With Dermagraft Sale, Shire Jettisons Business Acquired 3 Years Ago

With Dermagraft Sale, Shire Jettisons Business Acquired 3 Years Ago.

Jan 22, 2014 at 11:00AM

Shire (NASDAQ:SHPG) engendered some high expectations after the Irish biopharmaceutical giant acquired San Diego's Advanced BioHealing in 2011 for $750 million. Over the next year or so, Shire formed a new San Diego-based division—Shire Regenerative Medicine—and unveiled plans to spend $100 million on a new corporate campus that would serve as the cornerstone for a new billion-dollar business.

But Shire's vision changed soon after Danish physician Flemming Ornskov took over as CEO last year—and the pharma's plans for regenerative medicine came to an abrupt end when Shire said last week it would sell Advanced BioHealing's Dermagraft business to Organogenesis of Canton, MA.

In a statement Friday, Shire said it would record a $650 million loss on the Dermagraft sale. Organogenesis paid nothing upfront to acquire the Dermagraft business (which Shire valued at $683 million as recently as Sept. 30), but agreed to pay Shire as much as $300 million over the next four years if the division can meet certain sales targets under its new owner.

The deal includes the technology, assets, and certain manufacturing plant, equipment, and materials needed to produce the Dermagraft bioengineered living skin grafts used to treat diabetic skin ulcers.

So what's left of Shire's once-ambitious plans for regenerative medicine?

The Irish pharma halted work on its 28-acre campus in San Diego last fall. In response to my queries, Shire's Jessica Mann says the company will no longer have a presence in San Diego or on the West Coast, which was once touted as a key element in Shire's global strategy. In an email, the Shire spokeswoman writes, "The RM [regenerative medicine] business unit no longer exists following the sale of Dermagraft to Organogenesis."

In the months following its 2011 buyout of Advanced BioHealing, Shire also acquired Pervasis Therapeutics of Cambridge, MA, and said it would be combined with the regenerative medicine business. Today, Mann says, "The Pervasis acquisition brought us the Vascugel program, which is still in the R&D pipe and managed out of our Massachusetts office." Another 2012 acquisition, San Carlos, CA-based FerroKin BioSciences, is not a regenerative medicine business and remains in Shire's drug development pipeline, Mann says.

Shire said the Dermagraft sale was part of a broader reorganization that began last May, and Ornskov cited "a renewed focus on operational discipline" that came after he officially took over as CEO last April. In a trenchant analysis, Genetic Engineering and Biotech News reported that changes in Medicare's reimbursement for wound-healing products like Dermagraft also had diminished the value of the business.

In the company's statement last week, Ornkov said, "The business environment has changed, and the prospects for the [Dermagraft] 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."

Another factor in Shire's decision, however, may be a continuing investigation by the U.S. Department of Justice into Dermagraft's sales and marketing practices. The Justice Department typically does not disclose anything about its ongoing investigations, but some details emerged in a wrongful termination and age discrimination lawsuit that was filed against Shire last May in a San Diego federal court by Jeffrey Jonas, a senior Shire executive.

Jonas moved to San Diego at the beginning of 2013 to take over Shire's new Regenerative Medicine division, and sued his employer less than six months later.

In the lawsuit, Jonas alleged that former Shire CEO Angus Russell and other Shire executives withheld information about a wide-ranging federal investigation into allegations of illegal conduct by Advanced BioHealing's sales and marketing group before and after the Shire acquisition. Among the allegations, according to Jonas' suit, was that sales projections for the regenerative medicine business were overinflated "because they were based on prior illegal conduct by ABH sales personnel."

According to the suit, Jonas only learned after he had moved to San Diego that "the Justice Department was seeking penalties of approximately $1.5 billion in connection with that investigation."

Shire did not file a response to the Jonas suit. The company later said it had settled the matter, although terms of the settlement were not disclosed. In mid-August, Cambridge, MA-based Sage Therapeutics named Jonas as CEO.

In its statement concerning the Dermagraft sale, Shire said it would retain Dermagraft's legacy liabilities, including the DOJ inquiry.

Evan Snyder, director of the Center for Stem Cell & Regenerative Biology at San Diego's Sanford-Burnham Medical Research Institute (and a San Diego Xconomist) said Shire's move to jettison the business was a little surprising.

"Just last year, we had meetings with Shire to figure out how we might collaborate," Snyder wrote in an email. Nevertheless, he added, "Shire's decision will [have] no impact whatsoever on regenerative medicine in San Diego—or anywhere else, for that matter. Where one company changes direction and vacates an approach, many others are there to take its place. The one thing I have learned is that there are so many facets to the regenerative medicine field—including that niche abandoned by Shire—that it really says very little about regenerative medicine as an opportunity either clinically or commercially."

Joe Panetta, who heads the nonprofit Biocom industry group in San Diego, offered a similar assessment.

With big companies like GSK, Thermo Fisher, Hologic, Ajinomoto, Cubist, and AstraZeneca establishing themselves recently in the San Diego region, "I don't worry too much about Shire, BMS or Salyx choosing not to be here," Panetta wrote in an email. Decisions by companies like Shire, Bristol-Myers Squibb, and Salyx to close or sell their San Diego acquisitions provides needed expansion space for others, Panetta added.

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This article originally appeared on Xconomy, along with:

Bruce V. Bigelow and Xconomy have no positions in any stocks mentioned. The Motley Fool recommends Cubist Pharmaceuticals and Thermo Fisher Scientific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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