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Counting Coup: Is Osiris Losing Faith in Prochymal?

August 5, 2013

In his Q2 2013 earnings call today, Osiris Therapeutics’ (NASDAQ:OSIR) CEO, C. Randal Mills, set a new company record...and probably didn’t even realize it.

We’ve recently begun to pay close attention to how much time Mills spends talking about Osiris’ trailblazing stem cell drug, Prochymal, motivated by our vague impression of late that the company seems to be downplaying its flagship product. And, sure enough, in today’s analyst conference call, Mills achieved a new low (see graph), pronouncing Prochymal’s name just 6 times in his hour-long prepared remarks -- which, by way of comparison, included a whopping 41 mentions of the company’s biosurgery product, Grafix.

About all that Mills seems to want to say about Prochymal nowadays -- as he reiterated yet again today -- is that the company is looking for a "partner" (which we read to mean a buyer) for Prochymal.

Why such eagerness to downplay -- and possibly even to be rid of -- "the world's first approved stem cell drug?" Just consider the product’s thus-far checkered history, then put yourself in Mills’ place.

Despite Osiris’ long labor and heavy investment in Prochymal R&D and clinical trials, the product’s results to date have been hit-or-miss at best (with misses predominating), and downright discouraging at worst. For example, in 2009 the company warned with respect to its Phase 2 trial of Prochymal in chronic obstructive pulmonary disease, "Pulmonary function in patients receiving Prochymal was not significantly improved compared to those receiving placebo." Similarly, regarding its Phase 2 trial of Prochymal for diabetes, in January, 2012 the company announced that "No significant differences in the rates of disease progression, as measured by stimulated C-peptide levels at the one year time point, have been observed" when comparing diabetics treated with Prochymal to those receiving placebo.

In its ongoing heart attack trial, however, the preliminary news might seem marginally better to the uninformed investor, since they at least enabled the company to announce recently that first heart attack patients "receiving Prochymal had significantly less cardiac hypertrophy...compared to patients receiving placebo" and "also experienced significantly less stress-induced ventricular arrhythmia." Still, this announcement was most notable for what it did not say: it made no mention of patients’ responses to Prochymal as reflected by the parameters the trial was supposed to employ as measures of success or failure, notably:

As commentator Alan Feuerstein has pointed out in a scathing critique of this announcement, in the world of commercially sponsored clinical trials a press release such as this, trumpeting results for measures the trial was never designed to employ, while remaining silent regarding those that it was, is all but an admission that the company actually views the trial’s results as a failure and would very much like to change the subject. Further reinforcing this impression, Forbes blogger Larry Husten reports that "the Osiris press release was issued without any input or consultation from the site investigators.... One investigator said he ‘had never worked with a company like this’.... Another member of the steering committee [said] that the committee had...not seen the trial data." In a multi-site trial such as this, sidestepping the physicians who actually treated and evaluated its patients is a telling dodge.

With their combined incidence of about 11 million new cases annually in the U.S. alone, these three indications for which Prochymal has so-far failed -- chronic obstructive pulmonary disease, diabetes, and heart attack -- would have been huge home runs for Osiris. As it is, however, the company has just one big-ticket disease left to pin its hopes on: Crohn’s disease, with a prevalence of about 1.8 million cases in the U.S. -- the only disease for which we are still awaiting a first word regarding the success or failure of Prochymal in a currently ongoing clinical trial.

Yet even that trial has raised disturbing red flags. As we have previously discussed, in March of 2009 Osiris announced the suspension of its Phase 3 Crohn’s trial due to what the company “believe[d] to be a systemic design flaw in the trial that would likely affect the utility of the data” -- a flaw that may have encouraged some participating physicians to evaluate their patients’ responses more enthusiastically than the medical facts of their cases alone should have dictated. By May of 2010 Osiris believed it had fixed the trial’s design and it resumed enrollment, but as yet all we know for sure is that investors, and the company, are still awaiting the four-year overdue results of a flawed trial to help them answer the important question: are there any epidemiologically significant conditions for which Prochymal might be an effective therapy?

No analysis of Prochymal’s prospects would be complete, however, without acknowledging that the company has enjoyed at least one bit of good news recently. In 2012, based on "only preliminary evidence," Health Canada approved Prochymal for the treatment of steroid-refractory acute graft-versus-host disease (aGvHD) in children, thus enabling the company to scoop the rest of the industry with its news of the "world's first approved stem cell drug."

But that press release’s pronouncement that "physicians now have an off-the-shelf stem cell therapy in their arsenal to fight GvHD" has thus far proven overly optimistic, as today -- a year and a quarter later -- that shelf remains bare, as Osiris has still not begun to actually market Prochymal in Canada despite the enticing prospect that the company could charge as much as $200,000 for a single course of treatment. This foot-dragging -- which in fact makes Prochymal the world’s first approved but not actually sold stem cell drug -- may have something to do with its financial prospects in this market: Health Canada estimates the incidence of pediatric aGvHD in Canada at just fifty cases annually. Even with a stratospheric sticker price of $200,000, Prochymal for aGvHD would be unlikely ever to recover its development costs (let alone its start-up and ongoing manufacturing costs). It might thus be hard to blame Osiris (at least from an economic perspective) for sitting on the fence a while to wait and see, along with the rest of us, whether Prochymal actually has any big-ticket indications that could possibly justify the expense of a full-blown manufacturing and marketing roll-out.

With still no indications on the horizon for the product to positively impact the company’s top or bottom lines, and with the company’s ongoing search for a new ‘partner’ apparently still unrequited, it seems reasonable for investors to wonder whether CEO Mills just isn’t that into Prochymal anymore.

[Update #1 (8/13/13): OSIR shares surged 123% on extremely high volume by mid-day today on news that its Grafix biosurgery product had demonstrated "overwhelming efficacy" in its diabetic foot ulcer clinical trial...perhaps giving Osiris yet another reason to forget Prochymal.]