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Charles Randal Mills - Chief Executive Officer, President and Director

Philip R. Jacoby - Chief Financial Officer, Treasurer and Corporate Secretary


Edward A. Tenthoff - Piper Jaffray Companies, Research Division

William J. Plovanic - Canaccord Genuity, Research Division

Eun K. Yang - Jefferies LLC, Research Division

Osiris Therapeutics (OSIR) Q3 2013 Earnings Call November 1, 2013 9:00 AM ET


Good morning, everyone. Welcome to the Osiris Therapeutics Third Quarter 2013 Earnings Conference Call.

Before we begin, I would like to remind everyone that this conference 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 conference over to Dr. C Randal Mills, President and CEO of Osiris Therapeutics. Please go ahead, sir.

Charles Randal Mills

Thank you, guys, very much, and welcome to our third quarter 2013 conference call, we're obviously very excited today. A big day for the company as we made a somewhat remarkable transformation from the concept of developing stem cell products into turning them into a commercial success and reality.

Recent highlights we have, and I'm going to go into details, then we'll go into detail on more of these, but for the quarter, revenue up, 220%; gross margin, up 254% from the third quarter. Obviously, fantastic results being delivered from the commercial team.

We are now a profitable and cash flow positive company from continuing operations. I'll talk more about that as that has a lot to do with the strategic decision we made around Prochymal earlier in the month.

We are very pleased with the initial results from the Grafix DFU study, which showed overwhelming efficacy. I'm also going to show you the follow-up results, because those were top line. And I'll show you the follow up results, which were presented by Dr. Lavery, earlier in the quarter. I'll give you a hint, all of the primary and secondary endpoints that we're able to reach statistical significance, reached statistical significance. So we're very thrilled about how Grafix is performing.

During the quarter, we reached a favorable agreement with the Food and Drug Administration on the regulatory status of our biosurgery products, which provides now, complete clarity and takes out uncertainty on how those products are regulated going forward. We are very pleased with that agreement. And very happy to have that uncertainty removed from our business.

We signed an agreement in at the end of the quarter, the beginning of -- October actually, in the beginning of October for Prochymal with Mesoblast, which is worth up to $100 million in royalties, or $100 million in payments in milestones, and still provides us with royalties on the technology going forward. I'll talk more about that going on as well. Significant to that, the elimination of development cost, which were for the trailing 12 months, a little over $12 million.

All of this together, gives us pro forma cash, investments available for sale and receivables of about $82 million, so a very strong balance sheet and no debt. When you put that on top of a company that's now transitioned over to cash flow positive from operations, continuing operation, obviously, this puts us in a tremendous position of strength.

Looking at how the product sales have done for the quarter, this graph really hardly could get prettier. We now have 10 consecutive quarters of revenue growth, with this last quarter ending up just short of $7 million.

When we look at it over the previous quarter, the second quarter of 2013 and from a year ago, as obviously, as we mentioned, up 220% for the year, we're up 30% in product revenue from the quarter, which is very, very strong revenue growth quarter-over-quarter continuing strong growth.

Gross profit, which is a reflection of not just the increased volumes, but the work we're doing internally to keep our cost down, particularly our production cost down as we go through this process. Gross profit rose to $5 million, which is a 32% quarter-over-quarter sequential increase and 257% increase over to the third quarter of 2012. And you can see the improvement in the gross margin from a year ago, 66%; last quarter, 72%, and now all the way up to 73%, so from a financial standpoint, we're very pleased with the performance that we're seeing.

Looking into -- just could add a little bit more color around the transaction that we did for Prochymal, at the beginning of October. Mesoblast has acquired the assets related to Prochymal, based to the Prochymal, business culture, expanded culture MSC business. For this, we received $50 million in consideration for closing an asset delivery. We also have an additional $50 million in payments 4 that are based on milestones. Some of those milestones are regulatory based, so for example, approval in the United States, approval in the EMEA, some of them are clinical base, there's a $10 million milestone for hitting the primary endpoint in the Crohn's trial, some of them are execution based or essentially negligible. So for example this $10 million milestone payment for simply completing or discontinuing enrollment in the current trial. So we're pleased about the future upside this agreement provides us.

Mesoblast has assumed all of the future development costs related to this business, which is one of the reasons that it has such a significant effect on our P&L. We preserve upside by having the royalties on product sales that are related to the technology. And most importantly, we retained a license to all of the IP necessary for us to run our continuing operations.

So what does this mean to us? So with regard, we had a couple of things that we wanted to accomplish with this agreement. A couple of months ago, we actually, couple of quarters ago, I think, we actually stated, we had a slide where we stated our objectives from a Prochymal agreement. And I want to sort of point out how well this agreement was able to accomplish those.

First, we significantly improved our P&L and cash flow statements. So our continuing operations are now profitable and cash flow positive. This is largely to do with Prochymal expense for the last 12 months, was $12.5 million. Being able to eliminate that expense going forward, as we've done, obviously, significantly improves the P&L and the cash flow statements. We have also significantly strengthened our balance sheet. So we have now pro forma cash, investments and receivable of approximately $82 million. When you put that in the context of a company that's profitable and cash flow positive, we are now really driving from a position of strength.

We also preserved upside though, so we have upside potential in future milestones, like I discussed earlier, $10 million from Crohn's enrollment, which is really more of an inevitability, other milestone payments based on regulatory and clinical success. And then royalties on sales of the technology that's the technology is used to get a product on the market. So if we've been able to preserve our upside with regards to these products as well.

And then lastly, keeping all the rights to the intellectual property needs to run our continuing in future businesses is -- was obviously, key to this. So we're very excited about this agreement. We think we were able to accomplish the objectives we set out as we had stated. And look forward to working with Mesoblast because obviously, our interests are both aligned in making Prochymal as great a commercial success as it could possibly be. With that said, I'm going to turn the call over now to Phil, who's going to go through certain aspects of our financial performance for the quarter. Phil?

Philip R. Jacoby

Thanks, Randy. As you see in the press release, we are now using the discontinued operations presentation for our financial statement. This is required by generally accepted accounting principles of the Unites States, but I think it does provide a much better focus on what our core business really is.

As Randy mentioned, the third quarter revenue from product distribution was $6.9 million, that's a 30% increase quarter-over-quarter and a 220% increase over the third quarter of the prior year. We are experiencing revenue growth in all 3 of our Biosurgery products, and we're continuing to invest in our direct sales force, while monitoring the profitability of each marketing representative.

On the gross margin side, that increased in the third quarter up to 73%, and that's primarily the result of increased utilization of our manufacturer facilities.

We continue to operate our facilities using a single shift, we have plenty of room for additional growth without making substantial capital investments in facilities. However, we are investing in the IT systems that we use for both manufacturing operations and finance to try to get ahead of the curve there.

We have generated positive cash flow from continuing operations for the 9 months ended September 2013, of $1.8 million. And this compares to approximately $100,000, positive cash flow from continuing operations for the same period of fiscal 2012.

As Randy said, the balance sheet continues to be very strong, we're free of all debt since 2008. Our cash investments and receivables at the end of the third quarter of this year, were slightly higher than they were at the end of the second quarter of this year. This is in part, as a result to our profitable operations, but also resulting from $2 million we received during the quarter as the deposit of the Prochymal sale. And more than $2 million we realized from the exercise of employee stock options.

Our accounts receivable and inventory at the end of the third quarter of this year was $8.4 million, which is only slightly higher than the $8.1 million we reported at the end of the second quarter of this year. And that's despite of that 30% increase in revenue.

Our bad debts remain negligible, our accounts receivable aging in good shape but we're making progress on reducing the number of day sales outstanding. And we continue to focus on profit billing and collection efforts.

The Biosurgery R&D is spending with approximately $900,000 in both the second and third fiscal quarters of this year. And we're now gearing up for additional clinical trial for Grafix into treating venous leg ulcers.

In our SG&A spending that we're experiencing intentional and a very substantial increases on our selling and marketing cost related to our commercialization efforts.

The third quarter 2013 SG&A was about $4 million, this compares to a little under $1 million in the third quarter of 2012. This cost may increase further as our continuing operations will now have to absorb 100% of the cost of our facilities and infrastructure that were previously shared by Biosurgery, as well as Prochymal.

Some of these cost pressure should be offset by the increasing productivity of our direct sales force, but we also continue to invest in expanding the direct sales force and a payback on this investment is typically approximately 1 year.

We reported a loss from Prochymal operations of $8.3 million during the first 9 months of this fiscal year. All future development cost of Prochymal has ceased, concurrent with entering into the purchase agreement.

During the third quarter of this fiscal year, we issued approximately 833,000 shares of stock from the exercise of employee stock options and the net exercise of the outstanding warrant. This generated approximately $2.4 million in cash during this quarter, and we presently do not have any warrants outstanding. We currently have 33.8 million shares of common stock outstanding.

We've reported a net loss of $1.7 million in the third quarter of fiscal 2013, all from the Prochymal operations. This compares to a net loss of $2.9 million in the third quarter of fiscal 2012. This translates into a net loss of $0.05 a share for the third quarter of this year, and a net loss of $0.09 a share in the third quarter of the prior year.

In the fourth quarter of this year, we're recording approximately $49 million pretax gain from the sale of Prochymal assets. This is composed of a $50 million of initial consideration from the sale, net of the expenses of the transaction and minor amounts, associated with the tangible assets of Prochymal. The gain does not include any of the contingent consideration, which could be as high as another $50 million. We will recognize the contingent consideration, as well as any royalties that are provided for in the agreement as part of the game if and when the individual milestones are achieved.

Also in connection with the Prochymal sale, we have reviewed the realizability of our deferred tax assets that we will be recognizing approximately $13.6 million of evaluation allowance release, with a reduce in the amount of income taxes that we would have otherwise have to pay. We presently have approximately $90 million in deferred tax asset that at the end of third quarter, we're fully reserved.

On a pro forma basis, our cash, investment and receivables at the end of the third quarter resulting from the Prochymal sale, would have been approximately $82 million. Randy?

Charles Randal Mills

Great, thank you, Phil. And now let's turn to a little bit more color on the products we have, and a little bit of direction of where we're going from here. So we currently have 4 products on the market. Ovation OS is our newest it replaces Prochymal, Grafix, Ovation and Cartiform. One of the things that I want to provide a little bit more clarity around there or for just the firm is our agreement that we reached with Food and Drug Administration.

One of the things which seem to be causing confusion is the order in which things occurred. So I want to make this first part very clear. We received an initial communication from the FDA in the form of an untitled letter. As a result of that, we've had conversations and discussions very productive and collaborative. They didn't take long to resolve. In fact, it was something like within 72 hours, we had reached an agreement in principle with the Food and Drug Administration. As part of that agreement, was that the FDA will have the opportunity to review any communication we made about the agreement prior to us making the agreement public. The way things worked out, and in quite unusual form, the government shut down the evening we reached this agreement, in principle, without FDA having the opportunity to review the press release before it went out. And so the agreement we had with the FDA was that we would not make anything public until they have the opportunity to review it. And so, on the 18th, when the Food and Drug Administration effectively started operating again, for this type of material, they were able to review the communications that we put out, commented on them and then we were able to release this.

Now, with regards to the agreement, itself. The first and most important aspect, is that the FDA affirmed that Grafix as one cover for the treatment of acute and chronic wounds is regulated solely as a tissue product under section 361 of the Public Health Service act. This includes chronic -- this includes diabetic foot ulcers. So like our chronic wounds, a diabetic foot ulcer is clearly a chronic wound and is included under what we we're able to market the product for. For clarity to, we are also and will, absolutely and use the clinical data that we have generated, and we'll continue to generate to market Grafix in the wound, in the chronic wound space and then specifically in the diabetic foot ulcer space. That has not changed and was not impacted as a result of this agreement. Another point I wish to make is that a biologic license application is not required for Grafix to remain on the market. The reason for this, is that the FDA is positioned now and this is contrary to what they wrote in their initial letter is that Grafix as a wound cover for the treatment of acute and chronic wound is solely regulated under section 361. So there is no regulatory risk associated with not getting a BLA for Grafix.

And I think that's the important part. One that I think, been misstated a time or 2. Second point, we are able to apply for BLA for enhanced label claims regarding the wound healing properties of Grafix. An example of this would be if we wanted to claim that there is an enhanced healing benefit to the prolonged secretion of certain growth factors or cytokines from cells contained within Grafix in order to make that claim, we would need a BLA.

That is something that we are very interested in doing. So we believe that there is a potential for significant product differentiation with regard to a BLA. Being able to make those claims. We think there is significant opportunity for sales outside the United States, once we have a BLA that are currently not available to us with a BLA, another important factor is the biologics license application or an approval creates a currency for that product which currently doesn't exist under the 8 CTP paradigm. So we are actively pursuing submission of our BLA for Grafix and we are doing that largely with the existing data we have both pre clinically and clinically.

And next point, Ovation is going to be replaced by Ovation OS but this is not going to occur until the end of next year. It was something we had in the plans earlier. We launched Ovation, it got picked up expensively in orthopedic market, but it wasn't ideal product. 40 orthopedic markets we believe we've corrected that with Ovation OS and think we have now have the premier stem cell product for the regeneration of bone tissue. It is important to note that Ovation OS is already registered with Food and Drug Administration and as the 361 tissue product.

The bottom line of this is prior to that agreement and then going into this agreement, there was regulatory uncertainty about how our products would be regulated going forward by the Food and Drug Administration. This agreement removes all of that uncertainty in a way that is favorable and completely acceptable to Osiris Therapeutics. So we are very pleased with this agreement.

Now turning on one of the things that I wanted to do and we talked -- I mentioned last time, we talked on a conference call, which was the conference call we had for the initial results of the Grafix trial in diabetic foot ulcers, those were top line results and there was going to be initial data coming. And so, I want to take you through the remainder of the data that we were able to get out of this trial and this is actually presented by Dr. Lavery, the end of September. At SAWC, out in Las Vegas. And it's pretty remarkable.

So as you recall, with regards to end points for the study, the primary endpoint was the proportion of patients who would achieve complete closure of their wound. This was the find of 100% reepithelialization period. This was confirmed by a blinded core lab. That did not know the assignments of the patients at the epithelialization that they we're seeing.

There are also a number of secondary endpoints that we were able to report on with the top line data. There were 3 that we were not able to completely report on, just because by virtue of it being top line data, we didn't receive all of the information.

The first was a portion of patients achieving a 50% reduction or greater in wound size by Day 28, so this is basically an indication of how fast the wounds are closing treatment versus control.

The second was wound recurrence after initial wound closure. So here, we're looking at -- if these wounds close, are they closing durably? Is the closure unacceptable? Or is it a weak closure that's prone to recurrence? And that's obviously, very important from a payer's standpoint, because if the wound closes, but then immediately reopens, the value to the payer isn't as high. And then the third thing that we promised to get back with you on was safety.

We did report in the top line data, that there was a significant reduction in adverse events in patients that were randomized to the Grafix arm. We did not have any clarity around why that was or what was driving it. We have that now. And so those things I'm going to share with you.

So first, just again, to reorient you the primary endpoint, initial complete closure rate, so 62% of the patients receiving Grafix had complete closure versus 21% in the control group, a relative improvement of 191% and the largest relative improvement ever demonstrated in a DFU trial with a multi-center controlled randomized study trial.

The another endpoint that we -- the secondary endpoint that we didn't report on last time, was wound closure velocity that is a 50% reduction in wound size in the first 28 days. Significantly higher in patients receiving Grafix versus patients receiving control.

The next one, very important. The durability of response. And so this is a proportion of patients whose wounds closed and remained closed during the 12-week follow-up. 52% of the patients had wounds that closed and stayed closed versus only 15% in the control group.

So this is telling us that we're not only getting rapid closure, but the quality of the closure is such that it's not subject to reopening. A 247% relative improvement in over control and a significant driver of cost. Obviously, a wound that remains closed, from a payer standpoint is a much better proposition that a wound that will immediately reopen, and therefore, require additional care.

Turning now to the safety. As we reported last time, there was a significant reduction in adverse events in patients receiving Grafix versus the control. We wanted to understand this better, and understand why. When we look at all of the adverse events that we received, with regards to the study, the vast -- by far the largest adverse events were infectious complications. And this doesn't really come as a surprise. If you have an open wound, that open wound is any time that wound is opened, it's subject to infection, which is like closing it is obviously so important.

So these are the adverse events by category, for all adverse events that were at least 5%. So you can get a good look there. But clearly, infection is what's driving this. So let me look specifically on how Prochymal did with regard or Grafix did with regards to wound infections. A significant reduction in with the number of wound infection. Actually, Grafix was able to reduce the number of wound infections in half, compared to the control arm. Wound infections is a single biggest driver of cost, in treating a patient with a diabetic foot ulcer. So obviously, very important, not just to the patient, but to the payer as well. We then went on and looked further and this one was really quite stunning at hospitalization. So patients that required hospitalization for a wound infection.

Grafix significantly reduced hospitalization in these patients. 2% of patients, or actually there was only1 patient that required hospitalization, randomized to the Grafix arm versus 15% of patients on the control arm. Hospitalizations are clearly at the highest end of cost generation in the treatment of wound care.

Okay. So to summarize here, the Protocol 302 is clearly demonstrated that with Grafix, we're able to close more wounds; we're able to close these wounds faster, with fewer treatments and then what we know today with fewer adverse events. And this is just all around better. This is better for the patient, this is better for the healthcare providers and importantly, this is important for the payers.

So moving forward, with regards to where we are going here from with regards to a pipeline. I presented this slide before, and I've talked on it. We have very specific criteria we use to guide our development decisions. They center around focusing our company on those things, which we think will drive the greatest long-term value for Osiris. There are 5 of them, one is, we have to have a real value proposition. Two, it has to be a very practical development pathway. As we talked numerous times, and you'll hear over and over again, reducing overall healthcare cost is now a mandatory requirement in our development programs. We have to be in meaningfully-sized markets.

And then lastly, we have to be able to have a technology, which we can generate favorable margins on and just frankly, make money on. If we're going to investing as much as we do in development of these products. So with that said, there are 4 things that I want to talk about with regards to development: The first is Cartiform. Cartiform patients are now reaching the one-year period from initial implantation. Keep in mind, these are some of the initial patients that were implanted with Cartiform had some of the most significant knee damage. There was essentially no option, patients other than receiving a total knee. All of the clinical feedback we've gotten on these patients has been very positive. They're returning to normal activity, they're experiencing significantly diminished pain and generally their quality of life has been improving.

More significantly, not one of these patients has gone on to require a total knee transplant, which is really what they were facing, when they received the Cartiform implantation. So right now, from where we stand, the clinical data we're getting back on Cartiform is incredibly encouraging.

Second, is the launch of Ovation OS. We're very excited about this product. We have a tremendous amount of preclinical data that had -- that shows significant differentiation in the orthopedics market. We think it's going to pick up a lot of the differences that we had or the deficiencies we had using regular Ovation for the treatment of orthopedic injuries and so we're very excited about the rollout of Ovation OS.

We have initiated, in with regards to Grafix, we have now initiated a 50-patient trial perspective trial, which is stratified into 5 groups, based on duration of wound, and prior treatment for the use of Grafix in closing venous leg ulcers. Now venous leg ulcer is a sort of the sister market today but diabetic foot ulcer, a significant unmet medical need and frankly, a less crowded space from a market standpoint. We are using the data from this 50-patient trial to design and conduct the sister trial to protocol 302, which is our diabetic foot ulcer trial. And so, the VLU trial is currently ongoing. And the pilot VLU trial is currently ongoing and as I said, we expect next year to initiate the larger randomized controlled sister trial to the DFU trial we completed this year, which was so successful.

And then lastly, we have 2 products that are in development for sports medicine indications. So what we're doing here is we're providing the proprietary salesforce that were developing for Cartiform, specifically for the sports medicine call point, we are supplying that commercial entity with complementary products that they can use in the same target position when they make their calls. We will be talking more about those 2 products as they're ready. Obviously, as we've said on calls, multiple times, we are very reluctant to disclose the specific products that we're working on until we absolutely have to. And that's to compare -- that's to continue our competitive advantage that we have.

So just to finish off, our near-term goals for success, really straightforward, really simple. Continue to grow our revenue. It's very important for us that we continue to see strong revenue growth. We are investing significantly on our commercial infrastructure in order to do this. Marketing, very aggressively, generating very high quality data so when we go out and engage positions, we engage them not just on anecdotal stories, but on scientific facts.

Second is control costs. Our goal here is to now continue to be a profitable biotechnology company. And one of the ways that we can do that is by reducing unnecessary cost. Things that improved gross margin. Things where we can be more efficient, increased productivity, so we're very focused on controlling costs.

And then the last is focused product development. So making sure we develop products, not every product that comes along, not every good idea that comes along but that fit in with our long-term commercial strategy and our commercial infrastructure and that drive real value and meet the criteria that we laid out in the previous slides. So we think if we do these 3 things, we will going to continue to be successful as a company in the cell therapy space.

With that, I will stop talking, I'll turn the call over to the operator for questions, and I'll stop there.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Ted Tenthoff of Piper Jaffray.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

Thanks for the detailed review of the timing of the negotiations with the FDA and also, the incremental DFU data, it’s really, really encouraging. So I just want to go back and confirm, you said that the delay in terms of communicating, was really a result of waiting for the FDA to review that press release. So the one question that is unanswered is, but I think is clear, is did they approve the statements that were made in that press release?

Charles Randal Mills

So the FDA, I don't want to speak for the FDA and put words in their mouth. The FDA insisted upon reviewing both, by the way, press releases, the press release we initially put out and the clarification press release. We put out the -- FDA wanted to review those press releases, as the FDA commented on those press releases and ultimately, I don't want to -- I'm just so reluctant to use the word approved with regards to FDA because they don't have a formal press release approval process.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

But they signed off on it?

Charles Randal Mills

That was the language that was agreed upon by both parties.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

Now again a very interesting data on the DFU side, especially that hospitalization infection rate, is really striking. What is the plan to incorporate that into a BLA? What is the timing that you think you may actually be able to get that submitted?

Charles Randal Mills

So, with regards to the BLA, we're actually going to be meeting with the FDA here shortly to get the ball rolling on that. We believe that we can have a submission into the FDA with around 12 to 18 months. As we have additional meetings with the FDA, we will obviously, update you on how that goes. With regards to -- from a clinical standpoint, well we don't believe we're going to need to generate additional data given the studies we have from -- they probably have multiple studies on the product and then the ongoing study we have in VLU, we think we'll be able to make a strong case for safety and that's a clinical standpoint based on that data.


[Operator Instructions] Our next question comes from the line of Bill Plovanic of Canaccord.

William J. Plovanic - Canaccord Genuity, Research Division

A couple of question to you. So you have on the Grafix data, is very impressive, I think out of all the data that we've seen in the space, it's very impressive. Just curious on the distribution strategy into the DFU market, is this going to be direct or through some sort of partner? And then, if it's direct, kind of where are you with the reimbursement efforts?

Charles Randal Mills

Yes, so the vast majority of the distribution we do with regards to Grafix is done through the direct sales force, proprietary sales force, we're building out. Though, we think that is controlling our destiny in relation to Grafix is very important to driving long-term value. Grafix, we believe, is by far the best product on the market. We're very confident, obviously, in its performance, based on the data, we think we are going to continue to be able to differentiate that with the biological license application. And we want to own that space. So the vast majority of our distribution is there. With regards to reimbursement, we're obviously, working with the Macs, that's a process that takes time. We have CMS -- we're very fortunate to have CMS literally right down the street from us, so we have the ability going and meet with them and have productive conversations and so, we are out there from a reimbursement standpoint, I think making significant progress. We would expect that in the coming months, we will be announcing, obviously, as they occur, coverage decisions by region.

William J. Plovanic - Canaccord Genuity, Research Division

And then what about with the VA?

Charles Randal Mills

The VA we're in right now, and actually we're experiencing a very significant penetration of VA and growth of the VA.

William J. Plovanic - Canaccord Genuity, Research Division

So you're on the SSS today?

Charles Randal Mills


William J. Plovanic - Canaccord Genuity, Research Division

And then as we look at the revenues, I don't think you gave a breakout of the $6.9 million, kind of, how much of that is Ovation? How much of that is Grafix? Do you provide a cut on that?

Charles Randal Mills

We don't break them out yet. As we go forward, and as those revenues become more significant, we'll be breaking that out, but as of now, we don't.


Our next question comes from the line of Eun Yang of Jefferies.

Eun K. Yang - Jefferies LLC, Research Division

I just want to make sure that I understand accurately. So you don't need BLA approval to market and reimburse Grafix for diabetic foot ulcers, correct?

Charles Randal Mills

That is correct.

Eun K. Yang - Jefferies LLC, Research Division

Okay. And then you also mentioned, you're building Grafix the sales force? How many sales reps are you planning to hire?

Charles Randal Mills

So we will be -- we anticipate being in around 50 within 6 months now. As you recall, we didn't expect the trial to be stopped at -- on the interim analysis for overwhelming efficacy. And we generally have a philosophy at Osiris, which is the anti-field of dreams. Meaning, we don't just build a giant sales force, and then hopefully have a product to sell it. So we generally like to do those things in locks that builds the sales force as the demand and as the market is there. So that positive data had the effect of aiding us to pull forward our plans on building out that salesforce and we're doing, but to answer your question directly, within 6 months, we expect to have about 50 reps there.

Eun K. Yang - Jefferies LLC, Research Division

Okay. And then you guys have also mentioned that once you build your sales force, you will take over 12 to 18 months to see meaningful sales impact, is that correct?

Charles Randal Mills

No. Our revenue curve kind of speaks for the sales impact we're seeing. It's pretty good. We're building up the sales force to continue that revenue -- to continue that revenue growth. But it's not like we expect there to be a delay and then all of a sudden, we'll see revenue in 12 to 18 months when we have a sales force.

Eun K. Yang - Jefferies LLC, Research Division

So could you remind me what the internal expectations for sales potential now with diabetic foot ulcer reimbursement in the future?

Charles Randal Mills

So our internal market size expanded dramatically with receipt of the data that we had and then the relative positioning of the product versus others, based on objective meaningful -- meaningfully-sized clinical data. And so, as we said in a number, not a number, maybe 1 or 2 calls, the DFU market for us, we think, is very large perhaps over $1 billion market, for us to be able to penetrate. But that continues -- as we continue to demonstrate efficacy in other types of chronic wounds, particularly VLU, we think we can double that number. With regard to forward-looking sales projections, obviously, as you recall from our IPO, nothing has change there. We don't give forward-looking projections with regards to financials.

Eun K. Yang - Jefferies LLC, Research Division

Okay. When you look at other product currently on the market like [indiscernible] graft they are getting reimbursement at the moment, but sales are not that robust? Why do you think that is?

Charles Randal Mills

Well, I mean, I would just look at the data that they have. When we put out the data that showed 191% relative improvement, that wasn't a little better than the other products on the market, that was a lot better than the other products on the market. And I think there's generally a fatigue sitting in with wound care physicians, let's say if I'm going to go to the trouble of putting on a sophisticated product for wound care. I want to see a very good result and so I think, the data we were able to generate has broken through that apathy that I think settled in.

Eun K. Yang - Jefferies LLC, Research Division

Okay. And for modeling purposes, the third quarter R&D is quite low, do you think like a $1 million of run rate is the kind of $1 million per quarter would be the run rate we should use going forward?

Charles Randal Mills

Well, again you're going to asking for forward-looking guidance, which I'm not able to give.

Eun K. Yang - Jefferies LLC, Research Division

Okay, and then the last question that I have for you, you said that, the BLA requirement is for the enhanced label, enhanced healing property of Grafix. Were you planning to add that [indiscernible] to property of Grafix before FDA requested BLA requirement?

Charles Randal Mills

It was something that we thought provided differentiation to our product. It became much less important, however, when the data from the clinical trial results come out. Because we're talking really about enhanced claims with regards to mechanism. But once the data came out, that showed the product had such overwhelming efficacy in DFUs and in chronic wounds, while it's a nice to have, it certainly dropped off on our list of things that were necessary. The data really for Grafix speaks for itself, very well designed, very well controlled trial, the exact time that these wound care physicians are used to seeing and used to treating, basing treatment decisions off of, so when we're able to go into the doctor's office, and just show them the data. It really does speak for itself.

Eun K. Yang - Jefferies LLC, Research Division

So basically, you don't need to file BLA, you don't need it? It's a nice to have at the moment? But you know you don't need it.

Charles Randal Mills

We do not need it. We do not need I think, we've said now a couple of times we don't need it. It's a nice to have. I’ll tell you one of the things, that when the opportunity came up, and one of the reasons that we're going after this so aggressively is it really does open ex-U.S. markets for us. The regulatory paradigm for which Grafix is regulated in the United States under HCTP 1271 rule, in a lot of ex-U.S. territories has no equivalent, and so it makes it somewhat difficult for us to go into OUS markets. This gives us significant opportunity. So when the option came along, we obviously jumped on it so.

Eun K. Yang - Jefferies LLC, Research Division

I see, then now you know that I want ask you one last question, so when you look at ex-U.S. market, how big is this cellular and acellular matrix product?

Charles Randal Mills

One more time, Eun, we missed that.

Eun K. Yang - Jefferies LLC, Research Division

So In ex-U.S., how big is this kind of a cellular and acellular matrix product?

Charles Randal Mills

Right, so we believe, based on the data we have, on markets that we would be interested in penetrating, so obviously, there has to be an ability for reimbursement, there has to be a sophisticated wound care system. We think the OUS realistic market potential is about equal to the current U.S. market potential. So we could potentially double the size that we're able to go into all of those markets. Now, whether we go into all of those markets, will be a commercial decision, we'll make down the road.

Eun K. Yang - Jefferies LLC, Research Division

I meant sorry, I mean to what are the current sales?

Current sales before those products in outside U.S. That's what I mean.

Charles Randal Mills

I don't know that.


And with no further questions in queue, I'd like to turn the conference back over to Dr. Mills for any closing remarks.

Charles Randal Mills

Great. Well thank you guys, so much, for joining us on this call today. And it's obviously, a very exciting day for Osiris. We look forward to seeing you at our upcoming events. From an investment standpoint, we'll be at the Canaccord conference in New York on the 14th of this month. Piper Jaffray on the December 3 or 4, I can't remember which day we'll present but obviously, we're putting out a release about that. From a commercial standpoint, we'll be back in Las Vegas for the Arthroscopy Association and from a wound care standpoint, we'll be featuring Grafix at Desert Foot out in Phoenix. So if you have an opportunity to come by and see us in those events, please do so, we'd love to see you with that. I bid you all a great day.


Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. And have a great rest of your day.

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