Regenerative therapies maker Shire (NSDQ:SHPGY) announced that it sold its troubled Dermagraft business to Organogenesis in a deal worth up to $300 million in sales-based milestone payments.
Shire plans to record a $650 million loss on its balance sheet, but SHPGY shares gained on the news as Wall Street analysts lauded the decision to ditch the "loss-making product." The stock gained 1.4% to close at $148.48 on Friday after the announcement was made.
Dermagraft’s potential has gone downhill since an unfavorable Medicare decision that lowered the reimbursement rate for the product, Shire said in a company statement.
"Shire has had a renewed focus on operational discipline. As such, we have been prioritizing investments that are of the greatest strategic, clinical and commercial value to our company. Dermagraft no longer meets these criteria and this divestment will allow us to focus our resources on other projects," CEO Dr. Flemming Ornskov said in prepared remarks. "Due to the recent Medicare ruling regarding reimbursement for Dermagraft, the business environment has changed, and the prospects for the product have reduced significantly. We believe the best path forward for the patients who benefit from Dermagraft is to transfer it to new ownership in order to provide continued care and availability of their treatment."
Organogenesis won’t pay any cash up-front but will take all intellectual property, regulatory filings, certain manufacturing plants, product inventory and more, Shire said. The assets are worth about $683 million, as recorded on Shire’s Sept. 30, 2013, balance sheet. Shire will hold on to legacy liabilities, including a Justice Dept. investigation related to Dermagraft.
The Dermagraft product, which Shire gained in June 2011 through a $750 million buyout of Advanced BioHealing, has hit a lot of hurdles in the past decade, changing hands multiple times as successive owners struggled to make much hay out of the skin substitute.
Dermagraft, which is cleared for treating diabetic foot ulcers, was owned by Smith & Nephew (FTSE:SN, NYSE:SNN), before the British health products giant abandoned it in 2005 after the FDA rejected it as a leg ulcer treatment. Smith & Nephew then sold the rights to Advanced BioHealing in 2006, which then sold to Shire.
Just 3 months after Shire’s acquisition, the abandoned its pursuit of a leg ulcer indication for the Dermagraft artificial skin patch after a Phase III clinical trial examining Dermagraft in treating venous leg ulcers failed to meet its primary endpoint.
In April 2012 the U.S. Justice Dept. launched a civil and criminal investigation into Shire’s Dermagraft marketing practices. A couple of months later Shire announced that it was putting "well over $100 million" into a new 150,000-square-foot campus to house the headquarters, manufacturing and laboratory space for Advanced BioHealing. Shire said at the time that it hoped to reap a $1 billion return within the decade from its regenerative medicine bets.
In September Dermagraft won its 1st non-U.S. approval from Health Canada, planning commercial launch for Q1 2013. In January 2013 the Massachusetts Institute of Technology and Children’s Medical Center Corp. sued Shire, accusing the company of willfully infringing on a trio of patents.
