an enormous, bankruptcy-based discount when it acquired the bio-manufacturing facility that cost ATS roughly $300 million and more than 15 years to develop. The investment in equipment and proprietary know-how may have dragged down the predecessor company, but it represents a windfall that would cost Advanced BioHealing hundreds of millions of dollars to duplicate elsewhere today.
“The cost of moving out of this facility is prohibitive,” McGee says. “So we decided to keep manufacturing here.”
[Corrected total amount of venture funding. See below] Getting medical insurance reimbursement proved to be another key factor.McGee says Smith & Nephew did a good job of establishing reimbursement codes with Medicare for both the product itself and related medical services, such as cleaning an ulcer before treatment. That enabled Advanced BioHealing to more than double the price of its Dermagraft product, which McGee says, “was key in the early days when we really didn’t have much funding.” (Since it was started in 2003, McGee says Advanced BioHealing has raised a total of more than $40 million through three rounds of financing.)
As part of its “high-touch sell,” McGee tells me Advanced BioHealing employs 10 “reimbursement specialists” around the country to educate physicians and encourages its sales force to do “insurance verification” to make sure reimbursement is in place. She estimates that Medicaid and Medicare cover more than 80 percent of diabetes patients, although it will only pay for the Dermagraft treatment in patients with diabetic ulcers.
McGee’s observations are reinforced by Gail Naughton, the scientist who figured out a way to culture human skin cells and coaxed them into growing on a three-dimensional scaffold made of suture material. Naughton, who is now dean of the business school at San Diego State University and the founder of another San Diego startup, says she’s often asked to talk about what went wrong at ATS, the company she founded.
In an email to me, Naughton writes: “Advanced Tissue Sciences was a leader in tissue engineering (now referred to as Regenerative Medicine) and, as such, did much of the ground breaking work in bringing the field from concept to approved products. There were many unknowns that ATS needed to figure out in the process, including how to reproducibly manufacture a living tissue, how to develop a product with a long shelf life, etc. These steps proved to be longer and more expensive than first anticipated, as did the clinical trials required for regulatory approval.
“In addition, ATS built a world world-class GMP (good manufacturing practices) facility with capacity to produce product to meet analyst forecasts for burns and chronic wounds, which were estimated at $500 million at market peak. What wasn’t understood was that reimbursement for these “first of a kind” products would take several years to be established. The incidence and prevalence of diabetic ulcers and venous ulcers was/is huge, but traditional wound treatment involved a few dollars per patient, a far cry from the $400/piece that ATS’s Dermagraft product was sold at.
“We also didn’t understand that wound care specialists are not usually early adopters of novel, expensive treatments. So the bottom line was that the manufacturing facility (and the high overhead costs it involved) was overbuilt and financially burdensome. It took years to get the appropriate reimbursement for the product (now at over $1350/piece) in order to have a profitable business.”
