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Osiris Therapeutics, Inc. (NASDAQ:OSIR)

Q4 2008 Earnings Call Transcript

February 27, 2009 9:00 am ET

Executives

Randall Mills – President and CEO

Rich Hunt – CFO

Analysts

Bill Tanner – Leerink Swann

Charles Duncan – JMP Securities

Edward Tenthoff – Piper Jaffray

Eun Yang – Jefferies & Co.

Jason Napodano – Zacks

Operator

Good morning, everyone. Before we begin, I'd like to remind everyone that this conference call may include forward-looking statements that involve uncertainties and risks. Actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the section entitled 'Risk Factors' in our filings with the Securities and Exchange Commission. As a reminder, today's call is being recorded.

I would now like to turn the call over to Dr. C. Randall Mills, President and CEO of Osiris Therapeutics. Please go ahead, sir.

Randall Mills

Good morning and welcome to our fourth quarter and full-year 2008 conference call. Today, I will be providing an update of our business and Rich Hunt, our Chief Financial Officer, will provide an overview of our financial performance for the quarter and full-year 2008. I will then outline our priorities for the coming months and we will end with a question-and-answer session.

By any measure, 2008 was an extraordinary year for Osiris and the results speak for themselves, so I'll keep my comments brief today. But here are some of our key accomplishments: We started 2008 by winning a Department of Defense contract fully valued at $225 million to develop and stockpile Prochymal for acute radiation syndrome. We sold our Osteocel business to NuVasive for $85 million in upfront and milestone payments. This transaction not only provided us with significant non-dilutive capital, but importantly allowed us to focus on the commercial launch of Prochymal.

We received approval to initiate the first-ever expanded access program for stem cell product, making Prochymal available to children with life-threatening GvHD. Even while enrolment in our Phase III trial was still in progress, this significant step was followed by similar approval in Canada and more recently, by the inclusion of adult patients in the United States.

In 2008, we formed a major strategic alliance with Genzyme Corporation. The largest of its kind for a stem cell product worth up to $1.4 billion in development and commercialization for Prochymal and Chondrogen. What is even more impressive about this transaction is that we retained sole rights to these products in the United States and Canada. And we finished the year by completing enrolment in the first worldwide Phase III stem cell trial for the treatment of steroid-refractory GvHD and importantly reached agreement with FDA regarding the timing and content of the submission of the first marketing application for a stem cell product.

There is no shortage of attention on stem cell therapy right now, so it's reasonable to ask what makes Osiris different. First, it's our practical experience working with stem cell therapeutics which is unmatched in the industry. At Osiris, we have spent 17 years responsibly developing the mesenchymal stem cell for therapeutic use. In 1998, we treated our first human recipients in FDA sanctioned clinical trials. Since then, we have treated over 1000 patients with the therapy, completing seven different Phase I and Phase II trials. During this time, our company has learned many valuable lessons and gained the type of insight that can only come from repeated clinical use.

Another key point is our market approach. We are not trying to start with the largest potential markets for the technology. Instead, we are going after serious and significantly underserved indications that have no good treatment option today. Take GvHD for example; it's life-threatening. There are no approved treatments and the patients are concentrated in a manageable number of transplant centers.

We recognize the challenges inherent to bringing the world's first stem cell therapy to market and we recognize that we must crawl before we walk. Once on the market, the technology has vast potential. But the first priority needs to remain getting the technology on the market. And so, that is what we're going to do.

The third Osiris difference is our business model. Our stem cell products are mass produced from only the most-healthy young adults. They are shipped in inventory at the point of care where they are ready to be used when needed. The products are easily administered in the outpatient setting and importantly, can be given multiple times if necessary. This model is not only financially attractive but practical as well.

Quality matters when it comes to patient care. Selecting only the most suitable donors and adhering to strict GMP manufacturing processes ensure product consistency that is demanded by physicians and regulatory agencies alike. In 2008, Osiris was respected by the FDA's health officials from the states of Maryland and Florida, and the American Association of Tissue Banks, and we passed each inspection without significant findings.

And lastly, our resources make Osiris different. We ended the year with over $123 million in cash, investments, and receivables. We expect an additional $45 million this year from our Osteocel transaction. We have a great partnership with Genzyme that provides us with additional financial resources; but importantly, also the expertise necessary to get the job done from a regulatory and commercial standpoint. And of course, we have our own internal resources; the most experienced team in this industry, an outstanding group of hardworking professionals that share the same beliefs, values, and mission.

Collectively, these four areas of strength -- our experience, our market strategy, our business model, and our resources -- have Osiris uniquely positioned in this exciting new field and poised to accomplish our goal of making Prochymal the world's first approved stem cell therapy.

I will now turn the call over to Rich to review our financials.

Rich Hunt

Thanks, Randy, and good morning everyone. I will now present the company's fourth quarter and full-year 2008 results and summarize events achieved during the calendar year that has strengthened the company's financial performance and position. We believe these events support the company's strategy of developing and launching the world's first stem cell drug.

We commenced the year by announcing the Department of Defense award to develop Prochymal for acute radiation syndrome, full valued at $224.7 million. In the first half of the year, we received $2 million in performance milestone payments under the Juvenile Diabetes Research Foundation contract. In July, we divested our Osteocel business for $35 million in upfront cash, $50 million in future milestones, $5 million of which have already been received, and we will continue to generate revenues by providing manufacturing operations for the purchaser.

Clearly, our biggest news of the year came during the fourth quarter when we announced the execution of the Genzyme-Osiris collaboration agreement, which guarantees non-contingent, upfront payments of $130 million. We've already received the first $75 million installment, with the remaining $55 million payment coming on July 1, 2009. These activities and others have allowed us to end the year with $123.5 million in cash, short-term investments and near-term receivables, with no debt. Additionally, we feel very confident we can achieve the remaining $45 million in Osteocel milestone payments.

As for the fourth quarter results, revenues were $6.2 million for the fourth quarter in 2008, compared to $1.2 million in the comparable period for 2007. The increased revenues were primarily driven by the amortization of upfront Genzyme piece under the collaboration agreement, as well as revenues recognized under the Department of Defense contract.

We reported in our third quarter 10-Q, the company was reviewing how to properly report the $130 million upfront cash payments from Genzyme in its GAAP financial payments. After reviewing the facts and circumstances associated with the multiple elements of the agreement with outside consultants and our auditors, we have concluded that the payment will be recognized in revenue over the period of the longest deliverable. Therefore, for GAAP purposes, we will defer the recognition of the revenue evenly over 39 months or $40 million annually, even though the $130 million upfront payment is guaranteed to us.

Our loss from continuing operations for the fourth quarter was $11.9 million, compared to a loss from continuing operations of $23.6 million in the same quarter of the previous year. While the loss in the quarter was a result of our continuous spending in support of the advancement of the clinical trials, the results improved significantly compared to the previous year as we were able to offset spending with increased revenues while decreasing interest we incurred.

Interest expense was negligible during the fourth quarter of 2008 as we were able to fully extinguish our debt during the period, which we believe gives us an extremely favorable financial position heading into 2009. We entered the year with no debt.

We continue to have eight active clinical trials underway, with four of these in Phase III. During the quarter, spending on the DoD trial continues to wrap up over prior quarters, but this cost is recovered through the Department of Defense contract which is reported as revenue.

Total R&D expenditures for the quarter were $15.6 million which is down from $17.4 million in the comparable quarter of 2007. Q4 R&D spending temporarily declined due to finalization of enrolment of our steroid-refractory GvHD and COPD clinical trials.

General and administrative expenses for the quarter were $2.3 million compared to $1.8 million in the fourth quarter of last year. We reported a small loss from operations of discontinued operations, a $0.7 million for the quarter, primarily due to outsourcing a portion of our Osteocel production volume to a contract manufacturer.

Our net loss for the quarter was $7.8 million compared to a net loss of $21.6 million in the comparable period of 2007. EPS for the quarter was a loss of $0.24, was calculated using 32.3 million basic and diluted common shares.

As for the full year, revenues were $10 million in 2008 compared to $2 million in the previous year. Again, the year-over-year increase was primarily the result of fees recognized from Genzyme and the DoD contract. Loss from continuing operations for the year were $69.4 million in 2008 compared to $57.9 million in the previous year.

With the interest [ph] being the result of the R&D spending, primarily the increase in number of Phase III clinical trials, total R&D expenses increased to $69.9 million from $47.1 million in 2007. General and administrative expenses for 2008 were $8.6 million, compared to $6.1 million last year. The year-over-year increase was primarily due to increased legal costs, increased personnel, costs in support of our expanded operations during the year.

Including the $5 million milestone payment received from NuVasive during the quarter, we have recognized a total gain on sale of the Osteocel product line of $30.4 million; in addition to earning from that unit $5.5 million for the year. Osteocel product line had earnings of $4 million in 2007.

Due to these factors, our net loss was $33.5 million or $1.05 per share in 2008, compared to a net loss of $53.6 million or $1.89 per share in 2007. EPS was calculated on 31.9 million basic and diluted common shares in 2008 and 28.5 million shares in 2007. For the year, net cash provided by continuing operations was breakeven, compared to cash used by operations of $47.3 million in the prior year.

Thank you. Randy, I will turn the call back to you.

Randall Mills

Thanks, Rich. Osiris has really hit its stride. Listen to some of these numbers. We now have over 200 centers around the world treating patients with our products. In 2008, we treated nearly 600 patients in our clinical programs. And on average, we are now treating over 10 patients per week. This high level of execution has translated into real value for the company. Up 60%, Osiris was in the top 1% of all 3,200 companies listed on the NASDAQ last year. Osiris is the third-best performing biotechnology or pharmaceutical IPO in the past three years and the increase in valuation of our company over the past five years has been even more dramatic.

I'd now like to take a moment to share with our top priorities for 2009. First, we will work to complete and close out our two stand-alone pivotal trials in GvHD; either one of which would be sufficient for registration. Next, we will work to complete and submit our BLA for Prochymal as expeditiously as possible. And third, we are going to work to complete enrolment of our Phase III trial for biologics-resistant Crohn's Disease. In addition to these efforts, we will continue to build out our robust product pipeline, with teams actively advancing clinical programs in acute radiation syndrome, COPD, type I diabetes, acute MI, and osteoarthritis.

Because of the efforts of the entire Osiris team, 2008 was a great year for the company. But 2008 is over and we must now work to make 2009 even better. Thank you for listening. Now, we'll turn the call back over to the operator and take your questions.

Question-and-Answer Session

Operator

(Operator instructions) We'll go first to Bill Tanner with Leerink Swann.

Bill Tanner – Leerink Swann

Thanks. Randy, just a few questions I guess on the Prochymal programs. First on the GvHD, can you just maybe put a little bit more detail on the anticipated calendar? I think it was last year that you guys mentioned potentially to start rolling BLA submission, perhaps in the first quarter and then complete the final module, obviously, after the last patient has gone off reg in the third quarter. So just maybe a little bit more detail on that. And then secondly, you also mentioned that this company had been in discussions with the FDA about broadening the expanded access program for adults, just curious, an update on that.

Randall Mills

So, with regards to Graft-versus-Host Disease, there are a couple of key points. So, you can expect an announcement in the first quarter, this quarter, about our submission of the first module of the Biological License Application. As you mentioned, that's going to occur under a rolling submission so, as modules are completed, they will go into FDA and they'll go into FDA without delay. We have been in constant communication with the Food and Drug Administration and they have told us that they are very interested in providing us as close to real-time feedback on those submissions. So we're really excited about that level of cooperation that we're getting.

With regards to timing, the last patient out of the first Phase III trial for steroid-refractory GvHD, which will be the first one we register off of, is right now scheduled for May 29. Once that last patient is out, there will be a process in which we will need to lock down the data at all the different sites. We enrolled patients in over 70 sites around the world, so be patient as we make sure we make sure we get the data locked down correctly.

Obviously, we're interested in doing this quickly, but most importantly, we're interested in doing it correctly. We've come now very far, 17 years, and we do not want to trip over the goal line. So, we're going to do what it takes to responsibly lock down that data as quickly as we can but, as I said, with emphasis on quality. I can't give you an exact time on how long that's going to take. I can just assure you it'll be as quick as we can do in a quality fashion. Once that's done, that will make for the final module of the Biological License Application in which that will go in, so it'll be sometime after May 29. It won't be right away. It takes a long time to – generally speaking, it takes a long time, several months, to lock a trial database of that size and particularly, with that many sites, but it'll be as quick as possible. After it goes in to the Food and Drug Administration, we really are on their clock. We will start the process by – along with the last module, will be the formal request for expedited priority review. We anticipate getting that, but that's not something that we can specifically ask for until the last module is in. If we get that, we would expect a review time of six months or less.

With regards to the second question was the expanded access program for Graft-versus-Host Disease. Where we stand with that right now is we started with pediatric approval in May of 2008, which was really a phenomenal event by the Food and Drug Administration. We've actually operationalized that program and continue to treat patients. In December, the Canadian authorities gave us a similar approval to treat children with steroid-refractory Graft-versus-Host Disease throughout Canada. And then, in late December and early January, the FDA came back and gave us – increased the scope of our expanded access program in the United States to include adult patients. And so we are in the process of operationalizing the expanded access program for adults. It takes a little bit of time to operationalize an expanded access program across the United States, but we're doing that as efficiently as we can and obviously trying to balance the needs of the children who were first in the expanded access program, our other clinical trials, as well as the needs of the GvHD patients.

So, that's an update on where we are there. We're really pleased though with the cooperation that we've been getting from the Food and Drug Administration, about making sure patients have access to this therapy during the regulatory review process.

Bill Tanner – Leerink Swann

And then, Randy, just on the broadened Prochymal for Crohn's, just on the 603 trial, any anticipated or the anticipation of data from that and can you provide any update on enrolment in the 610 [ph] the extension trial.

Randall Mills

So, we don't give specific numbers on enrolment. What I can tell you about Crohn's disease is from our standpoint, it's a very important program. Genzyme believes it is a very important program; we are continuing to enroll that. I just can't, at this time, give a data on when that trial is going to enroll. The readout from the 603 trial, the induction trial, is a 28-day endpoint, so data comes relatively quickly after enrolment is complete. When that trial is enrolled, I promise you, we will let you know as soon as that takes place and know it's a top priority at Osiris. But, giving guidance on trial enrolment is a fool's game, I've learned, and so we're going to avoid doing that. But we're working as hard as we can and we're obviously getting quite good at enrolling clinical trials and we're confident that'll take place throughout 2009.

Bill Tanner – Leerink Swann

Okay. Thanks very much.

Operator

We'll go next to Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hey. Good morning, everyone. And congratulations, Randy, on a good year and share price move in '08, and really looking forward to the Phase III data later this year. I had a question regarding the agreement with the FDA. I know that stem cell, obviously, therapeutic is a very new area, but could you give us a little bit more color on the key points of debate that it was important to characterize this as an agreement with the FDA, perhaps even the characterization procedure that you were focused on?

Randall Mills

Charlie, do you mean with our regards to our pre-BLA meeting with FDA?

Charles Duncan – JMP Securities

Yes.

Randall Mills

Okay. So, we actually held our pre-BLA meeting with FDA in late 2008, and one of the reasons that we didn't make the announcement until early 2009 was we wanted to make sure that we fully understood and were in agreement with exactly what took place at that meeting. That formally takes place with the Food and Drug Administration through the receipt of the minutes from the meeting. And so, we obviously submitted a pre-briefing document to the FDA, which were quite extensive in all of the different topics that we were going to cover in our Biological License Application.

Really important for us in that meeting was the timing and the concept of the submission, particularly the Integrated Summary of Safety, what that was going to look like, how many patients that was going to include, our statistical analysis plan for the data -- obviously, the primary endpoint, something we have agreed upon with the FDA prior to the initiation of the trial. And a big part of the meeting was devoted towards CMC, process validation, what process validation and stability data would be submitted as part of that package. Obviously we, from a CMC standpoint, have been progressing down that road for a long time, having needed to lock down the process prior to entering the pivotal trial. But we really had a good, robust discussion around what the FDA expected to see as part of the CMC component, which is one of the larger variables going into a Biological License Application for a stem cell product.

Obviously, the clinical portion is relatively straightforward; but when you talk about manufacturing the actual therapeutic agent, what the stability program for that's going to look like, what the process validation data needs to look like, reaffirming agreement on lot [ph] release criteria and the like, those were all very important issues for us to make sure we had clarity with the FDA on.

And ultimately, that's what we did and when we received – we had a good conversation. We resolved any potential questions that we had, which is what the meeting is for, and then we waited for the FDA to send us back the meeting minutes from that to make sure we heard everything correctly. After reviewing those minutes, we were in fact confident that we were on the same page as the FDA and that we have a very good understanding of what our Biological License Application is going to look like, both from timing standpoint as well as content. That was the meeting. It was a great meeting with the FDA. It was typical of the relationship we have developed with the agency over the last 10 years of us actually treating human patients and we just continue to look forward to work with them.

Charles Duncan – JMP Securities

And I guess implicit on your guidance with regard to being able to start the rolling submission within a short amount of time, it would seem that there isn't any additional characterization procedures that you need to go through than what you have been. Is that correct? Or do you think that there is additional analytical work that needs to define, for example, the difference between a pool versus an individual donor composition for each dose?

Randall Mills

Yes. We are definitely not changing formulation or composition at this stage of the game. When we entered the Phase III pivotal program, a requirement to enter actually a pivotal program from the FDA is to make sure that you have the important sections of CMC locked down and the reason for that is the product that you test in Phase III and specifically pivotal trial, the FDA wants to make sure it's going to be representative of the product that's released into commerce. So because of that, we had to have those questions locked down. So this is not a time for us to change formulation. This is not a time for us to really do anything new. And so, no, we don't have any additional characterization that we're doing. We certainly don't have any formulation changes that we're doing. It's really, at this point, simply a matter of formatting, preparing the CMC portion, and then as our real-time stability program continues to march along, collecting more and more of that data for shelf life extensions.

Charles Duncan – JMP Securities

And then, just two quick housekeeping questions. One is, can you remind us of the publication strategy? Do you have any manuscripts that are currently pending peer review or do you think that you'll wait to provide those with the final data from the Phase IIIs?

Randall Mills

Yes. So, we have a number of really interesting clinical trials that we have and that we're collecting from -- obviously, the cardiac trial, which we put out some data on; our previous GvHD trials. We have manuscripts for those and we have those actually for a number of those trials, prepared and currently in review. So, without giving any specific guidance on exactly what to expect when, I think it's safe to assume that we currently have a number of different publications in progress and we would expect to see those come out throughout the year.

Charles Duncan – JMP Securities

Sure, that makes sense. And one quick one for Rich, going to the revenue recognition of the Genzyme deal, when that was announced and recently you characterized it as a non-contingent and I understand that auditors are typically pretty conservative. But, could you help us understand what the difference between the terms which are non-contingent in the opinion of the auditors? Obviously you got to get the work done to recognize the revenue, but what are the risks in getting that done?

Randall Mills

I'll let Rich answer that in a second, but understand that the way we're accounting for revenue recognition actually has really nothing to do with the contingency of the payment. We are recognizing – we are accounting for all $130 million of that payment. We're just recognizing the revenue over a period of time and that's consistent with the way Genzyme is accounting for. They have actually taken all $130 million of that in this last quarter. So, the fact that we're accounting for that over a period of time actually has nothing to do with the contingency. But I know, Rich, you will have –?

Rich Hunt

Sure, yes. Thanks, Randy. Hey, Charles, it's Rich here. The $130 million is a non-contingent payment. As I mentioned earlier, we've already received $75 million and we'll be receiving the remaining $55 million in July of this year. But unfortunately, under GAAP, we have to recognize the payment over the period of the longest deliverable and you probably have had access to parts of the contract. There are some things that we need to do. The payment that we'll receive, $130 million, is not predicated on achieving those. But, under GAAP, we have to recognize it over the period of the effort and that being about 39 months for our longest trial that's underway today.

Charles Duncan – JMP Securities

Okay. And so, in the press release, you said that in '09 and '10, it sounds like you're going to recognize about $80 million altogether. That, to me, leaves about $50 million in remaining milestones. Are those really commercial stage milestones?

Rich Hunt

No, not at all. Let me be more clear about that. In my script, I mentioned that we would be recognizing revenue at about $40 million per year on a straight-line basis.

Charles Duncan – JMP Securities

Yes.

Rich Hunt

So we'll recognize, under our current estimate, $40 million in 2009, $40 million in 2010, $40 million in 2011, and the residual in 2012.

Charles Duncan – JMP Securities

Okay, good. Thank you.

Operator

Your next question comes from Edward Tenthoff with Piper Jaffray.

Edward Tenthoff – Piper Jaffray

Great, thanks. Congrats on just a really fantastic year and as you said, I'm excited to see the data come in this year and the filings. It's going to be a really exciting '09. Two quick questions, if I may. I think next on deck, we're going to be getting the COPD data. Can you just remind us what that study looks like and go into a little bit of detail about what you've seen in the past that initiated evaluation in that indication? And then secondly, maybe from a more 30,000-foot view, you mentioned in your remarks the excitement about stem cells recently and certainly, with a new administration down in DC, what would the currently hypothesized stem cell changes actually mean to Osiris? And just put that in perspective for us, if you would.

Randall Mills

Sure. So first, COPD – yes, next on deck actually should be Phase II data in COPD. That was a trial that we enrolled very promptly actually over the period of I think about 110 days; we enrolled 62 patients in that trial. No shortage of interest from COPD patients to participate in the stem cell trial for sure. The trial of 62 patients; it is a double-blind, placebo-controlled trial. It's randomized 1:1 placebo to active agent. The patients received a total of four infusions spaced one month apart and they're evaluated during the course of therapy for improvement in pulmonary functions, specifically FEV1 % predicted, which is a measure of pulmonary function typically used in patients with COPD. Our interest in going into COPD really stems back from a larger interest in going into pulmonary diseases and lung diseases in general. And COPD was a good place for us to start because the first we would need to do is demonstrate safety in conditions where pulmonary compromise was an issue. And what I mean – and so we dived into that a little bit deeper.

Our dose-limiting toxicity of Prochymal is actually pulmonary congestion leading to something that looks a lot like right-sided heart failure. And that's because if you give the drug in very high doses, to be fair, we have never seen this clinically -- but pre-clinically, when we forced the dose, in very high doses, we will actually cause the cells to clog up in the lungs and that happens at a dose that's around 30 times higher than our active, effective clinical doses. So we have a good margin of safety.

Well, the first thing we wanted to do is make sure, if we're going to go after lung diseases, that we can do this safely in a patient population with compromised lung function and COPD enabled us to do that efficiently. Another reason we like COPD was data we got from the cardiac trial. In that trial, as you recall, that trial was also a double-blind, placebo-controlled – in that trial, patients that received Prochymal had a statistically significant improvement in FEV1, the same outcome we're looking at here, pulmonary function, over placebo; and that affect was maintained through the six-month evaluation period when we measured lung function. What we liked even further was when we stratified the patients, because that was across all patients in the trial -- when we stratified the patients by those entering with compromised pulmonary function and decreased FEV1, the effect is doubled in size and it was quite clinically relevant to the patients.

And so, that certainly got us excited about going into lung diseases and COPD being the first step there because it is one we have the most information about. But in general, we're evaluating the technology and we're interested in evaluating the technology across a range of lung diseases, including things like interstitial pulmonary fibrosis or IPF, acute lung injury, COPD. There might even be a potential use in lung transplant patient, obviously, given some of the effects we're seeing in Graft-versus-Host Disease. So we just needed a good basis to do that and COPD provided us that opportunity to do that efficiently and quickly; and obviously, it's a huge market. So if that trial works well for COPD that would be a homerun for the company, no doubt. But the primary interest in that trial is to establish a foothold across a number of different lung diseases.

With regards to your question regarding change in the administration, I think here is actually a situation where there's far more hype than there is substance. Certainly, if we would not be acting responsibly, if we predicated any part of our strategy on something that we expected the Federal Government to do – and so, therefore, we don't. Our go forward strategy is based on things that we intend to accomplish on our own. At a high level, it certainly has increased the visibility into the stem cell sector. There are certainly a lot of people talking about it. The number of inquiries we get from pharmaceutical companies has increased, but the actual effects of any legislation on us, we don't anticipate to be significant over the short-term.

Edward Tenthoff – Piper Jaffray

Makes sense. Then one last question if I may. Just on the ARS program, what should we be expecting as milestones there this year? What kind of revenues could you recognize in 2009? And are we getting close to potential procurement?

Randall Mills

So first of all, the thing that all of the analysts hate to hear from us is we don't get forward-looking guidance, financial guidance. But, we would largely expect 2009 to be a continued year of development in that program. We are actively working on a number of different initiatives there alongside the Department of Defense. And actually, if you recall, that was our first program with Genzyme before even our landmark deal. And so, we're working diligently with Genzyme and the Department of Defense to move that program on, and we're having clear evidence of success. So, I think you can look forward to updates from us in that program as the year progresses. They are going to be, I would say, more on the developmental standpoint in ARS in 2009. But, as that program continues to roll out, I think the picture as far as acquisition goes will become clearer later.

Edward Tenthoff – Piper Jaffray

Okay, very helpful.

Operator

(Operator instructions) We'll go next to Eun Yang with Jefferies & Co.

Eun Yang – Jefferies & Co.

Thanks very much. Regarding the first Phase III study for GvHD, the steroid-refractory, can you talk about the kind of patient population in the trial now that the trial's patient enrolment has been completed? Most of the patients, is they're graded 3 or 4, and if you can comment on that one, then I'd like to ask you what's the complete response rate that you would see historically in that specific patient population?

Randall Mills

So, with regards to the patient demographics between B, C, and D – I'm actually asking Lode here if he knows what – so in our trial, we would expect or actually in this trial, we enrolled around 60% grades C, D, and 40% grades B. And with regards to placebo response rates in that trial for our endpoint, which is a pretty difficult endpoint, we would expect that to be some more or less than 25%.

Eun Yang – Jefferies & Co.

Okay. And then the study is – how is the study designed, like Prochymal arm? Is it designed to show like 25% improvement in terms of complete response over placebo group?

Randall Mills

Yes. The trial is designed to see a 20-point improvement over placebo.

Eun Yang – Jefferies & Co.

Okay. And then second question is on the second trial, the (inaudible) patients, is the data or is that coming out of third quarter and fourth quarter timeframe?

Randall Mills

Yes. So it goes back to the same thing that I mentioned earlier. I think when Bill asked the question about predicting trial enrolment. That trial is still in rolling right now. It is – we're coming out to the end of that trial. But once that trial is completely enrolled, we'll be able to give you a more accurate forecast of when the last patients come out. But it is moving along nicely.

Eun Yang – Jefferies & Co.

So would it be possible that the final deal will although include both the study, data from both the studies?

Randall Mills

It's absolutely possible that that happens. It's not necessary that that happens, but if there isn't a significant change in enrolment rate that takes place in the acute GvHD trial, both sets of data would be available nearly simultaneously. And so, we would obviously include that would be a very robust package for GvHD going into FDA, so we would include both sets of data in the BLA.

Eun Yang – Jefferies & Co.

Thank you.

Operator

We'll take another question from Edward Tenthoff with Piper Jaffray.

Edward Tenthoff – Piper Jaffray

Great. Thank you very much. Just a quick follow up. I know the focus hasn't been as much on the Chondrogen side, but what are the next steps there? I know that Genzyme through the agreement has an option on Chondrogen. So just kind of remind us what that option is based on and what your plans are. I mean, clearly you have a lot of balls up in the air here, so I applaud your focus; but just making sure I understand what's going on with Chondrogen.

Randall Mills

So the first thing to understand about our focus and the way we're actually able to balance this, our primary objectives are what I laid out. Completing enrolment and completing the two GvHD trials, filing the PLA, finishing the Crohn's trial. Beyond that though, we do have a number of different programs which are underway, one of which is we're in the early stages of initiating a Phase II trial in osteoarthritis. We have approval from the FDA to do that. It's 180-patient trial that will obviously be placebo controlled. With regards to Genzyme's option on that, they have an option to opt in after the one year data from that trial.

Edward Tenthoff – Piper Jaffray

That's helpful. Thank you.

Randall Mills

Great.

Operator

We'll take another question from Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Thanks guys for taking my follow up. I have a question regarding the statistical analysis plan that you discussed during the pre-BLA. I know that probably CMC dominated the discussion but could you give us some color on the stance for the trials for GvHD? Does your plan accommodate an evaluation of efficacy by grade or organ involvement?

Randall Mills

So, as part of our secondary endpoints in this trial, we have, as our statistical analysis plan, evaluation by grade, evaluation by organ system. There is a number of different ways that it's looked at and that was all discussed with FDA. But just to be perfectly clear, the primary endpoints of the trial haven't changed. And that obviously, the statistical plan of that was discussed, and both we and FDA believe that statistical plan for the primary endpoint to be appropriate.

Charles Duncan – JMP Securities

Sure. And do you believe that the FDA recognizes those different secondary endpoints as meaningful patient populations that can be defined in the real-world setting?

Randall Mills

The FDA has done something remarkable here with regards to our reviewer that we have found to be very helpful. They recently – when I say recently, it's actually probably been more than a year now, but it seems recent – brought in a reviewer who is a well-recognized expert in bone marrow transplantation and a bone marrow transplant physician herself, who has spent a lot of time and a lot of her clinical practice treating patients with GvHD. That is our lead medical reviewer for our BLA on the GvHD trial. They absolutely have an understanding of the medical necessity of GvHD in very, very clear terms.

One of the interesting things that's coming up in May is the FDA is actually holding a workshop on defining clinically significant or clinically relevant endpoints in Graft-versus-Host Disease specifically, and it's being put on, I believe, by actually the Center of Biologics, our center, just to give you an example of how interested the FDA is and really understanding and making sure they fully have a handle on this application.

Charles Duncan – JMP Securities

And that makes a lot of sense and it seems to be a risk lower for the program. Randy, can you help us understand a little bit more about the expanded access? You said that you need to get that running. If I can ask you about the supply of Prochymal, is that a consideration with the expanded access?

Randall Mills

It is because of the demand we've seen.

Charles Duncan – JMP Securities

Yes.

Randall Mills

So, our expanded access program, both of them – actually, all three of them came to us sooner than we expected. We didn't frankly expect the FDA to tell us in May of last year to go ahead and start treating children while we were still enrolling the Phase III program. We didn't expect the demand in that program to be as significant as it was, and then we didn't expect to get as rapid approval for the adult trial. So, because – we have no problem mass producing quantities of Prochymal, but it does take a fair amount of time to spool that up.

Charles Duncan – JMP Securities

Sure.

Randall Mills

And it's not like a light switch that we can just turn on and automatically have more products. It takes a certain amount of time, so we're doing that right now. We are increasing our production rates of Prochymal to be able to meet that demand through the second half of the year. I don't think it's going to be an issue in the first half of the year. We just have to make sure that we carefully balance and prioritize the needs of the different clinical programs, so it's something we're watching. We obviously never want to stall out a clinical program that's underway. On the other hand, we need to make sure that we treat the sickest patients first.

Charles Duncan – JMP Securities

Those are good problems to have. Congrats on a great year, looking forward to this one.

Randall Mills

Thanks, Charles.

Operator

And we'll take our next question from Jason Napodano with Zacks.

Jason Napodano – Zacks

Hi, guys. Thanks for taking the questions.

Randall Mills

Sure, Jason.

Jason Napodano – Zacks

I'm just wondering if you could go over some of the milestones and recognition that we might see in the remainder of the year. I know that there is some potential, I think, maybe $30 million or $32 million from Osteocel still and there is a potential milestone from Genzyme, if the Crohn's trial was positive. Can you go over when we might see those, and then how you might go about accounting for that?

Randall Mills

Well, I'll let Rich talk specifically on how we'll account for different milestones, obviously, if and when that happens. We do fully expect to earn, actually, $45 million in milestone payments from NuVasive this year and Rich can talk about the accounting for that. Beyond that, with regards to Genzyme, it's hard for me to give timing of the milestones without having the trial enrolment complete, but the first, what would appear to be the first major milestone that we would run into would be, as you said, the milestone for Crohn's data in our Phase III trial for Crohn's. That actually has two potential opportunities for us to earn a $50 million milestone payment. One of them would be if the trial demonstrates that Prochymal can do a 100-point drop in Crohn's Disease Activity Index.

The other opportunity is if the trial demonstrates that it can put a significant portion of the patients into clinical remission, which is having a CDAI of less than 150. Either one of those endpoints will trigger the $50 million milestone payment. In addition to that, in the relative near-term, without being able to give you a precise timing, we have a $25 million milestone payment that's triggered upon US approval and we have a $25 – and this is for GvHD, we have a $25 million milestone payment that's triggered upon the first European approval for Graft-versus-Host Disease. So, those are our relatively near-term milestone opportunities as well.

Rich Hunt

This is Rich here. Getting to the accounting for the $45 million that we will be receiving in 2009 for Osteocel that will be recognized into income upon receipt. In the case of the $45 million that is remaining as, that will be cash, but we will have some minor assets that we'll be transferring over, so there will be a net income effect, and we'll recognize that all as income this year. And as Randy mentioned, the Crohn's -- and the $50 million Crohn's milestone, if and when achieved, as well as the two GvHD milestones at $25 million each, those will be recognized into income upon receipt.

Jason Napodano – Zacks

Okay. So not amortized over any sort of life of the agreement or –?

Rich Hunt

Correct.

Jason Napodano – Zacks

Okay. Thank you.

Operator

That does conclude today's question-and-answer session. At this time, I will turn the conference back over to Dr. Mills for any additional or closing comments.

Randall Mills

Hey, guys. Thanks for spending the morning with us. I hope everyone has a great day. So this will conclude our fourth quarter and full year 2008 conference call.

Operator

Again, that does conclude today's conference call. We thank you for your participation.

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Source: Osiris Therapeutics, Inc. Q4 2008 Earnings Call Transcript
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