Why Brean's Jason Wittes Is Watching Osir Therapeutics

• Shares of Osiris Therapeutics, Inc. OSIR have increased by 19.62 percent, year to date, reaching a high of $22.64 on July 16.
• Brean Capital’s Jason Wittes has initiated coverage of Osiris Therapeutics with a Hold rating.
• While mentioning that the stock was fairly valued at present, Wittes expressed concerns regarding the elevated days sales outstanding (DSOs) and impact of competition in the longer term.

Most of Osiris Therapeutics’ revenues come from its cryopreserved amniotic tissue graft, Grafix, which is primarily used in Diabetic Foot Ulcer and Venous Leg Ulcers. However, according to the Brean Capital report, “Of the one million DFU cases annually, less than 10% are treated with biological grafts and penetration is even lower for chronic wounds.”

“Mounting clinical evidence for amniotic tissue grafts, improved reimbursement coverage and lower price points should help drive penetration,” Wittes explained, while also mentioning that ongoing investment in sales and marketing infrastructure has helped the company see rapid growth in the wound care market.

Wittes expects $90 million in Grafix sales in 2015 and $110 million in 2016.

In 2014, Osiris Therapeutics has extended “very generous payback terms” to customers, although the company is now offering terms that are in-line with the industry average.

“However, we still see a risk of customer losses, along with the potential for a large bad debt expense. 2Q15 DSOs were 148 days from 116 days in the prior year quarter,” Wittes stated.

The company currently has two partnerships, one for its stem cell based biologic for bone fusion, BIO-4, and the other for its allograft, Cartiform. Wittes expects the partnerships to contribute $5 million in 2015 and $10-$15 million in 2016.

With regard to the company’s product pipeline, the management categorizes them as short term, medium term and bio-engineered products and believes that most of the pipeline represents “smaller niche opportunities,” in the range of $25 million.