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Osiris Therapeutics 10-Q 2012

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 March 31, 2012

 

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 May 8, 2012

Common Stock, par value $0.001 per share

 

32,852,521

 

 

 



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

INDEX

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1.

Financial Statements

 

3

 

Condensed Balance Sheets — March 31, 2012 (Unaudited) and December 31, 2011

 

3

 

Statements of Comprehensive (Loss) Income — three months ended March 31, 2012 and 2011 (Unaudited)

 

4

 

Statement of Stockholders’ Equity— three months ended March 31, 2012 (Unaudited)

 

5

 

Condensed Statements of Cash Flows — three months ended March 31, 2012 and 2011 (Unaudited)

 

6

 

Notes to Condensed Financial Statements (Unaudited)

 

7

 

 

 

 

Item 2.

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

 

15

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

Item 4.

Controls and Procedures

 

21

 

 

 

 

PART II — OTHER INFORMATION

 

21

 

 

 

 

Item 1.

Legal Proceedings

 

21

Item 1A.

Risk Factors

 

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 3.

Defaults Upon Senior Securities

 

22

Item 4.

(Removed and Reserved)

 

22

Item 5.

Other Information

 

22

Item 6.

Exhibits

 

22

 

 

 

 

Signatures

 

 

22

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.                                                           Financial Statements - Unaudited

 

OSIRIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(amounts in thousands, except per share data)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

1,586

 

$

1,661

 

Investments available for sale

 

41,618

 

45,604

 

Accounts receivable

 

997

 

728

 

Inventory

 

415

 

767

 

Deferred tax asset

 

2,188

 

2,188

 

Prepaid expenses and other current assets

 

636

 

470

 

Total current assets

 

47,440

 

51,418

 

 

 

 

 

 

 

Property and equipment, net

 

2,306

 

2,463

 

Restricted cash

 

392

 

392

 

Total assets

 

$

50,138

 

$

54,273

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

4,804

 

$

4,692

 

Deferred revenue, current portion

 

 

3,333

 

Total current liabilities

 

4,804

 

8,025

 

 

 

 

 

 

 

Other long-term liabilities

 

419

 

430

 

Total liabilities

 

5,223

 

8,455

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $.001 par value, 90,000 shares authorized, 32,853 shares outstanding - 2012, 32,828 shares outstanding - 2011

 

33

 

33

 

Additional paid-in-capital

 

278,477

 

278,092

 

Accumulated other comprehensive income

 

4

 

20

 

Accumulated deficit

 

(233,599

)

(232,327

)

Total stockholders’ equity

 

44,915

 

45,818

 

Total liabilities and stockholders’ equity

 

$

50,138

 

$

54,273

 

 

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

 

3



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Unaudited

(amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Product revenues

 

$

1,137

 

$

37

 

Cost of product revenues

 

387

 

15

 

Gross profit

 

750

 

22

 

 

 

 

 

 

 

Revenue from collaborative research agreements and royalties

 

3,446

 

10,395

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

3,963

 

4,711

 

General and administrative

 

1,523

 

1,696

 

 

 

5,486

 

6,407

 

 

 

 

 

 

 

(Loss) income from operations

 

(1,290

)

4,010

 

 

 

 

 

 

 

Other income, net

 

18

 

29

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(1,272

)

4,039

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

Net (loss) income

 

(1,272

)

4,039

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

Unrealized (loss) gain on investments available for sale

 

(16

)

12

 

 

 

 

 

 

 

Total comprehensive (loss) income

 

$

(1,288

)

$

4,051

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(0.04

)

$

0.12

 

 

 

 

 

 

 

Diluted (loss) earnings per share

 

$

(0.04

)

$

0.12

 

 

 

 

 

 

 

Weighted average common shares (basic)

 

32,830

 

32,807

 

 

 

 

 

 

 

Weighted average common shares (diluted)

 

32,830

 

33,113

 

 

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 three months ended March 31, 2012

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, 2012

 

32,827,521

 

$

33

 

$

278,092

 

$

20

 

$

(232,327

)

$

45,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based payment-director services ($5.08 per share)

 

25,000

 

 

127

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based payment-employee compensation

 

 

 

258

 

 

 

258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(1,272

)

(1,272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments available for sale

 

 

 

 

(16

)

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2012

 

32,852,521

 

$

33

 

$

278,477

 

$

4

 

$

(233,599

)

$

44,915

 

 

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)

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(1,272

)

$

4,039

 

Adjustments to reconcile net (loss) income to net cash used in operations:

 

 

 

 

 

Depreciation and amortization

 

177

 

189

 

Non cash share-based payments

 

385

 

604

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(269

)

303

 

Inventory, prepaid expenses, and other current assets

 

186

 

(18

)

Other assets

 

 

17

 

Accounts payable and accrued expenses

 

101

 

(869

)

Deferred revenue

 

(3,333

)

(10,240

)

Net cash used in operating activities

 

(4,025

)

(5,975

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(20

)

(25

)

Proceeds from sale of investments available for sale

 

3,985

 

6,000

 

Purchases of investments available for sale

 

(15

)

(5

)

Net cash provided by investing activities

 

3,950

 

5,970

 

 

 

 

 

 

 

Net decrease in cash

 

(75

)

(5

)

Cash at beginning of period

 

1,661

 

1,442

 

 

 

 

 

 

 

Cash at end of period

 

$

1,586

 

$

1,437

 

 

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

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

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, primarily for therapeutic uses. We refer to this as our Therapeutics business or segment. Beginning in 2005 and until 2008 when we sold this business to NuVasive, Inc., we produced and marketed Osteocel, a product for regenerating bone in orthopedic indications.  During 2009, we created a Biosurgery business, which 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, 2011.

 

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, and share-based compensation.

 

Revenue Recognition

 

Our Therapeutics segment generates revenues from collaborative agreements and research licenses. 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 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.

 

In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation, then an independent and now a Sanofi company (“Genzyme”), for the development and commercialization of our biologic drug candidates, Prochymal® and Chondrogen®. Under this agreement, Genzyme made non-contingent, non-refundable cash payments to us, totaling $130.0 million. The agreement provided Genzyme with certain rights to intellectual property developed by us, and required that we continue to perform certain development work related to the subject biologic drug candidates. As discussed in Note 15, Subsequent Events in our Annual Report on Form 10-K for the Year Ended December 31,

 

7



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

2011 (“2011 10-K”), in February 2012, Sanofi issued a press release which included an update on their R&D pipeline, stating that it has “discontinued” its project with Prochymal for GvHD. The statement issued by Sanofi was made without consultation with or knowledge by us. Through our legal counsel, we have advised Sanofi that we are treating these public statements as Sanofi’s election to terminate the collaboration agreement. The agreement provides for voluntary termination by Sanofi and that, upon such voluntary termination, all rights to Prochymal revert back to us, and we are free to commercialize or enter into commercialization agreements for Prochymal with other parties without restriction. While we have been proceeding on the basis that Sanofi has terminated the collaboration agreement, Sanofi has since advised us that it disagrees with our characterization of their press release. We have requested an explanation from Sanofi with respect to their statements regarding Prochymal. There can be no assurances as to the outcome of these matters. However, we continue to proceed with our Prochymal regulatory approval efforts and, if successful, commercialization, alone or with another collaborator.

 

We evaluated the deliverables related to the upfront payments made to us under the Genzyme collaboration agreement, and concluded that the various deliverables represent a single unit of accounting. For this reason, we deferred the recognition of revenue related to the upfront payments, and amortized these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extended through January 2012.

 

We recognized $3.3 million of revenue from this agreement during the first fiscal quarter of 2012, corresponding with the estimated end point date in January of 2012, compared to $10.0 million of revenue in the first quarter of 2011. As of March 31, 2012, the upfront payments received under this contract had been fully amortized to revenue.

 

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 were amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they were received and earned. We have received all $4.0 million of the contingent milestones, and amortized the funding received over the duration of our obligations.  We completed our work under this contract in fiscal 2011.  As a result, we recognized approximately $200,000 of revenue in the first fiscal quarter of 2011, and did not recognize any revenue under this agreement during fiscal 2012.

 

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. We recognized approximately $110,000 of royalty revenue for the three months ended March 31, 2012, compared to $40,000 in the three months ended March 31, 2011.  During the three months ended March 31, 2011, we received $115,000 in cost reimbursement for Prochymal used in our adult expanded access program.

 

As discussed in Note 4- Segment Reporting below, we also operate a Biosurgery segment, focused on developing high-end biologic products for use in wound healing and surgical procedures.  We launched commercial distribution of our Biosurgery products in late 2010, and have continued to increase our distribution volume since that time.  Due to the nature of the products and the manufacturing process, all sales are final.  We recognized revenues of approximately $1.1 million and $37,000 from the distribution of Biosurgery products during the three months ended March 31, 2012 and 2011, respectively.

 

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 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

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery 

 

Total

 

Therapeutics

 

Biosurgery 

 

Total

 

Research and development costs

 

$

2,747

 

$

1,216

 

$

3,963

 

$

3,845

 

$

866

 

$

4,711

 

 

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:

 

8



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

External R&D Costs By Indication

 

($000s)

 

($000s)

 

Acute myocardial infarction

 

$

851

 

$

1,378

 

Treatment-resistant GvHD

 

100

 

154

 

Refractory Crohn’s disease

 

216

 

403

 

Other therapeutic programs

 

155

 

242

 

Therapeutics external R&D costs -

 

1,322

 

2,177

 

 

 

 

 

 

 

Biosurgery external R&D costs -

 

558

 

183

 

 

 

 

 

 

 

Total External R&D Costs -

 

$

1,880

 

$

2,360

 

 

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 loss per common share for the three months ended March 31, 2012 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 1,938,447 of our outstanding options as of March 31, 2012, as their impact on our net loss for this period is anti-dilutive.  As a result, basic and diluted weighted average common shares outstanding are identical for that period.

 

Diluted income per common share for the three months ended March 31, 2011 excludes the “out-of the money” 1,000,000 shares issuable upon the exercise of our outstanding warrant and approximately 1,032,000 “out-of the money” stock options, as their effect on our net income for this period is anti-dilutive.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

(000s)

 

(000s)

 

Basic weighted average common shares outstanding

 

32,830

 

32,807

 

Dilutive weighted average options outstanding

 

—  

 

306

 

Dilutive weighted average warrants outstanding

 

—  

 

 —

 

Diluted weighted average common shares outstanding

 

32,830

 

33,113

 

 

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.

 

Inventory

 

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation.

 

9



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

Our Biosurgery inventory consists of the following as of March 31, 2012 and December 31, 2011:

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

($000)

 

($000)

 

Inventory

 

 

 

 

 

Raw materials and supplies

 

$

170

 

$

184

 

Finished goods

 

245

 

583

 

 

 

 

 

 

 

Total Biosurgery inventory

 

$

415

 

$

767

 

 

We do not carry any inventory for our Therapeutics products, as none of the product candidates from this segment are currently available for commercial sale. Its operations have focused on clinical trials and discovery efforts to identify additional medical indications. Accordingly, manufactured clinical doses of our drug candidates are expensed as incurred, consistent with our accounting for all other research and development costs.

 

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 three months ended March 31, 2012 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, 2012

 

1,702,072

 

$

9.06

 

6.8

 

$

1,533

 

Granted at market value

 

269,000

 

5.08

 

 

 

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

(32,625

)

9.52

 

 

 

 

 

Outstanding at March 31, 2012

 

1,938,447

 

8.50

 

6.3

 

1,466

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2012

 

1,095,197

 

9.60

 

5.1

 

1,451

 

 

The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $2.60 per share.

 

As of March 31, 2012, approximately 160,000 shares of common stock remain available for future share awards under our Amended and Restated 2006 Omnibus Plan.

 

Share-based compensation expense (including director compensation) included in our statements of comprehensive (loss) income for the three months ended March 31, 2012 and 2011 is allocable to our research and development and general and administrative activities as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

($000)

 

($000)

 

Research and development

 

$

137

 

$

 243

 

General and administrative

 

248

 

361

 

Total

 

$

385

 

$

 604

 

 

As of March 31, 2012, there was approximately $1.5 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 approximately one year, as the options vest.

 

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Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

3.             Collaboration Agreements

 

We are a party to several material collaborative agreements and other contracts as fully described in Note 2 of our 2011 10-K. There have not been any material changes to any of these agreements during 2012 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

 

We 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. As of March 31, 2012, our Therapeutics segment does not have any products approved for sale and its revenues consist primarily of collaborative research agreements and royalties as described in our 2011 10-K in the “Revenue Recognition” section of Note 2, Significant Accounting Policies.

 

Our Biosurgery segment is focused on the development, manufacture and distribution 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.

 

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 months ended March 31, 2012 and 2011 are as follows:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery

 

Total

 

Therapeutics

 

Biosurgery

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

 

$

1,137

 

$

1,137

 

$

 

$

37

 

$

37

 

Cost of product revenues

 

 

387

 

387

 

 

15

 

15

 

Gross profit

 

 

750

 

750

 

 

22

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from collaborative research agreements and royalties

 

3,446

 

 

3,446

 

10,395

 

 

10,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

2,747

 

1,216

 

3,963

 

3,845

 

866

 

4,711

 

General and administrative

 

1,151

 

372

 

1,523

 

1,499

 

197

 

1,696

 

 

 

3,898

 

1,588

 

5,486

 

5,344

 

1,063

 

6,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

$

(452

)

$

(838

)

$

(1,290

)

$

5,051

 

$

(1,041

)

$

4,010

 

 

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 March 31, 2012 and December 31, 2011 are as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

($000s)

 

($000s)

 

 

 

Therapeutics

 

Biosurgery

 

Total

 

Therapeutics

 

Biosurgery

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

 

$

130

 

$

867

 

$

997

 

$

37

 

$

691

 

$

728

 

Inventory

 

 

415

 

415

 

 

767

 

767

 

Total segment assets

 

$

130

 

$

1,282

 

$

1,412

 

$

37

 

$

1,458

 

$

1,495

 

 

11



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

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, 2012. The primary difference for 2012 between our net loss 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 each of the three months ended March 31, 2012 and 2011 we did not recognize any income tax expense.

 

At March 31, 2012, the balance of our net operating loss and tax credit carryforwards was approximately $76.9 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 when we file our 2011 income tax returns. During the second quarter of 2011, upon filing our 2010 income tax returns, we reduced our deferred tax asset to $2.2 million, and we expect to utilize this during fiscal 2012. Our remaining deferred tax assets have been fully reserved in both 2012 and 2011 since their ultimate future realization cannot be assured.

 

6.             Investments Available for Sale

 

Investments available for sale consisted of the following as of March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

$000

 

$000

 

 

 

 

 

Unrealized

 

 

 

 

 

Unrealized

 

 

 

 

 

Cost

 

Gain

 

Loss

 

Fair Value

 

Cost

 

Gain

 

Loss

 

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds & certificates of deposit

 

$

254

 

$

 

$

 

$

254

 

$

527

 

$

 

$

 

$

527

 

Commercial paper

 

10,983

 

4

 

 

10,987

 

15,411

 

4

 

(1

)

15,414

 

 

 

11,237

 

4

 

 

11,241

 

15,937

 

4

 

(1

)

15,940

 

Short term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commom stock and municipal securities

 

1,090

 

 

 

1,090

 

1,612

 

 

(1

)

1,611

 

Corporate notes and bounds

 

29,087

 

8

 

(9

)

29,086

 

26,834

 

16

 

 

26,850

 

US & International government agencies

 

200

 

1

 

 

201

 

1,201

 

2

 

 

1,203

 

 

 

30,377

 

9

 

(9

)

30,377

 

29,647

 

18

 

(1

)

29,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

41,614

 

$

13

 

$

(9

)

$

41,618

 

$

45,584

 

$

22

 

$

(2

)

$

45,604

 

 

The following table summarizes maturities of our investments available for sale as of March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

$000

 

$000

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Maturities:

 

 

 

 

 

 

 

 

 

Within 3-months

 

$

30,620

 

$

30,632

 

$

42,612

 

$

42,627

 

Between 3—12 months

 

 

 

 

 

Between 1—2 years

 

10,994

 

10,986

 

2,971

 

2,977

 

Investments available for sale

 

$

41,614

 

$

41,618

 

$

45,584

 

$

45,604

 

 

Realized gains and investment income earned on investments available for sale were $18,000 for the three months ended March 31, 2012, and have been included as a component of “Other income, net” in the accompanying financial statements.

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

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.

 

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 March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

 

 

($000s)

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

254

 

$

 

$

 

$

254

 

Government obligations

 

201

 

 

 

201

 

Agency obligations

 

 

29,086

 

 

29,086

 

Corporate debt securities & commercial paper

 

 

10,987

 

 

10,987

 

Municipal securities

 

 

1,090

 

 

1,090

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

455

 

$

41,163

 

$

 

$

41,618

 

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 

 

 

December 31, 2011

 

 

 

($000s)

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

27

 

$

 

$

 

$

27

 

Government obligations

 

1,203

 

 

 

1,203

 

Certificates of deposit

 

 

500

 

 

500

 

Agency obligations

 

 

26,850

 

 

26,850

 

Corporate debt securities & commercial paper

 

 

15,413

 

 

15,413

 

Municipal securities

 

 

1,611

 

 

1,611

 

 

 

 

 

 

 

 

 

 

 

Investments available for sale

 

$

1,230

 

$

44,374

 

$

 

$

45,604

 

 

8.             Subsequent Events

 

We evaluated our March 31, 2012 financial statements for subsequent events through the date the financial statements were available for issuance. 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 and marketed biosurgery products (including Prochymal®, Chondrogen ®, Grafix®  and Ovation®); 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 marketed products or 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, 2011, and our unaudited Condensed Financial Statements for the three months ended March 31, 2012 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, 2011 under Part I — 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 month periods ended March 31, 2012 and 2011.  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, 2011.  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, cardiovascular, orthopedic and wound healing markets. We have two business segments, Therapeutics and Biosurgery. Our Therapeutics business is focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow. Our Biosurgery business, created in 2009 and operating as a separate segment since 2010, works 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.

 

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Table of Contents

 

In our Biosurgery business, we currently manufacture, market and distribute Grafix and Ovation for tissue repair. In our Therapeutics segment, our pipeline of internally developed biologic drug candidates under evaluation includes Prochymal for inflammatory, autoimmune and cardiovascular indications, as well as Chondrogen for arthritis in the knee. We believe our stem cell therapeutic 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.

 

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. Our lead biologic drug candidate, Prochymal (remestemcel-L), is being evaluated in clinical trials for a number of indications, including acute graft versus host disease (“GvHD”), Crohn’s disease, acute myocardial infarction, type 1 diabetes and gastrointestinal injury resulting from radiation exposure (animal rule). 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

 

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

 

 

Clinical Program Update

 

Prochymal for Treatment-Resistant Acute GvHD.  During the first quarter of fiscal 2012, Health Canada commissioned an independent expert advisory panel to evaluate the safety and efficacy of Prochymal for the treatment of acute GvHD in children.  The outcome of the panel's review was a recommendation in favor of our New Drug Submission for Prochymal.  Health Canada is not obligated to follow the panel's recommendation.  Currently, Health Canada is completing their review of our application and has told us they expect to render a decision during the second quarter of fiscal 2012.

 

There have been no other significant changes to our clinical programs in our Therapeutics segment since we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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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 distribution of several products developed and manufactured by our Biosurgery segment, including Grafix and Ovation. Disease targets for Biosurgery products 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 and conformable to complex anatomies, 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—collagen matrix, viable endogenous MSCs and key growth factors such as BMPs and VEGF—to enable tissue regeneration.

 

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 directly to hospitals and clinics. A significant market for Grafix is chronic wounds, which are primarily treated in the outpatient setting, and to obtain full reimbursement for use in the outpatient setting, a prospective randomized clinical trial comparing the standard of care to Grafix is needed. We have finalized the design for this reimbursement trial and expect to begin enrollment during the second quarter of fiscal 2012. The study design is intended to allow for the collection of data necessary for obtaining coverage from Medicare administrative carriers and private commercial payers.

 

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 48 U.S. and 145 foreign patents owned or licensed. We have 30 U.S. patent applications pending and 85 foreign patent applications pending.

 

Financial Operations Overview

 

Revenue

 

In the fourth quarter of 2008, we entered into a collaboration agreement with Genzyme Corporation, then an independent and now a Sanofi company, 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 was 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 agreement, we were paid $130.0 million for these rights. During the fiscal quarter ended March 31, 2012 we recognized revenue of $3.3 million, which was the final deferred revenue associated with the $130.0 million upfront payment.  During the fiscal quarter ended March 31, 2011, we recognized $10.0 million of revenue from the amortization of the upfront payment.

 

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 certain 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 February 2012, Sanofi issued a press release which included an update on their R&D pipeline, stating that it has “discontinued” its project with Prochymal for GvHD. The statement issued by Sanofi was made without consultation with or knowledge by us. Through our legal counsel, we have advised Sanofi that we are treating these public statements as Sanofi’s election to terminate the collaboration agreement. The agreement provides for voluntary termination by Sanofi and that, upon such voluntary termination, all rights to Prochymal revert back to us, and we are free to commercialize or enter into commercialization agreements for Prochymal with other parties without restriction. While we have been proceeding on the basis that Sanofi has terminated the collaboration agreement, Sanofi has since advised us that it disagrees with our characterization of their press release. We have requested an explanation from Sanofi with respect to their statements regarding Prochymal. There can be no assurances as to the outcome of these matters. However, we continue to proceed with our Prochymal regulatory approval efforts and, if successful, commercialization, alone or with another collaborator.

 

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 (JDRF) to conduct a Phase 2 clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. In 2003, we entered into an agreement with JCR Pharmaceuticals, granting it exclusive rights to Prochymal for the treatment of GvHD and other

 

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hematological malignancies in Japan.  We did not recognize any revenue from these other agreements during the first quarter of fiscal 2012.  During the first quarter of fiscal 2011, we recognized $240,000 of revenue from the JDRF collaboration.

 

Research and Development Costs

 

Our research and development costs consist of expenses incurred in identifying, developing and testing biologic drug candidates and biologic tissue based products. 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 March 31, 2012, we incurred aggregate research and development costs of approximately $414 million.

 

During the first fiscal quarter of 2012, we incurred $2.7 million of research and development costs in our Therapeutics segment and $1.2 million in our Biosurgery segment. For the same period in fiscal 2011, our total research and development costs were $3.8 million for our Therapeutics segment and $866,000 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. Should this occur, continued expense increases will also likely result from the hiring of additional operational, financial, accounting, facilities engineering and information systems personnel.

 

Other Income, Net

 

Other income 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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Provision for Income Taxes

 

Until fiscal 2010, we have not recognized any net 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 100% valuation allowance) of approximately $76.9 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 from the upfront fees we received from Genzyme Corporation is required to be recognized over several years from 2008 through 2012 for financial statement reporting purposes. For income tax purposes, the income was required to be fully recognized in 2009 and 2010. This resulted in our releasing $3.2 million of the valuation allowance on our net deferred tax assets in fiscal 2010. We recognized $1.0 million of the resulting deferred tax asset in 2011, and expect to recognize the remaining $2.2 million deferred tax asset in 2012.

 

We did not recognize any income tax expense or benefit during the first quarter of either fiscal 2012 or 2011.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2012 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011, other than as disclosed herein.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2012 and 2011

 

Revenues from Collaborative Research Agreements and Royalties

 

Revenues from collaborative research agreements and royalties were $3.4 million for the three months ended March 31, 2012 compared to $10.4 million for the first quarter of fiscal 2011.  During the three months ended March 31, 2012, we recognized the final $3.3 million in revenue from our collaborative agreement with Genzyme and $108,000 of royalty revenues. Revenues for the three months ended March 31, 2011 consisted primarily of $10.0 million from the Genzyme agreement, $240,000 from the JDRF collaboration and $115,000 of cost reimbursements from our expanded access program for adult acute Graft verse Host Disease.

 

Biosurgery Product Revenues

 

During the three months ended March 31, 2012, we continued to expand our distribution efforts in our Biosurgery segment, both through in-house personnel as well as through our expanding distributor network.  During the three months ended March 31, 2012, we recognized $1.1 million of product revenues from the distribution of Grafix and Ovation and realized gross profit of $750,000. Revenues from the distribution of Biosurgery products in the first fiscal quarter of 2011 were $37,000, and gross profit was $22,000.  We are continuing to distribute a substantial amount of these products for clinical evaluation and expect commercial distribution to ramp up slowly until such time as we are able to build the commercial capabilities necessary to drive more widespread adoption. Until such time as 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 March 31, 2012 were $4.0 million as compared to research and development expenses of $4.7 million for the same period of 2011, as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

($000)

 

($000)

 

Therapeutics

 

$

2,747

 

$

3,845

 

Biosurgery

 

1,216

 

866

 

 

 

 

 

 

 

 

 

$

3,963

 

$

4,711

 

 

The decrease in research and development expenses in our Therapeutics segment in the first quarter of fiscal 2012 compared to the same period in fiscal 2011 reflects lower expenses in our acute myocardial infarction clinical trial, which was fully enrolled in the third quarter of 2011, resulting in lower patient and site costs.  The increase in research and development expenses in our Biosurgery segment in the first quarter of fiscal 2012 when compared to the same period of fiscal 2011 reflects our increased process improvement efforts and development expenses incurred in exploring additional products to bring to market.

 

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General and Administrative Expenses

 

General and administrative expenses were $1.5 million for the three months ended March 31, 2012 compared to $1.7 million for the corresponding period in fiscal 2011. We incurred $372,000 of sales, general and administrative expenses related to our Biosurgery segment during the three months ended March 31, 2012, compared to $197,000 in the corresponding period of fiscal 2011. General and administrative expenses incurred in our Therapeutics segment during the first quarter of fiscal 2012 were $1.2 million compared to $1.5 million in the corresponding period of fiscal 2011.  This decrease is the result of our continued cost cutting efforts and the refinement of many of our general business processes.

 

Other Income, Net

 

Investment income, net, was $18,000 for the three months ended March 31, 2012, compared to $29,000 in the corresponding period in fiscal 2011.  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 first fiscal quarter of either 2012 or 2011.

 

Provision for Income Taxes

 

We did not recognize any income tax benefit related to our operating loss in the first fiscal quarter of 2012 because the realization of any tax benefit cannot be assured. We did not recognize any income tax expense during the first fiscal quarter of 2011because we did not expect to report taxable income for fiscal year 2011.

 

Other Comprehensive (Loss) Income

 

Our other comprehensive (loss) income consists of the unrealized gain or loss on our investments available for sale when they are marked-to-market at the end of each reporting period.  During the first quarter of fiscal 2012, we recognized unrealized losses of $16,000 compared to unrealized gains of $12,000 during the same period of fiscal 2011.

 

Liquidity and Capital Resources

 

Liquidity

 

At March 31, 2012, we had $43.2 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 March 31, 2012 to fund our operations through the commercialization of our first biological drug candidate.

 

Cash Flows

 

Comparison of Three Months Ended March 31, 2012 and 2011

 

Net cash used in operating activities for the three months ended March 31, 2012 was $4.0 million compared to $6.0 million in the corresponding fiscal period of the prior year.  The 2012 net loss of $1.3 million was increased by the final amortization of deferred revenue, which was partially offset by $562,000 of non-cash expenses.  Net cash used in operating activities during the first three months of 2011 reflect our net income of $4.0 million, which was offset primarily by reductions in deferred revenue and accounts payables and accrued expenses. Non-cash expenses incurred during the first quarter of 2011 were $793,000.

 

Cash provided by investing activities during the first three months of 2012 was $4.0 million compared to $6.0 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.

 

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;

 

·                  the timing of and the costs involved in obtaining regulatory approvals for our biologic drug candidates, which could be more lengthy or complex than obtaining approval for a new conventional drug, given the FDA’s limited experience with late-stage clinical trials and marketing approval for stem cell therapeutics;

 

·                  the costs of maintaining, expanding and protecting our intellectual property portfolio, including possible litigation costs and liabilities; and

 

·                  the costs of expanding our work force consistent with expanding our business and operations.

 

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Off-Balance Sheet Arrangements.

 

We have no off-balance sheet financing arrangements and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.

 

Item 3.                                  Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

Due to the short duration of our investment portfolio and the high quality of our investments, an immediate 10% change in interest rates would not have a material effect on the value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any material degree by the effect of a sudden change in market interest rates on our securities portfolio.

 

We believe that the interest rate risk related to our accounts receivable is not significant. We manage the risk associated with these accounts through periodic reviews of the carrying value for non-collectability and establishment of appropriate allowances in connection with our internal controls and policies.

 

Foreign Currency Exchange Rate Risk

 

We conduct clinical trial activities in areas that operate in a functional currency other than the United States dollar (USD). As a result, when the USD rises and falls against the functional currencies of these other nations, our costs will either increase or decrease by the relative change in the exchange rate. Foreign currency gains and losses were not significant during the three months ended March 31, 2012 or 2011, and at the present time, we have elected not to hedge our exposure to foreign currency fluctuations.

 

Derivative Instruments

 

We do not enter into hedging or derivative instrument arrangements.

 

Item 4.                                  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.                                  Legal Proceedings.

 

From time to time, we receive threats or may be subject to routine litigation matters related to our business.  However, we are not currently a party to any material pending legal proceedings.

 

Item 1A.                         Risk Factors.

 

There have not been any material changes in the risk factors previously disclosed under the heading “Risk Factors” in Part I — Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 as filed with the Securities and Exchange Commission on March 14, 2012.

 

Item 2.                                  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

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Item 3.                                  Defaults Upon Senior Securities.

 

None.

 

Item 4.                                  (Removed and Reserved).

 

Item 5.                                  Other Information.

 

None.

 

Item 6.                                  Exhibits.

 

Exhibit
Number

 

Description of Exhibit

 

 

 

31.1.1*

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).

 

 

 

31.2.1*

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).

 

 

 

32.1*

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Statements of Income, (ii) the Condensed Balance Sheets, (iii) the Condensed Statements of Cash Flows, and (iv) related notes (furnished herewith).

 


* filed herewith.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Osiris Therapeutics, Inc.

 

 

Date: May 10, 2012

/s/ PHILIP R. JACOBY, JR.

 

Philip R. Jacoby, Jr.

 

Chief Financial Officer (Principal Financial Officer)

 

 

Date: May 10, 2012

/s/ MATTHEW NEUMAYER

 

Matthew Neumayer

 

Corporate Controller (Principal Accounting Officer)

 

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