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Histogen Wins Legal Ruling in Saga of Entrepreneurial Perseverance

Xconomy San Diego — 

[Corrected 8/27/13, 5:50 pm. See below.] Back in 2011, when a federal judge in San Diego issued a summary judgment for San Diego-based Histogen in a patent dispute, CEO Gail Naughton proclaimed, “We are happy now to have this matter officially behind us.”

That didn’t exactly turn out to be the case. SkinMedica, the Carlsbad, CA, company that sued Histogen for patent infringement almost three years ago, appealed the case to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C.

After hearing arguments in May, a three-judge appellate court panel upheld the lower-court ruling in a 2-1 decision issued Friday. In a statement issued by Histogen today, Naughton says, “We are excited to have confirmation… that Histogen’s technology is unique, and outside of SkinMedica’s patent rights.”

The litigation came close to extinguishing Histogen. The regenerative medicine startup, founded in 2007, was on the verge of closing on $2.4 million in funding when SkinMedica filed the patent suit in early 2009. The investors withdrew their financial support, and Histogen was forced to lay off most of its employees to conserve cash. Naughton kept the company alive on her own cash and credit.

Gail Naughton

Gail Naughton

Now Histogen is almost in the same position it was four years ago. Naughton told Brad Fikes of U-T San Diego that Histogen is trying to raise another investment round—she hopes to raise as much as $30 million—and the timing of the appellate ruling is fortuitous.

For Naughton, the saga could probably serve as a business school case study in entrepreneurial perseverance.

Her quest to develop technology to produce synthetic patches of living skin tissue for healing sores, burns, and wounds began in the 1980s as the co-founder and CEO of San Diego’s Advanced Tissue Sciences (ATS). The company became one of San Diego’s prominent public companies and was a flag-bearer for the local biotech industry. But Advanced Tissue Sciences encountered regulatory difficulties in winning FDA approval for its synthetic “Dermagraft” skin patches, and ATS racked up more than $300 million in debt. The company ended in bankruptcy liquidation in late 2002.

During the court-supervised liquidation, SkinMedica acquired proprietary technology for producing “conditioned cell media” that Naughton had helped to develop and patent at Advanced Tissue Sciences. “Conditioned” cell media is an incubating cell culture—with living skin cells, nutrients, and a variety of cellular metabolites and proteins that cells secrete, including biologically active growth factors, inflammatory mediators and other extracellular proteins. It became a key ingredient in SkinMedica’s line of skin care products.

SkinMedica vs Histogen 3x2In another deal approved by the bankruptcy court, ATS’s global rights to its Dermagraft skin tissue substitute were acquired by Smith & Nephew, which resold the Dermagraft technology in 2006 to Advanced BioHealing, a venture-backed regenerative medicine company that developed a successful business around the technology. The Irish drug giant Shire acquired Advanced BioHealing for $750 million in 2011, and has been developing a new campus in San Diego for its operations.

Meanwhile, Naughton founded Histogen in 2007 in what amounted to an attempt to succeed where ATS had failed.

When she talked with me in 2008 about the origins of Histogen, she said she had given many speeches about the hurdles that Advanced Tissue Sciences was unable to overcome—and what she would have done differently. “After talking about what I would do differently a number of times,” Naughton says, “I decided to go out and actually do it.”

A key element in Naughton’s new strategy was the creation of Histogen Aesthetics, a subsidiary that would develop skin and hair restoration products based on the expertise Naughton and her team had acquired in developing conditioned cell media at ATS. Histogen Aesthetics would generate immediate revenue to support the long-term development of living tissue skin grafts and other regenerative medicine products.

So how is the technology underlying Histogen Aesthetics’ fundamentally different from the technology that was developed at ATS, and conveyed to SkinMedica?

Histogen skin cells

Cultured skin cells growing on bead

[Corrected to show that SkinMedica cultures cells in three dimensions] Lawyers for Histogen successfully argued that the two key patents SkinMedica had acquired in the ATS bankruptcy were limited in nature. They said the SkinMedica patents only covered the technology needed to grow skin cells in three dimensions, which excluded the growth of cells on beads in a single layer. The appellate court agreed, saying the way that Naughton and her colleagues described the technology in the ATS patent filings “plainly and repeatedly distinguished” the use of beads to culture skin cells in a single layer from methods that could be used to culture skin cells in three-dimensions.

Naughton’s team at Histogen grows its cells as a single, two-dimensional layer, on beads in suspension cultures under low oxygen conditions. The appellate court ruling upheld the trial court’s interpretation that SkinMedica’s approach to culturing three-dimensional skin cells was fundamentally distinct from the two-dimensional approach taken by Histogen. (In a dissent from the majority opinion, Chief Judge Randall Ray Rader wrote that he would reverse the district court’s grant of summary judgment, which would have returned the dispute to San Diego for trial.)

What’s next?

SkinMedica’s skin care business is now part of Irvine, CA-based Allergan, which paid $375 million to acquire the business last year. The company has declined to comment on its plans, but it could try another appeal.