San Diego Business Journal

Dermagraft Shed By Shire in No-Upfront-Payment Deal

By Meghana Keshavan Friday, January 17, 2014

Irish biopharmaceutical company Shire PLC has sold the assets of its Torrey Pines-based subsidiary Dermagraft to Massachusetts-based Organogenesis Inc. — incurring up to a $650 million loss in the process.

Organogenesis intends for Dermagraft, which makes material for skin grafts associated with diabetic foot ulcers, to continue operating from its local facility, a representative said by email. But layoffs are anticipated, the spokeswoman said, though how many and from what departments are undetermined.

Shire's decision to divest itself of Dermagraft was prompted by a change in strategy and a recent Medicare ruling regarding reimbursement for the product, CEO Flemming Ornskov said in a news release.

According Shire's release, Organogenesis will pay nothing up front to acquire Dermagraft, but it could pay up to $300 million in milestone payments if Dermagraft hits certain sales targets through 2018. Those targets range from $70 million in calendar years 2014 and 2015 to $250 million, according to Shire, which estimates the value of such contingent payments at $30 million for the purposes of determining its reported loss. Dermagraft saw an operating loss of $324 million in the nine months ended Sept. 30, 2013.

At the same time, Organogenesis will assume financial and management responsibility of Dermagraft, except that Shire is “retaining legacy liabilities,” which include a Department of Justice investigation regarding its sales and marketing practices under prior ownership.

In 2011, Shire acquired Dermagraft for $750 million from La Jolla-based Advanced BioHealing Inc. — despite the fact that ABH was already the subject of a Justice Department investigation. At the time, the Dermagraft segment employed about 200, and Shire announced plans to expand its San Diego presence by building a 150,000-square-foot facility.

But this past October, Shire halted development of the new 28-acre Sorrento Mesa campus, which sits on a $47 million parcel of land owned by San Diego life sciences property developer BioMed Realty Trust. Shire had signed a 20-year ground lease for the land.