Staff Writer

Genzyme Corp. and Osiris Therapeutics Inc. have agreed to develop and commercialize two stem cell products, in a deal that would provide Osiris with up to $1.25 billion in potential milestone payments and $130 million up front.

The up-front payment "eliminates any near-term balance sheet concerns," Piper Jaffray analyst Edward Tenthoff wrote in a research note.

He estimated that Osiris now holds pro forma cash of $172 million and could reach profitability with current cash reserves that include payments from a Department of Defense contract for Prochymal use in acute radiation sickness and milestones from Genzyme.

Both companies got a boost in share price on news of the agreement involving Prochymal and Chondrogen, two stem cell products designed to treat a wide range of diseases - including Crohn's disease, diabetes and osteoarthritic knee pain.

Under the deal, Columbia, Md.-based Osiris is responsible for the clinical development costs for all ongoing trials of stem cell products, as well as future trials for additional indications through completion of Phase II development. Osiris and Genzyme will share the cost of future Phase III and Phase IV trials in a 60 percent-40 percent split, with Osiris carrying the larger share.

If approved, Osiris would commercialize Prochymal and Chondrogen in the U.S. and Canada, while Genzyme would commercialize the treatments in all other countries.

C. Randal Mills, president and CEO of Osiris, said in a statement that the deal "greatly enhances our ability to effectively introduce this groundbreaking technology on a global basis."

Prochymal currently is being studied in two Phase III trials for graft-vs.-host disease (GvHD) and another Phase III trial for Crohn's disease. Data from all three Phase III Prochymal trials are expected in 2009. Based on data from the GvHD trial, Tenthoff said he expects Osiris to file a biologics license application next year with fast-track approval in late 2009 or early 2010.

Jefferies & Co. analyst Eun Yang agreed that the deal will bring in "much needed capital" for Osiris, but she said Phase III trials of Prochymal are "highly risky."

She wrote in a research note that, "Given the lack of placebo- or active-controlled clinical study data for Prochymal in GvHD, it is difficult to assess true, relative effectiveness of Prochymal treatment in GvHD (vs. currently available therapy)."

Prochymal also is being studied in Phase II trials for Type I diabetes and chronic obstructive pulmonary disease. Another Phase II trial of Prochymal for acute myocardial infarction (heart attack) and a Phase II/III trial of Chondrogen for osteoarthritis of the knee are expected to begin soon.

Genzyme and Osiris Genzyme see their products as being complementary, and the companies noted that they already were in a collaboration involving Prochymal for acute radiation syndrome. In January, the companies were awarded a $224.7 million contract from the DoD to develop Prochymal for that indication.

According to the companies, Prochymal for GvHD fits with Genzyme's existing global transplant franchise, which includes Thymoglobulin (anti-thymocyte globulin [rabbit]), used in the prevention and treatment of acute rejection in kidney transplant patients.

Prochymal and Chondrogen are derived from mesenchymal stem cells (MSCs) taken from bone marrow of healthy young adults. Studies suggest that MSCs are able to down-regulate severe inflammation and work at the cellular level to rebuild damaged tissue. In both GvHD and Crohn's disease, Prochymal is being tested in patients who have failed traditional therapies and have few, if any, treatment options remaining.

Cambridge, Mass.-based Genzyme also expects to launch Mozobil (plerixafor) in the U.S. and Europe during the first half of next year, following regulatory approvals. Mozobil is intended to enable patients with certain types of cancers to successfully receive a stem cell transplantation.

Additional potential applications for Prochymal could match up with Genzyme's other areas of focus on immune diseases, cardiovascular disease and endocrinology, the companies said.

Genzyme developed and commercialized the first-ever FDA-approved cell therapy product, Carticel (autologous cultured chondrocytes), used in knee cartilage repair. The company also markets MACI (matrix-induced autologous chondrocyte implantation), a second-generation version of Carticel, in Australia and Europe, and manufactures Epicel (cultured epidermal autografts), a cell therapy for treating patients with severe burns.

Chondrogen complements Genzyme's orthopedics franchise, which includes Carticel, MACI and Synvisc (hylan G-F 20), used to treat pain associated with osteoarthritis of the knee. The planned Phase II/III trial for Chondrogen will explore the therapy's ability to not only treat osteoarthritic knee pain, but also its potential for disease modification, the companies said.

"This partnership further strengthens Genzyme's late-stage pipeline of products with the potential to support our growth beyond 2011," Henri A. Termeer, Genzyme's chairman and CEO, said in a statement. "Osiris is the clear leader in stem cell technology, which holds the promise to transform standards of care in a number of therapeutic areas in which Genzyme already has a strong presence."

The $130 million up-front payment to Osiris will be paid in two parts, with $75 million paid initially and $55 million to be paid on July 1, 2009. The potential $1.25 billion in milestone payments from Genzyme depends on clinical trial results, regulatory approvals and product sales, according to the companies.

Osiris is eligible to receive up to $500 million in development and regulatory milestone payments for Prochymal related to GvHD, Crohn's disease and other potential additional indications that the companies develop together.

Based on sales in Genzyme territories, Osiris is eligible to receive up to $250 million in sales milestones for Prochymal based on certain sales targets. When annual sales reach $500 million, Osiris could receive $100 million payment, and when sales hit the $1 billion mark, Osiris could receive $150 million. Osiris also is eligible to receive significant escalating royalties on sales of Prochymal and Chondrogen within Genzyme territories.

Osiris would be eligible to receive up to $400 million in sales milestones for Chondrogen.

Depending on the results of the planned Phase II/III trial of Chondrogen, Genzyme may elect to opt-out of further Chondrogen development, at which point all rights to Chondrogen will revert to Osiris with no further obligation by either company. But if Genzyme elects to continue with Chondrogen development, Osiris would be eligible to receive up to $100 million in development and regulatory milestones based on certain clinical trial results and regulatory approvals.

Shares in Osiris (NASDAQ:OSIR) rose 43 cents, closing at $15.93. Shares in Genzyme (NASDAQ:GENZ) rose $1.06, closing at $74.60.

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