Assistant Managing Editor

Shares of Osiris Therapeutics Inc. sank 21 percent after the firm reported problems with the design of an ongoing pivotal Phase III study of adult stem cell product Prochymal in Crohn's disease and halted the study only 60 patients away from the 270-subject enrollment goal.

The decision followed a scheduled interim analysis that the company said revealed a higher-than-expected placebo effect and hinted at a potential for bias in patient reporting. Under the current trial design, Crohn's patients refractory to existing treatment are enrolled and randomized to receive either one of two doses of Prochymal, a formulation of mesenchymal stem cells, or placebo in a four-week induction trial.

Patients who responded at day 28 then would be eligible to enter a second study, in which they would be randomized to receive Prochymal or placebo for a longer-term, maintenance trial.

Because the endpoint is based partly on subjective patient-reported responses, as measured by the Crohn's Disease Activity Index, Osiris believes an eagerness to make it into the second study might have prompted patients to overreport their responses so they could continue treatment, C. Randal Mills, president and CEO of Columbia, Md.-based Osiris told investors during a conference call.

So even if patients suspected they were receiving placebo, they knew they could be re-randomized to possibly receive treatment in the second study, he said. "Even if they weren't feeling better, we gave them an incentive to say they were feeling better."

Mills said the trial was designed by a "very impressive group of experts" and was intended to address both the induction and maintenance questions simultaneously without overburdening patients or the company. But "hindsight is always 20-20," he added. "As we look back at it, it seems somewhat obvious" that the trial design could lend itself to patient bias.

The bad news is that Osiris will have to start over with the Phase III study, which means a "significant delay at best" to potential market with the product in the tough-to-treat refractory Crohn's population and "clearly pushes out potential Crohn's milestones and royalties" from partner Genzyme Corp, analyst Edward A. Tenthoff, of Piper Jaffray, wrote in a research note.

Osiris' stock (NASDAQ:OSIR) lost $3.90, to close Friday at $14.40.

But Tenthoff said the setback is unlikely to endanger the potential $1.4 billion deal Osiris signed with Cambridge, Mass.-based Genzyme in November for rights to Prochymal and mesenchymal stem cell-based arthritis drug Chondrogen.

That deal called for Genzyme to pay $130 million up front - $75 million of that was received in November, with the remaining $55 million scheduled for receipt in July - in exchange for rights to the products in all areas outside of the U.S. and Canada. Genzyme also agreed to pick up 40 percent of all late-stage trials going forward. (See BioWorld Today, Nov. 5, 2008.)

However, since the Phase III Crohn's disease trial predated the Genzyme deal, Osiris will have to cover 100 percent of the costs for a redesigned study, Mills said.

The company ended 2008 with about $124 million in cash, short-term investments and receivables.

The good news for Osiris' Prochymal program is that the potential for patient bias appears to be specific to the Crohn's disease trial and should not affect the company's ongoing Phase III program in graft-vs.-host disease (GvHD), Mills assured investors.

In the GvHD studies, the response rates are patient-reported, the primary outcome is determined by complete resolution of GvHD rather than a measurement of incremental improvement and "there's no incentive for patients to get into a longer-term trial," he said.

Analysts also remained positive on the GvHD program. Charles Duncan, of JMP Securities LLC, wrote in a research note that he doesn't believe "the results from Crohn's can be translated into potential outcome for GvHD due to the lack of safety concerns and the unmet medical need."

And Piper Jaffray's Tenthoff remains "confident" in seeing positive results in refractory GvHD this year and said Osiris could be in position to file a biologics license application with fast-track approval in the first half of 2010.

The company completed patient enrollment in December for the Phase III trial of Prochymal in steroid-refractory GvHD patients and expects top-line data "sometime in the third quarter," Mills said.

A second trial in acute GvHD still is enrolling subjects so the timeline is a little harder to gauge, but he said it's possible the shorter study also could yield early data in the third quarter.

Osiris also is testing Prochymal in Type II diabetes and chronic obstructive pulmonary disease and recently reported promising Phase I data of the drug in acute myocardial infarction.

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