Nov. 4 (Bloomberg) -- Genzyme Corp. will pay Osiris Therapeutics Inc. as much as $1.38 billion to develop therapies that use stem cells to treat blood cancers, inflammation and joint damage.

Osiris, based in Columbia, Maryland, will get $130 million initially from Genzyme for work on the experimental medicines, Prochymal and Chondrogen, the companies said today in a statement. Osiris could get as much as $1.25 billion more in payments if the drugs' meet development and sales goals.

The agreement would be the biggest ever in the field of adult stem cell therapy, which takes cells from mature tissues, instead of from embryos, said Edward Tenthoff, an analyst for Piper Jaffray & Co. in New York. Genzyme, the world's largest maker of drugs for rare genetic disorders, is betting on the technology to expand its offerings of cell transplant therapies.

``This is a huge validation,'' said Tenthoff in a telephone interview today. ``This is a major win for everyone involved.''

Osiris rose 43 cents, or 2.8 percent, to $15.93 at 4 p.m. New York time in Nasdaq Stock Market trading. Cambridge, Massachusetts-based Genzyme rose $1.06, or 1.4 percent, to $74.60.

Prochymal is in advanced stages of human testing against graft-versus-host disease, a complication of bone-marrow transplants. Chondrogen is designed to use stem cells to repair tissue in damaged knees.

``Genzyme is known for commercializing first-in-class biotechnology,'' Osiris Chief Executive Officer Randal Mills, said today in a telephone interview. ``There's a lot more value here, which is why we ended up doing the deal.''

Existing Collaboration

Osiris expects to apply for U.S. Food and Drug Administration approval by January 2009 to market Prochymal for acute graft-versus-host disease, Mills said. The life- threatening disorder strikes patients when immune cells from transplanted tissue, such as bone marrow, attack their organs.

The company expects to begin selling the product by the end of 2009 or early 2010 once it's approved, Mills said.

Genzyme and Osiris have worked together for the last 18 months on a Department of Defense contract for Prochymal in radiation sickness, Mills said. Once the drug is approved by the FDA the Pentagon will buy 20,000 doses at $10,000 each, he said.

Prochymal also is in advanced human trials to treat Crohn's disease, an inflammatory bowel disorder, and is being evaluated as a treatment for heart disease. Chondrogen is about to enter a new trial for arthritis of the knee.

Evolved Technology

``The technology has evolved to a point where we have a level of confidence where we're willing to make the deal,'' said David Meeker, an executive vice president for Genzyme, in a telephone interview today. ``We'll be working on the clinical development going forward and preparing for a commercial launch.''

Genzyme is also developing Mozobil, which spurs production of stem cells. The treatment is being developed for use in stem- cell transplants, a procedure used to restore the immune systems of cancer patients who have had treatments such as chemotherapy that destroy immune cells. Genzyme gained Mozobil through its 2006 acquisition of AnorMed Inc. for $589 million.

Genzyme will have rights outside the U.S. and Canada to Prochymal and Chondrogen. The deal isn't low-risk, said Geoffrey Meacham, a JP Morgan Securities analyst in New York.

``We note that stem cell approaches hold tremendous therapeutic upside, but do not have an established track record of success,'' Meacham wrote in a note to investors today.

Osiris will pay for ongoing human trials in both products. Genzyme will shoulder 40 percent of the costs in the future, according to the statement.

To contact the reporter on this story: Elizabeth Lopatto in New York at elopatto@bloomberg.net.

Last Updated: November 4, 2008 16:32 EST