Optimistic on Osiris

We highlight Osiris Therapeutics, Inc. (OSIR - Analyst Report) and Genzyme Corp. (GENZ - Analyst Report).

Osiris Therapeutics, Inc. (OSIR - Analyst Report) reported financial results for the first quarter 2009 on May 7, 2009. Total revenues in the quarter were $12.7 million, up from $0.4 million for the same period for 2008, and slightly above our forecasts of $11.8 million.

Revenues include the recognition of $10.0 million in amortized license fees from Genzyme Corp. (GENZ - Analyst Report) and $2.6 million related to the contract with the U.S. Department of Defense. The company reported net income of $14.8 million, or $0.45 per share for the quarter. This figure is comprised of losses from continuing operations of $7.9 million, or $0.24 per share, and income from discontinued operations of $22.7 million, or $0.69 per share.

Osiris exited the first quarter with $55.0 million in cash and $79.7 million in accounts receivable. Working capital totaled $123.5 million. Osiris should receive an additional $12.5 million from NuVasive in both June and September 2009, along with $55.0 million from Genzyme in July 2009.

We forecast the company will exit 2009 with roughly $120 million in cash on hand. This figure does not include the potential to receive an additional $15.0 million milestone payment from NuVasive if cumulative Osteocel sales exceed $35.0 million.

The first quarter saw several advancements in the development of Prochymal, along with one disappointment. As of late April 2009, both phase III GvHD programs are fully enrolled, with data expected on both the steroid refractory and acute trials at the end of the third quarter 2009. Management noted on the conference call that the initial update and survival results from the Prochymal pediatric expanded access program (EAP) has been positive.

Additionally, Osiris has begun enrollment of a phase II trial with Prochymal in acute (severe) myocardial infarction. On the regulatory front, Osiris has submitted the first parts of the biologic license application (BLA) to the FDA for Prochymal as part of the rolling-BLA submission advantage that comes with an FDA fast track designation. The only negative development over the past few months was the discontinuation of the phase III Crohn’s disease trial due to what management described as a design flaw that allowed for a significantly higher-than-expected placebo response rates.

In early May 2008, Osiris announced it has been given clearance by the U.S. FDA to initiate an expanded access treatment program (EATP) for Prochymal, making the investigational stem cell product available to children with life-threatening GvHD. The FDA’s EATP allows for the sale at cost to children ages 2 months to 17 years of age. Management provided an update on the EATP program on the first quarter call. So far a total of 41 children have enrolled in the program. Management noted that these are extremely sick patients with 92% at Grade-IV (the highest grade) of GvHD and 68% having multiple organ disease.

Most of the patients have failed two to three prior treatment options and are using Prochymal as a last resort. But so far the results are extremely encouraging, with 100 day survival at approximately 60%. In early December 2008, Osiris received approval from Health Canada to allow the expanded access for Prochymal use in children in Canada. Osiris is currently expanding its resources to be able to offer Prochymal through the EATP to adults in the U.S.

The company’s lead product candidate, Prochymal, has the potential to be a sort of wonder drug for various inflammatory or tissue damage indications. Osiris is currently in two phase III trials, both under U.S. FDA "Fast Track" -- one in steroid refractory GvHD and another in acute GvHD. Management will also look to re-initiate the phase III Crohn’s disease (CD) program in 2010.

The drug is also in earlier-stage programs for Myocardial Infarction (MI), Chronic Obstructive Pulmonary Disease (COPD), Type-1 diabetes and Acute Radiation Syndrome (ARS). In fact, we saw positive early-stage data in MI in February 2009. With a full label, Prochymal has blockbuster potential.

Assuming these trials hit, Osiris is in position to have posted its last negative EPS year in 2009. By 2012 the company will be enormously profitable based on the ramp in Prochymal sales and milestones from development partner Genzyme. Our $21 price target is based on 20x our 2012 EPS forecast of $3.18, discounted back to present day at 25%. We would be aggressive buyers of the stock at this level.