NEW YORK (Reuters) — Osiris Therapeutics Inc said it will receive $4.2 million to develop a treatment for radiation exposure as part of a U.S. government contract that could eventually be worth up to $224.7 million.

Under the terms of the contract, the Defense Department will make the initial payment this year to help with development costs for Prochymal, a stem-cell therapy to repair gastrointestinal injury from radiation exposure.

The treatment, currently in final stages of testing, is derived from stem cells from adult bone marrow and administered intravenously.

The company is eligible for another payment of $20.5 million to help complete development and registration of the experimental therapy, Osiris Chief Executive Randal Mills said in an interview.

Once Prochymal is approved by U.S. health regulators, the government, under terms of the contract, can purchase up to 20,000 doses in 5,000-dose increments at a cost of $10,000 per dose, the company said.

Mills said toxicology and safety studies are complete and that final efficacy studies are being conducted on animals as it is unethical to do radiation exposure studies on healthy humans.

Osiris is expected to meet with defense department officials in the very near future to discuss how it will proceed, Mills said.

"We are honored that the Department of Defense has selected Prochymal in this critical effort to better safeguard our armed forces against the potentially horrendous effects of battlefield exposure to a radiological weapon," Mills said in a statement.

Prochymal, which is being developed along with Genzyme Corp, is also in late-stage testing as a treatment for Crohn's Disease and mid-stage testing for type 1 diabetes.

(Reporting by Bill Berkrot; Additional reporting by Shailesh Kuber in Bangalore; Editing by Jeffrey Benkoe)

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