OSIR-Genzyme, Osiris Eye Stem Cell-Based Drugs
Friday November 7, 6:10 pm ET
Peter Benesh
At last, there's evidence that some companies are getting close to commercializing stem cell science.
Last week Genzyme (NasdaqGS:GENZ - News) and Osiris Therapeutics (NasdaqGM:OSIR - News) announced a pact that could be worth $1.4 billion, assuming all expectations and milestones are met.
It's the largest deal ever in the young stem cell industry, says Randal Mills, president and chief executive of Osiris. "It gives us a monumental influx of resources and tells the world that stem cell therapy has arrived."
Osiris has two stem cell-based products: Prochymal and Chondrogen. The Genzyme deal is aimed at getting regulatory approval for both and getting them to market.
Prochymal is in a pair of phase three trials. The first is for graft vs. host disease, a life-threatening immune condition that can hit cancer patients after a bone marrow transplant.
The second is for Crohn's disease. Crohn's is a chronic inflammatory disease of the intestines, afflicting more than 500,000 patients in the U.S. It requires the removal of bowel sections in 50% of patients.
Prochymal is also in clinical trials for the treatment of chronic obstructive pulmonary disease. With 12 million Americans diagnosed, it's the No. 4 cause of death in the U.S. And the drug is in clinical trials for prevention of heart failure after heart attack as well as a treatment for type 1 diabetes.
Chondrogen will soon start a phase two/three trial for regeneration of the meniscus in the knee, and prevention of osteoarthritis.
Opportunity Knocks
Financing Osiris' stem cell technology fits Genzyme's strategy and timetable, says David Meeker, a medical doctor and Genzyme's executive vice president for therapeutics, biosurgery and transplant.
"We like to invest in late-stage opportunities, while there's still an opportunity for us to create value," Meeker said.
Genzyme will make two upfront payments to Osiris: $75 million right away and $55 million on July 1, 2009. With milestones and royalties, Genzyme could pay Osiris another $1.25 billion.
Under the deal, Osiris will handle sales in the U.S. and Canada, while Genzyme will market Osiris' stem cell drugs in the rest of the world, paying royalties to Osiris.
Osiris will pay for the current rounds of clinical trials and for new trials for new uses of the drugs through phase two. Osiris and Genzyme will share the cost of phase three and four trials, with Osiris paying 60% and Genzyme 40%.
Those payments will give Osiris its first yearly profit since its founding in 1992. Thomson Reuters analysts expect earnings of $2.59 a share for 2008, though next year they see a loss of 5 cents.
Osiris' stock rose as much as 27% on Nov. 4, the day the deal was announced, before closing up 2.8%. Shares currently trade near 18, up from 11 the week before the deal.
Shares of Genzyme rose 1.4% to 74.60 the day of the deal, though they've since slumped and now trade near 71.
Wall Street Pitch
Genzyme's research spans many technologies, including protein, antibody, polymers, cells, genes, bio-materials and chemical-based drugs. The company targets rare inherited disorders, kidney disease, orthopedics, transplant, cancer and diagnostic testing.
Osiris' stem cells come from bone marrow of adult donors. The cells are encouraged to multiply in the lab. A small sample can become 10,000 cells, Mills says.
The deal should awaken investors to stem cell possibilities, says William Tanner, an analyst with Leerink Swann. "Stem cell therapies have not been ready for prime time, but if this technology works, it will underscore the importance of stem cells for treatment of various diseases."
Another benefit is that there's a natural synergy between Osiris and Genzyme. That's partly because the two firms have already worked together. They've been partners in a $225 million Department of Defense project to develop Prochymal to treat acute radiation syndrome, which results from nuclear attack or accident.
Still, both face challenges making the latest collaboration a success, watchers say.
"They must show efficacy and safety, and it's unclear how these stem cell drugs will respond in phases two and three," said analyst Matthew Osborne of Lazard Capital.
Meanwhile, there is talk that Genzyme, with a market cap of $19 billion, might decide to buy Osiris, which has a market cap of less than $500 million.
Genzyme might have to pursue an acquisition to take advantage of Osiris' U.S./Canadian rights to Prochymal and Chondrogen. Though Genzyme gets rights to the rest of the world, "there's practically no market outside the U.S.," Tanner said. To maximize its investment, "Genzyme will have to buy these guys."
If Genzyme does make a buyout offer, Tanner reckons it will come before the end of 2010.
Lazard's Osborne offers a different view. He says Genzyme "makes deals based more on licensing than acquisition." Since buyouts are expensive, he adds, Genzyme will stick with licensing to keep its commitment to 20% annual earnings growth.
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