Osiris Therapeutics counters report questioning sales

Its stock is off two-thirds from its summertime high, its auditor quit and it's restating earnings.

The past few months have not been friendly to Osiris Therapeutics, a Columbia-based company that's considered one of the state's most promising biotechnology firms.


Osiris, known for its stem cell-based products, is in the midst of transitioning from a research firm into a commercial enterprise and making strides with products such as Grafix, a human tissue product that treats chronic wounds such as foot ulcers.

But after showing much promise, Osiris, which takes its name from the Egyptian god of death and regeneration, faces uncomfortable questions about its recent missteps. Several shareholders have sued and postings on financial advice websites voice continuing doubts about its sales and financial reports.


Last week, the company took the unusual step of answering its critics, singling out a Seeking Alpha report it said misrepresented a business that has grown significantly over the past year.

"2015 was a transformational year for Osiris," said Lode Debrabandere, president and CEO, in a statement issued Tuesday. "In the interest of providing investors and other stakeholders further context of these changes and their impact — as well as responding to certain statements about the company recently posted to several websites — a recap of some of the 2015 activities is appropriate."

In its recap, Osiris explained that it has been able to significantly increase both market penetration and market share for Grafix and that it landed "industry-leading" distributors for products in its orthopedic sports medicine business, including Bio4, a bone growth product, and Cartiform, used for cartilage regeneration. The partnerships with Stryker on Bio4 and with Arthrex, for Cartiform, will allow Osiris to commercialize those products, the company said.

"Those products are relatively new, nine to 10 months, and doing well, but our wound care business is the larger business, and that's why it's important to correct those false statements," Debrabandere said.

The report by a Seeking Alpha contributor that prompted that response noted, among other things, that an Osiris competitor had questioned "supposed revenues being generated by Osiris."

The report said signs of trouble at Osiris included the resignation of the company's auditor in December, analyst stock downgrades from "buy" to "sell" and inconsistencies between various filings with the Securities and Exchange Commission.

"There are many existing red flags on Osiris," wrote the report's author, Richard Pearson, who is a contributor for Seeking Alpha, a crowd-sourced site for financial information that hosts insights from investors and analysts.

Osiris' auditor, BDO USA, resigned in December after disagreements with the company about the need to restate recent financial reports, according to a company SEC filing. Osiris initially disagreed with BDO's concerns about the timing of revenue recognition and its internal controls, but it relented and ultimately initiated a restatement of some of its results in the past year.


In the same SEC filing, it reported hiring Ernst & Young as its new auditor.

The restatement, first disclosed Nov. 6, raised doubts among investors, who hammered the stock, which fell 20 percent that day to $14.54 a share. It's since fallen further amid the broader market's swoon, though on Friday, Osiris shares rose 6.7 percent to close at $7.49 each.

As the stock fell amid the restatements, several shareholders filed lawsuits, alleging that the company and its executives made a series of false and misleading statements to investors between May 2014 and Nov. 16, when it filed an SEC statement further detailing the restatements.

The shareholder lawsuits accuse the company of overstating revenues from several contracts, not correcting financial statements and causing millions in losses. The restatements removed about $3.1 million of sales and shifted $3.9 million of sales between quarters, causing the company to miss revenue targets in three of the last four quarters, according to a class-action suit filed by the firm of Kessler Topaz Meltzer & Check in Radnor, Pa.

Debrabandere said the company plans to address the shareholder lawsuits, which he called a normal part of business.

As of Thursday, Osiris shares had an average score of "hold" from two analysts who cover the company, according to a Zacks Investment Research report.


"Although Osiris's third quarter 2015 loss was wider than expected, we are encouraged by the company's efforts to grow the Biosurgery business," said the Zack's report, adding that analysts had a positive view of the deals with distributors Arthrex and Stryker for the two products.

But the Zack's report cautioned that "the company's dependence on a single segment for growth is concerning."

Debrabandere said some of the recent concerns show a misunderstanding of the company's growth. Revenues totaled nearly $60 million in 2014, but the company had reported $25.3 million in the third quarter alone, reflecting accelerating growth.

In an interview Thursday, Debrabandere said Osiris took the unusual step of issuing a statement in response to the Seeking Alpha report mainly to rebut two points.

The report said Osiris had been highly dependent on Stability Biologics, a distributor of its Biosurgery products, which has been sold to Osiris competitor, MiMedx.

"There is considerable uncertainty as to just how much business Stability actually does with Osiris. This is due to blatant inconsistencies within Osiris' SEC filings," said the Seeking Alpha report, which characterized Stability as Osiris' largest customer and said the sale to MiMedx would "create a gaping revenue hole for Osiris."


Debrabandere countered that the business generated by Stability in the second half of last year accounted for less than a half-percent of its revenue.

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The report also under-represented the size of Osiris' wound care business, he said.

"It is unusual that Osiris does not disclose any breakdown of revenues between its products," the report said. "However, analysts estimate that 90%-95% of revenues come from the Grafix product alone. It is almost everything."

The company does not break out revenue for its individual businesses, including wound care and orthopedics. Debrabandere said the company has invested heavily in and expanded the wound business, but that the Seeking Alpha report incorrectly relied on 2014 Medicare data to determine the size of the wound care business.

The author of the report did not respond to a request for comment.

Debrabandere argued that Osiris is simply a company in transition, with very promising products based on breakthrough stem cell research.


"What we have been able to build here in this part of Maryland is actually extraordinarily beautiful," and on the forefront of stem cell research, he said. "We have been able to work quietly and diligently and gain enormous respect in the area of stem cells. In the last couple of years, equally positive for the region, we have translated research into commercial products that are doing very well."