Today we are initiating a short position in shares of Osiris Therapeutics (OSIR). Our short price is $5.29, and we are setting a stop at $6.
Osiris, as you might have noticed, bubbled to the top of our 'earnings manipulators' screen, due to high accruals (Net Inc-Cash Flow Operations/Total Assets). While we don't see any evidence to the fact that Osiris is manipulating earnings, we do believe that the stock is bound to move lower from here.
Osiris, which is focused on finding cures for diseases through the use of stem cell therapies, has two business segments: Therapeutics and Biosurgery. Via its Therapeutics division, Osiris is "is focused on developing biologic stem cell drug candidates from a readily available and non-controversial source-adult bone marrow".
In the Therapeutics segment, the pipeline of internally developed biologic drug candidates under evaluation includes Prochymal for inflammatory, autoimmune and cardiovascular indications, as well as Chondrogen for arthritis in the knee.
The Biosurgery segment, according to Osiris, "works to harness the ability of cells and novel constructs to promote the body's natural healing with the goals of improving surgical outcomes and offering better treatment options for patients and physicians." Here is a table indicating the stages of clinical trials for Osiris (click to enlarge):
Osiris has been working on a stem cell therapy for awhile now for Type 1 Diabetes, and has had little success. Although from the sounds of this press release, you might think that the company had the next big blockbuster drug on its hands, think again. The company buried the bad news in the release, noting that:
No significant differences in the rates of disease progression, as measured by stimulated C-peptide levels at the one year time point, have been observed.
And in January 2011, Health Canada requested additional information for drug submission of Prochymal as a treatment for pediatric GvHD:
The agency determined that the application in its initial form was not in full compliance with the current Canadian Food and Drug Regulations.
Osiris was given 90 days to answer certain questions that were raised during the review. While the Canadian approval looked close, the odds are looking slimmer by the day that anything happens in Canada.
And to make matters even more dire, in February 2012, Sanofi (SNY) (its partner for distribution on Prochymal and Chondrogen) issued a press release which included an update on their R&D pipeline, stating that it has "discontinued" its project with Prochymal for GvHD. According to Osiris:
The statement issued by Sanofi was made without consultation with or knowledge by us.
Needless to say, things are looking grim at Osiris. The loss of the Genzyme/Sanofi deal is a huge hit, and the break-up is a bit puzzling. While Osiris is now free to seek a new partner "without restriction," I'm not so certain a new tie-up is a given, especially with the lackluster trials for the drug.
The agreement with Genzyme (now Sanofi) was struck in the fourth quarter of 2008. Under the terms Osiris was paid $130 million for the distribution agreement. Osiris recognized $40.0 million of revenue in each of fiscal 2011, 2010 and 2009 related to this agreement. Osiris total revenues in 2011, 2010, 2009 were $42.4 million, $43.2 million, and $44.5 million. So without the Genzyme revenues, the company is essentially worthless. And with no approvals, and the likelihood of any upcoming approvals shaky at best, Osiris looks like a short-seller's dream.
Note that Osiris does have high short interest, with 17.5% of free float currently short. This is a higher risk short due to the high level of short sellers and for the fact that biotech stocks are highly volatile. If you'd like to take the safer route, take a look at the August 2012 5 Puts, which are trading at a reasonable premium of right around $1 per contract.