Biotech Stock Mailbag: Osiris, Arena, Ampio

Updated with new email on Arena Pharmaceuticals. BOSTON (TheStreet) -- I took a vacation day Thursday (and live-blogged the Onyx Pharma (ONXX) FDA panel Wednesday) so I apologize for the abbreviated Biotech Stock Mailbag. Back to full strength next week.

Dore S. writes, "Hey Adam, Osiris Therapeutics (OSIR) is the poster child for how in the short term, momentum trading with low-float stocks can render valuation meaningless. Osiris sports a market cap in excess of $325 million. You've said the Prochymal Canadian approval may apply to a dozen or so children and my guess is New Zealand is a fraction of that. You also forecast peak sales of the company's biosurgery unit at $8 million-$9 million. Valuation eventually does matter but quite a ride getting there."

Osiris is a solid example of a wildly overvalued stock with a fundamentally negative outlook that is also incredibly risky to short at this time for the reasons Dore notes: A low float, momentum (read: valuation insensitive) traders and I'll add shares that are difficult, if not impossible, to borrow in size.

Here's how Merrill Lynch, in an email to institutional clients sent Wednesday night, characterized the recent action in Osiris:

"Osiris Therapeutics Inc. (OSIR) – Stock price has gained for the 7th straight day as it rose as much as 10% intraday to $11.25, closing at $11.08. Supply has tightened significantly over the past few days with rates last seen trading as deep as neg[ative] 40%. Recall pressure is beginning to increase on the Street as the short interest is currently reported as 21.20% of the float."

Not pretty if you're short, or thinking about going short, Osiris.

I'm a fundie so I believe even high-flying momentum stocks can't defy the laws of gravity forever. Osiris will fall back to earth. I don't know when, but it will happen. Perhaps when Osiris raises money. I'm surprised a dilutive stock offering hasn't been announced yet. At some point, Osiris will also start reporting Prochymal sales from Canada and New Zealand, which are bound to disappoint relative to the stock's current valuation.

About 100 Canadian children with life-threatening graft versus host disease (GVHD) may be suitable for treatment with Prochymal every year, according to Lazard. At an estimated cost of $100,000 per course of treatment, Osiris would deliver $10 million per year in sales. Sales from New Zealand, whose population is a fraction that of Canada, will be insignificant.

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