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Advanced Tissue Sciences Inc.: Learning from the Past, A Case Study for
Regenerative Medicine

Article in Regenerative Medicine · September 2010

DOI: 10.2217/rme.10.66 · Source: PubMed

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Advanced Tissue Sciences Inc.: learning from the

past, a case study for regenerative medicine

On 31st March 2003 Advanced Tissue Sciences (ATS) was liquidated, with the effect that in excess of
US$300 million of stakeholder financing was destroyed. Although successful in the development of
breakthrough technologies in the regenerative medicine arena and the building of a substantial
portfolio of patents, the company never made a profit. In this case study, ATS’ business strategy, market
and competitive environment will be discussed in the context of the company’s historical development.
A number of important lessons from this case are discussed. From a management perspective the most
critical lesson is the importance of effective financial planning and management of costs, and in
particular R&D costs, including the significant costs associated with clinical trials. In addition, a clear
strategic focus is extremely important due to the significant resources required in the development
of a new therapy. From an investor’s perspective the lessons to be gathered from the ATS case are
related to the risk involved in investing in the field of regenerative medicine. This case indicates that
both professional and private investors did not fully question the validity of ATS’ business strategy
and financial forecasts. A clear and focused strategy based on long-term investor commitment is
essential for the successful commercialization of regenerative medicine.

KEYWORDS: Advanced Tissue Sciences n business model n business strategy Nitin Pangarkar1,
n Dermagraft ® n investment n regenerative medicine n tissue engineering
Marc Pharoah2,
Avinav Nigam3,
History In 1992, the financial projections for ATS’ Dietmar W Hutmacher4
After operating for several months under products were excellent. A ‘conservative rev- & Simon Champ†2
bankruptcy protection, Advanced Tissue enue model’ of the firm predicted that the 1
National University of Singapore
Sciences (ATS) was liquidated on 31st March first-year sales would touch $37 million and Business School, Singapore
2003. The company’s liquidation raised sev- grow to $125 million by 1998. A more aggres-
2
Proago Consulting, Zurich, Switzerland
3
Procter & Gamble Japan, Japan
eral questions among observers and analysts. sive model put the figure at $280 million by 4
Queensland University of Technology,
It had enjoyed a promising beginning when it 1998. Investment bankers, PaineWebber Inc. Queensland, Australia
†
Author for correspondence:
developed a new treatment for replacing the (NY, USA), predicted that ATS’ first-year sales Tel.: +49 623 892 0840
skin of patients suffering from burn wounds, would be $26.3 million and would further rise simon@[Link]
as well as diabetics with foot ulcers. Over its to $120 million by 1996 [2] . With this expected
17-year history, it had produced several tech- growth, the company’s average spending of
nical breakthroughs, which had enabled it to approximately $17 million on research every
garner as much as US$309 million of funding year seemed worthwhile [3] . These sales fore-
from various sources. The company’s founder casts resulted in a company value of approxi-
had also been honored with awards such as mately $9.1 billion on 28th December 1998.
the Inventor of the Year from the Intellectual By 10th December 2002 this value had plum-
Property Owners Association [1] . In July 1992, meted to $4.8 million without a major global
the health industry journal had hailed ATS’ financial crisis being involved, hence at that
new approach as follows “Treatment for severe point the company entered into Chapter 11
burns is moving out of the dark ages and pro- bankruptcy protection.
viding multimillion dollar market opportu- What factors, then, brought about ATS’
nities as advances in biotechnology spawn downfall? Was it a victim of circumstances
the first generation of permanent, living skin or the inexperience of management? Had the
replacements” [2] . numerous joint ventures formed by it sapped
During its active existence from 1988 to management attention and consumed precious
2003 ATS was granted over 40 patents by the financial resources, ultimately leading to bank-
US Patent Office. Its products had also won ruptcy? [4] Was the failure of ATS inevitable?
praise from physicians who had used them on How had its value been so overestimated by
victims of the September 11th terrorist attacks. the market? Regardless of the exact causes, it

10.2217/RME.10.66 © 2010 Future Medicine Ltd Regen. Med. (2010) 5(5), 823–835 ISSN 1746-0751 823
Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

was clear that the event holds important les- several drawbacks. Cadaver skin was often in
sons for other investors, business executives and short supply and sometimes transmitted disease
­high-tech startup companies. [6] . The use of cadaver skin also required two
or three painful dressing changes per day and a
Beginnings minimum 2-week hospital stay [7] .
Advanced Tissue Sciences was started in 1987 Investment bank Smith, Barney, Harris
in La Jolla, California, USA, by two former Upham and Co. estimated the annual market
City University (NY, USA) medical researchers. potential for all severe burn treatment products
Initially, under the name Marrow Tech Inc., it at $750 million per annum. The actual size of
was working on improving the process of repli- the burn market was considered steady, as the
cating bone marrow, especially useful for cancer number of victims did not vary significantly
patients who needed bone marrow transplants. from year to year [2] . However, the authors’ expe-
The company was aiming to develop autologous rience would indicate that the accessible market
therapies, reducing the chance of rejection. After to any product entering this market would prob-
raising $6 million in a 1988 public offering to ably have achieved a maximum of approximately
fund this ambitious project, the company found 30% market penetration 10 years post-launch,
that it simply could not convince enough patients, that is, approximately $250 million per annum.
who were at high risk of developing cancer, to pay Treatment of skin ulcers represented the sec-
for extraction and storage of marrow for potential ond application of permanent skin replacement.
use several years (or even decades) later [3] . This market itself consisted of several different
Given the difficulties of working with bone segments but two of which, diabetic foot ulcers
marrow, the company switched focus and broad- and venous skin ulcers, were the most significant
ened its scope to include multiple tissue types, in terms of market size. An estimated 2.6 mil-
such as skin, liver, cartilage and oral mucous lion people (in 1993) suffered from chronic,
membranes. With the change in its research slow-healing or nonhealing skin ulcers [8] .
domain, it renamed itself in 1992 to ATS. The Diabetics suffering from skin (especially foot)
company had the challenging aim of helping ulcers (800,000 in the USA alone) formed a very
solve organ shortages by providing material for important segment of this market. According
organ transplants. Its Chairman and CEO said to one estimate as many as 400,000 diabetic
in 1992: “If there aren’t enough tissues or organs patients suffered foot ulcers and these ulcers led
for testing and transplantation, we’re going to to 60,000 amputations each year [5] .
build them’’ [5] . The market in the USA for regenerated skin
among the diabetic foot ulcer patients was
Market estimated at between $750 million and $1 bil-
Tissue engineered products had already entered lion per year, giving an accessible market of
the wound care market with Biosurface approximately $250–350 million per annum
Technology’s autologous keratinocyte sheet being after approximately 10 years postlaunch [9] .
launched in 1989. It is possible that ATS’ man- The US market size for venous skin ulcers was
agement thought that they could leverage the expected to be $180 million, giving approxi-
‘success’ of Biosurface Technology in launching mately $60 million per annum after 10 years
an engineered product in order to develop their postlaunch [2] . The world market was expected
own business. At the time, it was thought that to be roughly double the above figures [2] .
permanent skin replacement was potentially use- In addition to the previous two major applica-
ful for several different applications. ATS initially tions, permanent skin replacement was predicted
focused on two key segments of this market, burn to have uses in diverse setting ranging from oral
victims and patients suffering diabetic ulcers. wound healing to cosmetic surgery.
According to 1991 estimates, close to 100,000
people a year suffered severe burns in the USA Competitive landscape
with almost 25,000 suffering severe burns that Advanced Tissue Sciences’ primary product
required skin replacement [2] . Burn victims had Dermagraft®, which consisted of cultured lay-
to choose from two rather unattractive alterna- ers of human skin (dermal region) grown from
tives. They could undergo split thickness skin infant foreskins discarded after circumcision, was
grafts from their own bodies, which led to targeted at the burns and skin ulcer markets (see
disfiguring scars and lengthy hospital stays [5] . Table 1 for an overview of ATS’ product pipeline,
Alternatively, cadaver skin could be temporarily as of its liquidation in 2002). Dermagraft had
implanted in the wounds but this procedure had several perceived advantages over other similar

824 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report
Table 1. Advanced Tissue Sciences’ product pipeline and competitive products as
of the organization’s liquidation in 2003.
Product Terminal stage Technology
Dermagraft ®
Launched Allogeneic cryopreserved human fibroblast-derived
dermal substitute based on biosorbable scaffold
Transcyte® Launched Allogeneic cryopreserved human fibroblast-derived
dermal substitute based on nonbiosorbable scaffold
Neocyte™ Preclinical trials Human articular cartilage replacement implant
Cardiovascular therapy Feasibility studies Small-diameter vascular grafts
Skin2® Market launched In vitro skin model for cosmetics testing

products since it implanted only the dermis products, the companies followed very dif-
layer: the chances of rejection were thought, but ferent strategies to get their products into the
not determined, to be lower; it had a maximum market. ATS believed that it was more impor-
shelf-life of 6 months (as compared with some tant to understand the basics of growing tissue
competing products that had to be produced on first, which could be achieved by growing large
demand); Dermagraft was perceived to be more amounts of skin. To this end, it found another
cost-effective than alternative treatments, espe- use for cultured skin, testing of cosmetics, which
cially for severe burns and had better success rate had previously been carried out on animals and
than the prevailing treatments for diabetic foot hence evoked strong negative reactions from ani-
ulcers; and it allowed the patient near-normal mal rights activists. ATS believed that by offer-
mobility (some rivals’ approaches had the draw- ing skin for testing to cosmetics companies, it
back of tethering the patient to a machine) [10] . could enhance its likelihood of success and had
Competitor products to Dermagraft and the signed up several high-profile partners such as
associated companies are given in Table 2 . Please Procter & Gamble and Colgate Palmolive [12] .
note a technical comparison of these products is Organogenesis, on the other hand, took
beyond the scope of this article and, as will be the direct route by investing more money into
discussed later, is not necessarily relevant to the research, and into Apligraft. Organogenesis
core theme of the case study. believed it would save $2 million a year by
A key advantage of Dermagraft was supposed dropping the skin test product. This would let
to be in terms of economics of the treatment. it concentrate more on skin replacement, which
It was projected to cost between $30,000 and it could send earlier to the FDA for approval. In
65,000 to treat the most extensive burns (those contrast to ATS, which had high profile part-
with total treatment costs ranging from $100,000 ners, Organogenesis was going it alone in the
to 200,000) according to Smith Barney [2] . market, with few big corporate tie-ups.
In the other potential market segment a single
treatment of Dermagraft for foot ulcer treatment US FDA
cost between $450 and 500. Typically, patients Clinical trials for ATS’ skin products for burn
went through 8 weeks of treatment, leading to victims began at 12 burn centers in January 1991.
total costs of approximately $4000. While this In 1992, the company received approval to extend
cost was considerably more than antiseptics and studies to another 24 centers. By July 1992, the
bandages, it was less than the cost associated with company had enrolled 75 patients. It expected
foot ulcers that became worse and developed a to submit the results to the FDA for approval
chronic profile. Foot ulcer cases with complica- in 1993 or 1994 and hoped to receive approval
tions could cost a patient (or his/her insurance to market in 1995 [10] . Preliminary results from
company) as much as $60,000 for a year’s treat- ATS’ trials were published in the Journal of Burn
ment and nursing. Despite the high costs, tradi- Care and Rehabilitation, which prompted ATS
tional treatments had high failure rates, leading to claim that: “It’s the first peer review journal
to 50–75,000 amputations per year [11] . This that ever talks about a tissue engineering prod-
risk of failure and the associated economic and uct being successfully used in transplantation, for
social costs increased the financial attractiveness any kind of treatment.” [5] .
of Dermagraft. At the time of starting trials in 1992 ATS
Apligraft® from Organogenesis was the clos- believed that Dermagraft being tested as a medi-
est competitor to ATS’ Dermagraft (Table 2) . cal device, and not as a drug, would shorten
Although the survival of both companies was the approval process and the product would be
dependent on the success of their respective ready for the market in 1995. Subsequent events,

future science group [Link] 825

Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

Table 2. Summary of Advanced Tissue Sciences’ commercial milestones.

Year Milestone Strategic value
1987 Foundation ATS founded under original name of Marrow Tech. Inc. Development of process for
autologous replication of bone marrow
1988 Initial public offering Raises US$6 million in initial public offering
1991 Clinical trials of Dermagraft ®
Clinical trials for burn victims begin. Trial extended in 1992
1992 Change name Marrow Tech. Inc. changes name to Advanced Tissue Sciences Inc., changes focus and
broadens scope to include skin, liver, cartilage and oral mucous membranes
1992 Purchase of Neomorphics ATS acquires Neomorphics for $21 million. Neomorphics holds patents on polymeric
scaffolds for tissue culture
1992 Skin2® launched In vitro toxicology assay for testing of cosmetics launched. Interested parties include
Proctor & Gamble Corp. and Colgate Palmolive Corp.
1994 US FDA request and granted Request to FDA for Dermagraft TC. Approval in 1996 for partial thickness burns and
for TransCyte® 1997 for full thickness burns. Product later branded as TransCyte
1994 Investment by St Jude Medical Inc. $5 million investment in ATS to develop heart valves
1994 Intensification of engineered liver R&D Diversification of portfolio and extension of accessible market for technology
1994 Investment by Smith & Nephew Plc. $10 million investment into joint venture with ATS for development of human
cartilage for orthopedic applications
1996 TransCyte project with IDEO Global design consultancy IDEO develops cell culture and packaging concept
for TransCyte
1996 Investment by Smith & Nephew Plc. $10 million payment to ATS with further option of additional $60 million for
marketing of Dermagraft in joint venture
1998 Expert panel recommends but Expert panel recommends Dermagraft for diabetic foot ulcer treatment but FDA
FDA overrules overrules recommendation. FDA requests more data
1998 Grant from NIH Contribution of $800,000 to ATS to develop orthopedic cartilage for jaw
1998 Joint venture with University of Joint venture for in vitro growth of blood vessels
California, San Diego
1999 Marketing deal with Inamed Inc. $20 million deal to develop skin patch to accelerate wound healing after laser peeling.
Additional concept to develop in vitro skin for producing breast implants after a
partial mastectomy
2001 Marketing deal with Biozehm Collaboration to produce and market Nouricel®, an anti-aging skincare product.
Cosmeceuticals Inc. and ATS founds separate businsess, BioNuvia, in 2002 to further exploit anti-aging
SkinMedica Inc. cosmetics market
2001 FDA reject Inamed Inc. application for FDA reject application for collagen syringe for plastic surgeons
collagen syringes
2001 FDA approves Dermagraft FDA approves Dermagraft for treatment of diabetic foot ulcers
2002 Investment by Medtronic Inc. $20 million investment to fund development of products for the heart, spine, brain
and endrocrine system
2002 Organogenesis files for Chapter 11 Organogenesis files for Chapter 11 bankruptcy after failure to renegotiate marketing
agreement with partner, Novartis
2002 ATS files for Chapter 11 ATS files for Chapter 11 bankruptcy after failure to secure additional funding
2002 ATS sells joint venture ATS sells joint venture with Smith & Nephew Plc., in order to secure continued supply
of Dermagraft and TransCyte to patients
2009 ATS closed ATS wound up and books closed
ATS: Advanced Tissue Sciences.

however, subjected the company to unan- In March 1996, ATS filed a request with
ticipated delays due to the decision to file for the FDA for approval to market a skin prod-
approval as a medical device. The FDA’s medi- uct (TransCyte®) for burn patients, which was
cal device division at the time was in disarray granted in October 1996 (partial-thickness
following a controversy about silicone breast burns) and March 1997 (full-thickness burns).
implants (which were banned by the FDA in This allowed the company to launch its first
April 1992), which led to an extensive review of therapeutic product, TransCyte, developed
its approval process and also diverted the atten- as a temporary wound covering equivalent to
tion of FDA product reviewers, causing a huge cadaver skin [13] . ATS estimated the market
backlog of applications to accumulate [10] . This potential for Transcyte to be between $15 and
delay impacted ATS’ cash flow significantly. 65 million [14] .

826 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report
Excited by the approval, ATS made the fol- It is possible that to some degree ATS’ man-
lowing comment in the San Diego Metropolitan agement did not understand the full complexity
Magazine “No one but Mother Nature was able of the approval process and may not have been
to do what we’re doing. We’re starting off in a aware of how to optimize the interaction between
modest market that will grow as we add new ATS and the FDA. Friction created in the interac-
indications. Keep in mind, this was not only the tion between the organizations may have added
first bioengineered human tissue, but this was to the delay in Dermagraft’s approval. Early con-
also the first time the FDA approved a facility of sultation with regulatory bodies such as the FDA
this type. We’re not only redefining tissue repair or the UK’s Medicines and Healthcare products
and transplantation, we’re creating an entirely Regulatory Agency is absolutely critical in the
new industry” [101] . development of a regenerative therapy.
In early 1998, an expert advisory panel recom- Advanced Tissue Sciences had more success
mended the approval of the product for diabetic with the regulatory approval of Dermagraft
foot ulcer treatment in the USA, subject to the in other countries such as Canada (received
conditions that ATS trained physicians and per- approval and started marketing in August 1997;
formed a postmarketing study to confirm effi- Organogenesis’ product also received approval
cacy. ATS’ clinical tests showed that 60% of the at the same time) [15] . Dermagraft was already
patients who received one piece of Dermagraft being sold in countries where such products are
per week for 8 weeks were completely cured not regulated – including the UK, Canada, New
after 12 weeks compared with 32% of patients Zealand and Australia [16] . The lack of FDA
­receiving traditional treatments [15] . approval continued to be a major issue for ATS
In June 1998, however, overriding the expert and its ability to generate significant sales.
panel, the FDA requested additional clinical In 2001, ATS had mixed success with its FDA
trials before it granted marketing rights for applications. A joint development between ATS
the diabetic foot ulcer treatment [16] . The FDA and Inamed Inc., a leading facial and breast
said the existing patient studies were insuf- implants maker, aiming to provide collagen
ficient in determining whether the product syringes to plastic surgeons, outpatient surgery
actually worked. While testing the product in centers and hospitals, was denied FDA approval
a sample of 300 patients, ATS had decided to owing to lack of sufficient data [17] . In October
change some test parameters midstream, when 2001, in an important development for the
the treatment proved ineffective for some of the company, its Dermagraft treatment for diabetic
patients. The FDA disregarded this “retrospec- foot ulcers was finally given the go-ahead by the
tive ana­lysis” and said it wasn’t “viewed widely as FDA. The expectations for future revenue had
a highly valid method for looking at trials” [16] . moderated considerably from the optimistic sce-
The FDA, however, allowed Dermagraft to be narios several years earlier. An ATS spokesperson
used on patients with serious diseases who did projected revenue of $7.5 million from sales of
not have satisfactory alternative treatments. This Dermagraft in 2002 and $12 million in 2003
served the twin purposes of gathering additional [18] ; these forecast revenues were greatly below
data about the product’s effectiveness and recov- those expected by the market.
ering the manufacturing and distribution costs
for the company [14] . Business strategy
The FDA decision delayed the Dermagraft As far as the authors can deduce from the avail-
product launch for 12–24 months, and had able information, ATS followed an integrated
implications for the viability of some of ATS’ business model from its inception. The basis of
partnerships. Following the decision, ATS’ mar- such a model is the building by an organiza-
keting partner for Dermagraft for the diabetic tion of all the value chain functions required to
ulcer application, Smith & Nephew, said that it serve a market such as R&D, sales, marketing,
would have to rethink the involvement of its sales production and logistics. In the case of ATS it
force, which had been geared up for the launch would appear that the company invested heav-
of the product (in anticipation of receiving FDA ily in technical functions, such as R&D and
approval) [14] . Organogenesis, meanwhile, had production, at the expense of market-oriented
received FDA approval in May 1998 for its off- function such as sales and marketing. This cre-
the-shelf engineered skin, Apligraf ®. This was ated a long-term weakness in the company, with
a treatment for venous skin ulcers and not in a strong internal technological focus not being
direct competition with Dermagraft, targeted balanced by a strong externally focused market-
at diabetic foot ulcers (Table 2) . ing function. It is interesting to note that ATS

future science group [Link] 827

Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

embarked on an extensive series of alliances and Hospital and MIT who were doing complemen-
joint ventures during its lifetime (Table 3) . These tary work, involving in vitro tissue growth [5] . It
collaborations appear to be primarily focused on is difficult for the authors to deduce the value
generating commercial outlets for its products, of the Neomorphics patented technology and
and it is therefore possible that the management network to ATS’ product portfolio. However,
strategy to deal with the organization’s marketing it can be assumed that the similarity between
weakness was to focus on technology and effec- the Neomorphics technology, seeded polymeric
tively outsource its sales and marketing functions scaffolds, and Dermagraft and TransCyte would
and competencies to third parties. If this assump- indicate some general connection.
tion is correct, this may well have been a major To bolster revenue, the company launched
factor in the downfall of ATS, since outsourcing a product called Skin2® (skin-squared), which
would have justified the strength and existence could be used to screen new cosmetic phar-
of the company’s technical functions, reduced maceutical, household and chemical products.
the company’s internal marketing unit’s role in Since it reduced the need for animal testing,
decision-making and provided only marginal Skin 2 found ready acceptance among compa-
market input into ATS’ activities. A technology nies such as Procter & Gamble and Colgate
push-based business strategy in an emerging and Palmolive. Although the company was quick
resource-intensive field such as regenerative medi- to the market with this product (1990 launch),
cine is, in the authors’ opinion, a recipe for failure ATS’ CEO acknowledged that the market for
unless correctly managed. skin toxicity testing kits was small until the FDA
Examining ATS’s external activities provides made them eligible for official use in regulatory
further insight into the management of the com- approvals. Some optimistic estimates placed the
pany. For instance, in June 1992, the company size of the market at $25 million [12] . ATS’ sales,
undertook a bold step by acquiring the startup however, were only a faction of this potential,
Neomorphics for $21 million. Neomorphics amounting to $230,000 for the quarter end-
was a spin-out from MIT and held patents on ing July 31, 1992 versus $87K for previous year
the use of polymeric scaffolds in tissue culture. quarter [12] . In an encouraging development for
Although Neomorphics had only $6 million in ATS, Organogenesis, which had a roughly simi-
venture capital, its technology was expected to lar share of the market as ATS, withdrew from
have great potential; it would allow researchers/ this market segment in February 1993 and the
physicians to spawn banks of grown-to-order tis- ATS management aimed to expand its market
sues to reconstruct any part of the body [19] . The by serving Organogensis’ customers. Some ana-
acquisition also gave ATS access to a network of lysts recognized that there were technological
scientists (with whom Neomorphics was work- similarities and synergies in producing the tests
ing), including surgeons, materials scientists and kits and offering a skin replacement product. In
cell biologists at institutions such as Children’s fact, biotechnology magazine Bio Venture View

Table 3. Advanced Tissue Sciences’ products within product pipeline and competitor
products as of the organization’s liquidation in 2003 (tissue engineered only).
Company (product) Technology and market
Advanced Tissue Sciences Allogeneic cryopreserved human fibroblast-derived dermal
(Dermagraft®) substitute based on biosorbable scaffold for venous and
diabetic ulcers
Advanced Tissue Sciences (Transcyte®) Allogeneic cryopreserved human fibroblast-derived dermal
substitute based on nonbiosorbable scaffold for burns
Organogenesis (Apligraft®) Allogeneic cryopreserved human fibroblast-derived dermal
substitute based on biosorbable scaffold
BioSurface Technology (Unknown) Autologous fibroblast sheet on nonbiodegradable scaffold
Telios Pharmaceuticals (Telio-Dem®) Topical application of synthetic extracellar matrix for burns
Genzyme Tissue Repair Corp. (Epicel®) Supported keratinocyte sheet for burns
Ortec International Inc. (OrCelTM ) Allegeneic fibroblast sheet on nonbiodegradable scaffold
for burns
Life Cell Corp. (Alloderm®) Acellular cadaver allograft for breast reconstruction and
hernia repair
Life Sciences Corp. (Integra®) Allogeneic keratinocyte and fibroblast sheet on biogradable
scaffold for burns

828 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report
said: “Mass producing human skin for test kits time. It was fourth in the world in knee-joint
requires the same tissue engineering technology implants, and wanted to strengthen its position
needed to create a replacement skin. So solving in the orthopedics business.
problems for the first is valuable training for the In April 1996, Smith & Nephew also expanded
second” [12] . However, the company was losing the scope of the partnership with ATS by entering
money on Skin2, with some analysts arguing that into agreement with ATS to market Dermagraft
it consumed money that would be better spent for the treatment of diabetic foot ulcers. The
elsewhere [12] . ATS claimed that the increased company agreed to pay ATS $10 million and
knowledge more than compensated for small a further $60 million upon the achievement of
financial loss [12] . certain milestones. The companies would share
In 1994 several significant events for ATS equally in expenses and revenue beginning 1997.
occurred (Table 3) . The company set up a new The joint venture would have the right of first
business division to intensify its efforts towards refusal to develop Dermagraft for indications
developing an artificially grown liver – although such as pressure ulcers but ATS would retain the
it had been working in this direction for several right to develop Dermagraft for burns and for
years, the development had taken a back seat plastic and reconstructive surgery [9] .
to other initiatives such as replacement skin. In In September 1998, the NIH contributed
addition, St Jude Medical, the biggest maker of $800,000 to fund the development of ortho­
mechanical heart valves in the USA, decided pedic cartilage for the jaw [22] . The tissue engi-
to invest $5 million in ATS to work towards neered liver whose research had begun in 1994
the possible development of heart valves from was showing steady progress in September 1998,
human tissue [20] . but commercialization was at least 10 years from
Over the years, scientists at ATS had also fruition, according to published reports [22] .
invested efforts in growing cartilage from cells During the same month, in another attempt
supplied by cadavers, newborn skin and pla- to diversify the potential uses of its key tech-
centas. A key advantage was that, unlike the nology, ATS embarked upon a joint venture
epidermis, cartilage is not rejected by the body. with University of California, San Diego’s
Cultured cartilage could be useful in the recon- Bioengineering Department to grow blood ves-
struction of joints, especially knees, as well as sels aimed at making the removal of arteries
noses and ears [3] . The prevailing practice from a patient’s leg obsolete [7] .
involved simply removing seriously degener- In May 1999, ATS also took aim at the cos-
ated cartilage within a joint such as the knee. metic surgery market, and signed a $20 million
Typically, the remaining cartilage also deterio- deal with Inamed Inc. [23] . The collaboration’s
rated over time and would have to be removed as first product was expected to be a skin patch
well. This would ultimately lead to arthritis due that speeded healing after a ‘laser peel’ to tighten
to friction between the bones at the joints. ATS’ facial skin. Under the terms of the deal, ATS was
natural cartilage would have effectively made set to receive $10 million in upfront payments,
joint replacement redundant [21] . in exchange for the sale of a small equity stake
In May 1994, encouraged by ATS’ break- to Inamed, which would pay for all clinical
through in cartilage development, Smith & development costs for new products. ATS was
Nephew PLC, the UK-based healthcare firm, hoping to use the money raised for financing the
agreed on a joint venture with ATS to develop research of its primary products (the most impor-
human cartilage for orthopedic applications. tant being diabetic foot ulcers). ATS argued that
According to Smith & Nephew’s estimates, ath- the Inamed agreement would not take resources
letes and middle-aged people spent $1 billion a away from the company’s work in diabetic foot
year on this market and would welcome some- ulcers and human cartilage engineering. It was
thing other than prosthetic implants. Smith & believed that, by bringing in revenue in the short
Nephew, which said that “it had considerable term, the agreement would better enable the com-
interest in cell-based therapy for a number of pany to fund its research. The market was worth
years,” agreed to invest $10 million plus mar- $80 million in 2000 [18] . Inamed also hoped to
keting and distribution expertise into the trans- use ATS’ skin material to produce breast implants
Atlantic joint venture, with ATS contributing for cancer patients after a partial mastectomy [23] .
technology amounting to the same value [21] . In October 2001, ATS collaborated with
Smith & Nephew was the worldwide leader of Biozehm Cosmeceuticals Inc. (San Juan
arthroscopy equipment employed in joint opera- Capistrano) and SkinMedica (San Diego) to pro-
tions, and had global sales of $1.4 billion at the duce NouriCel®, an anti-aging skincare product.

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Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

Under the agreement, 10% of the sales value to cooperate with ATS. Third, ATS was viewed
would be given by Biozehm as royalty to ATS positively by industry analysts and observers, pos-
[17] . On March 22, 2002, ATS formed a sepa- sibly due to the managements’ focus on investor
rate business unit, BioNuvia Inc., to develop relationship management. Powerful partners were
and sell anti-aging products. NouriCel had sig- also seen by investors to allow ATS to overcome
nificant advantages over its competitors since it its weaknesses in marketing competence or the
was a byproduct of tissue engineering: it came ability to survive through the long approval cycles
at no extra cost and was ‘natural’ versus the for its products. At the time the Berkeley-based
other antiwrinkle treatments from bovine cells. Medical Technology Stock Letter for instance
David Berish, an analyst at the SCO Financial used the terms “Good People, Good Science” to
Group estimated that NouriCel would gener- describe ATS [9] . Other industry observers had
ate $14 million in royalty payments for ATS in described ATS as a “well-run firm whose techno­
2004 [17] . logy has remained at or near the forefront of the
During the same month, 2 days after ATS field of tissue engineering” [10] .
had received the FDA approval for Dermagraft, Despite success in raising capital from inves-
Minneapolis-based medical devices company tors and corporate partners, ATS’ stock price had
Medtronic Inc. invested $20 million to fund fluctuated heavily over the years (see Figure 1 for
research for ATS’ tissue engineering technology in the movement in the share prices and the key
the heart, spine, brain and endocrine system. This events triggering sharp fluctuations). Generally,
was the last major investment in the company and the peak in share price coincided with announce-
the last of ATS’ extensive range of collaborations. ments of new alliances or securing financing, as
Did ATS’ numerous joint ventures sap man- well as forward-looking statements about the
agement attention and consume precious finan- company’s technology. Annoucements regard-
cial resources, ultimately leading to bankruptcy? ing product delays or unfavorable FDA rulings
As discussed above, it is probable that the lack of resulted in a sharp decline in share price.
a strong internal sales and marketing function in In 1998, following the FDA’s request for addi-
ATS partially lead to the company’s demise due tional trials for Dermagraft and the consequent
to an overemphasis on technology rather than delay in bringing its most significant product to
customers and products. Also it is likely that the the market, ATS was also facing doubts about
number and breadth of cooperations added to having adequate financial resources for sustain-
the issue of a lack of market focus, as the com- ing its R&D program. It planned to finance the
pany received partial market information from new clinical trial using available cash, a $15 mil-
its partners and switched financial, physical and lion payment due from Smith & Nephew, its
human assets constantly between potential prod- untapped borrowing capacity, plus a line of credit.
ucts, markets and partners. From a management In addition, it had an FDA-approved severe burns
perspective, it could be argued that the various treatment on the market, which was used to treat
external collaborations created intangible value 1500 patients annually and provided around
for ATS and its stakeholders through creation of $2 million of revenue annually. However, cash
market hype around the company and its technol- outlays were required to continue the develop-
ogy. However, such value is short-lived and spec- ment of the other products in its pipeline with,
ulative, and so the authors would propose that as mentioned previously, a R&D budget of
in the end the majority of ATS’ collaborations ­approximately $17 million per annum [14] .
weakened the company’s long-term sustainability. Given ATS’ cash burn it is important to
note that the receipt of the FDA approval for
Financial crisis Dermagraft did not significantly effect ATS’ rev-
Throughout its history ATS was able to raise sig- enues or its profits due to a slow market penetra-
nificant amounts of financing for three interre- tion. A possible reason for the slow sales might
lated reasons. First, the technologies it was work- have included an alternative treatment from
ing on were initially perceived by the market to be Johnson and Johnson (Regranex®), which was
exciting and possess huge potential if successfully approved by the FDA in 1997 [14] . Slow sales
commercialized. Second, it managed to attract of key products combined with hefty R&D
high-profile partners, which helped in gaining expenditures meant that ATS continued to lose
credibility and raised its profile, creating intan- money at an alarming rate and was left with only
gible and speculative value. For example Smith & $12 million in cash at the end of June 2002. This
Nephew, which had generally preferred working reserve was sufficient to support ATS’ activities
alone rather than with partners, found it fruitful for only a few months. ATS’ stock declined rapidly

830 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report

16 Dermagraft approved by FDA

14 Clinical trials of
Dermagraft begin
12
Price per share US$

10

8 NIH grant received for

development of jaw cartilage
6 Initial public
offering
4 Skepticism in market as trials
redesigned midway through trial
2 Negative cashflow and
FDA orders retrial
lack of external funding
of Dermagraft
leads to bankruptcy
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Price per share on 31st July

Figure 1. Development of Advanced Tissue Sciences’ share price as of 31st July on

subsequent years. Key milestones in the company’s history are also shown.

and, with a price below $1, was in danger of being deeply disappointed at having to take this step.
de-listed [24] . September 2002 saw one of ATS’ Given the current uncertainty regarding capital
chief rivals, Massachusetts-based Organogenesis, markets, we had limited responsible alternatives
file for Chapter 11 bankruptcy protection after it and difficult choices for ways that could both
failed to renegotiate a ­marketing agreement with sustain current operations for the wound care
its partner, Novartis. products while preserving alternative approaches
In a desperate measure, ATS reorganized the to business opportunities for the company” [25] .
company’s management and tried alternative ways Some analysts blamed the woes of tissue engi-
to generate revenue through its skincare and anti- neering companies such as ATS and Organogenesis
wrinkle products. However, on October 10, 2002, on the inherent difficulties in commercializing the
ATS filed for Chapter 11 bankruptcy protection as technology. A leading academic of the day stated
it could no longer simultaneously sustain the oper- that: “The reality is that bioengineered skin, while
ations for the wound care division while diversify- on the cutting edge of science, struggles in the
ing into other areas. Interestingly, notwithstand- marketplace. The fundamental principles of tissue
ing its financial troubles, the company had a rich engineering aren’t known yet. The way research is
pipeline of new products; it had filed for pan-Euro- going is that people are doing more fundamental
pean approval for Dermagraft and, in the USA, studies, such as trying to understand more of the
Dermagraft was in human trials for periodontal cell type to put on the scaffold to try to grow the
disease and in late-stage trials for venous ulcers [18] . tissue rather than make great promises.” Other
The bankruptcy petition, which was filed with the observers argued that although the treatment itself
US Bankruptcy Court for the Southern District was effective and good, the costs of the treatment
of California, included a request to allow the sale were exorbitant. A director of clinical trials at a
of a joint venture to partner Smith & Nephew for world-leading dermatological institute stated:
$10 million and the assumption of $2 million in “The price of $4000 for an 8-week regimen of
debt. The Smith & Nephew sale was carried out Dermagraft, however, makes it a costlier treatment
to ensure that the patients would have uninter- than standard antiseptics and bandages. Even
rupted access to the joint venture’s Dermagraft grafting a small area (e.g., 5 × 5 inches) can cost
and TransCyte skin replacement products. ATS thousands of dollars. There is still a future of skin
said that it had an agreement for up to $5 million grafting, the question is to get it manufactured at
of debtor-in-possession financing from Smith & an affordable price.”
Nephew in order to finance the company’s opera- The bankruptcy filing was the final nail in the
tions for 60 days while it awaited court approval coffin, with investors bolting and frantic selling
[25] . ATS released the following statement “We are leading to ATS’ shares plummeting 90% from

future science group [Link] 831

Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

77 cents to 8 cents on trading of 60.5 million order to remain viable. When ATS’ actual turn-
shares. The company had lost $309 million since over is employed in the DCF calculation a negative
its founding. Industry analysts blamed regulatory DCF of approximately -$200 million is generated,
setbacks and a delay by the medical community correlating with that generated by taking ATS’
in embracing its products, as well as the absence sales forecast from 2001.
of health insurers covering the products [26] . During the period 2001–2002 the market con-
The inevitable happened a month later as ATS tinued to value the company at $200–300 mil-
decided to move towards liquidating its busi- lion. The above DCF calculations would indi-
ness in November 2002. It simply did not have cate that the market valued ATS optimistically
enough confidence about raising the money to throughout its lifetime. This overestimation of
escape bankruptcy. Dermagraft and Transycte, ATS’ value by the market was probably due to a
its only two FDA-approved products, were to be number of factors, such as positive sticky inves-
sold to Smith & Nephew and the transfer of 115 tor sentiment, with investors assuming or hoping
employees to Smith & Nephew was decided [27] . that total sales would exceed expectations in the
Some shareholders expressed concerns that long term and/or that the technology would find
ATS was abandoning its investment in the com- new and higher-value applications, and investor
pany’s product pipeline too early and without inertia, with investors willing to retain falling
securing a sufficient return on investment. The shares rather than sell at a significant loss.
company, however, insisted that the company’s This information also indicates that investors
wound care business had turned out to be more and their advisors did not have a clear understand-
difficult to develop than first imagined [27] . ATS ing of the risks, and in particular the costs, involved
had simply exhausted its resources before it could in the development of tissue engineered products.
build a viable business. It can be argued that the industry was at the peak
In 2009 ATS was finally wound up. From of a Gartner Hype cycle when ATS was floated,
2003 to 2009 royalty income from Inamed and with expectations for the new tissue engineering
NouriCel provided $5.5 million and $0.3 mil- industry being vastly exaggerated. However, it
lion, respectively. The sale of assets provided an must be remembered that a comparison of the
additional income of $7.5 million over this period. resources, time and complexity of developing
These revenues were significantly below forecast and marketing other healthcare products such as
and would indicate that in all cases the forecasts pharmaceutical actives and medical devices would
generated by ATS, and accepted by the market, have given the investor at least an indication of the
were potentially overestimated [102] . magnitude of investment required in developing a
therapeutic product or technology platform, and
„„ Had ATS’ value been overestimated therefore the risks involved.
by the market? With regard to the ‘real’ value of the market
With hindsight, it can be asked whether the mar- for ATS’ products, Dermagraft and TransCyte,
ket correctly valued ATS. Taking approximate val- it is important to note that according to industry
ues of ATS’ income, forecast and real, general costs rumors their sales for Advanced BioHealing are
published in various public records, and a nominal potentially in the region of $100–200 million
cost of capital of 10%, approximate discounted per annum with a growth rate of approximately
cash flows (DCF) for ATS from foundation to 100% per annum; this correlated well with the
insolvency can be calculated; the single payments authors own estimates of the potential markets
from alliance partners are not included in these for these products (see above). It would appear
calculations due to their insignificance to the long- that Advanced Biohealing paid approximately
term profitability. Using the forecast sales pub- $7 million in 2006 for ATS’ two products, plus
lished by ATS in 1992 and a constant annual total ATS’ physical assets. This sum was probably
spend of $25 million, a positive DCF of approxi- considerable less than the sunk costs incurred by
mately $400 million is generated. The magnitude ATS in the form of R&D costs associated with
of this value correlates well with the value of the Dermagraft and TransCyte and the original cost
company’s equity in 1991/1992, approximately of the La Jolla facilities. The current commercial
$500–900 million. When the downgraded sales success of the products indicates that the imma-
forecast given by ATS in 2001 is employed in the turity of the market rather than competition from
DCF calculation a negative DCF of approximately other tissue engineered products was the main
-$200 million is generated. This would indicate factor in the lack of initial commercial success;
that already in 2001 ATS required major restruc- seven of nine of the products listed in Table 2 are
turing of costs and a significant growth in sales in still on the market.

832 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report
In many respects the new commercial success therapy to market may deliver short-term gains
of Dermagraft and TransCyte is mirrored by the in terms of securing short-term financing, such
current success of Organogenesis’ Apligraft; in as seed or startup funding, but in the long term
the case of Apligraft the current Organogenesis this strategy greatly reduces the sustainability of
management were able to effectively write-off the the business by creating an oversized company
R&D costs and asset investments associated with unable to meet long-term goals due to lack of
Apligraft by taking the publicly listed company available resources and probably, as in the case of
private after it emerged from Chapter 11 bank- ATS, due to the absence of a clear strategic focus.
ruptcy. In doing so Organogenesis and Apligraft A clear and focused strategy based on long-term
were given a fresh start and were predicting investor commitment is essential.
­profitability after just 6 months of operations. The importance of a clear focus is another
extremely important lesson to be learnt from
„„ Was ATS a victim of circumstances or ATS. The dichotomy of developing a resource-
the inexperience of management? intensive therapy with limited resources requires
The above indicates that ATS’ product are and an extremely lean and focused organization. It
were commercially viable. However, it must is also extremely important that all activities,
also be noted that profitability for Advanced including alliance formation, must be aligned
BioHealing was achieved after the costs involved with the business strategy and limited in num-
in their development and manufacture were ber, in order to retain focus on the delivery of
effectively written-off by ATS and its sharehold- the defined goal. The need for a lean and focused
ers, as per Apligraft and Organogenesis. Hence, it organization has significant implications for the
would appear that the demise of ATS was almost selection of a suitable business model. However,
inevitable due to the technology being pursued; this topic is beyond the scope of this case study.
the recent demise of Intercytex provides addi- From an investor’s perspective, the lessons to
tional evidence that the risks versus rewards be gathered from the ATS case are related to the
balance for advanced regenerative therapies is risk involved in investing in the field of regen-
highly weighted towards risk of failure due to erative medicine. This case indicates that both
the immaturity of the technology and the asso- professional and private investors did not fully
ciated development and manufacturing costs. question the validity of ATS’ business strategy
With this in mind it could be argued that ATS’ and financial forecasts; the hype surrounding
management achieved the best results for their tissue engineering at the time of ATS’ founda-
stakeholders under the circumstances. However, tion and initial public offering, and the lack of
the authors would argue that although the risk of prior experience of investment in comparable
failure was always high, this risk could have been companies are probably the major reasons why
minimized by following a more focused and lean investors and their advisors funded the company.
business strategy based on a limited number of With hindsight it is trivial to suggest that
products, increasing market insight by a greater the investors in ATS should have queried the
proportion of resources investing in sales and ATS business case and in particular the forecast
marketing functions and by leveraging alterna- sales. However, forecasting market and sales for
tive funding sources [28] ; this is the strategy cur- a regenerative medicine therapy is extremely dif-
rently being adopted by Advanced BioHealing ficult due to the nascent state of the industry; it
and Organogenesis. would appear from empirical data collected by
the authors from a variety of industry sources
Lessons to be learnt that many regenerative therapies have accessible
A number of important lessons should be learnt markets far smaller than the extremely large
from this case. From the management perspec- generic markets often quoted by companies; it
tive, the most critical lesson is the importance of has been stated by some industry experts that
effective financial planning and management of generic regenerative medicine therapies will not
costs, and in particular R&D costs, including exist due to their complexity and that, unlike
the significant costs associated with clinical trials. small molecule pharmaceuticals, such therapies
Taking an optimistic view of the time and could be restricted to a multitude of niche mar-
resources required to bring a technology to the kets of limited value (i.e., <$100 million) [28] ;
market is a major mistake often made by compa- only time will tell if this thesis is correct. Hence,
nies operating in regenerative medicine. It needs the authors’ suggestion that forecasts should be
to be understood that underestimating or under- examined closely and that a 30% accessibility
stating the time and costs required to take a new and 10 years postlaunch rule be applied.

future science group [Link] 833

Special Report Pangarkar, Pharoah, Nigam, Hutmacher & Champ

In addition to evaluating a company’s finan- to correctly evaluate their true potential; this
cial forecasts, investors should also take a more being also in the interest of all company and
critical view of a company’s business strategy and industry stakeholders.
its implementation. For instance, is the strategy
clear, does it address all necessary factors such as Future perspective
marketing, operations, service and R&D? Is the The ATS case clearly highlights the pitfalls of
strategy focused and lean? The alignment of the the regenerative medicine industry for compa-
organization’s activities, such as alliance forma- nies entering into the industry and investors
tion, with its strategy also requires investigation. evaluating a company’s potential. The lessons
The evaluation of a company’s business strategy to be learnt from this case are as valid today as
with an emerging field such as regenerative med- they were 7 years ago when ATS was liquidated.
icine can be extremely challenging given the lack The resources required to develop and market
of comparable companies. However, the investor a regenerative therapy are substantial, as is the
should draw upon the experiences of cases such time to market, and the risk of failure is high.
as ATS in order to acquire an understanding of However, the potential benefits, both social and
rough strategic guidelines. This case study pro- financial, of regenerative medicine are enormous,
vides the first, although unsuccessful, compara- with predictions that the market for regenerative
tive company study for use in the evaluation or therapies will reach €11.5 billion in 2010 and
valuation of current and future investments. €300 billion in 2020 [103] . Turning this poten-
Finally, it is also extremely important that tial into reality will be challenging and compa-
investors lobby companies for greater transpar- nies need to develop and implement innovative
ency and communication in order to be able ­business strategies in order to succeed.

Executive summary
History
ƒƒ Advanced Tissue Sciences (ATS) was liquidated in 2003 with the effect that in excess of US$300 million of stakeholder financing
was destroyed.
ƒƒ While ATS was successful in the development of breakthrough technologies in the regenerative medicine arena and the building of a
substantial portfolio of patents, the company never made a profit.
Markets
ƒƒ Tissue engineered products had already entered the wound care market with Biosurface Technology’s autologous keratinocyte sheet
being launched in 1989.
ƒƒ Market size and therefore expected value of ATS was dependent on results of clinical trials and so both decreased during the
development process as limitations of technology were determined.
Competitive landscape
ƒƒ ATS’ primary product, Dermagraft®, had several perceived advantages over alternative treatments, including lower risk of rejection,
longer shelf-life and its potential as a cost-effective therapy for diabetic foot ulcers.
US FDA
ƒƒ ATS did not fully understand the full complexity of the approval process and may not have optimized the interaction between ATS and
the US FDA.
ƒƒ Friction created in the interaction of the organizations may have added to the delay in the approval of Dermagraft.
Business strategy
ƒƒ ATS followed an integrated business model.
ƒƒ It would appear that the company invested heavily in technical functions at the expense of market-orierented functions such as sales
and marketing, creating a long-term weakness in the company.
ƒƒ The lack of a strong internal sales and marketing function in ATS partially lead to the company’s demise due to an over emphasis on
technology rather than customers and products.
Financial crisis
ƒƒ The demise of ATS was almost inevitable due to the technology and business strategy being pursued, with the risks versus rewards
balance for advanced regenerative therapies highly weighted towards risk of failure due to the immaturity of the technology
and market.
ƒƒ The probability of failure was high but could have been minimized by focusing on a limited number of products and increasing market
insight through a greater proportion of resources been invested in sales and marketing functions
Lessons to be learnt
ƒƒ From the management perspective the most critical lesson is the importance of effective financial planning and management of costs, in
particular R&D costs, including the significant costs associated with clinical trials.
ƒƒ Strategy should be clear, focused and lean, address all necessary factors such as marketing, operations, collaborations and R&D.

834 Regen. Med. (2010) 5(5) future science group

 Advanced Tissue Sciences Inc.: a case study Special Report
Acknowledgements financial interest in or financial conflict with the subject
The authors would like to thank the peer reviewers for their matter or materials discussed in the manuscript. This
constructive input in the writing of this article. includes employment, consultancies, honoraria, stock
ownership or options, expert testimony, grants or patents
Financial & competing interests disclosure received or ­pending, or royalties.
The authors have no relevant affiliations or financial No writing assistance was utilized in the production of
involvement with any organization or entity with a this manuscript.

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