Growing its Chrysalin product platform, OrthoLogic Corp. signed a definitive agreement to acquire all of Chrysalis BioTechnology Inc.'s assets and intellectual property for up to $34.5 million in cash and stock.

Upon closing of the agreement, expected in the third quarter, OrthoLogic gains exclusive rights to technology and IP in developing synthetic peptide-based therapeutics for a variety of indications.

All of OrthoLogic's current products are based on the Chrysalin synthetic peptide - TP508 - which it licensed from Chrysalis in 1998. However, the acquisition will broaden OrthoLogic's Chrysalin platform beyond its initial focus.

"OrthoLogic will gain important additional preclincial and clinical data for several new potential indications beyond orthopedics," OrthoLogic President and CEO Thomas Trotter said in a conference call Thursday.

Chrysalis has conducted studies of its Chrysalin-based product candidates in other indications such as oral/maxillofacial bone repair, cardiovascular repair and wound healing.

More specifically, Chrysalis has conducted a few preclinical trials at a heart center in Texas, has completed extensive preclinical work and a Phase I/II trial using a Chrysalin-based product for diabetic ulcers, and also is studying a product for dental bone restoration. All of those programs have shown good results, Trotter said.

"We believe that several programs already under way have outstanding potential for future commerciability," he said.

OrthoLogic will pay Chrysalis $2.5 million in cash and $25 million in stock at closing. The remaining $7 million would be paid based on milestone achievements. The number of shares to be issued, somewhere between 3 million and 3.7 million shares, will be determined based on OrthoLogic's closing stock price for the 10 trading days before the closing.

OrthoLogic's stock (NASDAQ:OLGC) rose 66 cents Thursday to close at $8.01.

OrthoLogic also expects the final purchase price to be reduced by 5 percent, based on its existing ownership of Chrysalis. The company made an initial investment in Galveston, Texas-based Chrysalis in 1998 when OrthoLogic, of Tempe, Ariz., first licensed exclusive worldwide rights to develop and market Chrysalin-based products for orthopedic indications. Chrysalin is a 23-amino-acid peptide that represents a receptor-binding domain of human thrombin.

Through its license with the University of Texas, Chrysalis holds all other worldwide rights to develop, manufacture and market Chrysalin-based products. Upon closing the acquisition, OrthoLogic expects to enter a new license agreement with the University of Texas.

By conducting the acquisition, OrthoLogic not only gains new rights to the Chrysalin products, but also eliminates future milestone payments and reduces the royalty rates due to Chrysalis. The company also will be responsible for the manufacturing process. Previously, it had the right to do final formulation manufacturing of the peptide, but no other part.

"Going forward, we would have control of the entire manufacturing process from development of the peptide itself all the way to any formulation," Trotter said.

The company also will continue discussions with potential Chrysalis partners.

"Through our board we will make a strategic decision relative to which of the indications we want to pursue ourselves and which ones we will pursue in partnerships and joint ventures," Trotter said. "This is a significant broadening of the potential for those types of arrangements."

The acquisition is expected to add minimal incremental expenses to OrthoLogic's current operating plan for the year, but it should increase shareholder value in the long run, company officials said.

OrthoLogic is studying products in the clinic to treat fracture repair and spine fusion. In its most advanced program, OrthoLogic began a Phase III trial in 2002 of Chrysalin as a potential injectable product for accelerating fracture repair. The company expects to complete enrollment of about 500 patients in the U.S. trial this summer.

At the preclinical stage and earlier, OrthoLogic has products for cartilage defect, ligament and tendon-repair indications.

Trotter said the company would continue to lease the Chrysalis' Galveston facility, which employs 10 people, while keeping its 30-person organization stationed in Tempe.

Aside from the acquisition agreement, OrthoLogic also announced its first-quarter results on Thursday. The company incurred a net loss of $3.2 million, or 9 cents per share. It has about $120 million in cash and cash investments, and no long-term debt.