'Biological Legos' Could Become A Blockbuster Innovation For Osiris Therapeutics

| About: Osiris Therapeutics, (OSIR)
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Applying stem cells to regenerate healthy human tissue has been the dream of scientists for more than a century. Osiris Therapeutics (NASDAQ:OSIR), based in Columbia, Maryland, is not only succeeding in this goal, but it's the first company to commercialize the process.

Osiris develops and brings to market compound drugs that incorporate stem cells. The company focuses on "living skin equivalents" and therapies for diseases that have historically resisted all other types of treatment. Osiris takes its name from the ancient Egyptian god of the Afterlife, which is appropriate for a company that gives once hopeless patients new leases on life.

A stem cell is one of the body's unspecialized master cells, with the ability to grow into other specific cell types. Stem cell therapy applications are wide - from treating chronic wounds and burns to bone tissue repair and providing living skin grafts.

Chronic wounds that fail to heal, such as diabetic foot ulcers, are resistant to conventional drugs and typically result in severe infection, amputation or even death. According to the National Institutes of Health (NIH), chronic wounds in the US alone affect 6.5 million patients.

NIH estimates that more than $25 billion is spent annually on the treatment of chronic wounds and the problem is growing because of an aging population and a sharp rise in the incidence of diabetes and obesity.

Biological Legos

Osiris uses adult "mesenchymal" stem cells, which are especially resourceful for chronic wound treatment and creating living skin. This category of stem cell is akin to biological Legos, with the flexibility to differentiate into a particularly broad range of functioning cells. Since it was founded in 1992, Osiris has treated more patients with mesenchymal stem cells than the entire stem cell industry combined.

Most stem cell companies are enmeshed in laboratory-based research and clinical trials, with the development of a product still years away, if at all. However, Osiris already is bringing mesenchymal stem cell products to market.

In May, Osiris announced that it had received authorization from Health Canada, that country's equivalent of the US Food and Drug Administration, to sell its new stem cell therapy Prochymal for the treatment of acute graft-vs-host disease (GvHD) in children. Prochymal is an intravenous formulation of mesenchymal stem cells.

The watershed decision marks the world's first regulatory approval of a stem cell treatment for GvHD, a complication of bone marrow transplantation that kills up to 80 percent of children affected, often within weeks of diagnosis. Prochymal has the potential to be a blockbuster; Osiris could then use that revenue to develop its other products in the pipeline.

Osiris' other clinical development efforts for mesenchymal stem cells include treatments for Crohn's disease, Type I diabetes and cardiac complications.

Science Fact

Osiris produces another potential blockbuster called Grafix, a living skin equivalent that's the stuff of science fiction. Doctors can peel it off a roll, as if it were Scotch tape, and put it to immediate use on the human body.

Grafix is a membrane, comprised of mesenchymal stem cells, growth factors and living skin cells, all of which work in concert for tissue repair in chronic wounds, limb salvage procedures, and the repair of tendons and burns.

As with Prochymal, there's no competitor to Grafix. At least 20 percent of all chronic wounds don't respond to existing therapies, providing a huge untapped market for the treatment. Grafix also is effective in salvaging patients with severe burns. The product represents an entirely new paradigm in skin repair and could find a wide range of military uses.

In a major win for the company, the US Center for Medicare & Medicaid Services (CMS) announced in May that Grafix had been granted codes to facilitate reimbursement under Medicare's outpatient payment system.

Also in May, Osiris announced results for the first quarter of 2012, ending March 31. Revenue from biosurgery products, the company's main division that makes stem cell treatments, rose 49 percent from the previous quarter to $1.1 million.

Total revenues were $4.6 million, including license fees from the company's various partnerships with other biotech firms, down from $10.4 million from the same period a year ago. Net loss for the first quarter of 2012 was $1.3 million, compared to net income of $4 million in the first quarter of 2011.

Future Lifeblood

License fee revenue tends to fluctuate, but biosurgery product revenue is the company's future lifeblood and it's growing quickly. Also in the first quarter, the company won four new patents issued in the US and Canada covering the use of mesenchymal stem cells for the treatment of GvHD and cardiac disorders. The company finished the quarter with strong cash, receivables and short-term investments of $44.2 million.

Osiris has enough cash to cover operating expenses over a long period of time, to ensure survival during the often-protracted clinical trials process. Osiris boasts a market cap of $206.3 million, an operating profit margin of nearly 27 percent and a return on assets of 15.8 percent-more than enough to weather any storm.

As a flood of patent expirations continue to shake up the drug industry, the future growth stocks will be those with the strongest drug development pipelines and the most innovative treatments. Osiris is suitable for aggressive investors looking for a pure play in stem cell therapies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.