By Lisa Seachrist

Washington Editor

WASHINGTON — Setting aside the recommendation of an advisory panel, the FDA issued Advanced Tissue Sciences Inc. a non-approvable letter for its wound healing aid, Dermagraft.

While stating that "Dermagraft shows promise for the effective treatment of diabetic foot ulcers," the agency decided that the La Jolla, Calif.-based company's reliance on a retrospective analysis of the product's pivotal trial wasn't adequate to approve Dermagraft for diabetic foot ulcers.

As a result, the FDA is requiring that the company perform another randomized, multicenter clinical study.

Advanced Tissue Sciences (ATS) predicted that the data the agency wants from the trial will be available in 12 to 24 months, depending upon the number of patients needed in the study.

"This was absolutely disappointing — you don't expect this after getting a recommendation from the advisory panel," said Gail Naughton, president and chief operating officer of ATS. "But we are working very aggressively to have the data available closer to 12 months than 24 months."

ATS' stock (NASDAQ:ATIS) plummeted 44 percent to close at $3.938, down $3.125, while competitor Organogenesis Inc., of Canton, Mass., saw its stock (AMEX:ORG) jump 8 percent to close at $24.938, a $1.938 gain.

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 bioabsorbable 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 the product into diabetic foot ulcers.

Only 61 Treated Patients Evaluable In A Phase III Trial

The FDA's issue with Dermagraft emerged at the General and Plastic Surgery Devices Advisory Committee meeting January 29, 1998. At that time, ATS presented data from a randomized, controlled Phase III trial involving 281 patients with diabetic foot ulcers. When that study was completed, the company discovered that only a fraction of the Dermagraft implanted into the patients had the metabolic activity to promote healing, leaving the company with only 61 evaluable patients in the treated group.

The company retooled its manufacturing to produce only metabolically active Dermagraft and conducted a 50 patient uncontrolled trial. Pooling the results from the studies, ATS found that 51 percent of patients receiving Dermagraft had their ulcers heal completely in 12 weeks, compared with 32 percent of the patients who received weekly debridement of their wounds, antibiotics and moist saline dressings.

The advisory panel suggested the company conduct a post-marketing study to provide short- and long-term efficacy data. However, the FDA decided that such a trial is the domain of premarket studies.

"The agency doesn't want to set a precedent for retrospective subsetting of data," Naughton said. "This is a new technology that is going to be part of a huge industry. FDA is letting future manufacturers know what the rules are."

In addition to suggesting that the company resubmit the premarket approval application once the new data have been generated, the agency said ATS should file immediately for a treatment investigational device exemption (IDE). A product of the Food and Drug Modernization and Accountability Act of 1997, a treatment IDE gives patients with no alternative treatments access to the product and enables the company to recoup manufacturing costs. Should it be approved, it would be the first treatment IDE granted under the new provision.

Having the product available to patients through the treatment IDE may be vital for ATS to maintain a name in the market.

The FDA approved Organogenesis' ApliGraf skin-graft product for the treatment of venous leg ulcers last month. Like Dermagraft, ApliGraf is produced from discarded foreskins; however, ApliGraf is grown without using a scaffold. The product is delivered on agarose for up to five days.

"The non-approvable letter was a little surprising, it was certainly a let down for the company," said Alex Arrow, vice president of research at Wedbush Morgan Securities, in Los Angeles. "But, it's not entirely bad news. The company now knows exactly what the agency wants. And [the FDA] gives the impression that this is a wholly approvable product."

Arrow noted that because ApliGraf is on the market, physicians may choose to use the product off-label for diabetic foot ulcers. Organogenesis is currently conducting trials of ApliGraf in diabetic foot ulcers. However, Arrow suspects that Dermagraft will prove the superior product because it has an extended shelf life and is easier to use.

Dermagraft Revenues Not Expected For Two Years

In the meantime, ATS is looking at up to two years before it earns revenues from Dermagraft. The company currently has $26 million in cash and burns $13 million per quarter.

Nevertheless, Arrow considers the FDA action far from a death knell for ATS, because marketing partner Smith & Nephew plc, of London, has a commitment to the company, and other corporations have been seeking distribution rights in other countries. In addition, ATS has a $50 million equity line of credit.

"ATS is not in that much danger or insolvency," Arrow said.

In addition to the non-approvable letter, ATS said the FDA has scheduled a site inspection of its manufacturing facility for August to address concerns raised in a March inspection.

ATS also has Dermagraft in clinical trials testing its utility in treating venous leg ulcers and bed sores. *