Seeking Alpha
Profile| Send Message|
( followers)  

The stem cell market is slated to become $88.3 billion by 2014, with growth of well over 14.8% from now until then. This paves the way for potential revenues that border the imagination for any Wall Street analyst should any company become the first to see FDA approval. While at first thought this may sound like a juicy opportunity to jump on, unfortunately the best results companies have come up with are approvals for clinical phase I, II, and III trials and a few new drug applications here and there followed by rejections. A little disheartening, perhaps, but there is one company, Osiris (NASDAQ:OSIR), whose product Prochymal has slowly but surely begun to make waves among the investment community as it races to become the first approved and marketed stem cell product. By far, the best way to describe this undervalued, hidden company is — finding opportunity amongst uncertainty.

Osiris took a mild blow when on January, 15, 2011, regulators requested additional information to support the company’s request for approval (treatment of GVHD), determining that it was not in full compliance with current regulations. The agency has given Osiris 90 days to respond to the questions, to which the company responded that it intends to “expeditiously” provide the necessary information. Many experts agree that this request is merely a formality, especially considering the extensive amount of clinical data and research and development leading up to this process. Furthermore, the company is also expected to announce phase 2 trial results for type 1 diabetes during the 1st quarter 2011.

Financial Assessment

Beneath the mountain of biotech companies existing in the NASDAQ Biotechnology Index (NASDAQ:IBB) and S&P Biotech Index (NYSE:XBI), lies Osiris, who is one of the few that have maintained a healthy financial standing with a positive cash flow, whereby the revenues can cover operating costs. The company had a stellar third quarter, reporting net income of $4.5 million for the quarter compared to a loss from continuing operations of $6.8 million in the third quarter of 2009; $0.14 per diluted common share and reported cash, short-term investments and receivables of $76.5 million as of September 30, 2010. This caused Zacks Investment Research (pdf) to rate the company an outperform, as many analysts look towards the fourth quarter, which will be reported on February, 21, 2010 as continued positive progress, along with potential FDA approval of its flagship product.

A low beta of 0.23 which indicates a sustainable investment with low volatility, coupled with a float of 14.16M that is roughly 50% of shares outstanding, leave this as a highly attractive investment option for institutions going forward. Osiris also maintains one of the highest gross profit margins of 99.7% when compared to its peers, and maintains a sales growth of 1.6%, and trailing 12 months sales of $43.2 million.

Dilution has also not been a concern in the past and should not be one in the future, as according to their latest 10-Q EDGAR filing, the company had 90,000 shares authorized, with 32,790 outstanding in 2010, up a measly 17 shares from 32,773 in 2009.

Flagship Product

Osiris’ flagship product, Prochymal, is being evaluated in Phase 3 clinical trials for several indications, including acute graft versus host disease (GVHD) and also Crohn’s disease, and is the only stem cell therapeutic currently designated by the FDA as both an Orphan Drug and Fast Track product. Fast track already has benefits on its own, as it often makes approval more likely and shortens the approval time, while the orphan drug status is a pharmaceutical agent that has been developed specifically to treat a rare medical condition. A unique option within Fast Track is the opportunity to submit sections of an NDA/BLA to FDA as they are ready, rather than the standard requirement to submit a complete application at one time. Of products with Fast Track designation, FDA eventually approved 10.6% of the drugs and licensed 17.7% of the biologics, which is considerably higher than the average rate by almost triple-fold.

Experts have placed the annual GVHD market at approximately $300 million per year, while the diabetes market is predicted as exceeding $21 billion by 2011, according to the World Health Organization. Diabetes affects approximately 170 million people worldwide and is increasing, as seen in the US where 20.8 million people are currently suffering with diabetes. This equates to approximately 6% of the population, ranking it as the 6th most common cause of death as recorded on US death certificates.

Product Pipeline

(click image to enlarge)

As far as their overall clinical pipeline goes, Osiris is just glowing with potential. Osiris uses mesenchymal stem cells (MSCs), which have the capacity to form a variety of highly specialized cell types including bone, cartilage, muscle, tendon, fat, liver and many others. These observations have been extensively characterized both at Osiris Therapeutics, Inc. and at leading academic institutions.

Other than the GVHD and Crohn’s disease indication, Prochymal is also being evaluated in Phase 2 clinical trials for the repair of heart tissue following a heart attack, the protection of pancreatic islet cells in patients with type 1 diabetes, and the repair of lung tissue in patients with chronic obstructive pulmonary disease.

Osiris is also evaluating Chondrogen, an injectable formulation of mesenchymal stem cells, for arthritis in the knee.

(click image to enlarge)

Aside from its growing revenues and healthy financial status, Osiris also maintains a well balanced basket of partnerships, of the likes including Genzyme (GENZ) to develop Prochymal, JCR Pharmaceutical to produce Prochymal in Japan, Juvenile Diabetes Research for developing Prochymal as treatment of type 1 diabetes, and NuVasine who provided $85 million for the sale of Osteocel.

While this may seem impressive, what lies beneath the surface in the majority owners category of Osiris is all the more intriguing. For one, Peter Fredli, co-founder and chairman of the board, who owns 4.15M shares, or 12.67% of the float, is a well known venture capitalist, and also sits on the boards of Venturetec, New Venturetec and several other high profile companies. It is well known that in his past as a former chairman of Myriad Genetics (NASDAQ:MYGN), a 2.02 billion dollar market cap molecular diagnostic company, he grew that company through two stock splits and sold it at the equivalent of roughly $150 a share which led to his creation of Osiris. One of his closest friends is Thomas Schmidheiny, who currently sits on the Forbes wealthiest list at #234, and is also reported as having made a large investment (pdf) in the company. When you have one of the most financially powerful men in the world under your belt, you know you’re doing something right.

Opportunities In Funding

On August, 24, 2010, the US government funding for research using embryonic stem cells was officially thrown into disarray after a judge ruled that it violated laws prohibiting the destruction of human embryos. This caused shares of stem cell companies, of the likes including Geron (NASDAQ:GERN), StemCells (NASDAQ:STEM), Aastom (NASDAQ:ASTM), and Cytori (NASDAQ:CYTX), to drop sharply. Amidst the panic, one company seemed to pull through, and it was Osiris, as the company’s research is exclusively dealing with adult stem cells, which is acceptable under this ruling, leaving it as perhaps the only company to have the ability to apply and benefit from future government funding programs.

Source: Osiris: Finding Opportunity Amongst Uncertainty