National Editor

Aiming to emerge from the deal as a pure-play drug development company, OrthoLogic Corp. agreed to sell its bone-growth stimulation business to DJ Orthopedics Inc. for $93 million in cash.

The move would give OrthoLogic, of Tempe, Ariz., about $120 million in cash on hand, enough to get its first product - now in Phase III studies - to market, said Thomas Trotter, president and CEO.

"This was a step to create for ourselves a certain cushion, so we're doing it in our time frame and not someone else's," he told BioWorld Today.

OrthoLogic's stock (NASDAQ:OLGC) rose 90 cents Thursday to close at $6.55. The sale is subject to shareholder approval and is expected to close before the end of the year.

For the cash, DJ Orthopedics, a San Diego-based firm focused on sports medicine, would walk away with the part of OrthoLogic that is credited with all of the firm's $11.4 million second-quarter revenues, including the OL1000 device, approved by the FDA in 1994 for noninvasive treatment of an established nonunion fracture acquired secondary to trauma (excluding vertebrae and all flat bones); and another device, SpinaLogic, approved in 1999 for use as an adjunct to primary lumbar spinal fusion surgery for one or two levels.

OrthoLogic now is turning its attention to the platform based on Chrysalin, a 23-amino-acid peptide in Phase III trials for accelerating fracture repair and in Phase I/II studies for spinal fusion.

Trotter said the company is "well into" the Phase III trials, which will enroll 550 patients "probably by mid-summer of next year." Enrollment in the Phase I/II is expected to finish near the end of next year.

"It's the same formulation at different doses," he said.

A third Chrysalin-based product is in late-stage preclinical development for cartilage defect repair. That one involves Chrysalin in a matrix of microscopic, porous beads, which are surgically implanted.

OrthoLogic has worldwide rights to Chrysalin for all orthopedic indications through a series of licensing agreements that began in January 1998 with buying a minority interest in Chrysalis BioTechnology Inc., of Galveston, Texas, which patented the compound.

Trotter told investors during a conference call that OrthoLogic had been operated as two businesses, investing "virtually all the profits" from the bone-growth side into drug development.

"We have clearly achieved considerable success," he said, but it would not have been possible to keep doing that "without a sizable net loss for the next several years."

Continuing that way with a partner helping was another option considered, he said, and such an approach "would likely have generated sufficient funds" for five years.

"The price we would need to pay in terms of the lost future marketing rights as well as overall program control would have been very high," he said.

So the decision was made to sell off the bone-growth portion, which will provide more "clear and more favorable valuation metrics for our stock" and will leave OrthoLogic with plenty of cash and no long-term debt.

DJ Orthopedics is taking on "certain liabilities" that go with the bone-growth business, OrthoLogic said, but the buyer's shareholders apparently liked the deal. DJ's stock (NYSE:DJO) climbed $1.45 Thursday, or 10.4 percent, to close at $15.45.

Over the last 18 months to 24 months, OrthoLogic has talked with more than 20 companies, four of which seemed interested. The sale to DJ was "at the highest value generated throughout the whole process," Trotter said.

More details will be offered in OrthoLogic's next quarterly filing, he added, but the deal carries a $2 million breakup fee to DJ if OrthoLogic can't see the sale through.

In all, Trotter said, OrthoLogic expects the Chrysalin platform to yield five products. After 27 years working with devices and, to some degree, with biotechnology, he added, "I've probably seen a handful of products that showed the capability to change the practice of medicine" as he believes Chrysalin will.

Whether a development partner will be taken on later, when more products are advanced into clinical stages, is uncertain.

"We've been having ongoing discussions with orthopedic and pharmaceutical companies," Trotter told BioWorld Today. "There are certainly people willing to do it."