfracture.

Operator

And I'm showing no further questions. I would now like to turn the call back to Adam Gridley for any further remarks.

Adam Gridley

Thank you, operator, and thanks to the shareholders who are participating on the call day. We think it's a very exciting time for our company and we remain as committed as ever to executing the significant opportunity offered by NeoCart. Certainly, we are looking forward to announcing the topline one year superiority data from the NeoCart Phase 3 trial in the third quarter 2018 and we look forward to updating everyone on our progress. Have a good day, everyone.

Operator

Ladies and gentlemen, thank you for participating in today's conference.

You may now disconnect. Everyone, have a great day.