Osiris Therapeutics ( OSIR) has halted a phase III study of its drug Prochymal in patients with Crohn's disease after an interim analysis determined the drug wasn't working, the company announced Friday.

The news sent Osiris' stock price plummeting 40% in premarket trading.

The company blamed a design flaw in the study that caused a higher-than-expected placebo response rate. Enrollment in the Prochymal study for Crohn's disease was stopped at 210 patients. The study was designed to enroll 270 patients.

Prochymal is a drug made from mesenchymal stem cells, a form of adult stem cells derived from bone marrow. Osiris is studying the drug in late-stage trials for graft vs. host disease, a side effect of bone marrow transplants in which the body rejects the bone marrow, in addition to the Crohn's study.

Last year, Osiris signed a partnership agreement for Prochymal with Genzyme ( GENZ).
At the time of publication, Feuerstein's Biotech Select model portfolio was short Osiris.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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