Highlights include Osiris Therapeutics, Inc. (OSIR) and Genzyme Corp. (GENZ).

Management Halts Phase III Crohn’s Trial Due to Design Flaw

On March 27, 2009, Osiris Therapeutics (OSIR) announced it was stopping its phase III clinical trial program testing Prochymal for the treatment of acute Crohn’s disease (CD) due to a design flaw in the trial that was allowing for significantly higher-than-expected placebo response rates.

The decision was made after the trial’s final scheduled interim analysis showed that 1 of the 2 Prochymal dose arms had crossed a futility boundary (would not achieve statistical significance).

As a reminder, Osiris’ phase III CD program consisted of 2 trials, and induction program (S-603) followed by a maintenance program (S-610). The Study-603 “Induction” program was targeted to enroll 270 patients and randomize into three arms, one-high dose Prochymal, one low-dose Prochymal and placebo.

After 28 days of dosing, patients were to be analyzed for a reduction in the Crohn’s disease activity index (CDAI). Patients with a 100-point drop in CDAI score, measured largely on a self-reported subjective basis, would then be eligible for re-randomization into the longer-term Study-610 “Maintenance” program.

Management believes that there was a bias in the placebo group to meet the eligibility requirements to be able to re-randomize and participate in the S-610 program. This is evident by the fact that 56% of the participants in the in the S-603 program enrolled in the S-610 program. We would have expected the number to be more around 30 – 40%.

Management will analyze the data from the 210 patients that completed the S-603 program looking for signs of objective response – including endoscopic index of severity scores – and then sit down with development partner, Genzyme (GENZ), to re-design the phase III Crohn’s program.

Osiris will handle the costs for the re-workup and initiation of the new phase III CD program. However, this delay should have no impact on the ongoing GvHD program or the expected filing in GvHD later this year.

Unfortunately, the delay in the CD program pushes back sales expectations in our financial model, as well as the $50 million milestone from Genzyme to Osiris for the successful completion of the CD program that we have previously modeled in the 4th quarter of 2009.

We believe it could be a year or so before Osiris can re-initiate the Crohn’s program, which will most likely include two separate phase III trials, one induction and one maintenance, but once initiated the program should enroll quickly given management’s experience from just halted program and the inclusion of several additional new centers that did not participate the first time.

We would use this news as a buying opportunity for the shares. Osiris remains financially sound and should exit 2009 with over $100 million on the books. We still expect that Prochymal will be on the market in the U.S. by the end of next year for GvHD. Our target is $25 per share.

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