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Osiris Loss Narrower Than Expected

Zacks Equity Research

Osiris Therapeutics Inc. (OSIR) reported a second quarter loss of 13 cents per share, narrower than the Zacks Consensus Estimate of a loss of 15 cents. However, year-ago earnings were 5 cents per share. Revenues for the quarter came in at $1.7 million, below the Zacks Consensus Estimate of $2 million and the year-ago revenues of $10.4 million.

Quarterly Highlights

Biosurgery product sales came in at $1.6 million, up 43% on a sequential basis.

Research and development (R&D) expenses declined 21.2% from the year-ago period to $4.1 million, mainly due to the completion of enrollment in the myocardial infarction study with Prochymal. General and administrative expenses declined 57.6% from the year-ago period to $1.4 million.

Pipeline Update

Osiris has made significant progress with stem-cell therapies. The upside potential to lead candidate Prochymal could be enormous. Prochymal gained approval in Canada and New Zealand in the second quarter of 2012 for the treatment of acute graft-vs-host disease (GvHD) in children. Prochymal is the first manufactured stem cell product to gain approval and the first treatment to gain approval for GvHD.

Besides being approved in Canada and New Zealand, we note that the product is available under an Expanded Access Program (:EAP) in seven countries, including the US. The company expects to launch Prochymal with reimbursement in Canada later this year. Osiris is working with regulatory agencies across the world to provide them with the information needed to approve Prochymal.

Osiris is studying Prochymal for several indications including Crohn’s disease, acute myocardial infarction, and type I diabetes, most of which are blockbuster indications.

As far as the Crohn’s disease indication is concerned, Osiris said that enrolment for a phase III study continues. An interim analysis of the study showed that one of the Prochymal dosage arms achieved statistical significance in the primary endpoint.

Meanwhile, the company completed enrolling patients in a phase II trial that is studying Prochymal for the treatment of severe myocardial infarction. Osiris presented encouraging interim data from this trial in July 2012.

Low Visibility on Sanofi Agreement

We continue to have low visibility on the status of Osiris’ development and commercialization agreement with Genzyme, a Sanofi (SNY) company, for Prochymal. Earlier this year, Sanofi, in its fourth quarter press release, had said that it has discontinued the development of Prochymal for 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 had not received any communication from Sanofi regarding the termination of their agreement, Osiris 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 pursue commercialization agreements for Prochymal with other parties.

However, following this announcement, Sanofi informed Osiris that it is not in agreement with Osiris’ interpretation of its fourth quarter R&D update.

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.

On the second quarter call, Osiris said that the issue is now in the hands of lawyers. We expect investor focus to remain on the resolution of this issue.

Neutral on Osiris

We currently have a Neutral recommendation on Osiris, which carries a Zacks $2 Rank (short-term Buy rating). While positive on the approval of Prochymal in Canada and New Zealand, the lack of visibility on the status of the Sanofi deal is concerning.

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