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.

GVHD is a potentially deadly complication stemming from bone marrow transplants in which transplanted immune cells attack a patient's own organs and tissue as foreign.

I previously predicted that Osiris would not be successful in gaining Canadian approval for Prochymal as a treatment for GVHD. Obviously I was wrong, but with an asterisk because newly released documents show that Health Canada granted conditional approval to Prochymal out of compassion for children with a very rare fatal illness and not based on convincing scientific evidence.

The Health Canada documents -- a summary report on an expert advisory panel that reviewed Prochymal and the drug's Canadian-approved label -- show that the decision to approve the stem cell therapy was based on clinical data culled in part from a failed study found to be "limited" and "suggestive but not definitive with respect to efficacy" by the Canadian agency's expert advisors.

This is how the six-member Expert Advisory Panel on Prochymal summed up Procyhmal's efficacy data:

"The panel noted that severe Grade D GvHD is an extremely serious disease that affects a very small patient population. A few panel members have seen in their clinical experience how pediatric patients dramatically responded to treatment with Prochymal. However, this positive anecdotal evidence is not adequately reflected in the efficacy data.

"The panel further noted that there is very limited efficacy data; the data is suggestive but not definitive with respect to efficacy. There is a very small post-hoc analysis (in children) from a randomized sic trial, protocol 280 that demonstrated a small change in effects between the Prochymal arm and the placebo arm. In addition, protocol 275 is a cohort study for severe refractory GvHD with limited efficacy endpoints and vague inclusion criteria. In protocol 275, the survival probability through 180 days post onset of acute GvHD in refractory Grade D pediatric patients is 56.2% for the Prochymal group and 31% for the historical control group. From a clinical perspective, this is a positive effect; however, it is not a conclusive indication of efficacy."

Despite lack of convincing evidence, the advisory panel, which met Jan. 26 under the auspices of Health Canada, deemed Prochymal to be safe and "most probably effective" for a small group of severely ill patients (kids with GVHD) who had run out of medical treatment options.

Based on this lukewarm recommendation, Canadian regulators approved Prochymal on May 17 with conditions that restricts use of the stem cell therapy and requires Osiris to provide further clinical data to prove its clinical benefit.

This is not the ringing endorsement of Prochymal that Osiris has portrayed since the Canadian approval was announced last month. A read of the Prochymal label approved in Canada makes that point clear.

"Protocol 280" was a double-blind, placebo-controlled phase III study that enrolled 240 patients with steroid-refractory GVHD. In 2009, Osiris announced that the "protocol 280" study failed, as did a companion phase III study in newly diagnosed GVHD patients. Prochymal provided little or no benefit over placebo.

Osiris, however, sifted through the negative phase III study to find a subgroup of 28 children with all grades of GVHD --14 treated with Prochymal and 14 with a placebo. In this retrospectively defined subgroup, the Prochymal response rate at day 28 was 64% versus 36% for the placebo-treated patients -- a trend favoring Prochymal but not statistically significant.

The survival data from this data-mined subgroup of children is equally weak. At day 100, 11 Prochymal patients (78.6%) were alive compared to seven placebo-treated patients (50%). The result was not statistically significant.

At day 180, the survival "benefit" narrows, with nine Prochymal-treated kids alive versus seven placebo-treated kids.

Health Canada also considered data from "Protocol 275," a single-arm (uncontrolled) study of 75 pediatric patients with Grades B-D acute GVHD who failed to respond to other treatments. GVHD severity is graded A-D, with A least severe, D most severe.

At day 28, the patient response to Prochymal was 61%, but unlike in protocol 180, there was no control arm to which the Prochymal response could be compared.

In order to examine survival in protocol 275, Osiris compared Prochymal to a historical control of "similar" GVHD patients. The probability of survival at 180 days post treatment was 51% for Grade D GVHD patients treated with Prochymal compared to 31% for the historical control group -- statistically significant.

But the same survival analysis conducted for patients with milder Grades B&C GVHD failed to demonstrate favoring Prochymal. In fact, survival trended in favor of the historical control for Grade C GVHD patients.

In other words, in order to show any survival advantage for Prochymal protocol 275, not only did Osiris need to employ a dubious historical control group, but it had to separate the GVHD patients by disease severity.

Osiris has never adequately explained why Prochymal benefits children with GVHD but not adults, nor has it explained why Prochymal only seems to prolong survival in children with more severe grades of GVHD while not helping less sick patients.

When Canada granted conditional approval for Prochymal in May, Osiris CEO Randy Mills told the New York Times that the company filed first in Canada because the U.S. Food and Drug Administration had told the company it would need additional data before seeking approval here.

The newly released Canadian regulatory documents show our neighbors to the North, despite approving Prochymal, are not yet convinced that the stem cell therapy benefits GVHD patients. FDA isn't going to be as lenient, which puts Osiris in a tough spot fundamentally, even if it has momentum traders on its side for now.

@zortrades asks, "What is your take on $ARNA?"

There's frenzied trading in Arena Pharmaceuticals ( ARNA) ahead of the June 27 FDA approval decision for the weight-loss drug lorcaserin. Take a look at the StockTwits heat map for health care: The trader twitter chatter is dominated by Arena! StockTwits executive editor Phil Pearlman has more details on the incredible 4,321% rise in social media traffic for Arena over the past three months. Staggering numbers.

It was noted by someone else (I don't know who) that FDA announced the three-month delay in the Vivus ( VVUS) Qnexa review eight days before the approval decision date. We are now past that eight-day mark for Arena, so perhaps the risk of a similar delay for lorcaserin is diminished, if not gone entirely.

I'm predicting full approval of lorcaserin on June 27. Of course, I've been wrong about Arena and lorcaserin in the past, so...

I can't help but think that momentum traders are largely behind Arena's run-up into the FDA decision date. Short covering and a cult-like retail investor following are helping, too. Don't believe me? Check out the InvestorVillage.com message board where Arena cult leaders rant endlessly about the evils of short selling and threaten to sue anyone for criminal conspiracy just because they don't like the stock. At some point, traders will take profits, leaving Arena's stock price vulnerable. Whether that happens immediately upon lorcaserin's approval or days later isn't clear to me. Your guess is as good as mine.

Arena's current $2 billion valuation is hard to justify given lorcaserin's mediocre weight-loss capability. I predict a strong launch of the drug fueled by extensive media publicity and word of mouth but sales will fizzle relatively quickly as the obese become disappointed and disillusioned about shelling out $100 or more per month for a pill that doesn't help them shed significant pounds or keep the weight off very long.

In case you think I'm biased against Arena only, I feel the same way about Vivus' Qnexa.

"LisaInBuffalo" writes, "I’m looking forward to your Mailbag column tomorrow and I have a small favor to ask. Could you please not be too harsh on Arena? Please! Please! We are having so much fun! I know that some of the Areniac’s are rude and inconsiderate (read:crazy) but most of us are pretty normal and cool like me. I was with you during your live blog of the Arena AdCom and you thought it would be a 23-0 vote and you know the FDA was very positive. I know that you think the drug is not the most efficacious but when it comes to obesity it’s hard for someone like you or me to understand. You look like a pretty fit guy and I’m 5’8 and 125 lbs. and have never had a weight problem, but I know many people who do.

"It is so hard for many overweight and obese people to lose weight through diet and exercise alone. Even if Lorcaserin helps them a little or moderately or inthe case of top responders, significantly, it can give them the motivation theyneed to keep dieting and exercising. If dieting worked, then nobody would beoverweight. Again, it’s hard for people like you and I to understand thepredicament of the obese. Of a person who just looks at food and gains weight-they need help and Lorcaserin can help a lot of people. Not everyone, but nodrug does that. Even Topamax is weight neutral for many people, but for thosewho do respond it works well. So, in closing, please Adam, let the party continue just a few more days. Keep up the good work. We all appreciate it."

Ampio Pharmaceuticals ( AMPE) update: Setback. FDA is requiring the company to conduct two new phase III clinical trials of its premature ejaculation drug Zertane in order to seek U.S. approval, the company announced Thursday.

As I noted in April, Ampio has been misleading investors about Zertane, claiming it had previously conducted a positive phase III study of the drug, which is simply a mint-flavored dissolvable tablet containing a low dose of a generic painkiller. In fact, this prior phase III study was actually a re-analysis of two shortened and failed studies conducted by Biovail, which ultimately gave up on Zertane.

Ampio had been hoping to convince FDA to allow the use of the old Zertane data to accelerate an approval filing in the U.S. but regulators here refused, telling the company instead that it must conduct two new phase III trials.

On a related note, Ampio management in late May sent shareholders a letter complaining about "rampant short selling" that is driving down the price of the company's stock, despite all its good works. In the letter (a copy of which I obtained), Ampio CEO Michael Macaluso asks shareholders to contact their brokers to request they stop lending out Ampio shares for short sales.

When management starts fixating on short sellers, trouble is usually not too far behind. We see evidence of that Thursday with the Zertane setback.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. 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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