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By Catherine Hollingsworth
Staff Writer
Osiris Therapeutics Inc. said it plans to sell its Osteocel business to medical device maker NuVasive Inc. for $35 million in an up-front payment at the closing of the deal, and up to $50 million in future milestone payments.
In a separate agreement worth up to an additional $52 million in revenue to Osiris, the company will manufacture and supply NuVasive with Osteocel for up to 18 months.
The deal, which is expected to close in the third quarter, would provide Osiris with net cash of about $100 million, on top of the roughly $40 million in cash and access to cash that the company had at the end of the first quarter, said Randy Mills, CEO of Osiris.
Osteocel, which preserves the native stem cell population in marrow rich bone, is used in spinal applications for bone regeneration. As a tissue-based product, Osteocel was not as scaleable as Osiris' other two products in development, Prochymal and Chondrogen, which can be made in large quantities to meet market demands, he said.
The decision to sell Osteocel comes as Osiris is "transitioning to a pure-drug company," Mills told BioWorld Today.
The money will help fund clinical trials of Prochymal, the company's most advanced product, which is being evaluated in three separate Phase III pivotal trials for three different indications. Prochymal for graft-vs.-host disease (GvHD in Phase III), Prochymal for Crohn's Disease (Phase III), and Prochymal for acute myocardial infarction (Phase I).
In addition, the company is developing follow-on versions of Prochymal under a Defense Department contract worth $224.7 million, for acute radiation syndrome.
The FDA recently cleared Prochymal use in an expanded access treatment program, making it the first investigational stem cell product available to children with life-threatening GvHD. Prochymal is a formulation of adult mesenchymal stem cells administered through a standard intravenous line.
Mills said the FDA's approval of Prochymal for use in the expanded access program "gives insight into FDA's thinking" about the product, that the agency is "comfortable using it in children."
The company's other product, Chondrogen for arthritis of the knee, is entering Phase II/III testing, marking the first of two trials required for registration. It is intended for the most treatment-resistant patients whose only option is surgery, Mills said.
As part of the Osteocel deal, Columbia, Md.-based Osiris retains the rights to culture-expanded versions of the product, previously referred to as Osteocel-XC. However, included in the agreement is an option for NuVasive to acquire the rights to the expanded version of the product at predefined terms as well as a right of first negotiation if Osiris elects to partner the product with a third party.
Alex Lukianov, chairman and CEO of NuVasive, said in a statement, "Osteocel provides our exclusive sales force with a unique stem cell-based bone graft that is synergistic with our Formagraft product and significantly enhances our biologics offering." He added, "Once we have integrated the processing operations, we believe Osteocel will make strong contributions to our revenue growth."
NuVasive expects that the transaction will add revenues of $15 million in 2008 based on the contractual terms of existing distribution agreements, and $25 million of revenue in 2009. The company expects the transaction to be dilutive to GAAP earnings per share in 2008, however, excluding in-process R&D charge expects no dilution in either 2008 or 2009.
The company said it expects to honor the current 2008 distribution agreements held by Osiris. Additional guidance is expected subsequent to the acquisition closing. At that time, the company will have worked through the transition plans for distribution and prepared the purchase price allocation and related intangible amortization expense.
According to both companies, Osteocel is the only viable bone matrix product on the market that provides the three beneficial properties similar to autograft: osteoconduction (provides a scaffold for bone growth), osteoinduction (bone formation stimulation) and osteogenesis (production bone). Its benefits, the companies said, is that Osteocel avoids the discomfort and potential complications of autograft harvesting and eliminates the time spent on a secondary surgical procedure.
In the first quarter, Osteocel sales were $7.5 million, compared to $2 million for the same period of the prior year, according to Osiris' first-quarter earnings report.
Analysts were mixed in their assessment of the deal, which is subject to shareholder approval.
Eun Yang, biotech analyst with Jeffries & Co., wrote in a research note, that the sale of Osteocel is a positive for Osiris because of the near-term cash it provides. "However, with a lack of significant data flow in 2008, coupled with remaining long-term financing risks, we remain on the sidelines."
Osteocel provides the full range of benefits of donated bone grafts but without the additional surgery and pain, and at lower cost, Ben Andrew, analyst with William Blair & Co., wrote in a research note. He said the product sells for roughly $2,000-$3,000 to the hospital, at a modest discount to Medtronic's InFuse.
"We like this deal and believe it is a relatively low-risk way for NuVasive to bolster its biologics franchise with a differentiated product," Andrews wrote.
But Joel Sendek, managing director and biotech senior analyst with Lazard Capital Markets, wrote, "We view the divestiture as a desperate move by Osiris to raise cash." He estimates that Osiris' burn rate will reach $25 million/quarter and that the company is down to six months cash. He recommended that investors sell Osiris shares.
Shares in Osiris (NASDAQ:OSIR) jumped 90 cents Friday, or 7.7 percent, closing at $12.67. Shares of NuVasive (NASDAQ:NUVA) rose $1.81 or 4.7 percent, closing at $39.99. | 
