Osiris Therapeutics Beset By Newer And Bigger Troubles

| About: Osiris Therapeutics, (OSIR)

Summary

Since I last highlighted fraud concerns at Osiris, the stock has fallen by 40%. I expect an additional 50% drop based on new catalysts.

The CEO has since resigned unexpectedly.

Osiris is unable to file its 10K and has now received a NASDAQ deficiency notice.

Last week, Osiris' head of sales has just been charged with defrauding the federal government.

Yet, Osiris still trades with a market cap of nearly $200 million.

Background on Osiris

The last time I wrote about Osiris Therapeutics (NASDAQ:OSIR) was in January 2016 when the share price was $8.50. At the time, the stock was hitting what were then 52-week lows. As I noted in that article, I seldom drop the "F Bomb" (the word "fraud"), but there are simply too many red flags to ignore with Osiris.

Since that time, the shares are now down by around 40% to around $5.00. The shares did briefly plunge to as low as $3.55 (down 60%) before rebounding to the current level. I now see an abundance of borrowable shares for shorting available at a very low rate, so I assume that the recent bounce was largely due to short covering.

I continue to expect that the shares will soon trade down to the $2-3 range, based on additional catalysts which were expected and which are now materializing. As expected, Osiris is now delinquent in filing its financials. As of its last filed financial statement, the company had approx. $1.23 in cash per share. (However, based on its historical cash burn, the cash balance has almost certainly declined significantly over the past 6 months). Osiris still has a market cap of close to $200 million.

In my previous article, I noted that the CFO had already resigned and been replaced. The auditor had already resigned. Internal controls had been deemed to be ineffective. The former auditor had required multiple restatements of the financials due to revenue recognition issues. I also noted that I expected that the annual report would not end up being filed as expected.

Recent developments

The recent bounce in the stock has now provided another excellent entry point for a short trade as the next leg down begins. Following my last article, there have been several new developments, none of which bode well for the future of Osiris.

First, shortly after my article, we saw that the CEO suddenly resigned for "personal reasons." Again, this follows the prior resignation of the CFO and the auditor BDO. Following a month long supposed "search" for a new CEO, Osiris simply appointed existing Chief Business Officer Dwayne Montgomery as the new CEO. The fact that Osiris couldn't (or perhaps wouldn't) find any outsider to take the role should be viewed as highly concerning.

Second, we saw that Osiris was unable to file its annual report 10K. Readers should keep in mind that Osiris appointed Big 4 E&Y as its new auditor following the resignation of BDO last year. This was to be E&Y's first opportunity to audit the books of Osiris. As I highlighted in my last article, if there was a problem (i.e. "fraud"), E&Y would find it and the 10K would not be filed. This is exactly what has now happened. Osiris has now just received a deficiency notice from the NASDAQ because it has not filed its 10K.

Finally, and most recently, Osiris has now lost its National Director of Sales and Marketing, Todd Clawson following charges that he defrauded the federal government. Sometime over the past few days, Clawson removed all references to Osiris from his LinkedIn page and his name no longer appears in the company's phone directory.

As noted here from March 18th:

Prosecutors claim Advanced BioHealing Inc. executive Todd Clawson and others paid kickbacks to VA [Veteran's Administration] podiatrists and clinicians who promoted the company's product, a "biologic" wound dressing. Clawson has been charged with bribery and health care fraud.

To view the government's full criminal complaint against Clawson, click here. Clawson is set to be sentenced on June 10th, but has not yet been jailed.

The point is that Osiris' problems are not limited to the C suite. Osiris has now lost the individual who is responsible for actually selling the product as well.

As shown here in the New York Times, Clawson is ("was") was big winer and diner at Michelin star restaurants in New York, entertaining doctors (prospective customers).

Conclusion

Since the time of my last article, shares of Osiris have declined by 40%, but previously declined to as low as $3.55. I believe that the real decline is just beginning and that the stock should ultimately settle in at around $2-3. That represents an additional decline from current levels of around 50%.

We have already seen the resignation of the CEO, the CFO, and the auditor. The head of sales has just been charged with defrauding the federal government. Financials have already been forced to be restated and now the company is unable to file its form 10K annual report.

Despite all of this, the company still trades with a market cap of nearly $200 million.

Based on all of this, Osiris is a compelling short down to around $2.00.

Author's note: Osiris management contacted the author and noted that Mr. Clawson had resigned from Osiris and is no longer employed there. Mr. Clawson’s title at Osiris was apparently incorrect on various public sites including LinkedIn, ZoomInfo, Connect.Data and the New York Times. Management notes that his correct title should be listed as “Executive Director, Marketing and National Accounts”. Management also noted that the criminal charges were against Mr. Clawson personally and not against Osiris. All details of the criminal charges against Mr. Clawson can be viewed in the government’s criminal complaint, which was provided above.

Disclosure: I am/we are short OSIR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author was previously an investment banker for a major global investment bank and was engaged in investment banking transactions with a wide range of healthcare companies including medical device, pharmaceutical, genomics and biotech companies. The author has not been engaged in any investment banking transactions with US listed companies during the past 5 years. The author is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. The author currently holds a short interest in OSIR and during the past 12 months has shared his fundamental and/or technical research with investors who hold a short position in the stock. The author may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser. The author has relied upon publicly available information gathered from sources, which are believed to be reliable and has included links to various sources of information within this article. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied