June 20, 2006
VIA EDGAR AND HAND DELIVERY
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
ATTN: | Jeffrey Riedler Assistant Director Mail Stop 6010 | |
Re: | Osiris Therapeutics, Inc. File No. 333-134037 Form S-1 filed May 12, 2006 |
Dear Mr. Riedler:
On behalf of Osiris Therapeutics, Inc. (the "Company"), this letter responds to the Staff's comment letter dated June 8, 2006 regarding the Company's Form S-1 Registration Statement filed with the Securities and Exchange Commission on May 12, 2006. A marked copy of Amendment No. 1 showing the changes from the Registration Statement as originally filed is attached for your reference. For your convenience and as requested by comment number two in the Staff's comment letter, each of the Staff's comments has been reproduced below, followed by the Company's response to such comment.
General
RESPONSE: The Company respectfully acknowledges the Staff's comment and has made all appropriate changes in the Registration Statement.
RESPONSE: The Company has complied with the Staff's request in this response letter.
RESPONSE: The Company respectfully acknowledges the Staff's comment and notes that it either has filed or will file all agreements required by Item 601(a) of Regulation S-K as soon as possible.
RESPONSE: The Company respectfully acknowledges the Staff's comment and intends to complete blank sections as soon as information is available. The Company has revised the Registration Statement to provide information regarding Use of Proceeds as noted in the response to comment number 15.
RESPONSE: The Company does not intend at this time to use any graphic, visual or photographic information in the printed prospectus. The Company will provide the Staff such information prior to use in a printed prospectus if it decides to use such information in the future.
RESPONSE: The Company respectfully acknowledges the Staff's comment.
RESPONSE: The Company respectfully acknowledges the Staff's comment.
RESPONSE: In response to the Staff's comment, the Company has identified the sources of certain factual statements in the Registration Statement, and respectfully advises the Staff that each of the identified sources is publicly available. In addition, certain factual statements in the Registration Statement reflect the conclusions of the Company based on its research and analysis and the research and analysis of certain third parties. These statements have been qualified in the Registration Statement to reflect the fact that they are the belief of the Company based on its research and analysis and the research and analysis of third parties. Because the third party sources contribute to and support the basis for the Company's beliefs but are not the exclusive basis, the Company has not named the third party sources in the Registration Statement.
2
Risk Factors, p. 8
"If the potential of our stem cell therapies...," p. 9
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 10 of the Registration Statement to reflect that it has not treated enough patients to permit a determination of whether serious unintended consequences will occur.
"There are no FDA approved treatments...." p. 10
RESPONSE: In response to the Staff's comment, the Company has expanded the disclosure on page 10 of the Registration Statement to explain the meaning of efficacy endpoints and statistical significance.
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 10 of the Registration Statement to explain that the graveness of the disease means that fewer patients will survive to be evaluated at the end of the study.
"Our dependence on a limited supply of adult marrow...." p. 12
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 12 of the Registration Statement to describe the effect of supply limitations for Osteocel.
"We use third party collaborators...." p. 14
RESPONSE: In response to the Staff's comment, the Company has filed the Distribution and Supply Agreement with Blackstone Medical, Inc. as Exhibit 10.18 to the Registration Statement. Certain proprietary information contained in this agreement is the subject of an Application for Confidential Treatment.
"If we are not able to recruit and retain qualified management..." p. 16
3
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 17 of the Registration Statement to discuss the key employees with whom it has entered into employment agreements.
Use of proceeds, p. 31
RESPONSE: The Company respectfully acknowledges the Staff's comment and has revised the disclosure on page 31 to discuss estimated milestones in its clinical trials that the Company currently believes are achievable based on the Company's current resources and anticipated proceeds of this offering. However, as noted in the revised disclosure on page 31, the Company is unable to make such estimates with any significant degree of certainty because the clinical trials are subject to many variables and risks as disclosed under "Risk Factors" in the Registration Statement.
Management's Discussion and Analysis of Financial Condition and Results of Operations, page 35 Research and Development Costs, pages 38 - 39
RESPONSE: The Company respectfully acknowledges the Staff's comment. Upon analysis of the legal expenses included in research and development ("R&D") costs for the year ended December 31, 2005, the Company has determined that $61,000 should not have been classified as R&D costs, representing less than 0.4% of the total R&D costs for 2005. The Company determined that all legal costs associated with patents were appropriately classified in General and Administrative Expenses for the years ended December 31, 2004 and 2003. The Company respectfully submits that the amount improperly classified for the year ended December 31, 2005 is not material, and therefore the Company believes that restatement of the financial statements is not necessary. However, the Company has modified Management's Discussion and Analysis on page 38 of the Registration Statement to remove references to legal costs for patent protection under the heading Research and Development Costs.
RESPONSE: The Company respectfully acknowledges the Staff's comment. However, because all of the current research and development conducted by the Company is based on mesenchymal stem cells, which represent a single platform technology, the Company respectfully submits that any disclosure of internal research and development costs on a project-by-project basis would be speculative and that the current disclosure is the most information that can be practicably and reliably provided.
4
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 38 of the Registration Statement to provide estimates of future expenses related to the Company's major research and development projects.
Liquidity and Capital Resources, page 44 Capital Resources, page 45
RESPONSE: The Company respectfully acknowledges the Staff's comment. Although the Company has the right to receive milestone fees under its collaborative agreements as discussed in the Registration Statement under "Business—Collaborations," these fees are conditioned upon milestones, the achievement of which is dependent on many variables and risks, including those disclosed in the Registration Statement under "Risk Factors." Consequently, the Company respectfully submits that any estimate of the amount and timing of future payments under the Company's collaborative agreements is speculative. In addition, the Registration Statement reflects the current intention of the Company not to enter into material new collaborative agreements. The Company respectfully submits that the current disclosure is the most information that can be practicably and reliably provided.
Business, p. 48
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page 56 of the Registration Statement to define statistical significance and to explain why a determination of statistical significance has not been performed with respect to the results of the Phase II clinical trials to investigate the use of Prochymal in patients with acute graft versus host disease.
5
RESPONSE: The Company respectfully acknowledges the Staff's comment and has expanded the disclosure on page 62 of the Registration Statement to describe all material terms of the agreement between the Company and Blackstone Medical, Inc. In addition, the Company has reviewed the disclosure relating to the other material agreements in the Registration Statement and believes that all material terms of the agreements are currently described.
Management, p. 73
RESPONSE: In response to the Staff's comment, the Company has filed the consent required by Rule 438 as Exhibit 99.1 to the Registration Statement. With respect to the use of the consent in connection with the original filing of the Registration Statement, the Company notes that the consent was dated and provided prior to the original filing of the Registration Statement.
Certain relationships and related transactions, p. 80
RESPONSE: In response to the Staff's comment, the Company hereby confirms that it either has filed or will file all agreements required by Item 601(b)(10) of Regulation S-K.
Registration Rights, page 88
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on pages 91 and 92 of the Registration Statement to describe the significant terms of the registration rights agreements and has filed the registration rights agreement with Cambrex Corporation as Exhibit 10.21. The Company has not filed as an exhibit the registration rights agreement associated with the $20.6 million convertible note because, as indicated in the revised disclosure on pages 91 and 92 of the Registration Statement, the right to convert the note into registrable shares of Company common stock arises only if an initial public offering of the Company's common stock occurs after December 20, 2006, meaning that all such registration rights will terminate upon this offering.
The registration rights agreements do not provide for any liquidating damages as contemplated in EITF 05-4 "The Effect of a Liquidating Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19." Although the Company is subject to certain obligations under the
6
registration rights agreements, there is no cash or other form of liquidating damages associated with the Company's failure to successfully register the shares.
The Company acknowledges that there are not sufficient authorized and unissued shares to satisfy its obligations under the registration rights agreements and other commitments. However, it is the Company's intention to effect a reverse stock split prior to the consummation of the offering. After the completion of the reverse stock split, there will be a sufficient number of authorized and unissued shares to satisfy its obligations under all registration rights and other commitments for the issuance of common stock.
The registration rights agreements identified by the Company do not provide for or include the issuance of any warrants or other contracts that are indexed to or could be settled in the Company's own stock, and therefore the Company respectfully submits that EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's own Stock," and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," are not applicable in this instance. The reference to warrants on page 88 of the Registration Statement as filed on May 12, 2006 under the heading "Registration Rights" referred to the outstanding warrants as currently presented on page F-28.
Financial Statements
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure throughout the Registration Statement to reflect interim financial information through the period ended March 31, 2006.
RESPONSE: In response to the Staff's comment, the Company has modified the balance sheets, statements of operations and statements of cash flows, for all periods presented, to present in greater detail the related party transactions. These transactions include:
Note 6, "Related Party Transactions," states that the Company paid referral fees and costs amounting to $3.4 million to accounts designated by Mr. Friedli, some of which accounts were held by third parties unrelated to Mr. Friedli. The Company advises that these costs were treated as deferred financing costs or an adjustment to additional paid-in capital, depending on the transaction.
Description of Business and Significant Accounting Policies, page F-8
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page F-8 of the Registration Statement to describe the Company's predecessor company and the transactions that resulted in the current organizational structure.
7
Inventory, page F-9
RESPONSE: The Company respectfully acknowledges the Staff's comment. As disclosed in Management's Discussion and Analysis on page 38 of the Registration Statement, during the year ended December 31, 2005 the Company was in the process of refining its methods of tracking and accounting for direct labor costs of its employees as they relate to costs of goods sold. Consequently, the Company did not begin to include such costs in inventory and costs of goods sold until 2006. The Company advises that third-party labor costs currently represent the majority of all labor costs associated with inventory production, and are and have been included in costs of goods sold and inventory costs. The Company respectfully submits that, during the approximately six months of production that occurred during 2005, the amount of direct labor costs associated with its employees was not material to its financial position or statement of operations. An analysis by the Company of direct labor costs for the first quarter of 2006 confirms this fact, and reveals that the Company's employees' direct labor costs were approximately 11% of all production costs. Applying this same percentage to the amounts reported as of and for the year ended December 31, 2005 would result in $11,000 of additional inventory and a $49,000 reclassification between costs of goods sold and research and development costs. Based upon these results, the Company respectfully submits that the amounts are not significant enough to warrant restatement of the 2005 financial statements.
However, the Company has modified the disclosure in "Cost of Goods Sold" on page 37 of the Registration Statement to include the following language: "Because our production process currently relies significantly on third-party labor, we believe that classifying direct labor costs associated with our employees as research and development costs did not materially affect our financial statements for the year ended December 31, 2005. However, direct labor costs associated with our employees are included in inventory and costs of goods beginning in the first quarter of 2006."
Revenue Recognition, page F-10
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page F-11 of the Registration Statement to reflect the Company's actual practice of recognizing revenue from the incidental assignment of technology rights on the accrual basis instead of the cash basis.
Stock Based Compensation, page F-12
8
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page F-23 of the Registration Statement to disclose the requested information concerning equity instruments granted in the 12 months prior to the date of the most recent balance sheet included in the Registration Statement.
RESPONSE: The Company respectfully acknowledges the Staff's comment and confirms that the disclosure requested by the Staff will be added in a pre-effective amendment once the price range of the IPO has been determined.
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on pages 39 and 40 of the Registration Statement to provide the requested information relating to the Company's issuances of equity instruments.
Notes Payable and Capital Lease Obligations, pages F-16—F-17
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on pages F-17 and F-18 of the Registration Statement to clarify how the Company determined the conversion rate of the loans from related parties to the Company into Series D Mandatorily Redeemable Convertible Preferred Stock.
RESPONSE: The Company respectfully acknowledges the Staff's comment and confirms that the disclosure requested by the Staff will be added in a pre-effective amendment once the price range of the IPO has been determined. The Company's $20.6 million convertible note is not expected to convert upon an IPO because its terms provide for conversion only if an IPO occurs subsequent to December 20, 2006.
9
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page F-18 of the Registration Statement to complete the description of all significant terms of the $20.6 million convertible promissory note. The Company respectfully submits that all significant terms of the other notes are described.
RESPONSE: In response to the Staff's comment, the Company has revised the disclosure on page F-18 of the Registration Statement to include the redemption premium amounts for the $20.6 million convertible promissory note and the $2.0 million convertible promissory note. The Company advises that these redemptions have been included in Long-term interest payable as of December 31, 2005.
The Company's calculations to determine the redemption premiums recorded as of December 31, 2005 are as follows:
$20.6 million × 9% = $1.85 million redemption premium
$2.0 million × 10% = $0.2 million redemption premium
Preferred Stock Rights and Preferences, page F-18
RESPONSE: The Company notes the Staff's comment and has analyzed recording a beneficial conversion feature for convertible and mandatorily redeemable convertible preferred stock issued based on EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," and EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments." EITF 98-5 defines a beneficial conversion feature, in part, as one that is in-the-money at the commitment date.
The Company believes that the conversion price of the convertible preferred and mandatorily redeemable convertible preferred when issued was at or above the fair value of the Company's common stock. The Company advises that although no formal independent valuation was performed coincident with the issuance of such convertible preferred stock, its internal analysis indicates that the conversion amounts were significantly higher than its estimate of the fair value of the Company's common stock on the date of issuance of the convertible instruments. Additionally, the independent valuation of the Company's common stock performed in December 2005 resulted in an estimated fair value of $1.71 per share as of December 31, 2005. Based on the recent success of achieving commercial sales of Osteocel in the second half of 2005 and debt and equity financing obtained in 2005, the Company believes that the December 31, 2005 valuation represents the highest value of the Company's common stock since prior to 2003. Based on the assertion that all of the conversion amounts were at or above the estimated fair value of the Company's stock on the commitment dates, no liability for a beneficial conversion feature has been recorded. The conversion amounts were fixed, and while many were dependent on the successful completion of an IPO exceeding a certain dollar amount, there were no variables that adjusted the conversion amount based upon the passage of time or the per share amount of an IPO. The Company notes that there are no additional cash payments required pursuant to these instruments in the event that the Company fails to successfully consummate an IPO, except for the mandatorily redeemable
10
Series D issue whose redemption premium of $58,305 has been recorded as of December 31, 2005.
| Class of shares | Conversion Amount per Share | ||
|---|---|---|---|
| Convertible preferred, Class I | $ | 5.00 | |
| Convertible preferred, Series B | $ | 5.50 | |
| Convertible preferred, Series C | $ | 2.00 | |
| Mandatorily redeemable Series D | $ | 0.20 | |
| Convertible preferred, Series E | $ | 2.50 | |
Signatures, p. II-7
RESPONSE: In response to the Staff's comment, the Company has revised the Registration Statement to include the signature of its Chief Accounting Officer.
Any questions or comments should be addressed to the undersigned at (215) 864-8606 or Douglas Fox at (410) 528-5505.
| Sincerely, | ||
Justin P. Klein |
Donald J. Murray, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
11
