Osiris Therapeutics Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: Osiris Therapeutics, (OSIR)

Osiris Therapeutics (NASDAQ:OSIR)

Q2 2012 Earnings Call

July 30, 2012 9:00 am ET


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

Eun K. Yang - Jefferies & Company, Inc., Research Division


Good morning, everyone. Welcome to the Osiris Therapeutics Second Quarter and Full Year 2012 Earnings Conference Call.

Before we would 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 turn the conference over to Dr. C. Randal Mills, President and CEO of Osiris Therapeutics. Please go ahead, sir.

Charles Randal Mills

Thank you. Good morning. Thank you for joining us for our second quarter 2012 conference call. Today, I'd like to provide you with an update on Prochymal, our intravenous stem cell therapy, which made history in the second quarter by becoming the world's first stem cell drug approved by an internationally recognized regulatory agency. I will then discuss the exciting momentum we are gaining in our Biosurgery division. Phil Jacoby, our Chief Financial Officer will provide you with an update of our financial performance over the last quarter. And in closing, I will offer a few comments before turning the call over to the operator for questions.

I see that there are many new callers on the line today, so let me start by providing you with a little perspective on how we developed Prochymal.

We were 20 years ago with a mission to responsibly develop and commercialize the stem cell-based therapy to address significant unmet medical needs. In 1992, we began performing the necessary laboratory work to enter human trials with mesenchymal stem cells. After 6 years of bench work, we initiated our first Phase I human clinical trial with MSCs in 1998. Since that time, Osiris has achieved many firsts in the field of stem cells including the first stem cell product to be awarded Fast Track status by the FDA; the first stem cell drug to be granted orphan drug status by FDA and EMA; the first Expanded Access Program to be approved for a stem cell drug, enabling patients all over the world to receive treatment with Prochymal; and finally, with Prochymal becoming the world's first approved stem cell drug and the first drug specifically approved for the management of acute GvHD.

None of these firsts happened because we took a shortcut. In fact, because it was the first stem cell therapy to be reviewed, the standards to which we were held were, in most cases, higher than that of a traditional drug. These accomplishments, instead, are the result of 20 years of hard work and determination.

With approvals in Canada and New Zealand, our work is transitioning into the commercial phase. Essential focus of this effort is ensuring fair but sufficient reimbursement for the product. Given Prochymal's 20-year development history and enormous development costs, premium pricing is appropriate. Fortunately, there are a number of factors that favorably impact reimbursement discussions around Prochymal. GvHD is a rare disease with an inherently limited market. It is an acute disease, meaning that patients typically receive treatment for only 1 to 2 months, unlike the life-long care required for many of the enzyme replacement therapies. It is the only drug approved for GvHD. And lastly, because the disease is most often lethal absent successful intervention, and treatment with Prochymal has been shown to be both clinically and -- clinically meaningful and improve survival.

For those of you who are not familiar with acute GvHD, it is a devastating disease that kills up to 80% of the children affected. It is a complication of bone marrow transplantation, and when T cells in the graft attack the host, its victims endure blistering of the skin, intestinal hemorrhage and liver failure. This makes GvHD the leading cost of transplant-related mortality with a median survival of only 80 days. Generally, steroids are used as a first line of therapy with a success rate of about 50%. When steroids fail, treatment options are limited.

It is in this setting where Prochymal can save lives. With Prochymal, we have been able to rescue 63% of children and significantly improve their chances of survival. To date, our initial meetings regarding reimbursement have been positive, but we have a few more to go. At this time, we anticipate Prochymal to be commercially available with reimbursement in Canada later this year.

Outside of Canada and New Zealand, we continue to work with regulatory agencies around the world to provide GvHD patients in those territories with access to our first-in-class off-the-shelf stem cell drug. We are working diligently to provide each agency with the information they need to approve Prochymal.

In addition to GvHD, Prochymal is also in development for Crohn's disease, acute myocardial infarction and type 1 diabetes. We continue to enroll patients in our Phase III clinical trial evaluating Prochymal in patients with moderate to severe treatment-resistant Crohn's disease. We've expanded the number of countries and clinical sites with approximately 20 leading centers to enroll up to 330 patients. This double-blind placebo-controlled trial is evaluating Prochymal's ability to induce remission in a patient population refractory to steroids and biologics for which there is clearly an unmet medical need.

We have also completed an enrollment in our Phase II trial evaluating Prochymal for the treatment of patients with first-time severe myocardial infarction. We recently announced our interim 1-year results, and while it's still or early on, we have already learned a lot. Importantly, Prochymal resulted in a statistically significant reduction in heart failure with none of the patients in the Prochymal arm requiring diuretic treatment compared to 7 in the placebo arm. While we are gratified by this finding, what was most striking was how low the incidence of heart failure was in the trial. At this point, we would have expected more than double the incidence of heart failure in the placebo arm. Therefore, we have made the decision to extend the trial to see if improvements in standard of care are extending the time to onset of heart failure or eliminating it altogether.

Turning quickly to our dispute with Sanofi. In early February, Sanofi issued a press release, which included an update on their R&D pipeline. In that release, Sanofi stated that it has discontinued its project with Prochymal for GvHD. We maintained that in February, Sanofi elected to terminate the collaboration agreement. The agreement provides that upon voluntary termination by Sanofi, all rights to Prochymal revert back to Osiris and we are free to commercialize or enter into commercialization agreements for Prochymal with other parties without restriction. Sanofi advised us that it disagrees with our characterization of their press release. This matter is now in the hands of lawyers. Given the sensitivity of this issue, I will not be making further comments today on this topic.

In therapeutics, we infuse stem cells throughout the body. However, sometimes this approach isn't necessary because the problem can be treated locally instead. That's how we use stem cells in biosurgery. In biosurgery, we are developing biologically based surgical constructs that improved wound healing and tissue regeneration, leveraging our extensive experience in cell therapy. Our marketed product line, Grafix, is applied directly to acute and chronic wounds, such as burns and diabetic foot ulcers. And Ovation is used in orthopedic applications. By the end of the year, we plan to expand our Biosurgery unit with a new product that's going to launch into the area of our cartilage regeneration in sports medicine. Earlier this month we had a significant presence at the American Orthopedic Society for Sports Medicine Annual Meeting where we met with many key opinion leaders in this space. The product was very well received and has the potential to be a real game changer in the cartilage repair market.

During our last call, I discussed our strategy of continuing to build the commercial infrastructure necessary for our Biosurgery products to succeed. To keep pace with product demand, a capacity expansion for manufacturing was initiated during the first quarter and continued through this past quarter. As we grow, we are committed to our goals of 100% order fulfillment and customer satisfaction. While we expect there to be some fluctuation in gross margin during the expansion, we will continue to strive for operational excellence and believe there is still substantial room for improvement. We are very pleased with our progress as indicated by revenue growth of 43% over the previous quarter and gross margins of 66%. However, we think we are just scratching the surface.

We initially introduced Grafix for the treatment of burns. This is a relatively small market with an addressable demand of about $250 million in the U.S. This market is, however, quite concentrated with about 65% -- or 65 burn centers treating approximately 80% of patients in the U.S. Therefore, given a finite number of burn centers, we are able to address those using our own small dedicated sales team.

Recently, Osiris had been -- has been selected by the Biomedical Advanced Research and Development Authority, or BARDA, to submit a proposal for a Broad Agency Announcement to fund advanced research and development of countermeasures specifically in the area of mass casualty thermal burn injuries. BARDA is looking for a safe and effective medical product that can be used to treat a wide range of burn injuries resulting from any cause, and importantly, from a mass casualty incidence.

Grafix is also used in the setting of limb salvage, representing a market opportunity twice that of burns with approximately 75,000 diabetic amputations performed each year in the U.S. We are using a hybrid model of independent distributors and representatives to address significant number of call points that exist.

Lastly, our largest market opportunity is in the chronic wound setting and is well over $1 billion. Since diabetic and venous ulcers are typically treated in the outpatient setting, reimbursement is more challenging. However, given the size of the market, a longer-term development cycle is warranted and we are taking the next steps necessary to accomplish this. This quarter, Osiris was notified by the Center for Medicare and Medicaid Services, or CMS, of its preliminary positive determination to establish permanent fix codes for the Grafix line. Receipt of these codes is the first step in the process of gaining coverage in the outpatient setting. The final decision should be rendered by the end of 2012. In tandem with these efforts, we are working with payors to enable physicians to treat patients with limited options now, either typically patients with more severe wounds refractory to other treatments who would clearly benefit from a more advanced therapy.

Ovation, our other marketed Biosurgery product is seeing significant use in orthopedic procedures where bone regeneration is needed, including spinal fusion and fracture repair. There are over 400,000 spinal fusions performed each year in the U.S., representing a very large market opportunity. After pioneering the use of stem cells for bone regeneration with the launch of Osteocel back in 2005, Osiris is building upon that success with Ovation.

The orthopedic market and the spine market, in particular, represent a very real opportunity for Ovation. Given these recent events surrounding BMP-2 and the acceptance of technologies that avoid the pitfalls of autograft, Ovation is making serious progress in spine.

During the quarter, we continued to expand and penetrate our geographic coverage. We are committed to growth for the long term in biosurgery, but will only expand at a rate in which we can ensure a quality experience for the surgeon. This does leave us the possibility of including a strategic and partnership -- a strategic partnership for certain areas if it can help us achieve this goal.

Lastly, I want to mention that we recognize that there are additional market opportunities beyond those we are currently in. We are taking methodical and pragmatic approach to realize these opportunities and are having success. We do maintain a rich pipeline. However, we elect not to disclose new products until it is necessary. In this area, we look forward to many good things to come.

With that, I'd like to turn the call over to Phil Jacoby, our Chief Financial Officer, to cover the financial highlights for the second quarter of 2012. Phil?

Philip R. Jacoby

Thanks, Randy. Good morning, everyone. I will briefly discuss the company's second quarter financial results. We finished the quarter with approximately $40 million in cash, receivables and short-term investments and we remain debt-free.

As Randy said, revenues from the distribution of our Biosurgery products rose 43% from the prior quarter this year to $1.6 million. Our gross margin remained very strong at 66% as we continued to more fully utilize our production facilities and we're able to spread the fixed costs over a wider base. Our other revenue during the second quarter was approximately $100,000 and it consisted of cost recovery on the adult GvHD compassionate use trial as well as some minor royalties.

Total revenue for the second quarter of fiscal 2011 were $10.4 million and consisted almost entirely of amortized license fees. Revenue from the distribution of Biosurgery products in the second quarter of last year was $130,000.

Total R&D expense for the second quarter of this year was $4.1 million compared to $5.2 million in the same period last year. We spent approximately $1.2 million during the second quarter of this year on R&D for our biosurgery operations compared to biosurgery R&D of about $1 million in the second quarter of last year. The decline in R&D expense in our therapeutics operations was primarily the result of a completion of enrollment of our myocardial infarction trial during the second half of last year.

General and administrative expenses for the quarter were $1.4 million compared to $3.3 million in the comparable period of last year. The second quarter 2011 G&A expense included a noncash charge of $1.7 million related to the extension of the expiration date of a warrant. We did realize a small increase in selling and general administrative expenses in our biosurgery operations as we continued to expand our distribution efforts.

We've reported a net loss of $4.3 million during the second quarter of fiscal 2012, which represents basic and diluted loss per share of $0.13. In the second quarter of fiscal 2011, we've reported net income of $1.8 million, which represented earnings per share of $0.05.

Net cash used in operating activities for the second quarter of this year was approximately $4.4 million compared to $5.5 million in the second quarter of last year.

With that, Randy, I'll turn it back to you.

Charles Randal Mills

Thanks, Phil. Osiris is quietly, but convincingly bringing strong science and real leadership to the field of cellular medicine. Even though we have enjoyed recent success, it was not overnight and it was not serendipity. It was earned through years and years of hard work, dedication and patient care. And while we are proud of what we have accomplished, we will not rest. In fact, the team is more energized than ever to bring the next new cellular therapy to patients who need it. I'd like to express my sincere gratitude to our patients, our physicians, our distributors, you, our shareholders and the entire Osiris team for their ongoing support and dedication.

With that, I'd like to turn the call over to the operator for questions.

Question-and-Answer Session


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

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

Great. Two questions, if I may. I appreciate the sensitivity around everything going on with Sanofi. But if you can just kind of remind us what is the current partnership and what is the means for arbitration or settlement, and then I have a quick follow-up question.

Charles Randal Mills

Yes. So we had a relationship -- we had an actually a fantastic partnership with Genzyme and then the Sanofi transaction took place and the relationship became somewhat more distant. The first thing I'd say about it, though, is, and I think it's important for everyone to understand: We did not start this dispute. We did not ask for this dispute. We are in no way at fault in this dispute. Sanofi issued an announcement saying they were discontinuing the program out of the blue without any prior warning or notification to us and literally blindsided us. The first I heard about it was when an analyst called and asked why I didn't put out a statement about it. They made no attempt to notify us before, and frankly, they made no attempt to notify us after. And so I'll say we dove into this dispute as clearly as the one who was harmed. And so our expectations for dispute resolution are very high; that's one thing. The second thing I'll say about it is that this is a dispute right now, which we are able to manage around. We are able to handle the regulatory filings as necessary that's evidenced by the approvals we were able to get out on our own in New Zealand, filings we've been able to do in other countries around the world. But there'll come a point where if this continues to drag on, the lives of little children can be put in jeopardy and that's where it's going to become a real problem and that's not some -- we will lose patients obviously when that happens and we'll be forced to escalate things. But as it stands right now, we are trying to come to an amicable resolution. But there'll be a time where that will not be an option.

Edward A. Tenthoff - Piper Jaffray Companies, Research Division

Understood, and that's actually really helpful that additional color. One quick other question, too. Obviously, you guys have had a lot of success in the biosurgery area, again growing like a weed with these 2 new ones. Very exciting to see that. What are your longer-term plans here for biosurgery? Obviously, you partnered or sold Osteocel to NuVasive before for very nice terms. Give us a little bit more color around where you think this thing actually ultimately gets.

Charles Randal Mills

Yes, I mean so I would say the Osteocel transaction demonstrates how valuable Biosurgery products can be in very real terms. We sold Osteocel for the first 3 years ourselves and through a distributor. We took it to about a $36 million run rate, generated some very real cash out of that product and it grew very nicely. Ultimately, we made a decision at that time to -- that frankly we needed to be able to focus, to divest it -- that product line to NuVasive for somewhere between $85 million and $90 million that we fully received in cash. And so all in all, that product generated somewhere north of $100 million in non-dilutive cash for Osiris. So when we talk about these biosurgery -- that was just one biosurgery product. And so when we talk about these Biosurgery products, it's important to understand they represent very, very real value. Now, we are not opposed to and we are actually evaluating in certain markets, having helped with distribution. There are some markets where, frankly, we have strong ability to distribute in and there's some markets where we probably are not the optimal ones to attempt to distribute ourselves. We are not looking to divest, though, our Biosurgery products in the same way which we divested Osteocel. We would really just be looking for a way to be able to accelerate the growth of the products beyond what we can do organically.


[Operator Instructions] Our next question comes from Eun Yang from Jefferies.

Eun K. Yang - Jefferies & Company, Inc., Research Division

So in Canada, last -- on the last conference call, you mentioned that there are about 100 to 150 children who may be candidates for Prochymal. How many patients in New Zealand?

Charles Randal Mills

In New Zealand?

Eun K. Yang - Jefferies & Company, Inc., Research Division


Charles Randal Mills

It's small. I don't know what the number is off the top of my head, but the New Zealand market would be substantially smaller than the Canadian market.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And then both countries require confirmatory trial. Is there any kind of a timeline when you may have to start and complete the trial?

Charles Randal Mills

Yes, that's a good question. Let me provide a little clarity around the confirmatory trial. So the confirmatory trial is an open-label usage trial. And so basically the patients that we are normally treating commercially are given the option to also enter into the trial and basically have their surveillance recorded. They're not required to enter into the trial, but they're given the option to enter into the trial and that's -- it's completely their option, but it's not -- they're otherwise commercial patients. And so the trial then enrolled these patients. We have approximately 5 years to have the trial completed. Obviously, if there are some extenuating circumstances that the -- if there are some extenuating circumstances where we have some issues with enrollment, then that's -- it takes longer and you're documenting good faith, then that's not a problem. But the trial size is fairly reasonable. The trial size is estimated to be somewhere between 100 and 150 patients total with somewhere around 70 to 100 of those actually being treated and the others being case-matched controls. And given the number of patients we achieve on a regular basis that's -- we think that certainly is doable within the timeframe. But so far the regulatory agencies have been very accommodating with working through the nuances with the protocol and designing a trial, which gets them the answers that they need. Another key point is that the trial is the worldwide trial. And so as we go and we talk to additional regulatory agencies, the regulatory agencies are comfortable with the confirmatory trial that's being done. So it won't only be drawing from Canadian patients.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And then question on Crohn's disease. Randy, did you mention that the Phase III trial, the patient enrollment has been completed?

Charles Randal Mills

Oh, no. I wish. Oh I wish. No, that patient control -- the patient enrollment continues in Crohn's disease. In Crohn's, the thing -- we are getting close, but just to lay out exactly what's going on there for everyone. As we see started that trial, patients that had failed a biologic, which is a requirement to be in that trial, were relatively -- there were certainly a fair number of them. Since that time, there have been multiple biologics that have been approved. And in the United States in particular, standard of care is to attempt multiple lines of therapy with biologics, sometimes 3 or 4 different biologics. And what our experience has shown is that is if you fail 2 -- more than 2 biologic agents, you end up with Crohn's disease, which is not -- is no longer just inflammatory, but is structural. And where there's structural fibrotic scar tissue and the like built up there, the chances of any immunomodulatory agent reversing that comes much less, if not impossible. So one of the enrollment criteria in our trial is that these patients have to be first or second line biologics failures, not third, fourth or fifth line biologics failures because there's essentially no chance that the drug would be able to rescue them. And so if the standard of care has evolved to where those patients in the U.S. that was what a biologics refractory patient generally looked like, to now of the standard of care being these patients getting treated again and again and again and again. And so what we've done to address that issue and give ourselves the best chance for successful trials, we've just expanded it into other territories where the use of 2, 3, 4 lines of biologic agents is not standard practice. And so sophisticated countries, obviously, because they have these biologic agents, but not where multiple lines of therapy are done. Examples, New Zealand, Australia and the like.

Eun K. Yang - Jefferies & Company, Inc., Research Division

I see. So it's a total of 330 patients, can you comment on how many patients have been enrolled so far?

Charles Randal Mills

I don't know where it is right -- I don't actually off the top of my head know where the number is right now. We are -- I don't know exactly, but it's -- I would say we probably have something like 60 or 70 left to go.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. So is there data still coming out this year or...

Charles Randal Mills

I don't think we'll have data this year.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And lastly, who's paying for this Crohn's disease trial? Is it you or Genzyme?

Charles Randal Mills

That is -- we paid for it, but actually the way that contract was written, that trial is essentially completely paid for. So there's -- most of that trial was paid for at the front end of it, so we're taking very little -- there's very little ongoing cost associated with Crohn's.


I would like to hand the conference back over for any closing remarks at this time.

Charles Randal Mills

Excellent. Well, thank you all for joining us, and we look forward to speaking with you as time goes on at further conference calls or between them as developments exist. Have a good day.


Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.

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