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OSIR > SEC Filings for OSIR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for OSIRIS THERAPEUTICS, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Statements included or incorporated herein which are not historical facts are forward looking statements. When used in this Quarterly Report, the words estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward looking statements.

Forward looking statements reflect management's current views with respect to future events and performance and are based on currently available information and management's assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the "safe harbor provisions" of the Private Securities Litigation Reform Act of 1995, the Company notes that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in greater detail in our Annual Report on Form 10-K under Part I - Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 1A "Risk Factors," and may be discussed elsewhere herein or in other documents we file with the Securities and Exchange Commission, or SEC. Examples of forward-looking statements may include, without limitation, statements regarding any of the following: our product development efforts; our clinical trials and anticipated regulatory requirements, and our ability to successfully navigate these requirements; the success of our product candidates in development; status of the regulatory process for our biologic drug candidates; implementation of our corporate strategy; our financial performance; our product research and development activities and projected expenditures, including our anticipated timeline and clinical and commercialization strategy for mesenchymal stem cells (MSCs) and biologic drug (including Prochymal® and Chondrogen®), and marketed biosurgery products (including Grafix® and Ovation®); our cash needs; patents, trademarks and other proprietary rights; the safety and ability of our products and potential products to treat disease; our ability to supply a sufficient amount of our marketed products or product candidates and, if or insofar as approved or otherwise commercially available, products to meet demand; our costs to comply with governmental regulations; our plans for or success of sales and marketing; our plans regarding facilities; our ability to establishing and maintain reimbursement for our commercially available products; types of regulatory frameworks we expect will be applicable to our products and potential products; and results of our scientific research.

Readers are cautioned that all forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our audited Financial Statements and related notes thereto and other disclosures included as part of our Annual Report on Form 10-K for the year ended December 31, 2011, and our unaudited Condensed Financial Statements for the three and nine month periods ended September 30, 2012 and other disclosures included in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the first and second fiscal quarters of 2012, and our Current Reports on Form 8-K during these periods and since then to date. Our Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, and are presented in U.S. dollars.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Some of the important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under Part I - Item 1A "Risk Factors." There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

When we use the terms "Osiris," "we," "us," and "our" we mean Osiris Therapeutics, Inc., a Maryland corporation.

Introduction and Overview

The following is a discussion and analysis of our financial condition and results of operations for the three and nine month periods ended September 30, 2012 and 2011. You should read this discussion together with the accompanying unaudited condensed financial statements and notes and with our Annual Report on Form 10-K for the year ended December 31, 2011. Historical results and any discussion of prospective results may not indicate our future performance. See "Cautionary Statements About Forward-Looking Information."

We are a leading stem cell company headquartered in Columbia, Maryland and focused on developing and marketing products to treat medical conditions in the inflammatory, cardiovascular, orthopedic and wound healing markets. We have two business segments, Therapeutics and Biosurgery. Our Therapeutics business is focused on developing biologic stem cell drug candidates from a readily available and non-controversial source-adult bone marrow. Our Biosurgery business, created in 2009 and operating as a separate segment since 2010, works to harness the ability of cells and novel constructs to promote the body's natural healing with the goals of improving surgical outcomes and offering better treatment options for patients and physicians.

In our Biosurgery business, we currently manufacture, market and distribute Grafix for tissue repair and Ovation for use in orthopedic, would healing, and surgical procedures. In our Therapeutics segment, our pipeline of internally developed biologic drug candidates under


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evaluation includes Prochymal for inflammatory, autoimmune and cardiovascular indications, as well as Chondrogen for arthritis in the knee. During the second quarter of 2012, we received authorization from Health Canada to market our stem cell therapy Prochymal® for the treatment of refractory acute GvHD in children; and we have also since been granted marketing consent for Prochymal for the same indication in New Zealand. We believe our stem cell therapeutic products have significant therapeutic potential because of their ability to regulate inflammation, promote tissue regeneration and prevent pathological scar formation.

We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010.

Therapeutics Segment. Our Therapeutics segment is focused on developing biologic stem cell drug candidates from a readily available and non-controversial source-adult bone marrow. Prochymal (remestemcel-L) has now been approved for the treatment of refractory acute graft versus host disease ("GvHD") in pediatric patients in Canada and New Zealand. In addition, we have a Prochymal Expanded Access Program for pediatric and adult patients in eight countries, including the U.S. Prochymal is also being evaluated in clinical trials for Crohn's disease, acute myocardial infarction, type 1diabetes and gastrointestinal injury resulting from radiation exposure (animal rule). Our pipeline of internally developed biologic drug candidates also includes Chondrogen for osteoarthritis in the knee.

The following table summarizes the status of our biologic drug candidates.

Drug Candidate              Indication                           Status
Prochymal        Pediatric Refractory Acute GvHD    Marketing Approval received from
                                                    Health Canada in May 2012 and
                                                    from Medsafe (New Zealand's
                                                    medical regulatory agency) in
                                                    June 2012

                 Refractory Acute GvHD in           Available in eight countries
                 pediatric and adult patients       under Expanded Access Programs

                 Biologics Refractory Crohn's       Phase 3
                 Disease

                 Acute Myocardial Infarction        Phase 2

                 Type I Diabetes Mellitus           Phase 2

                 Acute Radiation Syndrome           Phase 3(Animal Rule)

Chondrogen       Osteoarthritis & Cartilage         Phase 2
                 Protection

Clinical Program Update

In May 2012, we received approval from Health Canada to market Prochymal (remestemcel-L), for the treatment of refractory acute GvHD in children. We believe this is the world's first regulatory approval of a stem cell therapeutic drug product and the first therapy approved specifically for GvHD, a devastating complication of bone marrow transplantation that kills up to 80 percent of children affected, many within just weeks of diagnosis.

Prochymal was approved under Health Canada's Notice of Compliance with conditions (NOC/c) Policy, which provides expedited market clearance to high quality medical products that address significant unmet medical conditions and which have demonstrated favorable risk/benefit profile in clinical trials. Under the NOC/c pathway, the sponsor must agree to carry out confirmatory clinical testing.

Health Canada's approval was made following the recommendation of an independent expert advisory panel commissioned to evaluate Prochymal's safety and efficacy. In support of the application, Osiris submitted over 90,000 pages of data generated over a 20 year development cycle. In Canada, Prochymal is now approved for the management of acute GvHD in children who fail to respond to steroids. The approval was based on the results from clinical studies evaluating Prochymal in patients with severe refractory acute GvHD. Prochymal demonstrated a clinically significant response 28 days post initiation of therapy in 61-64 percent of patients treated. Furthermore, treatment with Prochymal resulted in a statistically significant improvement in survival when compared to an historical control population of pediatric patients with refractory GvHD (p=0.028). The survival benefit was most pronounced in patients with the most severe forms of GvHD. As a condition of approval, the clinical benefit of Prochymal will be further evaluated in a case-matched confirmatory study.

In addition to the extensive patent protection for Prochymal, Health Canada's decision will also provide Prochymal with regulatory exclusivity within the territory for the approved pediatric application. Canada affords eight years of exclusivity to Innovative Drugs such as Prochymal, and an additional six-month pediatric extension is available since it is intended to treat a pediatric population.

There have not been any other significant changes to our clinical programs in our Therapeutics segment since we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Biosurgery Segment. Our Biosurgery segment seeks to harness the ability of cells and novel constructs to promote the body's natural healing, with the goals of improving surgical outcomes and offering better treatment options for patients and physicians. During the third quarter


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of 2010, we launched limited commercial distribution of several products developed and manufactured by our Biosurgery segment, including Grafix and Ovation. Disease targets for Biosurgery products commercialized or in development include diabetic foot ulcers, venous stasis ulcers, dermal burns, and various orthopedic conditions.

Grafix is a three-dimensional tissue matrix designed for application directly to acute and chronic wounds, including diabetic foot ulcers and burns. Flexible and conformable to complex anatomies, this cellular repair matrix provides a rich source of extracellular matrix, viable endogenous MSCs and epithelial cells, as well as growth factors directly to the site of the wound, protecting the area from inflammation, scarring and infection.

Ovation is a novel cellular repair matrix designed for use in surgical applications where bone tissue repair is needed. Easily applied to the site of injury, Ovation provides the three essential components of periosteum-collagen matrix, viable endogenous MSCs and key growth factors such as BMPs and VEGF-to enable tissue regeneration.

Grafix and Ovation are regulated by the FDA under 21CFR Part 1271, Human Cells, Tissues and Cellular and Tissue-based Products ("HCT/Ps"). We are registered with the FDA as a tissue establishment and are accredited by the American Association of Tissue Banks ("AATB"). Extensive donor screening, serological testing, bioburden testing and sterility testing is performed on every lot to demonstrate suitability for transplantation. Our Biosurgery products are all manufactured in our Columbia, Maryland facility. Each lot is tested to confirm viable cell content post thaw.

We market and distribute both Grafix and Ovation through a network of distributors as well as directly to hospitals and clinics. A significant market for Grafix is chronic wounds, which are primarily treated in the outpatient setting, and to obtain full reimbursement for use in the outpatient setting, a prospective randomized clinical trial comparing the standard of care to Grafix is needed.

We have received transitional pass-through status from the Center for Medicare & Medicaid Services ("CMS"), with C-Codes being designated for Grafix. Further, the product has been assigned pass-through status under Medicare's outpatient prospective payment system ("OPPS"), effective July 1, 2012. CMS also issued a preliminary positive decision for the assignment of permanent Healthcare Common Procedure Coding System (HCPCS) Q-codes for Grafix. If the decision is made permanent, it is anticipated that the Q-codes would be available starting in January 2013. The assignment of unique Q-codes will assist in facilitating reimbursement in the physician office setting, offering additional access for Medicare patients.

A study designed to allow for the collection of data necessary to obtain the permanent HCPCS Q-codes began during the second fiscal quarter of 2012.

We are a fully integrated company, having developed capabilities in research, development, manufacturing, marketing and distribution of stem cell products. We have developed an extensive intellectual property portfolio to protect our technology including 51 U.S. and 154 foreign patents owned or licensed. We have 30 U.S. patent applications pending and 80 foreign patent applications pending.

Financial Operations Overview

Revenue

Biosurgery Segment. Beginning in fiscal 2010, we started to account for our Biosurgery business as a separate segment. We manufacture human tissue based products in our Columbia, Maryland facility and distribute these products through a network of independent distributors as well as employee sales personnel. We presently manufacture and distribute Grafix for the treatment of chronic wounds and burns and Ovation for orthopedic surgeries. Both of these products are cryo-preserved and stored in special freezers at -80 degrees Celsius. Due to the conditions required to preserve these products, customers may elect to have the product shipped to them in dry ice, or we offer to store the product in our freezers for no longer than 30-days. Legal title passes to the customer when the product either leaves our shipping dock or when it is placed by us in a specifically designated freezer. Due to the nature of the products and the manufacturing process, we do not allow sales returns.

Therapeutics Segment. In the fourth quarter of 2008, we entered into a collaboration agreement with Genzyme Corporation, then an independent and now a Sanofi company, for the development and commercialization of Prochymal and Chondrogen. Under the terms of the agreement, we retained the rights to commercialize Prochymal and Chondrogen in the United States and Canada, and Genzyme was granted exclusive rights to commercialize Prochymal and Chondrogen in all other countries, except with respect to GvHD in Japan, where Prochymal has previously been licensed to JCR Pharmaceuticals Co., Ltd. Under the agreement, we were paid $130.0 million for these rights. During the fiscal quarter ended March 31, 2012 we recognized revenue of $3.3 million, which was the final deferred revenue associated with the $130.0 million upfront payment. We recognized $10.0 million of revenue from the amortization of the upfront payment during each of the first three fiscal quarters of 2011.

The collaboration agreement provided that it would expire upon the completion of all development plans stipulated in the agreement and the expiration of all payment obligations; however, in addition to certain opt out rights, Genzyme could terminate the agreement early and without further obligation at any time, and either party could terminate the agreement due to non-performance, material breach or insolvency.

In February 2012, Sanofi issued a press release which included an update on their R&D pipeline, stating that it had "discontinued" its project with Prochymal for GvHD, and in September 2012, we entered into a termination agreement with Sanofi that terminated the


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collaboration agreement and memorialized an amicable parting. Under the termination agreement, neither party has any continuing financial or other obligations to the other. We continue to proceed with our Prochymal regulatory and commercialization efforts.

In prior years, we entered into strategic agreements with other companies for the development and commercialization of Prochymal for specific indications and geographic markets. In 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation (JDRF) to conduct a Phase 2 clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. In 2003, we entered into an agreement with JCR Pharmaceuticals, granting it exclusive rights to Prochymal for the treatment of GvHD and other hematological malignancies in Japan. We did not recognize any revenue from these other agreements during fiscal 2012. We recognized approximately $240,000 of revenue from the JDRF collaboration during each of the first three fiscal quarters of 2011.

Research and Development Costs

Our research and development costs consist of expenses incurred in identifying, developing and testing biologic drug candidates and biologic tissue based products. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research and manufacturing, costs of facilities, and the costs of manufacturing clinical batches of biologic drug candidates, quality control supplies and material to expand biologic drug candidates.

Consistent with our focus on the development of biologic drug candidates with potential uses in multiple indications, many of our costs are not attributable to a specifically identified product indication. We use our employee and infrastructure resources across several projects. Accordingly, we do not account for internal research and development costs on a project-by-project basis. From inception in December 1992 through September 30, 2012, we incurred aggregate research and development costs of approximately $421 million.

During the three and nine months ended September 30, 2012, we incurred $1.8 million and $7.4 million, respectively, of research and development costs in our Therapeutics segment and $1.2 million and $3.6 million in our Biosurgery segment. During the three and nine months ended September 30, 2011, our total research and development costs were $4.4 million and $12.5 million, respectively, for our Therapeutics segment and $607,000 and $2.4 million for our Biosurgery segment

We expect our research and development expenses to continue to be substantial in the future, as we continue our clinical trial activity for our existing biologic drug candidates as they advance through the development cycle, and as we invest in additional product opportunities and research programs. Clinical trials and preclinical studies are time-consuming and expensive. Our expenditures on current and future preclinical and clinical development programs are subject to many uncertainties. We test our products in several preclinical studies, and we then conduct clinical trials for those biologic drug candidates that we determine to be the most promising. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some biologic drug candidates in order to focus our resources on more promising biologic drug candidates. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, size of trial and intended use of a biologic drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

† the number of patients who participate in the trials;

† the number of sites included in the trials;

† the length of time required to enroll trial participants;

† the duration of patient treatment and follow-up;

† the costs of producing supplies of the biologic drug candidates needed for clinical trials and regulatory submissions;

† the efficacy and safety profile of the biologic drug candidate; and

† the costs and timing of, and the ability to secure, regulatory approvals.

As a result of these uncertainties, we are unable to determine with any significant degree of certainty the duration and completion costs of our research and development projects or when and to what extent we will generate revenues from the commercialization and sale of any of our biologic drug candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of the costs associated with our general management, including salaries, allocations of facilities and related costs, and professional fees such as legal and accounting expenses. We have experienced a general decrease in general and administrative costs as the result of our continued cost cutting efforts and the refinement of many of our general business processes, as well as a reduction in share-based compensation expense. However, we expect future expense increases to likely result from the hiring of additional operational, financial, accounting, facilities engineering and information systems personnel as we approach the commercial launch of Prochymal for an initial indication.


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Other Income, Net

Other income consists of interest earned on our cash and investments available for sale and realized gains and losses incurred on the sale of these investments. Interest expense consists of interest incurred on capital leases and other debt financings. We do not expect to incur material interest expense in the future as we had extinguished all of our outstanding debt prior to fiscal 2009. During the third fiscal quarter of 2012, we entered into a capital lease agreement to finance the acquisition of copier and printing equipment. In connection with this capital lease, we incurred $1,000 of interest expense during the third fiscal quarter of 2012.

Provision for Income Taxes

Until fiscal 2010, we had not recognized any net deferred tax assets or liabilities in our financial statements because we cannot assure their future realization. Because realization of deferred tax assets is dependent upon future earnings, a full valuation allowance has been recorded on the net deferred tax assets, which relate primarily to net operating loss and research and development carry-forwards. In the event that we become profitable within the next several years, we have net deferred tax assets (before a 100% valuation allowance) of approximately $95.3 million that may be utilized prior to us having to recognize any income tax expense or make payments to the taxing authorities, other than the alternative minimum tax. The income from the upfront fees we received from Genzyme Corporation was required to be recognized over several years from 2008 through the first quarter 2012 for financial statement reporting purposes. For income tax purposes, the income was required to be fully recognized in 2009 and 2010. This resulted in our releasing $3.2 million of the valuation allowance on our net deferred tax assets in fiscal 2010. We recognized $1.0 million of the resulting deferred tax asset in 2011, and we recognized the remaining $2.2 million deferred tax asset in 2012. Upon filing these 2011 tax returns, we reclassified the short-term deferred tax asset to income tax receivable and these amounts were received by us during the third fiscal quarter of 2012.

During the three months ended June 30, 2012, we filed our federal and state income tax returns for the fiscal year ended December 31, 2011 and trued-up our income tax receivable to the short-term deferred tax asset that was on our December 2011 balance sheet by recognizing a tax benefit of $32,000. We received the refunds during the third fiscal quarter of 2012 and recognized an additional tax benefit of $5,000. Similarly, during the three months ended June 30, 2011, we filed our fiscal 2010 income tax returns and recognized income tax expense of $43,000 when truing up our short-term deferred tax asset to the amounts reported in our fiscal 2010 income tax returns.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months ended September 30, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011, other than as disclosed herein.

Results of Operations

Comparison of Three Months Ended September 30, 2012 and 2011

Biosurgery Product Revenues

During the three months ended September 30, 2012, we continued to expand our distribution efforts in our Biosurgery segment, both through in-house personnel as well as through our expanding distributor network. During the three months ended September 30, 2012, we recognized $2.2 million of product revenues from the distribution of Grafix and Ovation and realized gross profit of $1.4 million. Revenues from the distribution of Biosurgery products in the third fiscal quarter of 2011 were $331,000, and gross profit was $192,000. The increase in revenue and gross profit in 2012 is due to volume increases, as we have continued to expand our distribution network. We are continuing to . . .

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