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Osiris Therapeutics 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1.1
  3. Ex-31.2.1
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                    

 

Commission File Number: 001-32966

 

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

71-0881115

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7015 Albert Einstein Drive, Columbia, Maryland

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

443-545-1800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at November 4, 2011

Common Stock, par value $0.001 per share

 

32,826,896

 

 

 



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

INDEX

 

 

 

Page

PART I — FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements — Unaudited

3

 

Condensed Balance Sheets — September 30, 2011 and December 31, 2010

3

 

Condensed Statements of Operations — three and nine months ended September 30, 2011 and 2010

4

 

Statement of Stockholders’ Equity— nine months ended September 30, 2011

5

 

Condensed Statements of Cash Flows — nine months ended September 30, 2011 and 2010

6

 

Notes to Condensed Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

PART II — OTHER INFORMATION

24

 

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

(Removed and Reserved)

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

 

 

 

Signatures

 

29

 

 

 

Exhibit Index

 

 

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.                            Financial Statements - Unaudited

 

OSIRIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(amounts in thousands)

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

1,403

 

$

1,442

 

Investments available for sale

 

50,454

 

66,166

 

Accounts and other receivables

 

1,460

 

1,928

 

Inventory

 

729

 

510

 

Deferred tax asset

 

2,192

 

3,170

 

Prepaid expenses and other current assets

 

762

 

736

 

Total current assets

 

57,000

 

73,952

 

 

 

 

 

 

 

Property and equipment, net

 

2,646

 

3,127

 

Restricted cash

 

392

 

521

 

Other assets

 

19

 

184

 

Total assets

 

$

60,057

 

$

77,784

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

5,613

 

$

5,569

 

Deferred revenue, current portion

 

13,573

 

40,960

 

Total current liabilities

 

19,186

 

46,529

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

 

3,333

 

Other long-term liabilities

 

442

 

465

 

Total liabilities

 

19,628

 

50,327

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.001 par value, 90,000 shares authorized, 32,827 shares outstanding - 2011, 32,794 shares outstanding - 2010

 

33

 

33

 

Additional paid-in-capital

 

277,749

 

274,646

 

Accumulated other comprehensive income (loss)

 

22

 

(3

)

Accumulated deficit

 

(237,375

)

(247,219

)

Total stockholders’ equity

 

40,429

 

27,457

 

Total liabilities and stockholders’ equity

 

$

60,057

 

$

77,784

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

3



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS

Unaudited

(amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

331

 

$

99

 

$

498

 

$

99

 

Cost of goods sold

 

139

 

34

 

209

 

34

 

Gross profit

 

192

 

65

 

289

 

65

 

 

 

 

 

 

 

 

 

 

 

Revenue from collaborative research agreements, government contract and royalties

 

10,242

 

10,659

 

30,861

 

32,340

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

5,018

 

5,460

 

14,938

 

18,476

 

General and administrative

 

1,429

 

1,268

 

6,405

 

4,677

 

 

 

6,447

 

6,728

 

21,343

 

23,153

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

3,987

 

3,996

 

9,807

 

9,252

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

26

 

27

 

80

 

151

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

4,013

 

4,023

 

9,887

 

9,403

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

525

 

(43

)

(692

)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,013

 

$

4,548

 

$

9,844

 

$

8,711

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.12

 

$

0.14

 

$

0.30

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.12

 

$

0.14

 

$

0.30

 

$

0.26

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (basic)

 

32,826

 

32,789

 

32,818

 

32,781

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (diluted)

 

33,121

 

33,100

 

33,121

 

33,095

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

4



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2011

Unaudited

(amounts in thousands, except for share and per share data)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Equity (Deficit)

 

Balance at January 1, 2011

 

32,793,457

 

$

33

 

$

274,646

 

$

(3

)

$

(247,219

)

$

27,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of options to purchase common stock ($.40- $7.74 per share)

 

8,439

 

 

22

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based payment-director services ($7.13 per share)

 

25,000

 

 

178

 

 

 

178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based payment-employee compensation

 

 

 

1,163

 

 

 

1,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based payment - related party

 

 

 

1,740

 

 

 

1,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

9,844

 

9,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments available for sale

 

 

 

 

25

 

 

25

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

9,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

32,826,896

 

$

33

 

$

277,749

 

$

22

 

$

(237,375

)

$

40,429

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

5



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited

(amounts in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Continuing operations:

 

 

 

 

 

Net income

 

$

9,844

 

$

8,711

 

Adjustments to reconcile net income to net cash used in continuing operations:

 

 

 

 

 

Depreciation and amortization

 

560

 

566

 

Non cash share-based payments

 

1,341

 

1,281

 

Non cash expense- extension of expiration date warrant to related party

 

1,740

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts and other receivables

 

468

 

876

 

Prepaid expenses, inventory, and other current assets

 

733

 

(162

)

Other assets

 

165

 

(2,747

)

Accounts payable and accrued expenses

 

21

 

(1,938

)

Deferred revenue

 

(30,720

)

(30,801

)

Net cash used in continuing operations

 

(15,848

)

(24,214

)

Discontinued operations:

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

 

(412

)

Net cash used in discontinued operations

 

 

(412

)

 

 

 

 

 

 

Net cash used in operating activities

 

(15,848

)

(24,626

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(79

)

(98

)

Proceeds from sale of investments available for sale

 

15,805

 

24,598

 

Purchases of investments available for sale

 

(68

)

(236

)

 

 

 

 

 

 

Net cash provided by investing activities

 

15,658

 

24,264

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital lease obligations

 

 

(3

)

Restricted cash

 

129

 

145

 

Proceeds from the exercise of stock options

 

22

 

2

 

 

 

 

 

 

 

Net cash provided by financing activities

 

151

 

144

 

 

 

 

 

 

 

Net decrease in cash

 

(39

)

(218

)

Cash at beginning of period

 

1,442

 

1,306

 

 

 

 

 

 

 

Cash at end of period

 

$

1,403

 

$

1,088

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

6



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

1.              Nature of Business

 

Osiris Therapeutics, Inc. (“we,” “us,” “our,” or the “Company”) is a Maryland corporation headquartered in Columbia, Maryland. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010. We are a leading stem cell company focused on developing and marketing products to treat serious medical conditions in the inflammatory and cardiovascular disease areas, and wound healing. Our biologic drug candidates utilize adult human mesenchymal stem cells, or MSCs, which can selectively differentiate, based on the tissue environment, into various tissue lineages, such as muscle, bone, cartilage, marrow stroma, tendon or fat. In addition, MSCs have anti-inflammatory properties and can prevent fibrosis or scarring, which gives MSCs the potential to treat a wide variety of medical conditions. Historically, our operations have consisted primarily of research, development and clinical activities under several research collaboration agreements to bring our biologic drug candidates to the marketplace. During 2009, we created a Biosurgery business, which in 2010 we began operating as a segment separate from our Therapeutics segment.  Our Therapeutics segment is focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas; and our Biosurgery segment focuses on products for wound healing and use in surgical procedures by harnessing the ability of cells and novel constructs to promote the body’s natural healing.

 

2.              Significant Accounting Policies

 

Unaudited Interim Financial Statements

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates.  We believe that the most significant estimates that affect our financial statements are those that relate to revenue recognition associated with our collaborative agreements, deferred tax assets, inventory valuation, share-based compensation, and the non cash charge associated with the extension of the expiration date of an outstanding warrant discussed below in Note 8.

 

Revenue Recognition

 

Our Therapeutics segment generates revenues from collaborative agreements, research licenses, and a government contract. We evaluate revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment.

 

Revenues from research licenses and government contracts are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.

 

7



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation (“Genzyme”), now a wholly owned subsidiary of Sanofi (NYSE: SYN), for the development and commercialization of our biologic drug candidates, Prochymal® and Chondrogen®. Under this agreement, Genzyme has made non-contingent, non-refundable cash payments to us, totaling $130.0 million. The agreement provides Genzyme with certain rights to intellectual property developed by us, and requires that we continue to perform certain development work related to the subject biologic drug candidates. We have evaluated the deliverables related to these payments, and concluded that the various deliverables represent a single unit of accounting. For this reason, we have deferred the recognition of revenue related to the upfront payments, and are amortizing these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extend through the first quarter of 2012.

 

We recognized $10.0 million of revenue in the each of the first three fiscal quarters of both 2011 and 2010 related to the amortization of the upfront payments. The balance of the non-refundable payments we received from Genzyme, $13.3 million, has been recorded as current deferred revenue as of September 30, 2011. The agreement also provides for contingent milestone payments of up to $1.25 billion in the aggregate, as well as royalties to be paid to us on any sales by Genzyme. Consistent with our revenue recognition policies, we will recognize revenue from these contingent milestone payments for which we have no continuing performance obligations upon achievement of the related milestone. For any milestone payments for which we have a continuing performance obligation, the milestone payments will be deferred and recognized as revenue over the term of the related performance obligations.

 

In 2007, we partnered with Genzyme to develop Prochymal as a medical countermeasure to nuclear terrorism and other radiological emergencies. In January 2008, we were awarded a contract from the United States Department of Defense (“DoD”) pursuant to which we are seeking, in partnership with Genzyme, to develop and stockpile Prochymal for the repair of gastrointestinal injury resulting from acute radiation exposure. We began recognizing revenue under this contract in 2008, and completed our work under the contract during 2010. We have not recognized any revenue associated with this contract during fiscal 2011. Contract revenue was recognized as the related costs are incurred, in accordance with the terms of the contract. We recognized $360,000 and $470,000 in revenue from the DoD contract during the three and nine months ended September 30, 2010, respectively. We have not pursued further opportunities pursuant to this collaboration with Genzyme. Furthermore, other than certain ancillary provisions, the agreement with Genzyme expired in July 2009.

 

In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation (“JDRF”) to conduct a Phase 2 clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are received and earned. We have received all $4.0 million of the contingent milestones, and are amortizing the funding received over the duration of our obligations, resulting in approximately $200,000 of revenue in each of the first three fiscal quarters of both 2011 and 2010 under the agreement with JDRF. The remaining deferred revenue under this agreement has been recorded as $240,000 of current deferred revenue as of September 30, 2011.

 

We have also entered into strategic agreements with other pharmaceutical companies focusing on the development and commercialization of our stem cell drug products. For example, in 2003, we entered into an agreement with JCR Pharmaceuticals Co., Ltd. (“JCR”) pertaining to hematologic malignancy (graft versus host disease) drugs for distribution in Japan.  Under such agreements, we receive fees for licensing the use of our technology. We recognized $1.0 million of revenue during the first fiscal quarter of 2010 from JCR upon the achievement of a milestone event specified in the agreement.

 

Our Therapeutics segment also earns royalty revenues and cost reimbursement under our adult expanded access program.  Royalties are earned on the sale of human mesenchymal stem cells sold for research purposes. We recognize this revenue as sales are made. Such royalty revenue was immaterial during the three months ended September 30, 2011 and approximately $65,000 for the nine months then ended.  Such royalty revenues totaled $70,000 and $218,000 during the three and nine months ended September 30, 2010, respectively.  During the nine months ended September 30, 2011, we received $75,000 in cost reimbursement for Prochymal used in our adult expanded access program, all of which had been earned prior to the third fiscal quarter of 2011.

 

As discussed in Note 4- Segment Reporting below, in 2010 we began operations of our Biosurgery segment, focused on developing high-end biologic products for use in wound healing and surgical procedures.  We commenced the manufacturing of our first Biosurgery product, Grafix®, a regenerative wound care product, during the first quarter of 2010.  During the first and second quarters of 2010, we distributed the product only for initial clinical evaluation. We launched the product for limited commercial sale during the third quarter of 2010, and revenues on such sales are recognized when the product is shipped to the customer.  We began distribution of a second Biosurgery product, Ovation® in early fiscal 2011. Due to the nature of the products and the manufacturing process, all sales are final.  We recognized revenues of approximately $331,000 and $498,000 from the sales of Biosurgery products during the three and nine months ended September 30, 2011, respectively.  We recognized revenues of approximately $99,000 from the sales of Biosurgery products during the third quarter of 2010 following commercial launch of our first product.

 

8



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

Research and Development Costs

 

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of our biologic drug candidates used in clinical trials, in the period incurred.

 

Beginning in 2010, with the creation of our Biosurgery segment, we began to separately track research and development costs by segment.  Total research and development costs for each of our operating segments are as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Total Research & Development Costs

 

($000s)

 

($000s)

 

($000s)

 

($000s)

 

 

 

 

 

 

 

 

 

 

 

Therapeutics segment

 

$

4,411

 

$

4,639

 

$

12,520

 

$

15,231

 

Biosurgery segment

 

607

 

821

 

2,418

 

3,245

 

Total R&D costs -

 

$

5,018

 

$

5,460

 

$

14,938

 

$

18,476

 

 

We do not track internal development costs by project within the Therapeutics segment.  We do, however, track external research and development costs by project, which were as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

External R&D Costs By Indication

 

($000s)

 

($000s)

 

($000s)

 

($000s)

 

 

 

 

 

 

 

 

 

 

 

Acute myocardial infarction

 

$

1,865

 

$

1,574

 

$

4,973

 

$

3,432

 

Treatment-resistant GvHD

 

325

 

(151

)

618

 

3,004

 

Refractory Crohn’s disease

 

358

 

230

 

1,239

 

731

 

Other therapeutic programs

 

114

 

367

 

201

 

1,427

 

Therapeutics external R&D costs -

 

2,662

 

2,020

 

7,031

 

8,594

 

 

 

 

 

 

 

 

 

 

 

Biosurgery external R&D costs -

 

207

 

209

 

705

 

1,251

 

 

 

 

 

 

 

 

 

 

 

Total external R&D costs -

 

$

2,869

 

$

2,229

 

$

7,736

 

$

9,845

 

 

Income per Common Share

 

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

 

Diluted income per common share for the three and nine months ended September 30, 2011 excludes the 1,000,000 shares issuable upon the exercise of an outstanding “out-of the money” warrant, and approximately 1,376,000 and 1,123,000 shares, respectively, issuable upon the exercise of “out-of the money” stock options, as their effect is anti-dilutive.

 

Similarly, diluted income per common share for the three and nine months ended September 30, 2010 excludes the 1,000,000 shares issuable upon the exercise of an outstanding “out-of the money” warrant and approximately 884,000 and 811,000 shares, respectively, issuable upon the exercise of “out-of the money” stock options, as their effect is anti-dilutive.

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

A reconciliation of basic to diluted weighted average common shares outstanding for the applicable periods is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(000s)

 

(000s)

 

(000s)

 

(000s)

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

32,826

 

32,789

 

32,818

 

32,781

 

Dilutive weighted average options outstanding

 

295

 

311

 

304

 

314

 

Dilutive weighted average warrants outstanding

 

 

 

 

 

Diluted weighted average common shares outstanding

 

33,121

 

33,100

 

33,121

 

33,095

 

 

Investments Available for Sale and Other Comprehensive Income (Loss)

 

Investments available for sale consist primarily of marketable securities with maturities less than one year. Investments available for sale are valued at their fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income. All realized gains and losses on our investments available for sale are recognized in results of operations as other income.

 

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

 

Share-Based Compensation

 

We account for share-based payments using the fair value method.

 

We recognize all share-based payments to employees in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.  Awards of shares of our common stock to non-employee directors are valued at the closing price on the grant date.

 

A summary of option activity under both of our stock-based compensation plans for the nine months ended September 30, 2011 is presented below.

 

 

 

Number of
Shares

 

Weighted Average
Exercise Price Per Share

 

Weighted Average
Remaining Term
(in Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

$(000)

 

Outstanding at January 1, 2011

 

1,349,261

 

$

9.75

 

6.89

 

$

2,357

 

Granted at market value

 

445,000

 

6.85

 

 

 

 

 

Exercised

 

(8,439

)

2.57

 

 

 

34

 

Forfeited

 

(68,000

)

8.89

 

 

 

22

 

Outstanding at September 30, 2011

 

1,717,822

 

9.07

 

6.97

 

1,456

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2011

 

878,134

 

9.55

 

5.31

 

1,454

 

 

The weighted average grant date fair value of options granted during the nine months ended September 30, 2011 was $3.51 per share.  We received approximately $22,000 in cash from the exercise of options during the nine months ended September 30, 2011.

 

As of September 30, 2011, approximately 406,000 shares of common stock remain available for future share awards under our Amended and Restated 2006 Omnibus Plan.

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

Share-based compensation expense (including director compensation, but excluding the non cash expense related to the extension of the expiration date of our warrant, as detailed in Note 8 below) included in our statements of operations for the three and nine months ended September 30, 2011 and 2010 is allocable to our research and development and general and administrative activities as follows:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

($000)

 

($000)

 

($000)

 

($000)

 

Research and development

 

$

182

 

$

248

 

$

656

 

$

667

 

General and administrative

 

165

 

178

 

685

 

614

 

Total

 

$

347

 

$

426

 

$

1,341

 

$

1,281

 

 

As of September 30, 2011, there was approximately $1.7 million of total unrecognized share-based compensation cost related to options granted under our plans, which will be recognized over a weighted-average period of less than one year, as the options vest.

 

Supplemental Cash Flow Information

 

A summary of our supplemental disclosures of cash flow information for the nine months ended September 30, 2011 and 2010, is as follows:

 

 

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

 

 

($000)

 

($000)

 

Supplemental disclosure of cash flows information:

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

Cash paid for income taxes

 

 

1,635

 

 

Recent Accounting Guidance Not Yet Adopted at September 30, 2011

 

In May 2011, ASU 2011-4, Fair Value Measurement (Topic 820)— Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-4”) was issued to standardize requirements for measuring and disclosing fair value information under U.S. GAAP and IFRS.  This guidance primarily changes the wording used to describe disclosure requirements under U.S. GAAP, but is not intended to change the application of those requirements.  ASU 2011-4 is effective for interim or annual periods beginning after December 15, 2011 with early adoption not permitted. Since ASU 2011-4 changes the wording used to describe the fair value disclosure requirements, but does not materially change the actual requirements, the adoption of ASU 2011-4 will not have a material impact on our financial statements.

 

In June 2011, ASU 2011-5, Comprehensive Income (Topic 220)— Presentation of Comprehensive Income (“ASU 2011-5”) was issued to increase the prominence of items reported in other comprehensive income. Specifically, this guidance requires entities to report all non owner changes in stockholders’ equity in either a single continuous statement of comprehensive income or in two separate, but consecutive, statements  This guidance eliminates the current financial reporting option for an entity to report the components of other comprehensive income as a part of the statement in changes in stockholders’ equity.  Further, this guidance requires presentation of all reclassification adjustments between net income and other comprehensive income on the face of the financial statements.  ASU 2011-5 is effective for interim or annual periods beginning after December 15, 2011, with early adoption permitted.  We will be required to change the format of our financial statements when this guidance becomes effective, and are currently evaluating which of the two permissible formats to use.  The adoption of ASU 2011-5 will not have a material impact on our financial position or results of operations.

 

In July 2011, ASU 2011-7, Health Care Entities (Topic 954)— Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU 2011-7”) was issued to increase the transparency of net patient service revenue and the related allowance for doubtful accounts for health care entities. Specifically, this guidance requires entities to report the provision for bad debts associated with patient service revenue as a deduction from patient service revenues as opposed to as an operating expense.  This guidance also requires enhanced disclosures regarding the accounting policies for revenues and assessing bad debts.  ASU 2011-7 is effective for interim or annual periods beginning after December 15, 2011, with early adoption permitted.  The adoption of ASU 2011-7 will not have a material impact on our financial position or results of operations.

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

3.             Collaboration Agreements and Government Contract

 

We are a party to several material collaborative agreements and other contracts as fully described in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2010 (“Annual Report”).  There have not been any material changes to any of these agreements during 2011 that require disclosure.  The accounting policies related to each of these contracts, including material impact on our financial statements, is included above under the “Revenue Recognition” section of Note 2, Significant Accounting Policies.

 

4.              Segment Reporting

 

In 2010, we began to manage our business in two reportable operating segments: the Therapeutics segment and the Biosurgery segment. Our Therapeutics segment focuses on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas. Its operations have focused on clinical trials and discovery efforts to identify additional medical indications. Our Therapeutics segment does not presently have any products approved for sale and its revenues consist primarily of collaborative research agreements and royalties as described in our Annual Report in the “Revenue Recognition” section of Note 2, Significant Accounting Policies.

 

Our Biosurgery segment is focused on the development, manufacture and sale of biologic products for wound healing and use in surgical procedures by harnessing the ability of cells and novel constructs to promote the body’s natural healing.  We commenced the manufacturing of our first Biosurgery product, a regenerative wound care product, during the first quarter of 2010.  During the first and second quarters of 2010, we distributed the product only for initial clinical evaluation. Accordingly, we incurred research, development, manufacturing, general, and administrative costs related to the Biosurgery segment throughout 2010, but did not recognize revenue from sales until beginning in the third quarter of 2010.  As a result of these start up costs, any measure of segment profitability from our Biosurgery segment for 2010 is not indicative of the segment’s expected future results.

 

Substantially all of our revenues and assets are attributed to and are received from entities located in the United States.

 

The costs specifically attributable to each of our segments for the three and nine months ended September 30, 2011 and September 30, 2010 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery

 

Total

 

Therapeutics

 

Biosurgery

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

 

$

331

 

$

331

 

$

 

$

99

 

$

99

 

Cost of goods sold

 

 

139

 

139

 

 

34

 

34

 

Gross profit

 

 

192

 

192

 

 

65

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from collaborative research agreements, government contract and royalties

 

10,242

 

 

10,242

 

10,659

 

 

10,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

4,411

 

607

 

5,018

 

4,639

 

821

 

5,460

 

General and administrative

 

1,230

 

199

 

1,429

 

1,084

 

184

 

1,268

 

 

 

5,641

 

806

 

6,447

 

5,723

 

1,005

 

6,728

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

4,601

 

$

(614

)

$

3,987

 

$

4,936

 

$

(940

)

$

3,996

 

 

12



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2010

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery

 

Total

 

Therapeutics

 

Biosurgery

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

 

$

498

 

$

498

 

$

 

$

99

 

$

99

 

Cost of goods sold

 

 

209

 

209

 

 

34

 

34

 

Gross profit

 

 

289

 

289

 

 

65

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from collaborative research agreements, government contract and royalties

 

30,861

 

 

30,861

 

32,340

 

 

32,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

12,520

 

2,418

 

14,938

 

15,231

 

3,245

 

18,476

 

General and administrative

 

5,767

 

638

 

6,405

 

4,185

 

492

 

4,677

 

 

 

18,287

 

3,056

 

21,343

 

19,416

 

3,737

 

23,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

12,574

 

$

(2,767

)

$

9,807

 

$

12,924

 

$

(3,672

)

$

9,252

 

 

In general, our total assets, including long-lived assets such as property and equipment, and our capital expenditures are not specifically allocated to any particular operating segment. Accordingly, capital expenditures and total asset information by reportable segment is not presented. The only assets that are allocated to the individual segments are the inventory and accounts receivable specifically related to each segment.

 

The assets specifically attributable to each of our segments as of September 30, 2011 and December 31, 2010 are as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery

 

Total

 

Therapeutics

 

Biosurgery

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

1,215

 

$

245

 

$

1,460

 

$

1,757

 

$

171

 

$

1,928

 

Inventory

 

 

729

 

729

 

 

510

 

510

 

Total segment assets

 

$

1,215

 

$

974

 

$

2,189

 

$

1,757

 

$

681

 

$

2,438

 

 

5.              Income Taxes

 

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

 

For income tax reporting purposes, we anticipate a loss for the year ending December 31, 2011. The primary difference for 2011 between our net income for financial reporting purposes and the loss for income tax reporting purposes relates to the recognition of deferred revenue from our collaborative agreement with Genzyme, which was previously reported for income tax purposes. During the nine months ended September 30, 2010, we recorded $692,000 of income tax expense which represented the Federal Alternative Minimum tax. During the nine months ended September 30, 2011, we recorded income tax expense of $43,000 related to the true up of our tax asset accounts upon filing our 2010 income tax returns.

 

13



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

At September 30, 2011, the balance of our net operating loss and tax credit carryforwards was approximately $78.0 million.  During fiscal 2010, we released a portion of valuation allowance in the amount of $3.2 million to reflect our expectation of being able to utilize net operating loss and tax credit carryforwards in 2011. During the second quarter of 2011, upon filing our 2010 income tax returns, we reduced our deferred tax asset to $2.2 million and increased our income tax receivable to $1.4 million ($1.1 million of which is included in Accounts and Other Receivables in the Condensed Balance Sheet at September 30, 2011). Our remaining deferred tax assets have been fully reserved in both 2011 and 2010 since their ultimate future realization cannot be assured.

 

6.              Investments Available for Sale

 

Investments available for sale consisted of the following as of September 30, 2011 and December 31, 2010:

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

$000

 

$000

 

 

 

 

 

Unrealized

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair Value

 

Cost

 

Gain

 

Loss

 

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds & certificates of deposit

 

$

807

 

$

 

$

 

$

807

 

$

10,299

 

$

1

 

$

 

$

10,300

 

Commercial paper

 

5,997

 

 

 

5,997

 

18,589

 

 

 

18,590

 

 

 

6,804

 

 

 

6,804

 

28,889

 

1

 

 

28,889

 

Short term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

5,280

 

 

(1

)

5,279

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

36,744

 

22

 

(2

)

36,764

 

36,080

 

7

 

(12

)

36,076

 

U.S. & Foreign government agencies

 

1,604

 

3

 

 

1,607

 

1,200

 

1

 

 

1,201

 

 

 

 43,628

 

25

 

(3

)

43,650

 

37,280

 

8

 

(12

)

37,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

50,432

 

$

25

 

$

(3

)

$

50,454

 

$

66,169

 

$

9

 

$

(12

)

$

66,166

 

 

The following table summarizes maturities of our investments available for sale as of September 30, 2011 and December 31, 2010:

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

$000

 

$000

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Maturities:

 

 

 

 

 

 

 

 

 

Within 3-months

 

$

49,088

 

$

49,102

 

$

52,607

 

$

52,601

 

Between 3—12 months

 

 

 

4,870

 

4,870

 

Between 1—2 years

 

1,344

 

1,352

 

8,692

 

8,695

 

Investments available for sale

 

$

50,432

 

$

50,454

 

$

66,169

 

$

66,166

 

 

Realized gains and investment income earned on investments available for sale were $26,000 and $80,000, respectively,  for the three and nine months ended September 30, 2011, and have been included as a component of “Other income, net” in the accompanying financial statements.

 

7.              Fair Value

 

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

 

14



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

 

Level 1

 

Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

 

 

 

 

The fair valued assets we hold that are generally included in this category are money market securities where fair value is based on publicly quoted prices.

 

 

 

Level 2

 

Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.

 

 

 

 

 

The fair valued assets we hold that are generally included in this category are investment grade short-term securities.

 

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available. To date, we have never had any assets that were required to be classified as Level 3.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below as of September 30, 2011 and December 31, 2010:

 

 

 

September 30, 2011

 

 

 

($000s)

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

306

 

$

 

$

 

$

306

 

Government obligations

 

1,206

 

 

 

1,206

 

Certificates of deposit

 

 

500

 

 

500

 

Agency obligations

 

 

32,405

 

 

32,405

 

Corporate debt securities & commercial paper

 

 

10,358

 

 

10,358

 

Municipal securities

 

 

5,279

 

 

5,279

 

Foreign government obligations

 

 

400

 

 

400

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

1,512

 

$

48,942

 

$

 

$

50,454

 

 

15



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 

 

 

December 31, 2010

 

 

 

($000s)

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

9,449

 

$

 

$

 

$

9,449

 

Government obligations

 

1,201

 

 

 

1,201

 

Certificates of deposit

 

 

851

 

 

851

 

Agency obligations

 

 

27,545

 

 

27,545

 

Corporate debt securities & commercial paper

 

 

26,201

 

 

26,201

 

Foreign bonds

 

 

919

 

 

919

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

10,650

 

$

55,516

 

$

 

$

66,166

 

 

8.                              Warrant

 

At December 31, 2010, we had an outstanding warrant, held by Peter Friedli, the chairman of our Board of Directors, to purchase 1,000,000 shares of our common stock at an exercise price of $11.00 per share, as described in Note 9 to our financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.  This warrant then had an expiration date of May 24, 2011.

 

As detailed in Note 9 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, our Board approved the extension of the expiration date of the warrant until May 24, 2015, subject to stockholder approval of the extension. Our shareholders approved the extension of the warrant at our 2011 Annual Meeting of Stockholders, on May 26, 2011.

 

Upon approval by the stockholders, we incurred a non cash charge against earnings on account of the extension of the warrant expiration date, based on its increase in fair value of approximately $1.7 million.  This amount was recorded within general and administrative expenses.  The increase in value was computed using the Black-Scholes option pricing model with a risk free interest rate of 1.50%, a 4 year increase in the expected life of the warrant, and a historical volatility of approximately 51%.

 

9.                           Related Party Transaction

 

During the third fiscal quarter of 2011 we entered a contract research agreement with Prolexys Pharmaceuticals, Inc. under which we are conducting for Prolexys an early stage clinical trial investigating a novel compound as a product candidate for cancer therapeutics.  This contract was filed with the SEC on a Current Report on Form 8-K primarily because of the relationship of the management and ownership of Prolexys with us and our management and significant stockholders, and not because our rights or obligations under the Agreement are otherwise material to us.

 

Prolexys is 34.4% owned by BIH SA, which owns 8.2% of our outstanding common stock; 32.3% owned by Peter Friedli who is the Chairman of our Board of Directors and direct owner of 30.8% of our common stock; and 14.3% owned by Venturetec, Inc., which holds 12.7% of our common stock. Peter Friedli is the President and a 3% owner of Venturetec, Inc. C. Randal Mills, our President and Chief Executive Officer, and Lode Debrandandere, our Senior Vice President of Therapeutics, both serve on the Board of Directors of Prolexys, but have no other interest therein.

 

This arrangement is part of our ongoing efforts to expand our portfolio of product candidates, but we do not consider this arrangement to be material to us at this time.

 

10.                           Subsequent Events

 

We evaluated our September 30, 2011 financial statements for subsequent events through the date the financial statements were issued. We are not aware of any subsequent events which would require recognition or disclosure in the financial statements.

 

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Item 2.                    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Statements included or incorporated herein which are not historical facts are forward looking statements. When used in this Quarterly Report, the words estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward looking statements.

 

Forward looking statements reflect management’s current views with respect to future events and performance and are based on currently available information and management’s assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the “safe harbor provisions” of the Private Securities Litigation Reform Act of 1995, the Company notes that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in greater detail in our Annual Report on Form 10-K under Part I — Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A “Risk Factors,” and may be discussed elsewhere herein or in other documents we file with the Securities and Exchange Commission, or SEC. Examples of forward-looking statements may include, without limitation, statements regarding any of the following: our product development efforts; our clinical trials and anticipated regulatory requirements, and our ability to successfully navigate these requirements; the success of our product candidates in development; status of the regulatory process for our biologic drug candidates; implementation of our corporate strategy; our financial performance; our product research and development activities and projected expenditures, including our anticipated timeline and clinical strategy for mesenchymal stem cells (MSCs) and biologic drug candidates (including Prochymal®  and Chondrogen® ); our cash needs; patents, trademarks and other proprietary rights; the safety and ability of our products and potential products to treat disease; our ability to supply a sufficient amount of our product candidates and, if approved or otherwise commercially available, products to meet demand; our costs to comply with governmental regulations; our relationship with collaborating partners; our ability to maintain and benefit from our collaborative arrangements; our ability to benefit from government contracts; our plans for sales and marketing; our plans regarding facilities; types of regulatory frameworks we expect will be applicable to our products and potential products; and results of our scientific research.

 

Readers are cautioned that all forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

 

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited Financial Statements and related notes thereto and other disclosures included as part of our Annual Report on Form 10-K for the year ended December 31, 2010, and our unaudited Condensed Financial Statements for the three and nine months ended September 30, 2011 and other disclosures included in this Quarterly Report on Form 10-Q.  Our Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, and are presented in U.S. dollars.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Some of the important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 under Part I — Item 1A “Risk Factors,” and in this Quarterly Report on Form 10-Q, under Part II — Item 1A “Risk Factors.” There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

 

When we use the terms “Osiris,” “we,” “us,” and “our” we mean Osiris Therapeutics, Inc., a Maryland corporation.

 

Introduction and Overview

 

The following is a discussion and analysis of our financial condition and results of operations for the three and nine month periods ended September 30, 2011 and 2010.  You should read this discussion together with the accompanying unaudited condensed financial statements and notes and with our Annual Report on Form 10-K for the year ended December 31, 2010.  Historical results and any discussion of prospective results may not indicate our future performance.  See “Cautionary Statements About Forward-Looking Information.”

 

We are a leading stem cell company, headquartered in Columbia, Maryland, and focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas and wound healing. We believe our stem cell products have significant therapeutic potential because of their ability to regulate inflammation, promote tissue regeneration and prevent pathological scar formation. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010.

 

We have two business segments, Therapeutics and Biosurgery.

 

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Therapeutics Segment.  Our Therapeutics segment is focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow. Prochymal (remestemcel-L), our leading therapeutic drug candidate, is a formulation of mesenchymal stem cells (MSCs) designed for intravenous infusion that can be used to treat a variety of diseases.  The MSCs in Prochymal are naturally drawn to areas of inflammation by chemical signals called cytokines.  Once the MSCs reach the area of injury, they counteract inflammation by producing a number of different chemical signals that turn off inflammatory cells. Disease targets that are in development include acute graft versus host disease (GvHD), Crohn’s disease, acute radiation syndrome, acute myocardial infarction, and type 1 diabetes. Prochymal is the only stem cell therapeutic currently granted both Orphan Drug and Fast Track status by the United States Food and Drug Administration (“FDA”). Our pipeline of internally developed biologic drug candidates under evaluation also includes Chondrogen for osteoarthritis in the knee.

 

Our two biologic drug candidates, Prochymal and Chondrogen, utilize MSCs. MSCs can selectively differentiate, based on the tissue environment, into various tissue lineages such as bone, muscle, fat, tendon, ligament, cartilage and bone marrow stroma. In addition, MSCs have anti-inflammatory properties and can prevent fibrosis or scarring. These characteristics give MSCs the potential to treat a wide variety of medical conditions. We believe that our biologic drug candidates have advantages over other stem cell therapeutics in development for the following reasons:

 

·                  Stem Cell Source.  Our stem cells are obtained from adult bone marrow, a readily available source. The cells are drawn from the hips of healthy volunteer donors between the ages of 18 and 30 years, using a simple needle and syringe aspiration. Because the cells are obtained from consenting adult donors, we are able to largely avoid the ethical controversy surrounding embryonic and fetal stem cell research.

 

·                  Ability to Mass Produce.  Through our proprietary manufacturing methods, we can grow MSCs in a controlled fashion to produce up to 10,000 treatments of our biologic drug candidates from a single bone marrow donation. Our ability to produce a large quantity of treatments from one donation provides us with manufacturing efficiencies and product consistency that are essential to commercialization.

 

·                  Universal Compatibility.  Many stem cell therapies under development can elicit a rejection response in the recipient and therefore require donor-to-recipient matching or potentially harmful immunosuppression. This greatly reduces manufacturing efficiencies and creates a risk of mismatch which can result in an acute inflammatory response leading to serious medical complications and can even be fatal. Based on our clinical experience, we believe that our biologic drug candidates are not rejected by the patient’s immune system and so, like type O negative blood, do not require matching. This universal compatibility allows us to produce a standardized product available to all patients in almost any medical setting.

 

·                  Treatment on Demand.  Our biologic drug candidates can be stored frozen at end-user medical facilities until they are needed. We anticipate that medical facilities will be able to prescribe and dispense these products in much the same way as conventional drugs. In contrast, other stem cell technologies under development require weeks to prepare after a patient’s need is identified. This is a key feature of our technology, as many patients in the critical care setting require prompt treatment.

 

The following table summarizes key information about our active clinical trials for our biologic drug candidates.

 

Drug Candidate

 

Indication

 

Status

 

Prochymal

 

Steroid Refractory Acute GvHD

 

In Registration

 

 

 

Biologics Refractory Crohn’s Disease

 

Phase 3

 

 

 

Type I Diabetes Mellitus

 

Phase 2

 

 

 

Acute Myocardial Infarction

 

Phase 2

 

 

 

Acute Radiation Syndrome

 

Phase 3 (Animal Rule)

 

 

 

 

 

 

 

Chondrogen

 

Osteoarthritis & Cartilage Protection

 

Phase 2

 

 

There have been no significant changes to our clinical programs in our Therapeutics segment since we filed our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2011.

 

In the fourth quarter of 2008, we entered into a collaboration agreement with Genzyme Corporation (“Genzyme”), now a wholly owned subsidiary of Sanofi (NYSE: SYN), for the development and commercialization of Prochymal and Chondrogen. Under the terms of the agreement, we retained the rights to commercialize Prochymal and Chondrogen in the United States and Canada, and Genzyme has been granted exclusive rights to commercialize Prochymal and Chondrogen in all other countries, except with respect to GvHD in Japan, where Prochymal has previously been licensed to JCR Pharmaceuticals Co., Ltd. Under the collaboration agreement with Genzyme, we were paid $130.0 million in upfront payments. The agreement also provides for the payment to us by Genzyme of contingent milestone payments of up to $1.25 billion in the aggregate, in addition to royalties on any sales by Genzyme. The royalties payable by Genzyme to us upon commercialization are a percentage of sales ranging from the single digits to the twenties, depending upon several factors.

 

The collaboration agreement provides that it will expire upon the completion of all development plans stipulated in the agreement and the expiration of all payment obligations; however, in addition to its opt out rights, Genzyme may terminate the agreement early and without further obligation at any time, and either party may terminate the agreement due to non-performance, material breach or insolvency, in each case in accordance with and subject to the specific terms of the agreement.

 

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We have also partnered with the Juvenile Diabetes Research Foundation (“JDRF”) for the development of Prochymal as a treatment for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus.

 

Biosurgery Segment.  Our Biosurgery segment seeks 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. During the third quarter of 2010, we launched limited commercial sales of several products developed and manufactured by our Biosurgery segment, including Grafix® and Ovation®. We intend to build on the success of our first generation implantable product, Osteocel, which generated over $40 million of revenue for us before we sold it for $85.0 million, in 2008. Disease targets commercialized or in development include diabetic foot ulcers, venous stasis ulcers, dermal burns, and various orthopedic conditions..

 

Grafix is a three-dimensional tissue matrix designed for application directly to acute and chronic wounds, including diabetic foot ulcers and burns.  Flexible, conforming and immune neutral, this cellular repair matrix provides a rich source of extracellular matrix, viable endogenous MSCs and epithelial cells, as well as growth factors directly to the site of the wound, protecting the area from inflammation, scarring and infection.

 

Ovation is a novel cellular repair matrix designed for use in surgical applications where bone tissue repair is needed.  Easily applied to the site of injury, Ovation provides the three essential components of periosteum — extracellular matrix, viable endogenous MSCs and a source of growth factors — all playing key roles in bone repair.

 

Grafix and Ovation are regulated by the FDA under 21CFR Part 1271, Human Cells, Tissues and Cellular and Tissue-based Products (HCT/Ps). We are registered with the FDA as a tissue establishment and are accredited by the American Association of Tissue Banks (AATB). Extensive donor screening, serological testing, bioburden testing and sterility testing is performed on every lot to demonstrate suitability for transplantation. Our Biosurgery products are all manufactured in our Columbia, Maryland facility. Each lot is tested to confirm viable cell content post thaw.

 

We market and distribute both Grafix and Ovation through a network of distributors as well as direct sales to hospitals and clinics.

 


 

We are a fully integrated company, having developed capabilities in research, development, manufacturing, marketing and distribution of stem cell products. We have developed an extensive intellectual property portfolio to protect our technology including 46 U.S. and 144 foreign patents owned or licensed. We have 34 U.S. patent applications pending and 86 foreign patent applications pending.

 

Financial Operations Overview

 

Revenue

 

In 2008, we entered into a Collaboration Agreement with Genzyme for the development and commercialization of Prochymal and Chondrogen that provides for non-contingent, non-refundable upfront payments of $130.0 million and contingent milestone payments. This Collaboration Agreement has multiple deliverables, and consistent with our accounting policy for such transactions, we are amortizing these amounts into revenue on a straight-line basis over the estimated completion period of the deliverables, which extend through the first quarter of 2012. We recognized $10.0 million of revenue in each of the first three quarters of fiscal 2011 and 2010 related to this agreement. Contingent milestone payments earned and for which we have no continuing performance obligations, will be recognized as revenue upon achievement of the related milestone, while milestone payments for which we have a continuing performance obligation will be deferred when received and amortized to revenue over the term of the related performance obligations.

 

In prior years, we entered into strategic agreements with other companies for the development and commercialization of select stem cell biologic drug candidates for specific indications and geographic markets. In 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation to conduct a Phase 2 clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provided for JDRF to provide $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement are amortized into revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they are earned. As of December 31, 2010, we had achieved all $4.0 million of the milestones available under the contract. In each of the first three fiscal quarters of 2011, we recognized $240,000 in revenue from this agreement. During each of the first three fiscal quarters of 2010, we recognized $210,000 in revenue from this collaborative agreement. We expect to recognize the remaining $240,000 of deferred revenue related to the JDRF agreement during the fourth fiscal quarter of 2011.

 

In 2003, we entered into an agreement with JCR Pharmaceuticals, granting it exclusive rights to Prochymal for the treatment of GvHD and other hematological malignancies in Japan. During the first quarter of 2010, we achieved a $1 million milestone from JCR for development progress in Japan. The collaboration with JCR also provides for additional milestone payments of up to $5.5 million for regulatory and sales milestones, as well as royalty payments on sales of the drug in Japan.

 

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Research and Development Costs

 

Our research and development costs consist of expenses incurred in identifying, developing and testing biologic drug candidates as well as tissue based products in our Biosurgery segment. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research and manufacturing, costs of facilities, and the costs of manufacturing clinical batches of biologic drug candidates, quality control supplies and material to expand biologic drug candidates.

 

Consistent with our focus on the development of biologic drug candidates with potential uses in multiple indications, many of our costs are not attributable to a specifically identified product. We use our employee and infrastructure resources across several projects. Accordingly, we do not account for internal research and development costs on a project-by-project basis. From inception in December 1992 through September 30, 2011, we incurred aggregate research and development costs of approximately $405 million.

 

Prior to 2010, internal resources were applied interchangeably across several product candidates due to the potential applicability of our biologic drug candidates for multiple indications. Beginning in 2010, with the creation of our Biosurgery segment, we began to separately track research and development costs by segment. During the first nine months of fiscal 2011, our total research and development costs were $12.5 million for our Therapeutics segment and $2.4 million for our Biosurgery segment.

 

We expect our research and development expenses to continue to be substantial in the future, as we continue our clinical trial activity for our existing biologic drug candidates as they advance through the development cycle, and as we invest in additional product opportunities and research programs. Clinical trials and preclinical studies are time-consuming and expensive. Our expenditures on current and future preclinical and clinical development programs are subject to many uncertainties. We test our products in several preclinical studies, and we then conduct clinical trials for those biologic drug candidates that we determine to be the most promising. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some biologic drug candidates in order to focus our resources on more promising biologic drug candidates. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, size of trial and intended use of a biologic drug candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

 

·                  the number of patients who participate in the trials;

 

·                  the number of sites included in the trials;

 

·                  the length of time required to enroll trial participants;

 

·                  the duration of patient treatment and follow-up;

 

·                  the costs of producing supplies of the biologic drug candidates needed for clinical trials and regulatory submissions;

 

·                  the efficacy and safety profile of the biologic drug candidate; and

 

·                  the costs and timing of, and the ability to secure, regulatory approvals.

 

As a result of these uncertainties, we are unable to determine with any significant degree of certainty the duration and completion costs of our research and development projects or when and to what extent we will generate revenues from the commercialization and sale of any of our biologic drug candidates.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of the costs associated with our general management, including salaries, allocations of facilities and related costs, and professional fees such as legal and accounting expenses. We have increased our general and administrative expense for legal and accounting compliance costs, investor relations and other activities associated with operating as a publicly traded company and strengthened our administrative capabilities as we approach the commercial launch of Prochymal for an initial indication. Continued increases will also likely result from the hiring of additional operational, financial, accounting, facilities engineering and information systems personnel.

 

Other Income, Net

 

Other income, net consists of interest earned on our cash and investments available for sale and realized gains and losses incurred on the sale of these investments. Interest expense consists of interest incurred on capital leases and other debt financings. We do not expect to incur material interest expense in the future as we had extinguished all of our outstanding debt prior to fiscal 2009.

 

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Income Taxes

 

Historically, we have not recognized any deferred tax assets or liabilities in our financial statements since we cannot assure their future realization. Because realization of deferred tax assets is dependent upon future earnings, a full valuation allowance has been recorded on the net deferred tax assets, which relate primarily to net operating loss and research and development carry-forwards. In the event that we become profitable within the next several years, we have net deferred tax assets (before a valuation allowance) of approximately $78.0 million that may be utilized prior to us having to recognize any income tax expense or make payments to the taxing authorities other than the alternative minimum tax. The income tax accounting for the upfront fees we received from Genzyme Corporation require us to recognize revenue for income tax purposes several years earlier than we recognize this revenue for financial statement purposes. As of December 31, 2010 the entire Genzyme upfront payments had been fully recognized for income tax purposes. During 2010, we released a portion of the valuation allowance in the amount of $3.2 million to reflect our expectation of being able to utilize net operating loss and tax credit carryforwards in 2011. During the second quarter of 2011, upon filing our 2010 income tax returns, we reduced our deferred tax asset to $2.2 million and increased our income tax receivable to $1.4 million ($1.1 million of which is included in Accounts and Other Receivables in the Condensed Balance Sheet at September 30, 2011). Our remaining deferred tax assets have been fully reserved in both 2011 and 2010 since their ultimate future realization cannot be assured.

 

In the first nine months of fiscal 2011, we incurred a taxable loss of approximately $13.9 million, primarily because the $30.0 million of revenue recognized for financial reporting purposes from our collaborative agreement with Genzyme was recognized in prior years for income tax accounting purposes. During the nine months ended September 30, 2011, we recognized $43,000 of income tax expense when we trued-up our income tax accounts upon filing our fiscal 2010 income tax returns. In the first nine months of fiscal 2010, we recorded a provision for income taxes of $692,000 to recognize the U.S. Federal alternative minimum tax on our taxable income.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months ended September 30, 2011 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010, other than as disclosed herein.

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2011 and 2010

 

Revenues from Collaborative Research Licenses & Grants

 

Revenues from collaborative research licenses and grants were $10.2 million for the three months ended September 30, 2011 compared to $10.7 million for the third quarter of fiscal 2010.  During the three months ended September 30, 2011, we recognized $10.0 million in revenue from our collaborative agreement with Genzyme and $240,000 from our collaborative agreement with JDRF. Revenues for the three months ended September 30, 2010 consisted primarily of $10.0 million from the Genzyme agreement, $358,000 from our government contract for ARS research and, $210,000 from the JDRF collaboration.

 

Biosurgery Product Sales

 

During the three months ended September 30, 2011, we started to expand our sales efforts in our Biosurgery segment, and are now recruiting in-house sales and marketing personnel.  We sell our Biosurgery products both directly and through a group of distributors.  During the three months ended September 30, 2011, we recognized $331,000 in sales of Grafix and Ovation and realized gross profit of $192,000. We are continuing to distribute a substantial amount of these products for clinical evaluation and expect commercial sales to ramp up slowly until we can build the commercial capabilities that can drive more widespread adoption. Until such time as we determine it to be appropriate, and we ramp up our Biosurgery manufacturing activities to fully utilize our manufacturing facilities, our costs to manufacture these products are likely to vary significantly.

 

Research and Development Expenses

 

Research and development expenses for the three months ended September 30, 2011 were $5.0 million as compared to research and development expenses of $5.5 million for the same period of 2010, as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

($000)

 

($000)

 

Therapeutics

 

$

4,411

 

$

4,639

 

Biosurgery

 

607

 

821

 

 

 

 

 

 

 

 

 

$

5,018

 

$

5,460

 

 

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General and Administrative Expenses

 

General and administrative expenses were $1.4 million for the three months ended September 30, 2011 compared to $1.3 million for the corresponding period in fiscal 2010. We incurred $199,000 of general and administrative expenses related to our Biosurgery segment during the three months ended September 30, 2011, compared to $184,000 in the corresponding period of fiscal 2010.

 

Other Income, Net

 

Investment income, net, was $26,000 for the three months ended September 30, 2011, compared to $27,000 in the corresponding period in fiscal 2010.  Our investments available for sale consist primarily of short-term, investment grade securities with a focus on avoiding market risk. We did not incur any interest expense during the third fiscal quarter of either 2011 or 2010.

 

Comparison of Nine Months Ended September 30, 2011 and 2010

 

Revenues from Collaborative Research Licenses & Grants

 

Revenues from collaborative research licenses and grants were $30.9 million for the nine months ended September 30, 2011 compared to $32.3 million for the first nine months of fiscal 2010.  During the nine months ended September 30, 2011, we recognized $30.0 million in revenue from our collaborative agreement with Genzyme and $720,000 from our collaborative agreement with JDRF. Revenues for the nine months ended September 30, 2010 consisted primarily of $30.0 million from the Genzyme agreement, $1.0 million from our collaboration with JCR Pharmaceuticals, and $630,000 from the JDRF collaboration.

 

Biosurgery Product Sales

 

During the nine months ended September 30, 2011, we continued limited commercial sales of wound care products manufactured by our Biosurgery segment and recognized $498,000 in revenue and gross profit of $289,000. We are continuing to distribute a portion of these products for clinical evaluation and expect commercial sales to ramp up slowly until such time as the cost to consumers for these products becomes reimbursable by third party payers, including government health administrative authorities, health insurers, and benefit managers. Until such time as we determine it to be appropriate, and we ramp up our Biosurgery manufacturing activities to fully utilize our manufacturing facilities, our costs to manufacture these products are likely to vary significantly.

 

Research and Development Expenses

 

Total research and development expenses for the nine months ended September 30, 2011 were $14.9 million as compared to research and development expenses of $18.5 million for the same period of 2010, as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

($000)

 

($000)

 

Therapeutics

 

$

12,520

 

$

15,231

 

Biosurgery

 

2,418

 

3,245

 

 

 

 

 

 

 

 

 

$

14,938

 

$

18,476

 

 

The reduction in research and development expenses incurred in our Therapeutics segment during the first nine months of fiscal 2011, when compared to the corresponding period of the prior year, reflects the completion of enrollment in our Phase 3 clinical trials and the associated reduction of treatment site and patient costs.  R&D expenses incurred in our Biosurgery segment during the first nine months of fiscal 2010 include the initial product research and start-up costs, which were not incurred during fiscal 2011.  We continue to invest in research and development in our Biosurgery segment and expect to launch new products in the future.

 

General and Administrative Expenses

 

General and administrative expenses were $6.4 million for the nine months ended September 30, 2011 compared to $4.7 million for the corresponding period in fiscal 2010.  During the second fiscal quarter of 2011, we recognized $1.7 million of non cash compensation expense related to the extension of the expiration of a Warrant held by the chairman of our board of directors. The non cash charge for share-based compensation allocated to general and administrative expenses during the nine months ended September 30, 2011 was $2.5 million (including $1.7 million related to the extension of the expiration of the Warrant) as compared to $614,000 for the same period last year. General and administrative expenses for the nine months ended September 30, 2011, net of share-based compensation charges were approximately 3% less than the same expenses for the corresponding period in fiscal 2010.

 

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Other Income, Net

 

Other income, net, was $80,000 for the nine months ended September 30, 2011, compared to $151,000 in the corresponding period in fiscal 2010.  Our investments available for sale consist primarily of short-term, investment grade securities with a focus on avoiding market risk. We did not incur any interest expense during the nine months ended September 30 of either 2011 or 2010.

 

Liquidity and Capital Resources

 

Liquidity

 

At September 30, 2011, we had $51.9 million in cash and investments available for sale.  We have not had any outstanding debt at any time since fiscal 2008. Although there can be no assurance, we believe that we have sufficient liquidity on hand as of September 30, 2011 to fund our operations through the commercialization of our first biological drug candidate.

 

Cash Flows

 

Comparison of Nine Months Ended September 30, 2011 and 2010

 

Net cash used in operating activities for the nine months ended September 30, 2011 was $15.8 million compared to $24.2 million in the corresponding fiscal period of the prior year.  The 2011 net income of $9.8 million was offset by net decreases in working capital, primarily a result of reductions in deferred revenue, which was partially offset by $3.6 million of non-cash expenses.  Net cash used in operating activities during the first nine months of 2010 reflect our net income of $8.7 million, which was offset primarily by reductions in deferred revenue and accounts payables and accrued expenses. Non-cash expenses incurred during the first half of 2010 were $1.8 million.

 

Cash provided by investing activities during the first nine months of 2011 was $15.7 million compared to $24.3 million in the same period of the prior year.  Cash provided by investing activities during both fiscal periods was primarily the result of the net sales of investment available for sale in order to provide funds for operating activities.

 

Cash provided by financing activities during the first nine months of 2011 and 2010 was immaterial, and in both years primarily reflect reductions in restricted cash used to collateralize letters of credits which we use in lieu of security deposits.

 

Capital Resources

 

Our future capital requirements will depend on many factors, including:

 

·                                          the scope and results of our research and preclinical development programs;

 

·                                          the scope and results of our clinical trials, particularly regarding the number of patients required for our Phase 3 trials;

 

·       &#