In Development of Bio-Engineered Skin Tissue, Third Try is Charm for Advanced BioHealing

Xconomy San Diego — 

[Corrected 12/29/09, 3:40 pm. See below.] When it comes to commercializing a bio-engineered human skin substitute that could be used to treat diabetic ulcers and other tissue damage, Kathy McGee has the benefit of a long view.

McGee tells me she arrived in San Diego from Ireland in 1992 to work for Advanced Tissue Sciences (ATS). The pioneering biomedical startup raised hundreds of millions of dollars and spent 15 years developing its human tissue products before filing for Chapter 7 bankruptcy liquidation in late 2002. ATS then passed the baton to Smith & Nephew, the London-based medical products giant that had been its partner in a joint venture to manufacture its product line. In a 2003 deal approved by the bankruptcy court, ATS sold the global rights to its Dermagraft tissue substitute and related technologies and manufacturing facilities in La Jolla to the British company. Smith & Nephew tried without success to commercialize the technology itself—and ultimately sold the same rights and facilities in 2006 to Advanced BioHealing, a regenerative medical technology company that has a headquarters in Westport, CT and a manufacturing facility in San Diego.

Kathy McGee

Kathy McGee

“I was here for the startup and the shutdown and the restart,” quips McGee, who is now a vice president with Advanced BioHealing and general manager of the company’s San Diego operation. She joined ATS five years after it was founded, and worked in various capacities during the company’s early stage of development. She stayed on as Smith & Nephew’s director of manufacturing. And a few years later, as a member of Smith & Nephew’s shutdown team, McGee says, “I signed my layoff letter from Smith & Nephew in the morning, and signed my employment letter from Advanced BioHealing in the same afternoon.”

Now Advanced Biohealing could someday serve as the definitive case study in how the third time is the charm when it comes to building a complex medical products company. “The two companies that were based here before us were unsuccessful in making a business with this product,” McGee says.

Advanced BioHealing re-launched the business in 2007, focusing solely on the sale of 2-inch by 3-inch Dermagraft patches, which are derived from human skin cells and used to treat diabetic foot ulcers. The company says its sales are expected to climb to $80 million by the end of 2009, and McGee says the private company is now profitable.

Inside Advanced BioHealing

Inside Advanced BioHealing

About half of Advanced BioHealing’s 220 employees work in San Diego, and McGee says the company is moving to expand the use of its technology. “One of the things we’ve looked at as an organization is what other opportunities are out there,” McGee says. “We really have tried to expand the pipeline.”

In a strategic growth plan that chairman and CEO Kevin Rakin outlined in September, Advanced BioHealing has embarked on three initiatives:

—Expand Dermagraft sales in the U.S. and worldwide. Of the 23.6 million Americans with diabetes, Advanced BioHealing estimates 15 to 25 percent will develop foot ulcers. The company estimates there are 171 million diabetics worldwide.

—Explore new uses for similar bio-engineered products based on the company’s proprietary technology. Advanced BioHealing has begun enrolling 400 to 500 patients in eight countries for a late-stage clinical trial of its Dermagraft product on venous leg ulcers. The company also is looking at potential applications for soft tissue repairs, such as rotator cuff tears and Achilles tendon ruptures.

—Diversify its product line by re-launching TransCyte, an ATS-developed product that won FDA approval in 1997 as a temporary treatment for severe burns.

McGee says a variety of factors and management decisions have played a part in the success that two previous companies could not attain over the previous 22 years. One key factor is that Advanced BioHealing got an enormous, bankruptcy-based discount when it acquired the bio-manufacturing facility that cost ATS roughly $300 million and more than 15 years to develop. The investment in equipment and proprietary know-how may have dragged down the predecessor company, but it represents a windfall that would cost Advanced BioHealing hundreds of millions of dollars to duplicate elsewhere today.

“The cost of moving out of this facility is prohibitive,” McGee says. “So we decided to keep manufacturing here.”

[Corrected total amount of venture funding. See below] Getting medical insurance reimbursement proved to be another key factor.McGee says Smith & Nephew did a good job of establishing reimbursement codes with Medicare for both the product itself and related medical services, such as cleaning an ulcer before treatment. That enabled Advanced BioHealing to more than double the price of its Dermagraft product, which McGee says, “was key in the early days when we really didn’t have much funding.” (Since it was started in 2003, McGee says Advanced BioHealing has raised a total of more than $40 million through three rounds of financing.)

Dermagraft Product in Pouch

Dermagraft Product in Pouch

As part of its “high-touch sell,” McGee tells me Advanced BioHealing employs 10 “reimbursement specialists” around the country to educate physicians and encourages its sales force to do “insurance verification” to make sure reimbursement is in place. She estimates that Medicaid and Medicare cover more than 80 percent of diabetes patients, although it will only pay for the Dermagraft treatment in patients with diabetic ulcers.

McGee’s observations are reinforced by Gail Naughton, the scientist who figured out a way to culture human skin cells and coaxed them into growing on a three-dimensional scaffold made of suture material. Naughton, who is now dean of the business school at San Diego State University and the founder of another San Diego startup, says she’s often asked to talk about what went wrong at ATS, the company she founded.

In an email to me, Naughton writes: “Advanced Tissue Sciences was a leader in tissue engineering (now referred to as Regenerative Medicine) and, as such, did much of the ground breaking work in bringing the field from concept to approved products. There were many unknowns that ATS needed to figure out in the process, including how to reproducibly manufacture a living tissue, how to develop a product with a long shelf life, etc. These steps proved to be longer and more expensive than first anticipated, as did the clinical trials required for regulatory approval.

“In addition, ATS built a world world-class GMP (good manufacturing practices) facility with capacity to produce product to meet analyst forecasts for burns and chronic wounds, which were estimated at $500 million at market peak. What wasn’t understood was that reimbursement for these “first of a kind” products would take several years to be established. The incidence and prevalence of diabetic ulcers and venous ulcers was/is huge, but traditional wound treatment involved a few dollars per patient, a far cry from the $400/piece that ATS’s Dermagraft product was sold at.

“We also didn’t understand that wound care specialists are not usually early adopters of novel, expensive treatments. So the bottom line was that the manufacturing facility (and the high overhead costs it involved) was overbuilt and financially burdensome. It took years to get the appropriate reimbursement for the product (now at over $1350/piece) in order to have a profitable business.”

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