Amidst Allegations of Financial Misconduct, Osiris CEO Resigns

Published: Feb 05, 2016

Amidst Allegations of Financial Misconduct, Osiris CEO Resigns
February 4, 2016
By Mark Terry, BioSpace.com Breaking News Staff

Columbia, Md.-based Osiris Therapeutics, Inc. announced that Lode Debrabandere, president and chief executive officer, has resigned for personal reasons.

Dwayne Montgomery, currently the company’s chief business officer, will act as interim chief executive officer. Frank Czworka, presently vice president and general manager of wound care, will step up as chief operating officer.

The board of directors will start a search for a permanent chief executive officer and has hired an executive search firm to assist in the process. The company indicates it will consider both internal and external candidates.

The company has had some problems lately. The company is currently transitioning from research to a commercial company. A Seeking Alpha report published on Jan. 15 cited several red flags. One was that the company’s chief financial officer, Phil Jacoby, resigned in September, replaced by Gregory Law.

Another warning sign is that that company’s registered public accounting firm, BDO USA, resigned in December. BDO indicated that Orisis’ 2013 and 2014 financial statements were fine, it “advised that their opinion on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2014 should no longer be relied upon due to management’s identification of a material weakness in internal controls over financial reporting related to the timing of revenue recognition under certain distribution contracts.”

In addition, according to Seeking Alpha, “Research analysts have switched from ‘buy’ to ‘sell,’ The company’s receivables DSO (Days Sales Outstanding) balance has exploded to over 130 days, despite assurances from that company that it should be declining. There are blatant inconsistencies between various SEC filings, as well as inconsistencies between statements made by management and information contained in filings.”

The company manufactures three different types of human tissue products. The primary one is Grafix, which is used for wound care such as for burns and diabetic foot ulcers. Analysts believe that Grafix accounts for 90 to 95 percent of company revenues. It also markets Cartiform, a cartilage allograft. It also markets BIO4, a bone allograft.

BIO4 has a complicated background. Previously marketed as Ovation, the U.S. Food and Drug Administration (FDA), according to Seeking Alpha, “ruled against the production of Ovation and required Osiris to stop producing and marketing the product. Rather than destroy the remaining inventory, Osiris took a very unusual step.”

Essentially, Osiris gave its remaining inventory to a number of distributors and asked for payment once it was sold. As Seeking Alpha stated, “So even though the FDA ruled against it, Osiris found a way to keep selling the product.” Then the company made changes to the product, primarily making it from bone tissue instead of placental tissue, and renamed it BIO4.

It gets even more complicated, with the company’s main competitor, MiMedx , publically accusing Osiris of overstating its revenues. At the MiMedx third-quarter conference call, the company stated, “Now this Medicare data tells us that the SmartTrack data for MiMedx and Organogenesis are reasonably consistent with the Medicare data. With the SmartTrack, Osiris data is very likely significantly overstated.”

Richard Pearson, writing for Seeking Alpha, said, “How can these discrepancies be explained? It is simple. Osiris is recognizing revenues in exchange for receivables. The products simply sit at the distributors and are never being sold to the end market. And unfortunately Osiris is never getting paid. We can see this from the DSO balance which now exceeds 130 days. … Osiris has consistently been improperly recognizing revenues.”

If Pearson’s allegations are correct, and he does cautiously use the word “fraud,” then it might explain the turnover at Osiris and Debrabandere’s sudden resignation for personal reasons.

Debrabandere issued a statement Tuesday in response to the Seeking Alpha report, saying, “2015 was a transformational year for Osiris. In the interest of providing investors and other stakeholders further context of these changes and their impact—as well as responding to certain statements about the company recently posted to several websites—a recap of some of the 2015 activities is appropriate.”

Various shifts in the company’s reporting have led to lawsuits by shareholders, “alleging that the company and its executives made a series of false and misleading statements to investors between May 2014 and Nov. 16, when it filed an SEC statement further detailing the restatements,” reported The Baltimore Sun.

Osiris is currently trading for $6.30 per share. The company’s 52-week high was $23.67 in July. Despite the turmoil, Piper Jaffray reissued a “buy” rating in a report on Tuesday.

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