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Osiris Therapeutics, Inc. (OSIR - Analyst Report) recently provided an update on its development and commercialization agreement with Genzyme, a Sanofi (SNY - Analyst Report) company, for its phase III candidate, Prochymal.

The update was triggered by Sanofi’s R&D update in its fourth quarter press release. Sanofi, in its press release, said that it has discontinued the development of Prochymal, a mesenchymal stem cell being evaluated for graft-versus-host disease (GvHD). Osiris said that the announcement was made without its knowledge or advice.

Osiris’ President and CEO clarified that Prochymal’s development has not been discontinued. Although Osiris is yet to receive any communication from Sanofi regarding the termination of their agreement, Osiris has, in fact, gone ahead and notified Sanofi that it is treating Sanofi’s statement as an intention to terminate the agreement.

According to Osiris, all rights to Prochymal will return to Osiris without the company being required to compensate Sanofi. Osiris believes it can now pursue commercialization agreements for Prochymal with other parties. We note that besides GvHD, Prochymal is being evaluated for a range of indications including type I diabetes, Crohn’s disease, acute myocardial infarction and acute radiation syndrome.

The collaboration agreement with Genzyme was signed in October 2008 for the development and commercialization of Prochymal and another pipeline candidate, Chondrogen. While Osiris retained the rights to commercialize the candidates in the US and Canada, Genzyme gained exclusive rights to commercialize Prochymal and Chondrogen in all other countries, except Japan, where Osiris has an agreement with JCR Pharmaceuticals. JCR Pharmaceuticals holds rights to Prochymal for the treatment of patients with hematological malignancies.

We currently have a Neutral recommendation on Osiris, which carries a Zacks #3 Rank (short-term Hold rating). We expect Osiris shares to be negatively impacted by Sanofi’s announcement regarding the discontinuation of Prochymal for GvHD.

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