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Osiris Therapeutics Inc. (NASDAQ:OSIR)

Q1 2008 Earnings Call

May 9, 2008 9:00 am ET

Executives

C. Randal Mills - President and CEO

Phil Jacoby - CFO

Analysts

Bill Tanner - Leerink Swann

Ted Tenthoff - Piper Jaffray

Eun Yang - Jefferies

Andy Schopick - Nutmeg Securities

Jon Robohm - Gagnon Securities

Gabe Hoffman - Accipiter Capital

Alexander Doman - Caducious Fund

Operator

Good morning, everyone. Before we begin I'd like to remind everyone that this conference call 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 call over to Dr. C. Randal Mills, President and CEO of Osiris Therapeutics.

C. Randal Mills

Good morning and welcome to our first quarter 2008 conference call. Today I will be providing an update of our business, as well as providing further details on the Osteocel transaction we announced yesterday. Phil Jacoby, our CFO will then provide an overview of our financial performance. I'll briefly outline our priorities for the coming months and then we will take your questions. But first, let me provide a quick overview of Osiris for those of you who may be new to the story.

Osiris Therapeutics has established itself as the leader in the exciting field of stem cell medicine. Osiris currently produces and sells Osteocel for regenerating bone in orthopedic indications. Prochymal, an intravenous formulation of adult mesenchymal stem cells or MSCs is currently in Phase III clinical trials for three indications including acute and steroid refractory Graft versus Host Disease as well as Crohn's disease.

Prochymal has been granted fast track status by FDA for all three of these indications. FDA established the Fast Track programs to accelerate the development of drugs that show promise for treating life threatening conditions. Prochymal has also been granted Orphan Drug status by both FDA and EMEA. Orphan Drug designation provides incentives to companies that develop drugs for underserved patient populations.

Osiris has also partnered with Genzyme Corporation to develop Prochymal as a medical counter measure to nuclear terrorism and was recently awarded a contract by the Department of Defense fully valued at $224.7 million to develop and stockpile Prochymal for Acute Radiation Syndrome.

The company's pipeline of other internally developed biologic drug candidates currently in human clinical trials include Chondrogen for arthritis in the knee as well as Phase II programs evaluating MSCs for acute MI in type 1 diabetes. Osiris has developed an extensive intellectual property portfolio to protect the company's technology including 47 US and 253 foreign owned or licensed patents.

Now to our update. To start out let me say that I am very pleased with the exceptional progress Osiris has made since the first of the year and believe that we are squarely on track to help Prochymal become the world's first approved stem cell therapeutics. Therefore let me begin with an update of recent activities in our clinical development programs.

We continue to experience strong enrollment in our ongoing Phase III clinical trials. Let me start with our lead indication for Prochymal steroid refractory Graft versus Host Disease or GvHD. This trial has 77 sites worldwide which are active and treating patients with this life threatening disease. During the quarter, we did not experience a significant drop in enrollment as we thought we might have due to the addition of our Phase III trial evaluating Prochymal as a first line agent for GvHD.

Instead it appears that the few trials are having a more synergistic effect on one another with both programs working together to increase the level of awareness among clinicians about Prochymal. Although the rarity of the disease often leads to sporadic enrollment that prevents us from giving a precise estimate of trial completion, we do now believe that the end is clearly insight for this landmark trial.

We are excited to announce that Osiris has been given clearance by the United States Food and Drug Administration to initiate an expanded access treatment program for Prochymal making the investigational product available to children with life threatening GvHD. So while we complete enrollment and diligently work towards registration of Prochymal for GvHD, we will be able to offer treatment to more children faster through this important program.

The Expanded Access Program was created in a joint effort by FDA and Congress to make promising new drugs more widely available to desperately ill patients. FDA Expanded Access Treatment Programs allow for investigational drugs for life threatening diseases can be made available to patients under certain circumstances during evaluation in late stage clinical trials. To obtain this special status, FDA must determine that the available scientific evidence taken as a whole demonstrates the drug maybe effective or does not pose significant safety risks. Under the program we will be able to treat children two months to 17 years of age inclusive who have GvHD that is not responsive to steroid therapy.

We are excited about this new development and believe it illustrates beautifully the purpose and importance of the Osiris mission. Our Phase III program for the treatment of moderate to severe Crohn's disease that is not responsive to biologic therapy also continues to enroll very well. We now have 55 sites active in the United States and Canada. Trial operations are progressing smoothly and we continue to receive positive feedback from our investigators about the trial and the need for an effective therapy for these patients.

In addition to our Phase III programs we have a Phase II program in type 1 diabetes which is been conducted in partnership with the Juvenile Diabetes Research Foundation. JDRF is providing $4 million in funding for the clinical evaluation of Prochymal to prevent disease progression and protect pancreatic islet cell in patients with new onset type 1 diabetes. And lastly following positive one year data, we are moving forward with trials of Prochymal for acute myocardial infarction and Chondrogen for osteoarthritis in the knee.

Another area of significant effort has been our work in support of our recently awarded contract from the Department of Defense to develop and stockpile Prochymal as a counter measure for acute radiation syndrome. As you may recall, the award is fully valued at $224.7 million including purchase options for Prochymal.

DoD and specifically the Army at Fort Dietrich has been a true partner in the best sense of the word as we progressed through early stages of this contract. We are now conducting the appropriate animal trials and regulatory efforts to advance the program. Along with our partners at Genzyme, we are honored to be developing this promising therapy which may one day be used to help the brave men and women of our armed services.

As many of you know, Osiris intellectual property portfolio is both broad and strong due to our pioneering scientific efforts and long-term dedication to this space. Recently one of our European patents involving MSCs applied to a broad range of cardiovascular therapies was challenged by two opponents. We are pleased to announce that all counts of that opposition were decided in our favor earlier this week. This case highlights both the strength of our intellectual property position as well as our unwavering result to defendants.

Now turning to Osteocel, in terms of production, we continued to execute well. For the first quarter, Osteocel sales reached $7.5 million as our previous expansion efforts continue to payoff. The value that Osiris has created in Osteocel did not go unnoticed. Yesterday we announced that we have entered into a definitive agreement with NuVasive for the Osteocel business. Given NuVasive's impressive growth in the spine market we believe that they are an excellent partner for this first in-class product.

The deal is comprised of two major agreements. The first is an asset purchase agreement worked up to $85 million including an upfront payment in milestones. The second is an 18 month manufacturing agreement during which time Osiris will continue to process Osteocel and ensure a smooth transition of the business to NuVasive. The manufacturing agreement is worked up to $52 million in revenue to Osiris over the 18 month period.

Let me breakdown the payment schedule for the $85 million asset purchase agreement. First there is an upfront cash payment of $35 million due at closing. The remaining payments are milestone based and fall into three major categories. There is $17.5 million in milestone payments for the delivery of product as specified under the supply agreement. There is another $17.5 million due at the completion of the manufacturing agreement and facility transfer.

And lastly there is a $15 million milestone payment due upon NuVasive's achievement of $35 million in cumulative Osteocel sales. Let me be clear we believe that these milestones are fully achievable and anticipate monetizing the entire $85 million under the asset purchase agreement and $52 million in revenue under the supply agreement between now and the end of 2009.

As part of the transaction Osiris retains the rights to culture expanded versions of the product, previously referred to as Osteocel-XC. However, included in the agreement is an option for NuVasive to acquire the rights to the expanded version of the product at predefined terms as well as a right of first negotiation if Osiris elects to partner the product with a third party. Closing of the transaction is subject to Hart-Scott review, Osiris shareholder approval and other customary closing conditions.

We are pleased with this deal for three main reasons. First, it demonstrates the ability of Osiris to generate substantial revenue through our proprietary technology platform and underscores the commercial value of our products. Second, it allows us to truly focus our efforts and resources on our core products. This is especially true for Prochymal as commercial launch draws near. And finally it provide substantial amount of non-dilutive capital over the near term. We believe the deal is synergistic to both NuVasive and Osiris and we look forward to working with them to maximize the value of Osteocel.

With that I would like to turn the call over to Phil Jacoby our Chief Financial Officer for a brief review of our financial results. Phil?

Phil Jacoby

Thanks Randy, good morning. I will now take a few minutes to provide a more detailed look at our financial results for the first quarter of 2008. Upon entering into the definitive agreement to sell the Osteocel product line, we eliminated the operations of our Osteocel business from our ongoing operations and have presented the results of this group for all periods as discontinued operations as required by General Accepted Accounting Principles.

As Randy mentioned Osteocel sales were $7.5 million during the first quarter of 2008 compared to $2.0 million in a comparable period to 2007. Revenues excluding Osteocel were $4.4 million in the first quarter of 2008 and consisted of $0.3 million from our contract with the Department of Defense for preclinical studies on ARS and $0.1 million in royalty fees.

Comparable revenues for the first quarter of 2007 were $0.3 million and consisted primarily of license fees from a research, development and commercialization agreement which has since been terminated enabling us to retain the worldwide rights to Prochymal for cardiac indications.

Our loss from continuing operations for the first quarter were $19.1 million compared to a loss from continuing operations of $10.1 million in the previous year. This loss was driven by the continued advancement of our clinical trial. We currently have eight active clinical trials. We've reported a net loss of $15.6 million for the first quarter of 2008 compared to a net loss of $11.5 million in the comparable period of 2007.

Research and development expenses for the first quarter were $16.7 million compared to $8.5 million in 2007 and represented 86.5% of our total operating expenses. The cost of our Phase III pivotal trials and other active clinical trials was the primary cost driver for the first quarter of this year.

General and administrative expenses for the first quarter of $2.6 million represented 13% of our total operating expenses. G&A expenses of $1.5 million were incurred in the first quarter of 2007, which represented 15% of our total operating expenses during the first quarter of last year.

The increases in G&A expenses was largely driven by increases in professional staff as we prepare for commercialization of Prochymal and the cost of operating our two facilities. The lease on our Baltimore, Maryland facility expires in September of this year and we will consolidate operations and staff in our Columbia, Maryland headquarters over the next two quarters.

We had available cash of $42 million at March 31, including $12 million of cash in short-term investments and $30 million available to us under our credit line. Net cash used for operations was $11.3 million for the first quarter, compared to $8.6 million for the first quarter of 2007.

Thank you and with that I'll turn the call back to over Randy.

C. Randal Mills

Thank you, Phil. I would now like to take a moment to outline our thinking for the upcoming months. First, we look forward to completing our Phase III pivotal trial for valuating Prochymal for the treatment of steroid refractory Graft versus Host Disease. Concurrent with these efforts we will continue to initiate sites and drive enrollment in the second Phase III pivotal trial for evaluating Prochymal as a first line agent for GvHD.

Second, we will continue enrolling patients in our Phase III trial evaluating Prochymal for the treatment Crohn's disease and are very excited about the prospects for Prochymal in this larger indication. Third, we will work to rapidly close the Osteocel transaction and perform against the agreements to supply NuVasive ample product while recognizing future milestone payments in a timely fashion.

And finally, we look forward to continued advancement of our late stage pipeline including the initiation of our Phase II cardiac study and Phase II/III Chondrogen study and continued work with Department of Defense advancing Prochymal as a counter measure for acute radiation syndrome.

Osiris has had a remarkable start to 2008 and the company is performing exceptionally well. While we understand that challenges lie ahead, we believe that we are up to those challenges and have the resources necessary to accomplish our mission of making Prochymal the world's first approved stem cell drug.

I would like to conclude my comments today by offering my sincere thanks to the entire Osiris organization, including our Board and Chairman and especially the Osteocel team for yet another solid quarter. Thanks you very much for listening today. At this time I'll turn the call back over to the operator who'll open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Bill Tanner with Leerink Swann.

Bill Tanner - Leerink Swann

Thanks, couple of questions Randy. Just first on the NuVasive agreement, just curious if Orthofix was in the mix, in terms of looking at Osteocel. It seems like they would have had a logical choice and I don't know if you can comment as to whether they were and what was ultimately what lead to go on with NuVasive?

C. Randal Mills

Sure. So, it's two [time], so Orthofix certainly did have an opportunity to acquire the business. We did talk with them about that, ultimately we didn't come to an agreement with them. But I will say that we intend to and NuVasive intends to operate under the Orthofix agreement as stipulated for the remainder of 2008.

Bill Tanner - Leerink Swann

Okay. So, they did have an opportunity?

C. Randal Mills

Correct.

Bill Tanner - Leerink Swann

Okay. And then the second thing just its kind of curious, it seems like we are certainly loosing some visibility at least on our side on some of these clinical trial wrap up. So just going back and I was looking at I think the second quarter transcript and there is the expectation that the Prochymal steroid refractory GvHD trial. I think there is a comment that enrollment could complete in the first quarter of '08. And so now it sounds like I know you said that you can see the light I guess, but how should we be thinking about this then or I guess where with enrollment actually not falling off, can you provide some better clarity on the timeline?

C. Randal Mills

Yeah, let me be as clear as I can here. So enrolling steroid refractory Graft versus Host Disease trial, the size of the one that we have 240 patients is a difficult event and because the bone marrow transplant patient population often has a lot of investigational agents not for GvHD, but for other side effect conditions that go along with bone marrow transplantation.

Predicting enrollment can be difficult and we had a trial that was subject to that, an anti-CMD drug that was under investigation was during some part of the trial siphoning patients off who otherwise would be able to enter the trial because the FDA won't allow us to have two experimental therapies on the same patient. So, that gave us some challenges in trying to accurately forecast when the trials would enroll.

Now, again, as I mentioned it is a rare disease and so there is generally a periodic nature to the way enrollment occurs, but as clear as I can be about it we do not believe we will actually finish enrollment in the current second quarter. It is very possible that, that event will take place in the third quarter and perhaps the fourth quarter. But I would say right now would be on track for the third quarter.

Bill Tanner - Leerink Swann

And so then from a last patient I think the transcript said, think you had said a 100 days so you know if you could possibly be having date at the end of this year, early next year I mean so contemplating a 2009 launch is still?

C. Randal Mills

Absolutely.

Bill Tanner - Leerink Swann

Okay. And then just any -- and I know that on the last call you guys talked about passing on the interim on the Crohn's, I mean is there any update as to the enrollment pace there?

C. Randal Mills

The enrollment pace there is good and our confidence in that trial is high. So given those two we have elected to pass on the interim analysis, spare the alpha and get the full trial enrolled as quickly as possible. Still little too early for us to give an exact forecast on when that -- we have 55 sites enrolling patients in a 258 patient trial, so it's -- we are pleased with how that's coming along.

Bill Tanner - Leerink Swann

Okay. All right, thanks.

C. Randal Mills

Thanks Bill.

Operator

Our next question comes from Ted Tenthoff with Piper Jaffray.

Ted Tenthoff - Piper Jaffray

Great, thank you and congratulations on the string of good news this week.

C. Randal Mills

Thank you.

Ted Tenthoff - Piper Jaffray

Quick question if I may, just kind of more from an accounting standpoint. How do you guy's intend to recognize the upfront payment, the milestones and the revenues. Will the upfront be amortized, will it all fall into a check, will you start to recognize the contract supply, so obviously now Osteocel is going to a discontinued ops? Will it re-continue starting in the third quarter when we get the supply agreement kicking in. Just give me a sense of how all those things are going to fit together?

C. Randal Mills

Certainly, on the Osteocel revenue stream that will be treated as discontinued ops throughout the manufacturing and supply periods and that will show us one line in the income statement. However there will be some more detail provided through footnote disclosures.

On the payment that's due to us on closing that will all be recognized upon closing and offset against that will be the cost of the assets that will be transferred with the transaction. The milestone payments will be recognized as income to the company as they are received.

Ted Tenthoff - Piper Jaffray

Great and Randy you mentioned with Osteocel-XC that you guys will continue to develop that and I think NuVasive may be has a most of the time it is predefined auction right can you give us more detail on that is there a specified amount?

C. Randal Mills

Sure the, so the rights to Osteocel-XC or the culture expanded version of the product stays with Osiris and was not part of the consideration. However the agreement does give NuVasive the rights. A first right of negotiation auction and also gives them a right to acquire exclusive license for Osteocel-XC at a predetermined price. That predetermined price is $75 million for the license fee plus a development agreement and manufacturing agreement that go along with it.

Ted Tenthoff - Piper Jaffray

Great that's helpful. And then actually this one last about housekeeping, what are 2Q Osteocel gross margins?

C. Randal Mills

Osteocel gross margins were 50% I think.

Phil Jacoby

That's correct for the quarter.

C. Randal Mills

Okay.

Ted Tenthoff - Piper Jaffray

Very helpful good stuff keep it up.

C. Randal Mills

Thank you.

Operator

Our next question will come from Eun Yang with Jefferies.

Eun Yang - Jefferies

Hi, thanks very much. NuVasive you said that the deal would likely be closing in the third quarter, so I'm assuming that you are going to receive an upfront payment of $35 million at that time. But in terms of the other milestones to $17.5 million -- can you actually give us some timing when you might realize that those payments and I understand that completion of manufacturing transfer could take place about 18 months after the deal closing?

C. Randal Mills

Sure. We'll close the deal as quickly as we can. We do have to go through shareholder approval and Hart-Scott review and so the third quarter we think would be at the earliest. Obviously we're going to try to do everything we can to get the deal closed earlier and if it's possible to close it in the second quarter we will do that.

The way we think of the monetization of this deal between 2008 and 2009 is as such. We think with the upfront payment milestones, we will probably receive about $40 million in 2008 and $45 million in 2009, because the manufacturing milestones are on an as delivered basis. Those milestones come in as the product is manufactured, but all of that get's completed with the manufacturing agreement before the end of 2009.

There is also the $15 million milestone payment with NuVasive's achievement of $35 million in cumulative sales, so with them forecasting $15 million this year and another $25 million next year we would anticipate that would probably happen sometime in the second half of '09.

Eun Yang - Jefferies

Okay. I think that you mentioned that I might have missed it. The $35 million upfront payment is it going to be recognized a one time?

C. Randal Mills

Yes.

Eun Yang - Jefferies

Okay.

C. Randal Mills

It will get recognized at one time and offset against the assets which are going along with the deal. The remainder of the milestones get recognized as they occur and don't have an offset.

Eun Yang - Jefferies

Okay. And then also be the current deal with Blackstone, it is actually set to expire towards the end of this year. So does that mean it's not going to be renewed and all the Osteocel [getting] would be transferred to NuVasive.

Phil Jacoby

Osiris and NuVasive both intend to honor the agreement which does expire at the end of 2008. What happens beyond that is up to NuVasive and Orthofix to work through but it's no longer for Osiris to work through.

Eun Yang - Jefferies

Okay. And also on Osteocel-XC, in the previous conference call you kind of mentioned that given lot of clinical activities with Prochymal there was kind of on hold that in light with this agreement with NuVasive. Are you planning to actually reactivate that program?

C. Randal Mills

Well, we have activity going on in orthopedics using culture expanded versions of the product in certain orthopedic indications and are contemplating certain trials. I think for right now, we would be ready to launch into a clinical trial with Osteocel-XC and I think what we will be interested in seeing is as time goes by here whether or not NuVasive elects their Osteocel-XC option or whether somebody else comes in and wants that. The option with NuVasive runs through the term of the manufacture agreement so that expires in December 31of 2009.

Eun Yang - Jefferies

Okay, and then last question. This separate agreement with NuVasive, the $52 million supply agreement, can you actually talk about what that is and when you might actually see that might be coming in?

C. Randal Mills

Yeah, this is just simply us manufacturing the product and selling it to NuVasive. So it's exactly what we do now, so our current operations just continue to go on. It's essentially a purchase commitment from NuVasive for up to $52 million. Now obviously, its incumbent upon us to manufacture $52 million of the product, but as we manufacture and ship the product we recognize the revenue against that and so it will be up approximately one-third of it will be in 2008 and two-thirds of it in 2009 because this is an 18 month agreement.

Eun Yang - Jefferies

Okay, thanks very much.

C. Randal Mills

Thank you.

Operator

Our next question will come from Andy Schopick with Nutmeg Securities.

Andy Schopick - Nutmeg Securities

Thank you and good morning. I would like to touch on another subject, the DoD contract for Prochymal for acute radiation syndrome. One of the guys who was following Hollis-Eden and remember when its project Bioshield was announced and Hollis-Eden was developing a drug called NEUMUNE for an ARS application and the whole thing ended up being a complete bust.

Looks like you've gone on a somewhat different route. But what I'd like to ask you is in connection with the DoD contract, what do you anticipate the trial period to look like or the trial structures to look like the development cost to bring this to a commercial usable type of product? And how you would anticipate revenue to be recognized under this $224 million contract in terms of the timeframe in which you might begin to start to recognize and see revenue?

C. Randal Mills

Sure, one of the things that we liked about our opportunity to go into acute radiation syndrome and specifically provide for the Department of Defense this product. Was that it was in no way distracting from our other efforts. So Prochymal which is the drug is in Phase III pivotal's for Graft versus Host Disease and for Crohn's disease, and the products coming to market for that anyway.

So it makes the development effort rather efficient at time of when we think we would actually be registering the product for acute radiation syndrome will probably have somewhere north of 1,500 patients treated under clinical trials with Prochymal. So the development costs that we have to incur in order to add on ARS as an indication for Prochymal are actually fairly small and the timeframe is relatively shortened, because the clinical trial that are necessary to demonstrate safety under the animal rule are already ongoing.

So, in our contract -- the contract contemplated $24.7 million in development costs and we anticipate that the development efforts could be complete sometime in perhaps 2009 or 2010. However and this is the big however. We are working under the animal rule and the animal rule is a challenging rule to work under. And so we are currently in negotiations with FDA on the specific animal trial designs and the specific sequence of how they want to see animal work progress and until that comes about it frankly would be just nothing but speculative to give an exact timing of recognition of revenue. But we do believe it would be possible as we have laid out the plans the Department of Defense to be shipping the product to DoD in 2010. But again until both the Department of Defense the FDA have come to agreement on exactly what is going to be needed it will be difficult.

Andy Schopick - Nutmeg Securities

Randy from a biological or a science point of view could you comment at all about the approach that you are taking with Prochymal say compared to NEUMUNE, which is really the only other one that for me but although I do think there is another private company that's kind of pursuing this or public company that was pursuing this approach I just can't remember, but can you comment at all about that?

C. Randal Mills

Well mechanistically and conceptually to try and understand why Prochymal would be supportive for this. Is that Prochymal, it contains mesenchymal stem cells and mesenchymal stem cells are the way our body naturally and normally responds to tissue injury.

Andy Schopick - Nutmeg Securities

Sure.

C. Randal Mills

So there actually have been studies done in patients that are either given or animal subjects that are either given thermal burns or radiations burns the number of MSCs that mobilize in their body increases in response to that injury and the MSC is going in graph.

Now when mesenchymal stem cell comes into an area of radiation injury it does a couple of things which were interesting. First through a series of factors MSCs down regulate inflammation and so they are able to down regulate TNF-alpha and interferon-gamma. They can positively affect inflammatory cytokines and so they down regulate the current inflammation.

They also prevent apoptosis from taking place, so they block further cell damage from taking place and then the last thing that they secrete a series of growth factors and one of the more interesting and more important one is KGF keratinocyte growth factor otherwise known as FGF7. In response to inflammation and tissue damage and this is all very well documented.

KGF is good and helpful among other things the reepithelization of tissue. So, in gastro-intestinal forms of acute radiation syndrome where you have a lot of alteration and depletion of the intestinal mucosa. These cells are able to block that inflammation and then promote the reepithelization of the mucosa. So it's sort of an interesting and nice approach.

Andy Schopick - Nutmeg Securities

Well just to come back to one other point here. I remember when Hollis-Eden was pursuing this, they were pursuing it directly with the Department of Health and Human Services. And again it was under the animal rule and it was delayed and delayed and delayed and in the end they got nothing in $90 million to $100 million of shareholder money went down to drain.

What is the maximum exposure that you think you would have in terms of cost of capital so to speak to pursue this contract with DoD and for some reason it just didn't work out as expected?

C. Randal Mills

We just don't have any. We unlike Hollis-Eden, so Hollis-Eden entered into the competitive range with Health and Human Services, but as I understand that arrangement, they were actually never awarded the contract. We entered the in competitive range with the Department of Defense and then after being selected for the competitive range we went on and we were awarded the contract. Under that contract the Department of Defense is fully funding our development activities as well as some overhead associated with those development activities? So the exposure we have if none of this happens or goes away is literally none.

Operator

(Operator Instructions) our next question comes from Jon Robohm with Gagnon Securities.

Jon Robohm - Gagnon Securities

Hi Randy congratulations on recognizing a gigantic win for your company with regards to Osteocel. I think you brought a product on that never existed prior to your rival so that's impressive. With regards to access to supply of tissue, what has NuVasive stated their ability to gain allograft tissue, because as we all know this is a resource constrained marketplace for that particular product, what are they doing about that going forward?

C. Randal Mills

We have relationships as you know with a number of different tissue recovery agencies, and we've really developed pretty solid relationships with them one of the things that we really try to do is reach out essentially to many of the very high quality agencies that recover and control the tissue that's available in the United States. So under this agreement and as part of this agreement it's recognized that it's going to be very important to keep these tissue recovery agencies engaged and excited about the product.

Now for us and for NuVasive the nice thing is Osteocel is a first in class and only in class product. And that provides these recovery agencies a nice story to go back to their community whether they are actually able to supply products or supply tissue that gets turned into a stem cell product of which there is nothing as available. And so we value those relationships very much, we do we take the appropriate proactive action to make sure they stay good and healthy and we're going to continue to do that going forward with NuVasive.

Jon Robohm - Gagnon Securities

Okay, wonderful thank you very much.

C. Randal Mills

Thanks.

Operator

Our next question comes from Gabe Hoffman with Accipiter Capital.

Gabe Hoffman - Accipiter Capital

Good morning, Randy congratulations on the agreement. Just a couple of I guess financial housekeeping questions to make sure that I'm modeling this correctly going forward. So if I were to think of sort of your income from discontinued operations is about $3.5 million in the quarter which is 50% gross margin on sales you used about $11.3 million in cash from operations in the quarter. So net, net when the business is actually sold on an operating basis just purely operating the company would have about an operating cash burn of about 15 a quarter or so?

Phil Jacoby

Yeah, it's right.

Gabe Hoffman - Accipiter Capital

And in terms of thinking about the net cash, sort of back to Osiris to get the $85 million over the balances '08, '09 which is obviously that just cash and then the 52 should we think of that as, since it’s a transfer having about that seems sort of 50% gross margin so net-net you'll be getting 85 plus sort of a net 26 in cash from the supply arrangement?

C. Randal Mills

Under the agreement it won't be that high and we have a number of things going on right now and the companies are consolidating everything to one location. So a lot of allocation and lot of cost is going to go away. But there is a different transfer price involved under that and so it probably won't be another $25 million but it could be another $15 million or so.

Gabe Hoffman - Accipiter Capital

Okay. So out of the 52 there is a sort of gross or profit back to Osiris net of costs sold will be about 15?

C. Randal Mills

Yes. Again it becomes difficult to say for sure but all told when we look at fully monetizing the deal plus cash on hand plus our access to our line of credit that was $140 million.

Gabe Hoffman - Accipiter Capital

Sure. Right, it looks like this transaction net-net will yield about 100 which will get you about round about seven quarters of cash, six, seven quarters. Something like that you know.

C. Randal Mills

Something like that, yeah.

Gabe Hoffman - Accipiter Capital

Okay. Great just wanted to make sure kind of had the ballpark, I understand not exact but just a ballpark was in the right place. Thank you.

C. Randal Mills

Thanks.

Operator

Our next question will come from [Dr. Alexander Doman with Caducious Fund]

Alexander Doman - Caducious Fund

Good morning. Hi, Randy I heard you speak with just peripherally about osteoarthritis trial and I wonder where that stands. How large an enrollment might you expect, do you consider that Phase II, how many centers and how long might that Phase II enrolment go on?

C. Randal Mills

Sure. So while we have a product called Chondrogen which finished the Phase I/II trial in November of last year and the results were surprisingly good. We had a statistically significant improvement over the control at six weeks, six months and one year. Based on that data we are currently preparing for what would be one of the two registration trials for that product. We anticipate the first of those two registration trials to be approximately 200 patients. That I believe is before the FDA, right now, its not it's about to go before the FDA. And we look forward to initiating and actually enrolling that trial in the second half of this year.

Alexander Doman - Caducious Fund

Okay. Thank you very much.

C. Randal Mills

Thanks.

Operator

That does conclude today's question and answer session. At this time for any additional or closing remarks, I would like to turn the conference back over to Dr. Mills. Please go ahead.

C. Randal Mills

Thank you very much for joining us. This concludes our first quarter 2008 conference call.

Operator

Ladies and gentlemen, that does conclude today's teleconference. We appreciate your participation. Everyone have a great day.

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Source: Osiris Therapeutics, Inc. Q1 2008 Earnings Call Transcript
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