March 17, 2015 Osiris Therapeutics, Inc. NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 08/31/2014 Current Price (03/16/15) $17.48 Target Price $18.00 (OSIR-NASDAQ) SUMMARY Osiris fourth quarter 2014 results were better than expected with the company beating on the top- and bottom-line. The Biosurgery segment has been gaining traction over the past few quarters with the increased sales effort starting to pay off. Revenues are growing significantly the expanded sales force, improving Medicare and private reimbursement coverage should continue driving revenues. Meanwhile, we are positive on Osiris deals with Arthrex and Stryker for Cartiform and BIO4, respectively. We are also positive on the company s sale of its cemsc business which has not only brought in cash for Osiris in the form of an upfront payment but will also bring in royalties. That being said, we remain concerned about the company s dependence on a single segment for growth. SUMMARY DATA 52-Week High $18.40 52-Week Low $12.05 One-Year Return (%) 26.85 Beta 1.19 Average Daily Volume (sh) 155,762 Shares Outstanding (mil) 34 Market Capitalization ($mil) $594 Short Interest Ratio (days) 33.73 Institutional Ownership (%) 25 Insider Ownership (%) 45 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) -6.2 Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2015 Estimate 62.4 P/E using 2016 Estimate Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Average Type of Stock Small-Growth Industry Med-Biomed/Gene Zacks Industry Rank * 75 out of 267 ZACKS CONSENSUS ESTIMATES Revenue (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 4.1 A 5.3 A 6.9 A 8.1 A 24 A 2014 10 A 13 A 17 A 19 A 60 A 2015 90 E Q412 and Q413 and FY12 and FY13 reflect Therapeutics as discontinued ops. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 -$0.01 A -$0.05 A $0.00 A $0.05 A -$0.04 A 2014 -$0.02 A -$0.04 A $0.02 A $0.03 A -$0.01 A 2015 $0.28 E Q412, Q113, Q213 Q413 and FY12 and FY13 reflect Therapeutics as disc. ops. Zacks Projected EPS Growth Rate - Next 5 Years % 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Columbia, MD-based Osiris Therapeutics, Inc. focuses on the development, manufacture and sale of biologic products which have been developed to promote the body s natural healing process and improve surgical outcomes. Currently marketed products include Grafix, BIO4 and Cartiform for tissue repair. In Oct 2013, Osiris sold its culture-expanded mesenchymal stem cell (cemsc) business including Prochymal to a wholly-owned subsidiary of Mesoblast Limited for up to $100 million. Osiris will also be entitled to receive single to low double-digit royalties on sales of products derived from the cemsc technology. Osiris has also retained a license to all transferred intellectual property necessary to run its other businesses. Osiris has partnerships with Arthrex and Stryker for Cartiform and BIO4, respectively. Osiris generates revenues from the Biosurgery segment, collaborative agreements, government contracts and research licenses. Total revenues came in at $59.9 million in 2014, up 146.3%. REASONS TO BUY Biosurgery Products Gaining Traction: Osiris Biosurgery segment has been gaining traction over the past few quarters. Currently marketed products include Grafix, Cartiform and BIO4 for tissue repair. The company intends to continue increasing its focus on the development and commercialization of products in this segment. Osiris reported data on Grafix in Aug 2013 from Protocol 302, a multicenter, randomized, controlled study comparing the safety and effectiveness of Grafix to standard of care in patients with chronic diabetic foot ulcers. A planned interim analysis showed that Grafix had met pre-specified stopping rules for overwhelming efficacy. The Grafix study results are a major positive for Osiris. The market for diabetic foot ulcers is huge as about 25% of all diabetics suffer from the same and there are more than 25 million diabetics in the U.S. The company estimates that the diabetic foot ulcers market in the U.S. is about $2 billion. Grafix has a presence in the in-patient market which along with the VA market accounts for about 20% of the total diabetic foot ulcers market in the U.S. However, the company can now seek full reimbursement in the out-patient setting given the positive results from Protocol 302. Coverage in the out-patient market would expand Grafix market five-fold and lead to a significant increase in the number of wound care centers that can be covered by the company and the number of wounds that can be covered. We expect a significant boost in Grafix sales based on these results, expanded coverage and increased sales effort. The launch of additional graft sizes at price points falling within the CMS bundle should also boost revenues. Osiris is also looking to expand the Grafix label for diabetic foot ulcers, venous leg ulcers and complex and exposed wounds. Strong Partners for Cartiform & BIO4: We are positive on Osiris partnership deals for Cartiform and BIO4. Arthrex s vast sales and marketing reach among sports medicine surgeons will help maximize the penetration of Cartiform. Arthrex has started educating surgeons on the optimal surgical implantation technique. Meanwhile, the Stryker deal for BIO4 looks good to us - Stryker s marketing muscle and solid presence in the orthopedic and spine products segments makes it a strong partner for Osiris. Positive on Sale of cemsc Biz: We are positive on the company s sale of its cemsc business. Osiris sold its cemsc business including Prochymal for up to $100 million (including an upfront payment of $50 million). Osiris will also be entitled to receive single to low double-digit royalties on sales of Equity Research Page 2
products derived from the cemsc technology. Osiris has also retained a license to all transferred intellectual property necessary to run its other businesses. This deal provided Osiris with pro forma cash, investments and receivables of about $82 million. The sale of the cemsc business will not only provide Osiris with cash, it will also allow the company to focus on its Biosurgery segment, which has been gaining traction over the past few quarters. FDA Agreement Removes Uncertainty: Osiris agreement with the FDA regarding the regulatory status of Grafix has removed an overhang from the shares. With the FDA confirming the regulatory status of Grafix, the product will continue to be marketed as a wound cover for the treatment of acute and chronic wounds. REASONS TO SELL Entirely Dependent on Biosurgery Biz: With the sale of the cemsc business, Osiris is now solely dependent on its Biosurgery business for growth. Any setbacks, regulatory- or pipeline-related, would weigh heavily on the stock. Osiris is evaluating Grafix for additional indications and disappointing data would have an adverse impact on the shares. Long-Term Impact of Proposed CMS Ruling: Although Osiris will continue with the current payment methodology for Grafix, a bundled two-tier system will be applicable this year - Grafix will be reimbursed as a part of a packaged rate in the higher tier of the two-tier system. This could impact long-term growth of the drug. RECENT NEWS Osiris Therapeutics' Fourth Quarter Earnings Down Y/Y, Revenues Soar Mar 5 Osiris Therapeutics, Inc. (OSIR) reported fourth-quarter 2014 earnings of $0.03 per share, lower than the year-ago earnings of $0.05. The Zacks Consensus Estimate was a loss of $0.05 per share. Total revenues in the quarter shot up 139.1% year over year to $19.3 million, surpassing the Zacks Consensus Estimate of $15 million. Osiris Therapeutics full-year loss of $0.01 per share was narrower than the year-ago loss of $0.04. 2014 revenues jumped 146.3% to $59.9 million. Quarterly Details Osiris Therapeutics wound care business continued to perform well in the fourth quarter thanks to the efforts of its direct sales force. Revenues were also positively impacted by the expanding coverage for Grafix, representing over 70% of all Medicare lives. The increased sales effort should boost revenues and drive growth in 2015. The company expects full Medicare coverage this year. Meanwhile, private commercial coverage should also expand in 2015. Research and development (R&D) expenses increased 101.6% from the year-ago period to $3.9 million, primarily due to higher product and pipeline development related expenses. R&D spend is expected to increase in 2015 due to additional studies being conducted on Grafix to support the planned Biologics License Application (BLA), the development of new products and Equity Research Page 3
continued product improvement efforts. Meanwhile, Osiris Therapeutics has finalized the design of the confirmatory phase III study for its BLA for Grafix. Selling, general and administrative expenses jumped 141.4% from the year-ago period to $10 million reflecting investment in commercial activities. The company has increased its sales force significantly for the promotion of Grafix. Our Take Osiris Therapeutics revenues are growing significantly the expanded sales force, improving Medicare and private reimbursement coverage should continue to drive revenues. We are positive on Osiris Therapeutics partnership with Arthrex and Stryker (SYK - Analyst Report). The deals should help boost Cartiform and BIO4 revenues considering their expertise in the respective fields. Osiris and Stryker Team Up to Market Viable Bone Matrix Dec 22 Osiris and global medical technology company Stryker Corporation entered into an exclusive, worldwide partnership for the commercialization and development of the Osiris viable bone matrix tissue form. Under the agreement, Stryker will attain exclusive, worldwide rights to Osiris viable bone matrix under the name BIO4. While Osiris will be responsible for manufacturing, continued research and product improvement activities, Stryker will engage in the commercialization and marketing of BIO4. However, both organizations will team up on the design and conduct of future clinical development programs of the product. BIO4 a bone allograft that contains both viable cells and growth factors was developed by Osiris utilizing its proprietary Biosmart cryopreservation technology. Originally branded as OvationOS, Osiris viable bone matrix tissue form will now be marketed by Stryker under the brand name BIO4. This partnership strategically aligns one of Osiris leading regenerative medicine technologies with Stryker s innovative medical device portfolio. Stryker, being a global player in marketing orthopedic and spine products, enjoys a competitive position to maximize the market potential of Osiris next generation viable bone matrix. VALUATION Osiris reported fourth-quarter 2014 earnings of $0.03 per share, lower than the year-ago earnings of $0.05. The Zacks Consensus Estimate was a loss of $0.05 per share. Total revenues in the quarter shot up 139.1% year over year to $19.3 million, surpassing the Zacks Consensus Estimate of $15 million. Osiris fourth quarter results were better-than-expected with the company beating on the top- and bottomline. The Biosurgery segment has been gaining traction over the past few quarters and is well-positioned for growth. Revenues are growing significantly the expanded sales force, improving Medicare and private reimbursement coverage should continue driving revenues. Meanwhile, Osiris partnership with Arthrex should help boost Cartiform revenues considering Arthrex s vast sales and marketing reach among sports medicine surgeons. The Stryker deal also looks good to us Stryker s marketing muscle in the orthopedic and spine products segments makes it a strong partner for Osiris. We are also positive on the company s sale of its cemsc business which has not only brought in cash for Osiris in the form of an upfront payment but will also bring in royalties. While encouraged by the Equity Research Page 4
company s progress with its Biosurgery business, we remain concerned about the dependence on a single segment for growth. The company s current trailing 12-month P/S multiple is 9.9, compared to the 16.7 average for its peer group. Based on forward estimates, the stock is trading at 6.6x our 2015 sales estimate. Our $18 target price is based on 6.8x our 2015 sales estimate. Key Indicators P/S F1 P/S F2 Est. 5-Yr EPS Gr% P/CF P/S P/E 5-Yr High P/E 5-Yr Low Osiris Therapeutics, Inc. (OSIR) 6.6 9.9 1363.0 9.7 Peer Group Average 14.6 10.4 16.7 Repligen Corporation (RGEN) 14.3 12.4 17.5 51.9 16.1 517.0 13.3 Ligand Pharmaceuticals Incorporated (LGND) 17.9 13.3 30.0 53.2 22.8 1973.0 52.2 ANI Pharmaceuticals, Inc. (ANIP) 7.8 5.8 40.6 12.3 54.7 26.7 Orexigen Therapeutics, Inc. (OREX) 18.3 9.9 20.0 15.7 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Osiris Therapeutics, Inc. (OSIR) 7.2 18.7 3.7 0.2 0.0 0.0-293.4 Industry Average 13.4 13.4 13.4-112.7 0.1 0.1 39.7 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research Page 5
Earnings Surprise and Estimate Revision History Equity Research Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of OSIR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform - 15.5%, Neutral - 74.7%, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst QCA & Lead Analyst Reason for Update Arpita Dutt Arpita Dutt 4Q14 Equity Research Page 7