Just before its planned debut on the New York Stock Exchange, Advanced BioHealing Inc. instead on Tuesday May 17 agreed to a $750 million buyout offer from the specialty pharma Shire PLC, which has a history of using acquisitions to jump quickly into new lines of business.

With ABH, Shire dives into regenerative medicine, grabbing the commercial product Dermagraft, a patch that uses natural cells called fibroblasts to heal diabetic foot ulcers. Dermagraft, approved by FDA back in 2001, was originally developed in the 1990s by Advanced Tissue Sciences Inc., a high-flying regenerative medicine firm that couldn't survive the end of the millennial biotech bubble. The rights to Dermagraft passed to ATS's joint-venture partner Smith & Nephew PLC, which in turn sold them to start-up ABH in 2006 for an undisclosed amount. The deal builds on Shire's willingness to pay healthy premiums for companies that it sees as cornerstones to new lines of business. The most striking example is Shire's 2005 purchase of Transkaroytic Therapeutics Inc. for $1.6 billion, which gave Shire access to enzyme-replacement drugs for rare diseases and a technology platform from which to expand (Also see "Shire/TKT: The Price of Diversification" - In Vivo, 1 May, 2005.). That group, now known in shorthand as HGT within Shire, accounts for a third of the multinational firm's revenues.

More recently, Shire turned a minor gastrointestinal focus into a major initiative by paying $566 million for Belgian firm Movetis NV and its constipation treatment, Resolor. (Also see "Shire Emphasizes The GI Space In Its Bid For Movetis" - Pink Sheet, 9 August, 2010..)

As part of Shire, ABH management - who Shire officials said Tuesday they hope to retain - will have a long leash to build a new business for Shire. "You get all the autonomy you'd have in an IPO without the scrutiny, the quarterly fire drills that a public company is subjected to," said Shire President of Specialty Pharmaceuticals Mike Cola. "We allow our business units to drive their business, including with licensing and M&A. As this is new to us, we don't have any cost synergies to get out of this."

Shire's only other foray into regenerative medicine was a [See Deal] for Renovo Group PLC's scar-reduction treatment Justiva (human TGFbeta3), which ended badly earlier this year. Shire pulled out of the deal due to bad clinical results, forcing Renovo to cut staff and explore a drastic asset sale.

With ABH, Shire gains an immediate revenue stream from Dermagraft. One year after acquiring it from Smith & Nephew, ABH relaunched Dermagraft, more than doubling the price from $568 to $1,300 without a reimbursement problem, and hiring a sales force that blended device and pharma experience. (Also see "The Rebirth of Dermagraft" - Medtech Insight, 1 February, 2008.. Thanks to these changes and others, Dermagraft, which had struggled to gain commercial traction with previous owners, notched $147 million in sales in 2010 with gross margins of 80%.

That "visible revenue ramp," according to Cola, convinced Shire to pull the trigger on the deal, although it had had its eyes on ABH for at least three years.

Cola remembers a conversation with ABH CEO Kevin Rakin in 2008, in which Cola expressed interest and said to keep Shire in mind. The two men have known each other for years in various roles, both as operational managers and investors. Rakin was an executive in residence at Canaan Partners, a Connecticut venture firm that stands to gain the most from the ABH sale. It owns 41% of the firm, and it aimed to sell 2.4 million of its 12.3 million shares in the offering, according to ABH's prospectus.

If it had priced at $15 a share, the midpoint of its expected range, ABH would have raised about $200 million and posted a market capitalization of $597 million based on nearly 40 million shares outstanding post-IPO. Shire's $750 million offer is a 25.6% premium over that amount. Shire's Cola said he understood the IPO to be three-times oversubscribed and the pricing was on the upswing, which means Shire might have had to pay substantially more for ABH on the open market. "We were happy with the price," said Cola.

That's a shift in strategy from the tack Shire took when acquiring Movetis, which went public in December 2009 on the strength of Resolor's Phase III data.

Cola said he was not aware of other potential bidders for ABH, which did not have much cash to spare. According to its prospectus, it had just under $20 million on April 2 with access to a $14 million line of credit. BofA Merrill Lynch and JP Morgan were set to lead the underwriting team.

-Alex Lash (a.lash@elsevier.com)

Shire Nabs Advanced BioHealing Before It Can Test the Public Waters

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