Wound Healing Regenerates, Slowly

Wound healing has long been a business of tape and gauze, not biotech. But now two tissue-engineered skin replacements and a growth factor have reached the market's doorstep. Are these lucrative new product categories or not?

• So far, biotechs haven't had good luck developing products for soft-tissue healing. The market once looked attractive, but several late stage failures polluted the waters. Investors have scowled on wound healing ever since.

• Now, as growth factors and tissue-engineered skins finally reach the market, they are subject to tough cost-benefit comparisons against conventional approaches.

• What kind of company—pharmaceutical firms or device makers—will be most effective in marketing these new products? A brewing battle between Novartis and Smith & Nephew in chronic wound care may tell.

By the time the law firm of Milberg Weiss Bershad Hynes & Lerach filed a class action shareholder lawsuit against Telios Pharmaceuticals Inc.,the business of developing drugs for wound healing had reached an all-time low in the minds of investors. The suit was prompted by a steep drop in Telios' stock in October 1994 after pivotal trials of its wound-healing Argidene gel in diabetic foot ulcers “proved equivocal” in the words of company founder Michael Piershbacher, PhD. Argidene had shown great promise in earlier trials, but in a scenario common to the field of wound healing, benefits previously seen against placebo evaporated in the larger study.

At the time, investors were showing little enthusiasm for biotechnology stocks. Their concerns over product failures had brought on a financing drought—and they were prepared to dole out harsh punishments to companies who justified their fears. The market's anxiety had been primed by significant failures such as Synergen Inc.'s sepsis-drug Antril earlier in the year.

Like sepsis, wound healing is a bane of drug developers because of the difficulty of running clinical trials. Animal models offer little insight into how a drug will fare in the clinic, where extreme variability in healing rates, and the relative effectiveness of traditional approaches, make superior efficacy hard to demonstrate. But unlike drugs for sepsis, wound healing compounds do not address as obvious an unmet clinical need. While there are no drugs on the market that can claim to accelerate wound healing, there are a host of relatively cheap therapeutic alternatives available to help the body heal itself.

Indeed, of all the biotech companies who fared poorly in the mid-1990's, biotechs in wound healing faced special problems. Telios' failure was part of a larger trend for biotech drugs for wound healing. ProCyte Corp. 's stock took a nose-dive soon after, as its own copper-based Iamingel failed to outperform placebo in a definitive Phase III trial for diabetic ulcers. And where it was once de rigeur for biotechs to try their growth factors in wound healing—in 1992 there were over 10 in development by some nine different firms—these efforts have steadily declined in light of troubles in the clinic and the growing disapproval of the market. Synergen's basic fibroblast growth factor (bFGF) formulation Trofak had met with failure in Phase III trials, and Amgen Inc. dropped its work on PDGF in wounds.

Meanwhile, companies developing tissue-engineered skin replacements for treating burns and ulcers, such as Advanced Tissue Sciences Inc. and Organogenesis Inc. , were facing similar problems making their case in the clinic, and saw their stock prices sag to all time lows. Their costly, technology-driven approaches, still struggling to show a benefit over simple tape and gauze, were viewed skeptically by a managed care driven marketplace. Potential partners steered clear of collaborations.

But now, after a decade and more of development, both growth factors and tissue-engineered skin replacements have arrived at the marketplace's door-step. Johnson & Johnson 's Regranex (becaplermin), a topicalformulation containing Chiron Corp. 's platelet-derived growth factor (PDGF), has completed Phase III in diabetic ulcers and awaits approval at the FDA. Kaken Pharmaceutical Co. Ltd. 's bFGF, licensed from Scios Inc. , awaits approval in Japan for dermal ulcers. [See Deal] Advanced Tissue Sciences' Dermagraft dermal replacement is being readied by partner Smith & Nephew PLC for marketing in the UK to treat diabetic ulcers. Organogenesis' Apligraf human skin equivalent, at the FDA for treating venous ulcers, is already approved in Canada, where marketing partner Novartis AG is preparing its launch.

The industry is watching the progress of these first-of-a-kind biotechnology products with keen interest. No drug has ever been approved for accelerating wound healing, and approval of J&J's Regranex would represent a watershed event, opening up a potentially lucrative new product category and likely encouraging others to enter the clinic with follow-on products.

The concurrent arrival at the wound care marketplace of growth factors and tissue-engineering highlights an important trend in new therapies. Science points to the likelihood of combining biomolecules with cells and biomatrices in a next generation of products. “We believe quite strongly that one component or one technology, if you will, cannot do it all,” states Piershbacher, who now serves as VP of R&D at Integra LifeSciences Corp., which acquired the bankrupt Telios in a reverse merger in 1995 [See Deal]. At Integra, follow-ons to the company's initial artificial skin product—which replaces a severe burn wound's missing dermal component with a collagen matrix—are being planned with the possibility of seeding the product with human cells, as well as imbedding cell attractants, and natural inhibitors of scar formation. By combining factors, cells, and matrix-like delivery vehicles, companies hope to develop more effective treatments that offer in a single product the context and essential ingredients for renewed and orderly tissue growth.

But biotech companies in wound healing also face a number of questions as they prepare for the launch of their first-generation products. Will existing reimbursement structures be able to accommodate these new therapies? In particular, will managed care recognize favorable cost/benefit profiles over existing wound care protocols? For companies like Organogenesis and Advanced Tissue Sciences (ATS), whose first major products represent millions of dollars spent over a decade of tissue-engineering research, will their hefty, albeit variable, stock market valuations be justified by sales?

The challenge biotechs face is in proving not just the clinical efficacy of their products, but in demonstrating their clinical value as well, especially given that they are entering markets served by well-established traditional wound care offerings. To what degree will biotechs be able to convince payors that theirs are a new class of products rather than simply enhancements over existing therapies? And how much will cost and price pressures, rather than clinical effectiveness, be the primary criteria in product selection?

In turn, as new wound healing agents appear, the intersection of drugs and devices in wound healing will bring companies that heretofore have not contended with one another into competition. For example, while Novartis is preparing to market Organogenesis' Apligrafin concert with its dermatology drugs, ATS' Dermagraft is partnered with Smith & Nephew which intends to market the product as part of its line of advanced wound dressings. Which will provide the greater advantage, the pharmaceutical company, with its detail reps and experience in introducing highly innovative products, or the device company's established sales and marketing channels, or companies that combine both?

Advanced Wound Care

The wound healing market that growth factors and tissue-engineered skins address includes severe burns and three general categories of chronic or non-healing wounds: diabetic foot ulcers, venous ulcers, and pressure or decubitus ulcers. Pressure ulcers afflict the bedridden and paraplegics, while venous ulcers are common in the legs of the elderly.

Current treatment of such wounds range from the simple—sterile gauze and antibiotics—to the esoteric: electrotherapy and hyperbaric oxygen chambers. High-tech approaches to treating chronic wounds feature advanced synthetic dressings such as hydrocolloids, calcium alginates, foams and thin films. Indeed, even as biotech companies were living out their darkest days in 1994, new suppliers in wound care were riding a wave of rising profits by introducing advanced wound care dressings that offered a moist healing environment. That many wounds heal faster in a moist setting had been an established clinical fact since the 1960's, but companies only began to expand their offerings of specialized dressings in the 1990's, as the category became a relatively lucrative alternative to the increasing price pressures on traditional products brought by hospital group purchasing agreements.

Advanced wound care products like 3M Co. 's thin film Tegadermescaped such pressures by demonstrating improved efficacy and maintaining brand recognition. The main strategic aims of advanced wound care companies such as 3M, Smith & Nephew and Bristol-Myers Squibb Co. 's ConvaTec division have been threefold: expanding market share by converting physicians and nurses from traditional to advanced dressings; introducing incrementally improved products to protect brand and pricing advantages; and gaining a marketing leverage with consolidating buyers by offering expanded product lines.

Those strategic efforts are illustrated by the recent history of ConvaTec, the overall sales leader in the advanced wound care market. ConvaTec's DuoDERM, a dressing that dominates the largest segment of the advanced wound healing market, hydrocolloid dressings, accounts for over 30% of the total million US advanced dressing market. ConvaTec, whose main business is in ostomy, was for a long time a one-product company in advanced wound care. But after trying to push DuoDERM into as wide an application as possible, it has added new dressings to its line where DuoDERM's ability to address clinical needs or compete with prices of other products tapered off.

Most significantly, ConvaTec's purchase of Merck's Calgon VestalLaboratories in 1994 brought the company a full line of skin care products—much of it related to protecting skin from moisture—and the number two alginate dressing in the marketplace [See Deal]. Says ConvaTec's VP and General Manager of US wound and skin care operations Bob Doman, “The wound healing market is a continuum: you use the skin care products to help prevent the breakdown of skin, but if you do get a wound, you go into treatment with our dressings. There is no single magic dressing out there. It's a broad comprehensive system of products to answer different needs.” In wound care, such needs vary widely—from treating exudating venous ulcers, to abscessed cavities, to recurring bedsores.

The Calgon Vestal purchase allowed ConvaTec to launch “Solutions—Wound and Skin Management System,” which along with programs in computerized patient assessment tools, patient and provider education, and a focus on wound prevention, represented a strategy for selling to large hospital customers and to managed care. Other companies, such as Smith & Nephew, have taken a similar tack, moving their marketing emphasis from the clinical advantages of particular products to marketing wound management programs tied to their brands.

Advanced wound care products, in other words, are feeling some of the pressures that previously led to the commoditization of traditional wound care products like tape and gauze. The proliferation of brands and alternatives has made product differentiation difficult, blurring distinctions between products in the eyes of the customer. Placing their marketing emphasis on a continuum of wound management strategies, rather than the clinical efficacy of single products, helps companies wrap a service offering around, and take the price pressure off, increasingly commoditized products.

To ATS' president & COO Gail Naughton, PhD, the current state of the advanced dressing marketplace is a reflection of the need not just for new products—there are already too many me-too products on the market—but for novel products that can prove clinical effectiveness, like those her company has developed. “There are many, many products for wound healing, and any clinician would tell you that there would never be so many products if any of them really worked well,” she maintains.

But how much of a threat are biotechnology products to advanced wound care companies, and what opportunity do they offer for better margins? For now ConvaTec's Doman, who says his company keeps close tabs on new technology, remains unconvinced of biotechnology's near-term promise in wound care. “We are constantly looking for new products, and there are a number of things that look very promising, such as the human skin equivalents. And yet, for all the data coming in, there is nothing significantly better than what one would expect with good standard of care with advanced wound care dressings,” he says.

Biotech companies working in diabetic and venous ulcers would argue that their products do heal wounds better—and moreover, do so in refractory patients who couldn't heal with standard treatments. But it's just such comparisons against standard treatments that lead to the conflicting claims, Doman says. Control groups in clinical trials are treated according to widely accepted practices, he says, rather than the state of the art in advanced wound care. Without offering a big clinical advance, how can a bioengineered skin that costs thousands of dollars compete with a $5 advanced dressing—especially when advanced wound care companies already struggle to wean buyers off their habit of paying just a few cents for gauze?

Investments in risky new products look especially misplaced given the size of the opportunity to expand markets for current advanced dressings. “At the absolute best, treating chronic wounds with advanced wound care dressings is probably 25% of the total opportunity,” says Doman. Even without increased penetration, he says, an aging population and fast growing outpatient and home health care markets provide double digit growth for his business. In these key markets, which represent about 40% of advanced wound care sales, tissue-engineered skins and expensive growth factors are likely to be irrelevant for the foreseeable future.

Consistent with such facts, ConvaTec has sought technology from companies like Vancouver's SBI Skin Biology Inc.The company, whose founder Loren Pickart, PhD also started ProCyte in 1985, is developing BioHeal a copper-based preventative for skin ulcers. The cream doesn't lay claim to vast healing powers, but it does target a very real emerging market. Pickart says BioHeal will sell into a “legal driven” market created by increasing citations levied by state agencies against long-term care facilities for poor wound care, and a few wrongful death suits brought against nursing homes where patients died from pressure ulcers. Doman says ConvaTec is considering sponsoring a clinical study of BioHeal.

The disconnect between biotechnology's offerings and a cost-oriented marketplace probably accounts for the slow rate of partnering between wound care companies and the handful of biotechs developing skin substitutes and growth factors. So far, only Smith & Nephew, a company with a long-term interest in tissue-based therapies originating in its orthopedics business, has publicly announced a deal.

Cost-Benefit and the Burn Market

While some traditional wound care companies may in fact believe that the future of wound healing lies in growth factors and advanced tissue-based products, that future seems far removed from the broad competitive issues in today's marketplace. It is in some measure appropriate then, that Dermagraft-Temporary Covering (TC)—Advanced Tissue Science's first therapeutic product, and the first bioengineered skin approved by the FDA—will be marketed into the specialized field of severe burn care.

There are only about 140 centers in the US that treat life threatening burns, so a small company can fairly easily sell its products into that market without a partner. Product choices are driven by a small cadre of burn specialists and plastic surgeons. Thus, companies with innovative products can work directly with surgeons to drive acceptance of their products. And thanks to the variety of burn severity and the somewhat multi-disciplinary nature of burn care, companies can use initial footholds to push their products towards additional indications. Most importantly, treatment options are limited. In light of that need, the FDA gave both Dermagraft-TC and Integra Life Sciences' Integra Artificial Skinexpedited reviews. About 100,000 burn patients are hospitalized per year in the US.

ATS' Dermagraft-TC was approved for marketing in March as a wound covering for third degree, or “full-thickness” burns, in which both the skin's dermal and epidermal layers have been destroyed. The product, distinct from the Dermagraft partnered with Smith & Nephew for diabetic ulcers, consists of a dermal layer produced by culturing human fibroblast cells onto a biosynthetic material bonded to a nylon mesh (Dow B. Hickam's BioBrane) which acts as a three dimensional scaffold. The fibroblasts, harvested from infant foreskins, are grown on the mesh where they secrete matrix proteins and growth factors. The product is then frozen at -70 degrees Celsius for shipment, and although the fibroblast cells are killed, ATS says the growth factors remain active and help alleviate pain and improve healing. The synthetic outer layer fulfills the role of epidermis: keeping moisture in and infection out. Dermagraft-TCis stapled over full-thickness burns where the burnt tissue has been surgically cleaned away or excised, remaining there until some of the patient's own skin is available to graft over the wound.

The Integra Artificial Skin, approved for marketing early last year and based on technology Integra acquired from Marion Merell Dow in 1991, is a similar covering except that it provides a matrix of bovine collagen and has no human cells in it. (As such, it doesn't qualify as a tissue-engineered skin.) The key clinical difference between the Dermagraft-TC and Integra, is that Integra's resorbable collagen layer acts as a “template” for regenerating dermal tissue—helping the wound form a new dermis in about 15 days. That allows surgeons to use much thinner autografts. Dermagraft-TC needs to be surgically removed to allow autografting.

The FDA approved Dermagraft-TCas an equivalent to human cadaver skin, the current ‘gold standard' for covering extensive burn wounds. ATS' product claims several advantages over cadaver skin: it's never rejected, always available, and see-through. In addition, says the company, the wound bed bleeds less, and surgical removal is easier than with cadaver skin. Also, Dermagraft-TC is a sterile product whereas cadaver skin has been blamed for transmitting infectious agents like cytomegalovirus, hepatitis and even HIV. “Since we were going to be the first human bio-engineered product out there,” says ATS' Gail Naughton, “We wanted to show in a dramatic way how we can offer at least a more readily available and safer alternative to cadaver skin.”

Even in the poorly served burn-market, Dermagraft-TC is subjected to a cost-benefit analysis. Given the general availability, and clinical equivalency of cadaver skin, is Dermagraft-TCenough of an improvement to justify its price of $3,600 per square foot as compared to $800 per square foot for cadaver skin?

ATS is banking on the benefits of what Stephen Parente, PhD, a clinician with Johns Hopkins University who conducted an economic analysis of the product, calls its “convenience attributes” in reducing the labor, risk of complication, and material consumed in treating large full-thickness burns. Parente notes in his review, which appeared in the Journal of Burn Care & Rehabilitationthis January, that “burn care is one of the most highly scrutinized reimbursements... because the average treatment cost per patient with a large full-thickness burn can be 100 times or more than the cost for an average hospital admission.”

Those high overall costs leave plenty of room for a product to prove cost-benefit. Parente's analysis predicts that Dermagraft-TC—which comes in a cassette sold for $1,800 with two 5 x 7.5 inch pieces—would save about $10,000 for a patient with burns over 20% of their body. According to ATS' director of health economics and reimbursement Teresa Grillot, “The choice to use the product is a clinical one. The cost-benefit analysis is a tool to help clinicians who favor the product to justify its cost.” To aid matters, ATS has established a reimbursement helpline, which Grillot says is the first of its kind in the burn field.

Dermagraft-TC's price itself is within a couple of hundred dollars of Integra's skin, and in a range set by LifeCell Corp. 's AlloDerm, a dermal replacement made of processed cadaver skin that hasn't required FDA approval and has been on the market since 1993. “We didn't want to be perceived as less important because of a much lower priced product, but our initial target price was near the current one even before Integra got their approval,” says ATS' Naughton.

Expanding from the Burn Market

ATS in particular emphasizes the differences between its product and Integra's, and possibly for good reason. When the top layer of Integra's skin is peeled away, a regenerated dermis below allows surgeons to graft on very thin layers of skin taken from another site on the patient—which means less trauma at the autograft site. “Some of the clinicians I've talked to are at a loss. If you have Integra Artificial Skin which is a permanent replacement, and rebuilds a dermis which they think is a superior grafting surface for a thin epidermal autograft, why would you use a temporary covering?” asks Integra's Piershbacher. While Dermagraft-TCdoesn't change how autografting is done, Naughton says it does give surgeons more flexibility as to when it is done, since the covering can stay on indefinitely.

It's not clear how big a window of opportunity that leaves Dermagraft-TC. The burn market is now served by more than five overlapping products including LifeCell's AlloDerm, pig and cadaver skin and some synthetic coverings. Dermagraft-TCaddresses a maximum of about 3,000 patients in the US with third-degree burns over more than 20% of their bodies. ATS estimates the total potential market at $30 million.

Not surprisingly, ATS is looking beyond the cramped quarters of the burn market. A trial run recently by John Hansbrough, MD of the University of California San Diego Medical Center, showed that when Dermagraft-TC was used to cover partial-thickness burns—in which the dermis is mostly still intact—pain and time to healing were reduced. In these second degree burns, or serious abrasions, the product substitutes for twice daily dressing changes which are painful, and because a nurse does them, expensive. Dermagraft-TC was simply attached to the wound with adhesive tape. Thus, it's not hard to imagine using the product for a number of less severe wounds. In Europe, for example, ATS reports having good results treating the skin disorder epidermolysis bullosa. Expanding the product's applications brings a two fold benefit—increased sales and lower production costs per unit. “I won't tell you what it costs to produce,” says Naughton, “But as you can imagine, it's volume driven.” Meanwhile, Integra's makers are taking that product's key benefit—allowing thinner autografts which permit the skin-donating sites to heal faster—and targeting the reconstructive surgery market. To the advantage of each company, their bids to expand indications are taking them in different directions.

Licensor/Licensee (Date) Transaction

SmithKline Beecham/Magainin Pharmaceuticals (2/97) SK licensed US marketing rights to Cytolex a topical antibiotic cream to treat diabetic foot ulcers in Phase III. SK pays Magainin $5mm upfront and $27.5mm in milestones.

Reprogenesis/University of Massachussets (9/96) Reprogenesis pays $100,000 upfront, $850,000 in research support, up to$2.3mm in milestones, and royalties for worldwide rights to cultured autologous cell-based “tissue painting” technology develeveloped by Charles Vacanti, MD.

Smith & Nephew/Advanced Tissue Sciences (4/96) Partners form 50/50 joint venture to commercialize ATS' Dermagraft. ATS receives $10mm upfront and up to $60mm in milestones, of which $10mm have been received todate.

Novartis/Organogenesis (1/96) Sandoz (now Novartis) licensed worldwide marketing rights for Apligraf, buying a 1.6% stake for $5 million ($23.37 per share), and paying $6.5mm in R&D support, and upto $26mm in future milestones and equity purchases.

Phytopharm/ Abies (12/95) Phytopharm licensed rights to Abisil, an anti-inflammatory wound-healing product from fir tree, from Russia-based Abies Ltd.

SOURCE:Windhover's Health Care Stretegist

Post-Product Depression

For now, ATS is entering a small market made smaller by Integra. And given the experience of Integra over the last year, ATS is likely to find that selling its first therapeutic product into a niche market brings harsh judgments from the stock market as expectations realign with results.

A year ago, just before Integra's approval at the FDA, Salomon Brothers analyst Eli Kammerman rated the company a “strong buy,” predicting profitability within the year and a steady growth in share price from $12 to $15. Instead, the stock has lost 60% of its value and is hovering near an all time low of $4. Sales of Integra were slower than predicted, running at $1.3 million in the last quarter of 1996. The slow uptake is, in part, an outcome of the FDA's requirement that all surgeons using the product be trained by the company, a requirement that may ultimately yield a benefit in increased compliance and sales. Notably, Integra's profits were undermined by the high cost of producing the product, according to a later analysis by Kammerman, who reports the company's manufacturing plant is capable of churning out up to $75 million worth of Integra. Given ATS' equivalent pricing, the company may see even lower income net of manufacturing costs since its product undergoes a culturing process and needs to be stored frozen. Sales costs may also be high, at least initially: ATS is offering surgeons a “freezer rebate” so they can buy the equipment for storing the skin.

While stock analysts praise ATS' entry into the burn market as an opportunity for the company to gain valuable sales and manufacturing experience, given the tiny size of that market and high manufacturing costs, it's not clear that ATS will see any impact by Dermagraft-TCsales on its bottom line. ATS had an opportunity to gain sales and manufacturing experience when it introduced a skin product for in vitro toxicology testing called Skin2 in 1990. From what can be gleaned from the company's annual reports, the cost of making and selling Skin2 was consistently higher than revenues of $1.1 million or so it generated per year. Organogenesis' had a similar experience with its first product, Testskin, also for toxicology testing, which did about $500,000 in sales for 1991 and 1992. When the product was pulled, Organogenesis reports, it “created an annual savings of about $2 million.”

For any biotechnology company the transition from development-stage firm to one judged on its earnings can be traumatic. But for companies seeking initial profits in the wound care market, it may be particularly challenging. ATS stresses that the firm tries to manage investor expectations, but in recent days the company's stock has nonetheless soared totally out of proportion with its near-term prospects. Last fall for example, with its stock trading near $20, ATS' total valuation was above $660 million, placing it, at the time, among the top 15 biotech companies—well above genomics favorite Incyte Pharmaceuticals Inc. , and just shy of Gilead Sciences Inc.

Organogenesis, valued at around $280 million, is among the top 50 biotech companies. Moreover, there is a sharp disparity between these companies' valuations and those of competitors like LifeCell and Ortec International Inc. Organogenesis and ATS are viewed as the premium companies because of their intellectual property positions and ability to leverage products through partners and with clinical thought-leaders. Nevertheless, Ortec, developing a living skin replacement not unlike Apligraf, recently fended off a patent infringement suit from Organogenesis. And scrappy LifeCell—whose non-FDA approved product comes with a limited clinical pedigree—saw sales of AlloDerm jump over 170% from 1995 to 1996, generating sales of $2 million. Working its distribution channels, the company has marketed the product to burn and reconstructive surgery markets, and recently signed an exclusive agreement with Dentsply International Inc. for sales to periodontists.

Apligraf v. Dermagraft

Both ATS and Organogenesis are close to marketing tissue-engineered skins that address the big chronic wound markets. Patients with very serious ulcers sometimes get their wounds grafted with healthy skin from another place on their bodies. Both Organogenesis' Apligrafand ATS' Dermagraft seek to provide a ready source of healthy skin to use as grafts. Apligraf is made with fibroblasts and keratinocytes from neonatal foreskins. The cells are cultured in a cow collagen matrix, where they form a skin-like sheet with living dermal and epidermal components. ATS' Dermagraft is made from donor fibroblasts cultured on a bioresorbable mesh, and provides only a dermal layer. Put onto an ulcer, the skins would deliver to the exposed wound bed the growth-factor producing, living cells that the body hasn't been able to. The grafts simply become part of the body once they have gotten the healing process restarted. Both products have been in and out of trials for years, and have been tested in all the chronic wound types, in addition to burns.

Organogenesis filed a pre-marketing approval application for Apligraf in venous ulcers in the fall 1995. Although the FDA gave Apligrafexpedited review status, it still hasn't been approved. In its venous ulcer pivotal trial, Apligraf proved more effective and faster than conventional compression therapy in closing ulcer wounds. However, although the trial was conducted using fresh, never-frozen Apligraf, Organogenesis asked the FDA to approve marketing of a frozen version. The costs of selling a fresh product that can only survive a few days would likely be prohibitive, but for Organogenesis to sell a frozen product the FDA will probably require the company to conduct another trial. Given this situation, its ironic that Organogenesis' annual report has a picture of company employees stacking box after box of Apligraf in the company's new shipping bay. Where are these products going? For the moment, nowhere. Organogenesis did receive marketing approval in Canada this year, but partner Novartis hasn't begun selling Apligraf there yet.

The challenge that Apligraf faces in the marketplace is that the majority of venous ulcers can be healed with standard compression therapy. But if the supply of Apligrafneeded to treat an ulcer runs about $2,700, Organogenesis thinks it can justify wide use by reducing healing time over standard approaches, and consequently the number of medical visits overall. But Dr. Alan Suggett, group director of R&D for Smith & Nephew, points out that Organogenesis compared Apligraf's performance against the Unna boot, the most widely used compression therapy, but not advanced wound care dressings. “Smith & Nephew's Profore 4-layer bandage system has been shown to heal 74% of venous ulcers in 12 weeks and 80% in 24 weeks, and for a cost of between $200-300,” says Suggett. To his mind, that leaves only the 20% of venous ulcer patients who can't be healed with either conventional or advanced dressings as the real market for Apligraf. Organogenesis estimates that there are between 900,000-1,500,000 patients suffering from venous ulcers in the US.

Diabetic ulcers on the other hand, argues Suggett, aren't at all well addressed by advanced wound care dressings, which don't perform much better than standard wet-to-dry saline gauze treatments. Therefore, he calculates, diabetic ulcers are the biggest markets for tissue-engineered skins. He estimates there are 800,000 diabetic ulcers per year overall in the US. “The cost-effectiveness argument is inherently stronger here than in venous ulcers. First, because there aren't effective therapies, and secondly because the costs involved in diabetic foot ulcers are higher.” In particular, the longer diabetic ulcers stay open the greater the potential for infection, and ultimately for amputation.

Suggett won't say what Dermagraft's price is likely to be, only noting that “ we are confident that the clinical results, when combined with the economic model, will support the kind of pricing that we have in mind for the product in the US and elsewhere.”

In mid-April ATS and partner Smith & Nephew released the final data on their pivotal trial of Dermagraftfor diabetic foot ulcers. In the trial, 38.5% of patients treated with Dermagraft healed completely in 12 weeks, against 31.7% in the control group. These results weren't strong overall, but because Dermagraft is frozen for shipping and then thawed before use, the product varies from unit to unit in its “metabolism”—that is, how many cells were still alive and producing growth factors. ATS submitted to the FDA the subset of patients who received Dermagraft with the most effective “metabolic range” only. The company has to prove it can reliably manufacture Dermagraft in this ideal range, and although Gail Naughton says the results in this sub-group were statistically significant, ATS will conduct a supplementary 50-patient study to bolster them. ATS submitted a pre-marketing application to the FDA in February.

“In wound healing, there's a big difference between statistically significant results and clinically meaningful ones,” says Evan Sturza, the publisher of Sturza's Medical Investment Letter, who doesn't think either Apligraf or Dermagraft will provide a clinically meaningful benefit over conventional therapy. Sturza has been a particularly merciless critic of Organogenesis, recommending in his newsletter that investors short the stock. While Sturza doesn't think the FDA will approve Apligraf, he suggests that “getting Apligraf approved would be the worst thing ever to happen to this company.” The company's stock would then have to align with earnings which, given the nature of the wound care market, he predicts would be minimal. Sturza accuses Organogenesis of dragging out the approval process on purpose to keep its stock up and, incidentally, to continue to defy his own now long-overdue predictions that the share price will topple to $3.

Tissue-Engineered and Biosynthetic Skin Replacements

Exhibit 4

Company Product & Regulatory Status

Advanced Tissue Sciences Inc. (La Jolla, CA) Dermagraft-TC—Engineered human dermal tissue combined with synthetic epidermal layer approved for covering full-thickness burns. Application to partial-thickness wounds being studied. Marketed 4/97

Dermagraft—Cultured human fibroblasts on resorbable suture mesh for application in chronic wounds. Partnered with Smith & Nephew. PMA Filed (Diabetic ulcers)

Integra LifeSciences Corp. (Plainsboro, NJ) Integra Artificial Skin—Bovine collagen topped with a layer of silicone, used as a template to regenerate dermal tissue in severe burn. Reconstructive surgery applications being studied. Approx. $5mm sales/yr. Marketed 3/96

Genzyme Tissue Repair (Cambridge, MA) Epicel-CEA-Service to culture up burn patient's own epidermal cells for graft. Not FDA regulated. Approx. $5mm in sales/yr.

LifeCell Corp. (The Woodlands, TX) AlloDerm—Dermal replacement made of processed human cadaver skin. Marketed to burn, reconstructive surgery, and periodontal markets. Not FDA regulated. Approx. $2mm sales/yr.

Oranogenesis Inc. (Canton, MA) Apligraf—Bovine collagen matrix seeded with cultured epidermal and dermal cells. Trials underway in diabetic ulcers and pressure sores with partner Novartis.PMA Filed (Venous ulcers)

Ortec International Inc. (New York, NY) Cultured Composite Skin—Bovine collagen matrix seeded with cultured epidermal and dermal cells. Pivotal trial underway in severe burns. Pilot trials in epidermolysis bullosa.

Smith & Nephew v. Novartis

After the long saga in the clinic, the marketplace should indeed present interesting challenges. Both ATS and Organogenesis have found marketing partners, Smith & Nephew and Novartis respectively, whose core competencies represent both scientific and commercial compatibility with tissue-engineered products for wound healing.

An Organogenesis executive describes the company's choice of partner this way: “The choice was between wound care companies and pharmaceutical companies. We decided we didn't want someone who would slot us in as part of a portfolio and be concerned about cannibalizing their own wound care products.” Also wound care companies are used to shorter product lives, and Organogenesis wanted a partner willing and able to spend heavily to introduce an innovative product, creating high barriers against competitors.

Sandoz, for example, transformed the transplant field with its immunosuppressant Sandimmun (cyclosporin) and a massive program of support for clinical and basic research, as well as follow-on trials for expanded indications. But since Apligraf is not a $1 billion dollar drug, one is left wondering what kind of resources Novartis will devote to it. “The clinical development plan that Novartis has for Apligraf is enormous right now,” asserts Geoff MacKay, Novartis Pharmaceuticals Canada Inc. 's brand manager for Apligraf. “Novartis is planning or has started trials in diabetic foot ulcers, pressure ulcers and for treating surgical excisions.”

In January 1996 Sandoz took worldwide marketing rights to Apligraf (then named Graftskin), in return for a $5 million equity investment and $6.5 million in R&D support, all of which was received in 1996. Novartis could pay another $26 million in milestone-dependent equity purchases and cash [See Deal]. Novartis will pay Organogenesis to manufacture Apligraf, and pay unspecified royalties.

As far as marketing goes, MacKay notes: “We have a bottom up strategy. We'll get the Apligraf out and let it speak for itself. And then have the physicians try to get it reimbursed at the individual hospital level. We face a problem of any new technology. Namely, there is no one out there waiting to pay for human skin equivalent. It's a new category and reimbursement will be an interesting challenge.”

In Canada, venous ulcers are treated by dermatologists, and therefore Apligraffalls into the existing dermatology business of the former Sandoz. Apligraf fits in well with Novartis' effort to further leverage its core competency in transplant/immunology in the dermatology area where newly approved dermatology drugs include Lamisil, an anti-fungal, and Neoral, the new formulation of cyclosporin, for psoriasis. MacKay points out that these new, more potent dermatology drugs are breakthrough products in an area long dominated by commodity products. Novartis' willingness to market novel therapeutics into crowded, commoditized categories will be critical for selling Apligraf in the wound healing market.

MacKay predicts the salesforce of Novartis Canada's dermatology business unit will be able to get the product out to customers effectively. “We have a breakthrough product and the salesforce to make use of it. And it's key that this is a niche market; there are only 500 dermatologists in Canada, and we will focus on the subset that treats ulcers.” Neither the price nor the launch date in Canada has been set, says MacKay, pending finalization of a global pricing strategy.

As regards competition MacKay says: “I think that the fact that this is a new complicated product lends itself well to a pharmaceutical company, because wound care has traditionally been more a commodity-type market. I think that the minute you get into the heavy science of something like Apligraf, you need the professionalism and clinical expertise of a pharmaceutical company.”

Such comments infuriate Smith & Nephew's Allen Suggett: “I don't want to play games with Novartis, but I think its fair to say we're unused to that kind of hype from a company that has not convinced the US FDA after 18 months that its product is suitable for venous ulcers. It ill behooves them to push too hard until they have actually got something to sell.”

ATS and Smith & Nephew formed a 50/50 joint venture to commercialize Dermagraft worldwide in April 1996 [See Deal]. “Also, they understand that these products are going to be very different from dressings, or tablets that you can put in a bottle,” says Naughton. “They are well known for a total patient care sell, and realize that [chronic ulcer] patients require multiple products, not a magic bullet.”

Smith & Nephew has revenues of approximately $1.5 billion annually. Novartis won't be able to simply out-spend or out-market Smith & Nephew due to the relatively small size of the wound healing market. Instead, the question becomes, which company has greater expertise? Smith & Nephew has taken a broad approach to tissue repair through its orthopedic implant, endoscopy and wound care businesses. Suggett thinks his company is also uniquely positioned, from a scientific perspective, to take advantage of the tissue-engineering opportunity in wound healing. “We're not coming cold to this in any sense. We've been learning about and moving towards tissue-engineering since the mid-80's,” he says, “and we've been in the advanced wound care field since the beginning of the moist healing concept, which Smith & Nephew began in the early 70's. So this is really bread and butter stuff for us.” By its own estimates, Smith & Nephew's $300 million or so in wound care sales worldwide make it the number three company in that category.

The mix of tissue-engineering expertise and real-world wound care experience is rare. Wound care leaders like ConvaTec don't bring the necessary scientific credentials to the table to handle a product like Dermagraft, while pharmaceutical companies lack insight into the wound care marketplace and customers. In particular, says Suggett, “The pharmaceutical industry has ignored delivery systems for years, whereas the medical device industry was making delivery systems before they were even called that. That's our core business. I don't think pharmaceutical companies necessarily have all the talents and techniques required to deliver these cells or growth factors to the right places.”

Growth Factors & Hormones In Active Development for Wound Healing

Exhibit 5

Company Product Indication Status

Johnson & Johnson/ rhPDGF-B Diabetic ulcers NDA filed

Chiron Corp.

Kaken Pharmaceutical Co. Ltd./ bFGF Skin ulcers Pending approval in Japan

Scios Inc.

Genzyme Tissue Repair TGF-Beta 2 Skin ulcers Phase II

Novartis AG/ TGF-Beta 3 Venous ulcers Phase II

Oncogene Science Inc. Burns Phase II

Maret Corp Angiotensin-II Partial-thickness burns Phase I/IIa

SOURCE: Start-Up

Growth Factors

Biotech companies have based their promise, and their pricing flexibility, on meeting unmet clinical needs. If clinically successful, the products are big winners because there are no apples-to-apples therapeutic alternatives. In wound care, however, there are no unmet clinical needs, just poorly served ones. Nor does it help that existing therapies are relatively cheap and getting cheaper all the time because of commoditization and price pressures. Thus, biotech wound agents face a double hurdle: proving efficacy, and proving a cost-benefit advantage over traditional approaches. One wound care segment that underscores this olympian challenge compellingly is growth factors.

When companies first started isolating and cloning growth factors in the 1980's, wound healing presented an immediately obvious first application for the novel biopharmaceuticals. In wounds, growth factors could be applied topically, avoiding the inconvenience and possible dangers of systemic IV delivery. “Ten years ago people were pretty nervous about growth factors, there has always been a lot of literature linking growth factors and cancer,” says Patty Olson, Chiron's senior director of research and project management. In 1988, Chiron signed a broad agreement with J&J's Ethicon Inc. to explore growth factors in soft tissue healing, in which Chiron handles manufacturing, and J&J development and sales. This January J&J's RW Johnson Pharmaceutical Research Institute filed a new drug application with the FDA for Regranex, a gel formulation containing recombinant human PDGF, for diabetic ulcers.

Applying growth factors topically is an attractive prospect, particularly since it points to vast consumer markets. But for companies without J&J's multi-disciplinary resources, delivering biologics to the wound itself presents a significant challenge for most companies. Amgen's VP, product licensing Kathleen Wiltsey, whose firm pursued both PDGF and KGF (keratinocyte growth factor) through the early 90's, notes that Amgen was ill-equipped to deal with the formulation question. “Would it be a cream or a gel? How do you deliver the drug to a topical site, and how do you control the duration of dosing? We didn't know how to do those things.”

Amgen ultimately pulled PDGF out of clinical development in 1992 because it didn't demonstrate enough efficacy to withstand the wound care market's strict cost-benefit calculus. “With only marginal improvements in healing, you are going to have a price problem, it's not going to be a high margin business,” says Richard L. Casey, Pres. & CEO of Scios, whose firm has looked at both EGF and bFGF in soft tissue repair. And companies like Scios have been given little reason to persevere in wound healing, especially given the opportunity to sign handsome, much earlier-stage deals in other indications. Indeed, Scios and Wyeth-Ayerst Laboratories, a unit of American Home Products Corp. , agreed to co-develop FGF for stroke last October, a deal in which Scios was paid $12 million up-front, could earn another $32 million in milestones, and keeps co-promotion rights [See Deal]. “There are much higher margins for FGF in stroke. Commercially and therapeutically, wound healing will never be as attractive as that,” says Casey.

Despite such negatives, Scios' Japanese partner Kaken Pharmaceutical has trudged through the clinic with FGF. Kaken has rights to bFGF in Japan and most of Asia under a 1988 agreement, and recently filed for approval of a spray formulation for treating intractable dermal ulcers [See Deal]. According to Oncogene's SVP of discovery Aurthur Bruskin, PhD the merger of Ciba and Sandoz has helped the product. “It was a pretty big item at Ciba, but I think Sandoz likes it as well, and so they have put it on the front burner. They saw they had competition with PDGF, and wanted to be there in a timely fashion.” A large venous ulcer Phase II trial with 308 patients is just getting underway in Europe, and in Japan the factor is being studied in burns.

The main criticism of growth factors is that they stimulate only one part of the cascade of events needed to heal a wound. Researchers disagree whether a single growth factor is likely to significantly improve healing on its own. They also often disagree just what affect a growth factor is likely to have. For example, while Novartis believes that TGF-Betaholds promise in wound healing due to its multiple regulatory functions, Integra's Michael Piershbacher says, “I cannot agree with that. In fact, we have a major program here directed at inhibiting TGF-beta. What TGF-beta does is drive the scarring process, and scar tissue is not healed tissue.”

Combining growth factors in clinical trials has also been considered, but not actively pursued since such a study would create intolerable regulatory burdens. Says Rich Casey: “The FDA would require four arms for that study, one for each growth factor, one for the combination, and one for placebo.” Meanwhile, companies such as Organogenesis argue that by putting their engineered living tissue into a wound, they harness cells to do what science, so far, cannot—determine just what factors are needed and when. Even cells may need a little help from factors though, says Casey, “We get approached fairly often by people who want to soak their skin in FGF, since it is very angiogenic.”

Clinically & Scientifically Underdeveloped

Companies have come to regard the wound healing marketplace as one with fundamentally flawed economics for developing novel products. But since there is no pharmaceutical approved for the acceleration of wound healing, that proposition has in fact never been tested. Why assume that drugs will compete against bandages in the marketplace, just because they must compare against them in the clinic?

The principal stumbling block in the clinic is that if wounds are well cared for using standard protocols, as they are in clinical trials, growth factors have a hard time showing improvements in healing rates. But such comparisons ignores a reality—that many patients don't get good care and could benefit from a self-administered topical wound care agent, or one given by a nurse in an outpatient setting.

For that reason some companies feel that the cards have been stacked unfairly against them by unrealistic clinical expectations. “The whole area was a big black hole for us,” Scios' Casey declares, “The FDA rules for efficacy were too strict. All the patients got the best possible nursing care, and you have to show wound closure at a significantly greater rate than placebo. That was a problematic endpoint.” In general, and in particular for diabetic ulcers where an open wound can cause infection, the FDA and the clinician alike demand that drug developers show 100% wound closure. Some companies feel that fairer standards would allow them to measure endpoints related not just to the totality of healing, but to the quality and speed of healing, such as recurrence rates, faster wound closure, or general reduction in wound size.

Compare the sophistication of the endpoints used in wound healing trials to those in oncology. There, tumor progress has been well defined and clinicians can measure a drug's effect on the body's decline via histological microanalysis of cell features or tumor size. For refractory patients, where the clinical endpoint is death, drug makers can seek to show only a statistically significant effect on survival. Wound healing, by contrast, presents the more demanding task of measuring an improvement in the body's rate of healing. And if companies choose, as they often do, to target those patients whose wounds haven't healed under any conditions, is wound closure still a reasonable endpoint?

“Prior to five years ago there weren't any randomized, placebo controlled wound healing trials,” notes ATS' Gail Naughton, “The products sold in this field are approved under 510(k)s, and so they haven't had a truly rigorous level of study. That means there is no historical data to help us define trials endpoints.” Nor has the relatively backwards state of the science of wound healing helped. “Not until the last two years have people even begun to define, at a molecular level, what's happening in different types of wounds,” Naughton goes on, “I've been in dermatology since 1980, and the field has definitely been slow to evolve. But now people appreciate the complexity of wound healing, and it simply needs to be addressed with better science. I think the increasing number of meetings and associations related to wound care give an indication that it's now happening.”

A $2 Billion Opportunity

What the field may need is its first approval of a drug with major commercial potential. News on J&J's Regranex—the Phase III trial results haven't been released yet—is being eagerly awaited. If Regranexgets approval, J&J will likely be successful in marketing the drug, and create the market that small companies cannot. And while biotech competitors may lose 80% of their market share to a big player like J&J, the 20% left to them is still larger than the market would have been had J&J not had a product. They need someone, as it were, to turn on the lights.

An approval for Regranex, in addition to shedding light on some of the unknowns in wound healing—regulatory path, pricing, reimbursement, revenue potential—would establish a baseline clinical efficacy for others to compare against. “But we don't know if their results are marginal and just good enough, or if they are spectacular,” says Terry Winters, a venture capitalist with Columbine Venture Funds who invested in the 1994 start-up Maret Corp. (Wayne, PA) Maret, which has raised $2.5 million so far, just started clinical development of angiotensin II, a peptide best known for its role in regulating blood pressure. The company's scientific founder, University of Southern California's Gere diZerega, MD, believes the hormone also has several key attributes as a wound healing compound—it stimulates new blood vessel growth, the release of growth factors, and growth of the extra-cellular matrix.

Before Maret came along, says Winters, “I hadn't seen a wound healing business plan for a long time. There were a spate of them in the 80s, but even then few got funded.” Winters says he invested in Maret despite the cautionary history of wound healing drugs because of angiotensin II's promising preclinical results. That history, however, has definitely influenced Maret's development plans.

Maret will test angiotensin II in partial-thickness burns, an approach the company hopes will allow it to avoid repeating past clinical failures (Phase I/II trials are underway at the University of California, Irvine and two other centers). Most companies with wound healing agents have gone after chronic ulcers because they believe the best place to show efficacy is in patients whose wound repair processes are compromised, and because chronic wounds represent the largest markets. Maret argues that it's better to study patients whose underlying ability to heal is intact. It also notes that since burn patients are hospitalized, its easier to collect trial data.

For David McCaleb, a consultant acting as Maret's marketing director, that's a smart strategy which precludes some missteps of the past. “Big companies have internal fights about what the influence of marketing should be on product development. If you decide not to pursue a therapeutic area just because the markets aren't big enough that can send a product down the wrong path. The companies that went after wound healing's biggest market—decubitus ulcers—ran into problems in the clinic and failure,” he notes.

With no offices and only part-time employees, Maret not only reduces financial risk, but is prepared for changes in the clinical development path—not an unlikely prospect in wound healing. “As a virtual company we are going to avoid getting too committed to a particular area,” says McCaleb, “If you hire a bunch of burn experts to help run your trial, they may not want to work on diabetic ulcers. We want to follow what is best for the product, not people's careers.” McCaleb, once marketing director for Amgen's Neupogen, seems acutely aware of big companies' foibles. He also admits to suffering from at least one, the herd instinct—“When Terry Winters came to me with this product I said ‘no way, what else do you have' because it was wound healing. But I was later convinced by the preclinical data.”

The key for Maret now is to secure a clinical proof of principle from which to branch out into other indications. They point to Novartis' Leukomax, a colony stimulating factor which was tried in many indications until it worked in hairy cell leukemia. Now the product is in pre-and early clinical studies for several other indications, including wound healing, according to a Novartis executive. Maret's CEO Joe Spemler, the former president & CEO of La Jolla Pharmaceutical Co. says that if the company can get the product through Phase II trials in burns, it can be partnered in other indications—which will likely require larger and more costly trials—possibly reserving the manageable burn market for their own sales force. Another important point is that Maret's peptide can be made on a peptide synthesizer, avoiding the costs of recombinantly produced proteins. “The economics are important; we don't like drugs that sell for $5,000 at a time, although you can make money there. What we have got will be very cost effective in the markets that we are going after,” says Winters.

“Because of the negative experience of the fallen warriors of the past—both Telios and ProCyte had peptides too—we got some ‘nos' from other VCs when we were raising money,” Winters declares. “It takes someone knowledgeable in science and the pharmaceutical business to recognize that wound healing is still a major opportunity. The bottom line is that if you have something that works, then there is a very large unserved market out there for you. We commissioned a study from The Wilkerson Group in which they underpriced our products and used low market penetrations and came up with a market covering burns and ulcers in excess of $2 billion. Now that's interesting.”