By Mary Welch

Advanced Tissue Sciences Inc. received some much-needed good news as it completed a $25 million private placement to help fund additional clinical trials for Dermagraft following rejection last month of the wound healing aid by the FDA for treatment of diabetic foot ulcers.

The funds also will be used to maneuver Dermagraft, a skin replacement product, through clinical trials for venous and pressure ulcers.

In addition, the La Jolla, Calif.-based company extended its existing equity credit line to February 2000, giving Advanced Tissue access to as much as $50 million from the sale of common stock to an investor group. The company originally obtained the equity line in February 1996, in a deal that allowed the withdrawal of up to $15 million at any time through the sale of common stock.

Advanced Tissue's stock (NASDAQ:ATIS) closed Monday at $4, up $0.375.

"We're particularly pleased with the capital and we have a good group of new investors," said Arthur Benvenuto, chairman and CEO. "We wanted to increase our investor base. This influx gives us some substantial flexibility in meeting our company's needs."

Promethean Investment Group LLC, of New York, represented both investor groups. Benvenuto did not disclose the identities of the investors, saying it would be revealed in a future Security and Exchange Commission filing.

Benvenuto called the $25 million private placement a "creative approach" in which Advanced Tissue negotiated a structure that increases the conversion price of the Series B preferred stock if the common stock's trading price goes above $8.

"It allows us to benefit from future increases on our common stock where we share equally with the investors," he said.

Dermagraft is a bioengineered, living, metabolically active skin implant derived from discarded foreskin tissue. The product essentially consists of viable dermal fibroblasts cultured on a bioabsorable scaffold that secretes vital matrix proteins, growth factors and glycosaminoglycans (a protein-polysaccharide complex needed for wound healing to occur).

Dermagraft, which is available in Canada, the U.K., Ireland and Finland, is cryopreserved and delivered frozen to the treating physician, who thaws and implants it into diabetic foot ulcers, where it is designed to vascularize with underlying tissue after a few days. Diabetic foot ulcers are responsible for up to 85 percent of the 60,000 foot and leg amputations that take place annually in the U.S.

FDA Requires Additional Trials

Despite a FDA advisory panel recommendation in January that Dermagraft be approved for foot ulcers, the regulatory agency in June issued a non-approvable letter.

The FDA said Dermagraft "shows promise for the effective treatment of diabetic foot ulcers," but disapproved of Advanced Tissue's reliance on a retrospective analysis of Dermagraft's pivotal trial. The data weren't adequate to approve the product, the FDA said.

The agency suggested the company resubmit its premarket approval application following new randomized multicenter trials and advised Advanced Tissue to file immediately for a treatment investigational device exemption (IDE). An IDE gives patients with no alternative treatment access to the product and enables the company to recoup manufacturing costs.

If the treatment IDE is approved, it would be the first one granted under the Food and Drug Modernization and Accountability Act of 1997, Advanced Tissue said. (See BioWorld Today, June 15, 1998, p. 1.)

Dermagraft's competitor, ApliGraf, received FDA approval for venous leg ulcers in May. The product hit the market in June.

ApliGraf, developed by Organogenesis Inc., of Gaithersburg, Md., is a living human skin equivalent which contains both epidermis and dermis layers of skin. Like Dermagraft, it is engineered from discarded human foreskins. But rather than utilizing a scaffold for the cells to grow around, ApliGraf is made by culturing the cells in a 3-D culture system that yields the two layers of skin. Organogenesis' marketing partner for ApliGraf is Novartis AG, of Basel, Switzerland.

"For us to do well, they don't have to do poorly," Benvenuto said of his competitor. "We wish they do well because, ultimately, it helps the whole sector."

New Studies Could Take One To Two Years

For its part, Advanced Tissue is determined to get back on track. The company is in discussions with the FDA and will set up the new trials soon. At the time of the FDA rejection letter, Advanced Tissue said it would take between 12 and 24 months to obtain the data the FDA wants, depending upon the number of patients needed.

"We're waiting for something in writing from the FDA, and when we get that, we will pass the information along," Benvenuto said. "We want to eliminate as much uncertainty as possible and provide clarity to our investors. We are now prepared to move forward."

He added the treatment IDE filing should take place soon after the FDA letter arrives. "I think it is reasonable to believe that all of this could and would happen in the third quarter.

"With respect to venous and pressure ulcers," Benvenuto continued, "we've done pilot studies to evaluate the appropriate dosage for these indications. We may want to do an additional pilot trial to lock in on the precise dosage prior to going to Phase III."

In 1996, Advanced Tissue Sciences entered into a $70 million joint venture for the commercialization of Dermagraft with Smith & Nephew plc, of London. In January, the two expanded the venture to $181 million and it now includes the worldwide marketing of Dermagraft and Dermagraft-TC, a related product approved by the FDA for burns. Advanced Tissue, however, retains marketing rights to Dermagraft-TC in the U.S.

Smith & Nephew made a $10 million initial payment when it made the deal in 1996 with Advanced Tissue, and in January purchased $20 million of equity in the company.

In January 1999, Smith & Nephew is due to pump $15 million into Advanced Tissue as part of its contractual obligations. The rest of the funds are in milestone payments. *