By Lu Chen, M.Sc., Yuk-Chien Liu, Ph.D., Suraj Pradhan, M.Sc., and Erik Pettersson, Ph.D.
As a pioneer in the regenerative medicine space, Osiris Therapeutics Inc. (NASDAQ:OSIR) has struggled to exploit the potential benefits of human stem cell therapies for the past two decades. After detailed analysis of the target markets, underlying science, and recent events we conclude that Osiris is currently overvalued. We estimate an NPV of ~$40M for its therapeutics division, ~$100M for its biosurgery division, and ~$35M cash on hand, resulting in a total NPV of ~$175M (estimated stock price of ~$5.32), as compared with the current market capitalization of $253M (stock price of $7.68).
The valuation results from insights in the company's technology and low efficacy indicated in the clinical trials. Although the company's leading product, Prochymal, has gained FDA approval to treat pediatric graft-versus-host disease (GvHD) in Canada and New Zealand in late 2012, this was based on evaluation of only a subset of the Phase III trial data. Osiris has not yet published the dataset from these Phase III trials. Additionally, Health Canada has declared that efficacy data provided was still inconclusive, and has required Osiris to conduct an international efficacy trial within the next five years. Other indications of Prochymal, including Crohn's disease and Type I Diabetes, are currently undergoing clinical trials but have not shown desired efficacy.
Business & Technology
Osiris Therapeutics Inc. was founded in 1992 on the basis of human mesenchymal stem cell (hMSC) technology. As one of the world's first stem cell companies, over $420M have been invested in research and development in its 20 years.
The core technology involves isolation and expansion of hMSCs from bone marrow aspirate of healthy adult human donors. These cells are capable of homing into the sites of injury and have demonstrated anti-inflammatory and regenerative properties, potentially making them useful in a variety of indications requiring tissue repair. Genetic stability of the hMSCs indicates a better safety profile than many other stem cell therapies. However, significant and wide-ranging improvements in disease outcomes have yet to be clearly demonstrated by clinical trials.
The company considers the hMSC technology a platform for the production and adaptation of the cell type for various therapeutic and surgical applications. To protect their technology Osiris has developed a solid intellectual property estate covering the isolation, production, and various therapeutic applications of hMSCs.
Osiris is facing technical, regulatory and market obstacles. Since the field of regenerative medicine is newly emerging and evolving, stem cells must demonstrate a significant cost-benefit ratio in order to gain market share. Below, we attempt to determine the value of Osiris' current portfolio and discuss whether it can exploit the competitive advantages of its proprietary technology and deliver true value to the medical community, patients and shareholders.
Osiris's business is divided into two segments:
- Therapeutics - systemic treatment with hMSC technology for immunomodulatory and regenerative purposes in various indications such as GvHD, Crohns disease, Type I Diabetes Mellitus, chronic obstructive pulmonary disease, and arthritis.
- Biosurgery - local hMSC applications targeting wounds and orthopedic procedures such as spinal fusions and cartilage repair.
Osiris' first commercial biosurgery products Grafix and Ovation were introduced in late 2010 and generated a small revenue of $600k in 2011 which has grown to an estimated $6M for 2012. Their lead product, Prochymal is currently in clinical trials for 6 indications (3 in Phase II and 3 in Phase III). Chondrogen and Osteocel XC are additional therapeutics for bone regeneration.
Valuation of these products is based on probability of success, reimbursement potential, market size and competition. A risk-adjusted NPV (discount rate of 40% for therapeutics and 25% for biosurgery) and a discussion address how Osiris is positioned for the future and whether current products are leveraging the competitive advantages of hMSCs.
Prochymal is the leading Phase III product for Osiris and is being pursued for treatment of various indications. It has been granted Fast Track status by the FDA for treating acute Graft vs. Host Disease (GvHD). GvHD is a rare life threatening condition that can occur in patients receiving transplants and represents a market opportunity of ~$60M per year in the US. GvHD is currently treated with immunosuppressant steroids, although this is only effective in 50% of patients. Osiris completed 2 phase III trials in 2009 with mixed results, but further analysis showed limited efficacy in a small subset of the population. This resulted in FDA approval for Osiris to participate in an expanded access program providing Prochymal treatment to patients with severe acute GvHD. Prochymal became the world's first approved stem cell drug in 2012 when it was approved in Canada and New Zealand for pediatric GvHD. Health Canada has granted the company with an 8 year long regulatory exclusivity within the territory for Prochymal, although it still requires an international efficacy study within the next 5 years. If approved in the US, Prochymal would be a first-in-class drug for treatment of pediatric GvHD. However, given the lack of convincing data in clinical trials and small size of market, we do not expect Prochymal for GvHD treatment to contribute much to Osiris' future revenue stream.
Steroid refractory Crohn's disease is another indication that has obtained Fast Track status from the FDA for Prochymal treatment and is currently undergoing 2 Phase III trials that are expected to be completed in mid 2014 and 2015. 20% of Crohn's patients are steroid refractory and suffer severe pain from inflammation in their bowels that may have to be treated with surgery. The total Crohn's disease market in the US is ~$3.3B and expected to grow 30% by 2020. However, Osiris faces tough competition in this market from J&J's (NYSE:JNJ) Remicade, Abbott's (NYSE:ABT) Humira, Biogen's (NASDAQ:BIIB) Tysabri, and UCB S.A.'s (UCB) Cimzia. The phase II trial showed promising efficacy, but it was an open-label study on only 10 patients and needs to be interpreted conservatively. Due to unclear mechanistic evidence of hMSC efficacy in Crohn's, we believe the chances of success in Phase III trials are low.
Osiris is also working with the US government on a potential therapy for acute radiation syndrome (ARS), which could result from a widespread nuclear or radiological event. As a countermeasure against nuclear terrorism the US Department of Defense is seeking medical treatments for ARS and signed a $224.7M contract with Osiris in 2008 - $24.7M of this was paid in cash while the rest is contingent upon FDA approval. The DoD has agreed to purchase each treatment at $10,000 if Prochymal is validated in Phase III trials for GvHD and Crohn's and shows efficacy in ameliorating the toxic effects of radiation exposure in animals. Again, success in this indication depends on success in the first two, and therefore represents a risky revenue stream.
Osiris is pursuing Phase II trials of Prochymal for several other indications. The most prevalent of these is acute myocardial infarction (AMI), or heart attacks. Each year 1.1 million Americans suffer from heart attacks and this figure is projected to increase 20% over the next 20 years, representing a ~$2B market annually. Following good safety data and limited efficacy, a Phase II trial is underway for AMI and is due to be completed in early 2016. AMI is a promising market opportunity for Osiris, although it will be difficult for hMSC based therapy to compete with existing effective alternatives such as the thrombolytic agent tPA. Furthermore, there are ~10 companies pursuing stem-cell based therapies for AMI, making it a very crowded landscape.
Other indications that underwent Phase II trials are type 1 diabetes mellitus (T1DM) and chronic obstructive pulmonary disease (COPD). There are 2.5 million Americans diagnosed with T1DM and 12 million Americans diagnosed with COPD, representing a total market in excess of ~$25B. Prochymal would be a first-in-class drug in these categories as other existing treatments are only symptomatic and not preventive. Phase II trials of both indications showed good safety profiles but lacked data showing significant efficacy of treatment on the rate of disease progression. Currently there are no Phase III trials planned for T1DM or COPD.
Although its Prochymal development partner, Sanofi (NYSE:SNY), broke ties with Osiris in 2011, Osiris has now partnered with Swiss-based biotech Lonza to manufacture Prochymal and has regained worldwide rights to market the therapeutic. For all 6 indications including GvHD, Osiris faces stiff regulatory hurdles to get approval from the US FDA and it remains uncertain whether Prochymal will make it onto the US market anytime soon given its unimpressive results in clinical trials.
Chondrogen is Osiris' potential therapy for arthritis treatment and is in a Phase II clinical trial for regeneration of the meniscus and prevention of osteoarthritis (OA) in the knee. 27 million Americans were diagnosed with OA in 2011, and this figure is expected to grow to 38 million in 2030. Since the 1980s hyaluronic acid (HA) viscosupplementation treatment has been tested and is considered the gold-standard treatment for OA in the knee. Chondrogen will target this HA market with a projected value of $2.5 billion worldwide by 2017 according to Millennium Research Group. Chondrogen as a stem cell therapeutic would be a huge success if it can help restore or even maintain a disintegrating joint. Phase II data showed some improvements over existing HA therapy. However, we are pessimistic about the chances of Chondrogen becoming a blockbuster therapeutic as it is not clear whether it will be more effective than treatment with implantation of autologous chondrocytes, an alternative therapy being successfully applied in the clinic.
Osteocel XC is the successor of the product Osteocel Plus, which was acquired by NuVasive Inc. (NASDAQ:NUVA) from Osiris in 2009 for $85M. Before being sold to NuVasive, Osteocel Plus was on the market for 4 years and earned Osiris total revenue of $39M. Osteocel XC is the next generation of therapy for focal bone regeneration and contains all of the necessary components for bone growth including cells, signals and scaffold. Osteocel XC is currently in Phase I trials and it still remains to be seen whether it will be able to capture some of the Osteocel Plus market share.
Table 1 - Therapeutics Overview
P - Phase I
P - Phase II
P - Phase III
P - Combined
Osiris is pursuing biosurgery products demanding less regulatory approval by the FDA and resulting in a quicker path to market. With the launch of products for local treatments in wound care and orthopedics in late 2010, Osiris is at an inflection point where the market demands proof of product acceptance. Sales are taking off with a significant increase for 2012 (we estimate $6M from $600k in 2011). However, growth is expected to be fairly slow until a potential market acceptance will render a broader use.
These high-end biological products for tissue regeneration are believed by the company to have advantages over existing treatments. We believe that products targeting bone- and cartilage regeneration are more in line with the competitive advantage of hMSCs than wounds, and that the latter, although a valid product, will be facing fierce competition. So far, two products have been introduced, while a third is expected to launch early 2013, with additional products expected in the pipeline.
Grafix is cellular matrix designed for direct application to wounds, were the healing process will benefit from hMSC and growth factors. The main targets are within the advanced wound care markets including dermal burns ($250M), limb salvage ($500M), and chronic wounds ($1B), mainly diabetic foot ulcers. In order to address the chronic wound market properly, and obtaining a permanent cost reimbursement profile for Grafix in the outpatient setting, a clinical trial is required. This process is ongoing with a fairly high probability of success, and final decision is expected early this year. Grafix is likely to face intense competition with at least seven competing products within tissue engineering and growth factors and with potential additional market players entries in the near future. As of present, the NPV (discount rate at 25%) for advanced wound care is estimated to approx. $30M.
Ovation is comprised of an extracellular matrix, hMSC and growth factors to promote bone tissue formation in spinal fusions. Osiris is thereby continuing a successful track record within osteogenesis, i.e. Osteocel. Ovation represents a significant market opportunity estimated to $3B. The fact that the technology is circumventing the need for autografting gives it a competitive edge. However, the assumed need for distribution and revenue sharing will have an impact on gross margin for the Ovation line. Also, Osiris should be facing competition in this area. Adaptation of the hMSC cellular matrix for cartilage regeneration and repair is expected to start contributing in 2013 with a new product as a third revenue stream in addition to Grafix and Ovation. Current standard-of-care surgical treatment has a high failure rate and if this new product can deliver upon the promises it has potential in this segment. The ultimate market opportunity in the U.S. is estimated to $500M which Osiris will be targeting with a direct sales team aimed at orthopedic surgeons within sports medicine. As of present, the NPV for orthopedic products (discount rate of 25%) is estimated to approx. $70M.
To summarize, we estimate the NPV for the Biosurgery division to be ~$100M, with orthopedic products contributing to 70% of sales. Additional biosurgery products yet to be revealed are expected to be in the pipeline indicating a potential upside in future biosurgery sales and value if market reception goes well.
Osiris may have been a victim of overly optimistic view of stem cell therapy, reflected in its present drug pipeline and product portfolio. The key question that remains is how well positioned the company is, taking into consideration the benefits of its core technology and market dynamics including competitors.
During 2012, Osiris' stock rose close to 70% ($5.35 to $8.98) on the news of their lead drug Prochymal being approved for the treatment of pediatric Graft vs. Host Disease (GvHD) in New Zealand and Canada. Reports of sales taking off within the Biosurgery division ($600k in 2011 which has grown to an estimated $6M for 2012) and optimistic comments from management added to the positive trend.
Last year's positive news was desperately needed to reinvigorate the 20 year old company. However, much hope has been placed on the lead drug Prochymal's preliminary success, and its true efficacy has not yet been demonstrated, making the Prochymal portfolio unattractive. The GvHD success in Canada is still dependent upon the successful completion of an international efficacy study and has low value due to its extremely limited market. Osiris is also investigating the use of hMSCs for Type I diabetes mellitus, acute myocardial infarction, and Crohn's disease, where the clinical trial results do not seem convincing. Although there is no indication of safety risk, no real indication of efficacy has been shown either. There are many uncertainties within the latest round of clinical trial data and even if successful, Prochymal will be facing stiff competition.
While there are several uncertainties for Prochymal, there is potential in orthopedic settings as demonstrated previously by the Osteocel product line, which was later acquired by NuVasive, Inc . The hMSCs do diverge into bone, cartilage and fat tissues providing scientific proof of concept for bone and cartilage regeneration. Although Chondrogen has demonstrated less potential than previously thought, Osiris is moving into areas where they may have a higher probability of success - Ovation and upcoming products in cartilage repair e.g. within sports medicine. We believe these areas to represent a large market opportunity for Osiris, as there is a significant demand for better treatments. As for wound care, Osiris should be facing significant competition as they diverge from their competitive edge. Wound treatment may very well work with other cell types rendering hMSC a suboptimal choice.
We estimate an NPV of ~$175M (corresponding to a stock price of ~$5.32), as compared to the current market capitalization of $253M (stock price of $7.68). In the long term, we see potential for certain areas in biosurgery, but given the risk and the current strategy, we believe a reconstruction of the portfolio and the establishment of a partnership are critical steps in realizing this value.
Additional disclosure: Business relationship disclosure: Alpha Cardinal is a team of graduate students and postdocs at the Stanford University School of Medicine. This article was written by Lu Chen, M.Sc., Yuk-Chien Liu, Ph.D., Suraj Pradhan, M.Sc., and Erik Pettersson, Ph.D., members of one of our teams. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.