Washington Editor

As part of a restructuring plan that has cost many employees of Advanced Tissue Sciences Inc. their jobs, the company intends to sell its interest in its Dermagraft joint venture to partner Smith & Nephew.

The La Jolla, Calif.-based company dismissed 70 of its employees Thursday, yet expects that London-based Smith & Nephew will offer positions to another 115 employees who will be cut as part of the restructuring, leaving the company with 35 to 40 people.

Advanced Tissue Sciences (ATS) has filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of California. That type of filing allows a company to continue operating in the ordinary course of business while it evaluates and formulates its restructuring plans, according to a prepared statement released by the company.

Dermagraft is a bioengineered, cryopreserved tissue approved in the U.S. a year ago as a treatment for chronic foot ulcers in diabetic patients. ATS will sell Smith & Nephew its rights to wound care uses but will retain rights to the technology, currently being considered for periodontal and cardiovascular uses. Smith & Nephew also will gain rights to TransCyte, a temporary skin cover for treating serious burns.

A prepared statement released by Smith & Nephew said combined sales of Dermagraft and TransCyte are expected to reach $8 million this year.

Facing financial issues related to raising its portion of money necessary to operate the joint venture, ATS seeks to sell its interest to Smith & Nephew for $12 million, including $10 million in cash and an assumption of $2 million of debt. ATS expects the bankruptcy court to hear its case within 30 to 45 days.

"Coming out of this deal we will have no debt and we will not have the need to commit additional money to it because they will cover all future cash needs of it," Abe Wischnia, ATS's senior director of investor relations, told BioWorld Today. "We were faced with having to make a very sizeable and ongoing additional cash contribution for our share of funding the costs of the venture and basically in the current environment, there wasn't a way that we could raise the money in any acceptable manner. The only way that we could have done it was a really sizeable dilution, heavy warrant coverage, and we wouldn't have brought in a whole lot of money. We looked at that and said, This doesn't make a lot of sense and we're not the kind of company that is going to do a toxic deal.'"

Wischnia wouldn't elaborate on a specific amount ATS was required to pay into the 50-50 global deal that was valued at $111 million when it was signed in January 1998. ATS received a $5 million milestone payment from Smith & Nephew last year when Dermagraft was approved. (See BioWorld Today, Jan. 20, 1998.)

In its prepared statement, Smith & Nephew said the acquisition of ATS's share "will require Smith & Nephew to bear an increased share of the start-up costs of the venture of some $18 million over 2003 and 2004. This is more than counterbalanced by the benefit of attaining full control and with break-even targeted in 2005 and 100 percent of profits thereafter."

At the end of the second quarter, ATS had about $12.8 million in cash and 73.4 million outstanding shares. Wischnia said third-quarter earnings are expected to be released in the second week of November.

ATS's stock (NASDAQ:ATIS) closed Friday at 7.9 cents, down 69 cents, or 89.7 percent.

Wischnia said ATS also will withdraw the 10-million-share shelf registration it filed with the SEC in June.

ATIS has an agreement to receive up to $5 million of debtor-in-possession financing from Smith & Nephew in order to finance its operations for 60 days while the company awaits court approval of the sale. Any amounts advanced by Smith & Nephew would reduce the price of the overall transaction.

Otherwise, Smith & Nephew has agreed to continue manufacturing and supplying dermal fibroblast for ATS's periodontal and cardiovascular uses. Smith & Nephew also will manufacture human collagen and extra cellular matrix for aesthetic and surgical product markets and NouriCel for cosmetic and other applications.

The companies will dissolve their NeoCyte joint venture to develop human cartilage and postpone the preclinical trials that were upcoming. Wischnia characterized the NeoCyte deal as "slow-moving," saying it remained in animal trials.

ATS has hired an independent outside firm to evaluate its product pipeline to make recommendations as to how the company should proceed.