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Osiris Therapeutics Inc. (NASDAQ:OSIR)

Q3 2012 Earnings Call

November 5, 2012 9:00 am ET

Executives

Randal Mills – President, Chief Executive Officer

Philip Jacoby – Chief Financial Officer

Analysts

George Steinberg (ph) – Anson

Operator

Good morning everyone. Welcome to the Osiris Therapeutics Third Quarter Earnings conference call. Before we begin, I would like to remind everyone that this conference may include forward-looking statements that involve uncertainties and risk. Actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the sections 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 conference over to Dr. C. Randal Mills, President and CEO of Osiris Therapeutics. Please go ahead, sir.

Randal Mills

Thank you and good morning. Thank you all for joining us for our third quarter 2012 conference call. Seated alongside me for the entire call, I hope, is Phil Jacoby, our Chief Financial Officer. Today I’ll be providing you with an update on the outstanding work our teams are doing across the company. In therapeutics, I’m going to focus on our lead product, Prochymal or remestemcel-L, which earlier this year, as you know, became the world’s first approved stem cell drug. I’ll also cover the tremendous growth taking place in biosurgery which today are anchored by our Ovation and Gravix product lines. Phil Jacoby will discuss our financial performance over the quarter, and in closing I’ll offer a few summary comments before turning the call over to the operator. So let’s begin.

Earlier this year, we received a landmark approval of Prochymal for the treatment of children with life-threatening graft versus host disease. This was the culmination of 20 years of hard work which along the way produced many firsts for the entire field of stem cell medicine. While the impact of these accomplishments cannot be overstated, we still have much work to do. With Prochymal, that means we will continue to pursue regulatory approvals for graft versus host disease around the world.

Acute GvHD is a devastating disease that kills up to 80% of the children it affects. As a first line of therapy, physicians generally use steroids off-label with a success rate of only about 50%. However, when steroids fail, children with severe GvHD face almost certain death and a median survival of less than 80 days. These are the patients we help with Prochymal. Prochymal has been shown to rescue approximately two-thirds of children with end-stage GvHD and as a result significantly improves survival.

Having now received approvals in Canada and New Zealand, Osiris has two main areas of focus for Prochymal right now. One is to secure appropriate reimbursement for Prochymal and continue the necessary pre-commercialization activities. The other is to gain further approvals in other countries with meaningful transplant programs. During the quarter, Osiris met with reimbursement officials in Ottawa about pricing guidelines for Prochymal. The process consisted of an extensive review to identify potential treatments for the management of GvHD that could serve as a comparator for Prochymal. However, the conclusion was that there were no comparators for Prochymal in this indication and as a result the sponsor is permitted to set the price in the marketplace based on its own risk-benefit assessment. We are currently working with reimbursement specialists in Canada to finalize these pricing plans.

The second major focus for Prochymal is to obtain additional approvals in territories with meaningful transplant programs, and we are working diligently to provide agencies around the world with the information they need. We were pleased to have received notice from Swissmedic that Prochymal will be evaluated under its rapid authorization procedures. This designation typically cuts the evaluation period for promising new drugs in half. Swissmedic approved the use of rapid authorization procedures following its review of summary clinical data for Prochymal. Rapid authorization procedures are only permitted by Swissmedic if the clinical evidence demonstrates a high potential for benefit for a severe, debilitating or life-threatening disease, and where no alternative treatment option exists. We expect to have further regulatory updates regarding Prochymal in the coming months.

Outside of GvHD, enrollment in our Phase III clinical trial evaluating Prochymal in patients with moderate to severe treatment-resistant Crohn’s disease is ongoing. We are now starting to see some increased enrollment as a result of our expansion of the trial into new territories. In addition to Crohn’s, our Phase II trial in acute myocardial infarction continues to generate high-quality outcome data surrounding the benefit of treatment with Prochymal in preventing heart attack patients’ progression to heart failure.

And finally, we were able to end our collaboration agreement with Sanofi after invoking certain dispute resolution procedures. The outcome was highly favorable to Osiris in that we regained all rights to Prochymal and Chondrogen worldwide. There are no further financial responsibilities for either party and Osiris is now free to engage other interested parties for the commercialization rights to Prochymal and Chondrogen.

Turning to biosurgery, the bottom line is that our sales continue to show excellent growth, up more than six-fold from the third quarter of 2011 and 32% over the last quarter alone. Our sales numbers reflect the success we are having strengthening our commercial team and the very real benefit our patients and surgeons are seeing with our best-in-class cell therapy platform of products. In biosurgery, we are leveraging our cell therapy experience to develop and market biologically-based surgical constructs for improved wound healing and tissue regeneration. Instead of systemically infusing the stem cells, as we do with Prochymal, the approach in biosurgery is to make biologically-based constructs and apply them locally where they are needed. This avoids much of the cost associated with systemic treatment.

The Grafix family of products is applied directly to acute and chronic wounds such as burns and diabetic foot ulcers. Clinically, it has shown remarkable ability to close very challenging wounds and is also being used to treat burn victims, avoiding much of the scarring and fibrosis that would otherwise typically be seen. Our strategy with Grafix is to penetrate the highly concentrated but limited burn market where approximately 65 centers account for 80% of the addressable burns. From there, we are expanding into the limb salvage and ultimately outpatient DFU markets, which while fragmented are much larger, exceeding a billion dollars in opportunity. To support these activities, we continue to bring on new talent in sales and marketing, are working to gain expanded reimbursement coverage, and are conducting clinical trials to demonstrate the benefit of treatment with Grafix.

Our Ovation product line is used in orthopedic applications such as spinal fusion and fracture repair. Ovation has seen particularly strong uptake in spinal fusion. There are nearly 500,000 spinal fusion procedures performed each year in the U.S., representing a market opportunity of over $900 million annually. Ovation’s growth comes at a time where other established products are experiencing a downturn in usage. We believe that we are well positioned to continue to capture new market share.

And finally, we will soon see the expansion of biosurgery once again with the introduction of our new product, Cartiform (ph), for the treatment of acute cartilage injury. Cartiform has the potential to significantly transform the way surgeons approach cartilage injury. Stay tuned as there will be more to come on this topic.

Since biosurgery launched last year, we are very pleased with the rates of adoption, conversion and overall growth. We are particularly gratified by the positive feedback we are getting from our surgeon customers and expect there is significant opportunity for continued long-term growth.

With that, I’ll turn the call over to Phil Jacoby, our Chief Financial Officer, to cover the financial highlights for the third quarter 2012. Phil?

Philip Jacoby

Thank you, Randy. Good morning everyone. I will now briefly discuss the company’s third quarter financial results. We finished the quarter with approximately 39.4 million in cash, receivables and short-term investments, and we continue to remain free of any debt. As Randy mentioned, revenues from the distribution of our biosurgery products rose 32% from the prior quarter of this year to $2.2 million. Biosurgery revenue in the third quarter of last year was $331,000. Our gross margin remained very strong at 66% as we continue to increase our production capabilities and more efficiently utilize our clean room facilities. Our other revenue during the third quarter of this year was $230,000 and consists of cost recovery on the adult GvHD expanded access program, and royalties. Total revenues for the third quarter of fiscal 2011 were 10.6 million and consist primarily of amortized license fees.

Total R&D expense for the third quarter of this year was 3 million compared to 5 million for the same period last year. We spent approximately 1.2 million during the third quarter of this year on R&D for our biosurgery operations compared to biosurgery R&D of approximately 600,000 in the third quarter of last year. The decline in R&D expenses in our therapeutics operation from 4.4 million in the third quarter of fiscal 2011 to 1.8 million during this quarter was primarily the result of the completion of enrollment of our myocardial infarction trial during the second half of last year.

General and administrative expenses for the quarter were 1.6 million this year compared to 1.4 million in the comparable period of last year. G&A in our biosurgery segment increased from approximately 200,000 in the third quarter of fiscal 2011 to a little more than 650,000 during the current quarter as we increased our commercialization activities.

We reported a net loss of 2.9 million during the third quarter of fiscal 2012, which represents basic and diluted loss per share of $0.09. In the third quarter of fiscal 2011, we reported net income of 4 million, which represented earnings per share of $0.12.

Net cash used in operating activities for the third quarter of this year was approximately 1.6 million compared to 4.4 million in the third quarter last year. The reduction in our net cash burn this quarter was augmented by the receipt of income tax refunds of approximately 2.2 million in spite of our investments in increased inventories and receivables of our biosurgery business.

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

Randal Mills

Thank you, Phil. We are now transitioning from a development-stage company to a commercial-stage company, and along with this transition our goals too must change. For 20 years, we were focused on obtaining the world’s first approved stem cell drug. Today, our focus has turned to long-term growth and profitability. With that, you will see new faces with commercially oriented skills join the team. You’ll see investments made in sales, marketing, and reimbursement activities; and yes, you will see new cutting-edge products launched.

But let me be clear about two things which will not change: one, we will not relinquish the scientific lead we have gained throughout our 20-year history. It is far too valuable. Our in-depth understanding of this technology has a significant impact as much when we are talking to a new physician as it does when we are developing a new product. It is a core strength at Osiris and we will nourish it. Two, we will not change the way we think about our patients, that the best thing we can do for Osiris is to always do the best thing we can do for them.

I’d like to express my sincere gratitude to all of you for your ongoing support, our patients, our physicians, our distributors, and the entire Osiris team for their dedication.

With that, I’d like to turn the call back over to the operator who will open the line to questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

We have a question from George Steinberg from Anson.

George Steinberg – Anson

Hello?

Randal Mills

Hello.

George Steinberg – Anson

Hi. Can you tell me whether a new drug application has been submitted to the FDA, and if not, what seems to be holding it up?

Randal Mills

Sure. First of all, we don’t submit new drug applications for the kind of work we do at Osiris. I think it’s an important thing to understand and I’m glad the point was brought up. With regards to the work we do, we fall under 351 or 361 products; and 351 and 361 products are regulated in the Center of Biologics Evaluation and Research. In the Center for Biologics Evaluation and Research, the appropriate application for a drug like remestemcel-L is a biological license application. We have prepared the biologics license application in the form an electronic common technical document. That document has been submitted to a number of different countries, it has been reviewed by a number of different countries, it’s gone through panel review now in a number of different countries. We have received very good feedback on that obviously as it went through the review and approval process, and beyond that we are just simply updating those changes and we expect the filing with the United States Food and Drug Administration to take place shortly.

Operator

Thank you. I’m showing no further questions at this time. I’d like to hand the conference back over to Dr. Mills for any closing remarks.

Randal Mills

Okay, well short question and answer session, but thank you guys for all listening in on the call. We hope to be back with you later on. We have a Piper conference coming up later on this year which will be webcast, and at other events where we get a chance to meet or speak with you publicly. I wish you all a good day. Bye.

Operator

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

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