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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

Or

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number: 001-32966

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

443-545-1800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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OSIRIS THERAPEUTICS, INC.

INDEX

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PART I — FINANCIAL INFORMATION

Item 1.                                                           Financial Statements - Unaudited

OSIRIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(amounts in thousands, except per share data)

The accompanying notes are an integral part of these condensed financial statements.

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OSIRIS THERAPEUTICS, INC.

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Unaudited

(amounts in thousands, except per share data)

The accompanying notes are an integral part of these condensed financial statements.

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OSIRIS THERAPEUTICS, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2012

Unaudited

(amounts in thousands, except for share and per share data)

The accompanying notes are an integral part of these condensed financial statements.

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OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited

(amounts in thousands)

The accompanying notes are an integral part of these condensed financial statements.

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

1.             Nature of Business

Osiris Therapeutics, Inc. (“we,” “us,” “our,” or the “Company”) is a Maryland corporation headquartered in Columbia, Maryland. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010. We are a leading stem cell company focused on developing and marketing products to treat serious medical conditions in the inflammatory and cardiovascular disease areas, and wound healing. Our biologic drug candidates utilize adult human mesenchymal stem cells, or MSCs, which can selectively differentiate, based on the tissue environment, into various tissue lineages, such as muscle, bone, cartilage, marrow stroma, tendon or fat. In addition, MSCs have anti-inflammatory properties and can prevent fibrosis or scarring, which gives MSCs the potential to treat a wide variety of medical conditions. Historically, our operations have consisted primarily of research, development and clinical activities under several research collaboration agreements to bring our biologic drug candidates to the marketplace, primarily for therapeutic uses. We refer to this as our Therapeutics business or segment. Beginning in 2005 and until 2008 when we sold this business to NuVasive, Inc., we produced and marketed Osteocel, a product for regenerating bone in orthopedic indications.  During 2009, we created a Biosurgery business, which we began operating as a segment separate from our Therapeutics segment. Our Therapeutics segment is focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas; and our Biosurgery segment focuses on products for wound healing and use in surgical procedures by harnessing the ability of cells and novel constructs to promote the body’s natural healing.

2.             Significant Accounting Policies

Unaudited Interim Financial Statements

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates.  We believe that the most significant estimates that affect our financial statements are those that relate to revenue recognition associated with our collaborative agreements, deferred tax assets, inventory valuation, and share-based compensation.

Revenue Recognition

Our Therapeutics segment generates revenues from collaborative agreements and research licenses. We evaluate revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment.

Revenues from research licenses are recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance are designated as deferred revenue. Non-refundable upfront license fees and certain other related fees are recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights is recognized as revenue as it is earned and received.

In October 2008, we entered into a Collaboration Agreement with Genzyme Corporation, then an independent and now a Sanofi company (“Genzyme”), for the development and commercialization of our biologic drug candidates, Prochymal® and Chondrogen®. Under this agreement, Genzyme made non-contingent, non-refundable cash payments to us, totaling $130.0 million. The agreement provided Genzyme with certain rights to intellectual property developed by us, and required that we continue to perform certain development work related to the subject biologic drug candidates. As discussed in Note 15, Subsequent Events in our Annual Report on Form 10-K for the Year Ended December 31,

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

2011 (“2011 10-K”), in February 2012, Sanofi issued a press release which included an update on their R&D pipeline, stating that it has “discontinued” its project with Prochymal for GvHD. The statement issued by Sanofi was made without consultation with or knowledge by us. Through our legal counsel, we have advised Sanofi that we are treating these public statements as Sanofi’s election to terminate the collaboration agreement. The agreement provides for voluntary termination by Sanofi and that, upon such voluntary termination, all rights to Prochymal revert back to us, and we are free to commercialize or enter into commercialization agreements for Prochymal with other parties without restriction. While we have been proceeding on the basis that Sanofi has terminated the collaboration agreement, Sanofi has since advised us that it disagrees with our characterization of their press release. We have requested an explanation from Sanofi with respect to their statements regarding Prochymal. There can be no assurances as to the outcome of these matters. However, we continue to proceed with our Prochymal regulatory approval efforts and, if successful, commercialization, alone or with another collaborator.

We evaluated the deliverables related to the upfront payments made to us under the Genzyme collaboration agreement, and concluded that the various deliverables represent a single unit of accounting. For this reason, we deferred the recognition of revenue related to the upfront payments, and amortized these amounts to revenue on a straight-line basis over the estimated delivery period of the required development services, which extended through January 2012.

We recognized $3.3 million of revenue from this agreement during the first fiscal quarter of 2012, corresponding with the estimated end point date in January of 2012, compared to $10.0 million of revenue in the first quarter of 2011. As of March 31, 2012, the upfront payments received under this contract had been fully amortized to revenue.

In October 2007, we entered into a collaborative agreement with the Juvenile Diabetes Research Foundation (“JDRF”) to conduct a Phase 2 clinical trial evaluating Prochymal as a treatment for type 1 diabetes mellitus. This collaborative agreement provides for JDRF to provide up to $4.0 million of contingent milestone funding to support the development of Prochymal for the preservation of insulin production in patients with newly diagnosed type 1 diabetes mellitus. The contingent milestone payments under the agreement were amortized to revenue on a straight line basis over the duration of our obligations under the collaborative agreement as they were received and earned. We have received all $4.0 million of the contingent milestones, and amortized the funding received over the duration of our obligations.  We completed our work under this contract in fiscal 2011.  As a result, we recognized approximately $200,000 of revenue in the first fiscal quarter of 2011, and did not recognize any revenue under this agreement during fiscal 2012.

Our Therapeutics segment also earns royalty revenues and cost reimbursement under our adult expanded access program.  Royalties are earned on the sale of human mesenchymal stem cells sold for research purposes. We recognize this revenue as sales are made. We recognized approximately $110,000 of royalty revenue for the three months ended March 31, 2012, compared to $40,000 in the three months ended March 31, 2011.  During the three months ended March 31, 2011, we received $115,000 in cost reimbursement for Prochymal used in our adult expanded access program.

As discussed in Note 4- Segment Reporting below, we also operate a Biosurgery segment, focused on developing high-end biologic products for use in wound healing and surgical procedures.  We launched commercial distribution of our Biosurgery products in late 2010, and have continued to increase our distribution volume since that time.  Due to the nature of the products and the manufacturing process, all sales are final.  We recognized revenues of approximately $1.1 million and $37,000 from the distribution of Biosurgery products during the three months ended March 31, 2012 and 2011, respectively.

Research and Development Costs

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of our biologic drug candidates used in clinical trials, in the period incurred.

Beginning with the creation of our Biosurgery segment, we began to separately track research and development costs by segment.  Total research and development costs for each of our operating segments are as follows:

We do not track internal development costs by project within the Therapeutics segment.  We do, however, track external research and development costs by project, which were as follows:

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

Diluted loss per common share for the three months ended March 31, 2012 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 1,938,447 of our outstanding options as of March 31, 2012, as their impact on our net loss for this period is anti-dilutive.  As a result, basic and diluted weighted average common shares outstanding are identical for that period.

Diluted income per common share for the three months ended March 31, 2011 excludes the “out-of the money” 1,000,000 shares issuable upon the exercise of our outstanding warrant and approximately 1,032,000 “out-of the money” stock options, as their effect on our net income for this period is anti-dilutive.

A reconciliation of basic to diluted weighted average common shares outstanding for the applicable periods is as follows:

Investments Available for Sale and Other Comprehensive Income (Loss)

Investments available for sale consist primarily of marketable securities with maturities less than one year. Investments available for sale are valued at their fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income. All realized gains and losses on our investments available for sale are recognized in results of operations as other income.

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

Inventory

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation.

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

Our Biosurgery inventory consists of the following as of March 31, 2012 and December 31, 2011:

We do not carry any inventory for our Therapeutics products, as none of the product candidates from this segment are currently available for commercial sale. Its operations have focused on clinical trials and discovery efforts to identify additional medical indications. Accordingly, manufactured clinical doses of our drug candidates are expensed as incurred, consistent with our accounting for all other research and development costs.

Share-Based Compensation

We account for share-based payments using the fair value method.

We recognize all share-based payments to employees in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.  Awards of shares of our common stock to non-employee directors are valued at the closing price on the grant date.

A summary of option activity under both of our stock-based compensation plans for the three months ended March 31, 2012 is presented below.

The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $2.60 per share.

As of March 31, 2012, approximately 160,000 shares of common stock remain available for future share awards under our Amended and Restated 2006 Omnibus Plan.

Share-based compensation expense (including director compensation) included in our statements of comprehensive (loss) income for the three months ended March 31, 2012 and 2011 is allocable to our research and development and general and administrative activities as follows:

As of March 31, 2012, there was approximately $1.5 million of total unrecognized share-based compensation cost related to options granted under our plans, which will be recognized over a weighted-average period of approximately one year, as the options vest.

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

3.             Collaboration Agreements

We are a party to several material collaborative agreements and other contracts as fully described in Note 2 of our 2011 10-K. There have not been any material changes to any of these agreements during 2012 that require disclosure.  The accounting policies related to each of these contracts, including material impact on our financial statements, is included above under the “Revenue Recognition” section of Note 2, Significant Accounting Policies.

4.             Segment Reporting

We manage our business in two reportable operating segments: the Therapeutics segment and the Biosurgery segment. Our Therapeutics segment focuses on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas. Its operations have focused on clinical trials and discovery efforts to identify additional medical indications. As of March 31, 2012, our Therapeutics segment does not have any products approved for sale and its revenues consist primarily of collaborative research agreements and royalties as described in our 2011 10-K in the “Revenue Recognition” section of Note 2, Significant Accounting Policies.

Our Biosurgery segment is focused on the development, manufacture and distribution of biologic products for wound healing and use in surgical procedures by harnessing the ability of cells and novel constructs to promote the body’s natural healing.

Substantially all of our revenues and assets are attributed to and are received from entities located in the United States.

The costs specifically attributable to each of our segments for the three months ended March 31, 2012 and 2011 are as follows:

In general, our total assets, including long-lived assets such as property and equipment, and our capital expenditures are not specifically allocated to any particular operating segment. Accordingly, capital expenditures and total asset information by reportable segment is not presented. The only assets that are allocated to the individual segments are the inventory and accounts receivable specifically related to each segment.

The assets specifically attributable to each of our segments as of March 31, 2012 and December 31, 2011 are as follows:

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

5.             Income Taxes

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

For income tax reporting purposes, we anticipate a loss for the year ending December 31, 2012. The primary difference for 2012 between our net loss for financial reporting purposes and the loss for income tax reporting purposes relates to the recognition of deferred revenue from our collaborative agreement with Genzyme, which was previously reported for income tax purposes. During each of the three months ended March 31, 2012 and 2011 we did not recognize any income tax expense.

At March 31, 2012, the balance of our net operating loss and tax credit carryforwards was approximately $76.9 million. During fiscal 2010, we released a portion of valuation allowance in the amount of $3.2 million to reflect our expectation of being able to utilize net operating loss and tax credit carryforwards when we file our 2011 income tax returns. During the second quarter of 2011, upon filing our 2010 income tax returns, we reduced our deferred tax asset to $2.2 million, and we expect to utilize this during fiscal 2012. Our remaining deferred tax assets have been fully reserved in both 2012 and 2011 since their ultimate future realization cannot be assured.

6.             Investments Available for Sale

Investments available for sale consisted of the following as of March 31, 2012 and December 31, 2011:

The following table summarizes maturities of our investments available for sale as of March 31, 2012 and December 31, 2011:

Realized gains and investment income earned on investments available for sale were $18,000 for the three months ended March 31, 2012, and have been included as a component of “Other income, net” in the accompanying financial statements.

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

7.             Fair Value

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available. To date, we have never had any assets that were required to be classified as Level 3.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2012 and December 31, 2011: