Mallinckrodt, a global specialty pharmaceutical company, has entered into a merger agreement with Stratatech, a privately held regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft regenerative skin tissue and a technology platform for genetically enhanced skin tissues. Financial terms of the transaction were not disclosed.

If approved, StrataGraft could be the first biological "off-the-shelf" skin substitute product for treatment of severe burns—Stratatech's proprietary tissue engineering technology produces living tissues designed to mimic human skin and promote tissue regeneration. The current standard of care for second- and third-degree burns requires autograft, the painful harvesting of a patient's tissue from an uninjured area to graft into another burned area. Severe burns can frequently cause extensive scarring, create multiple channels for infection risk and may result in multiple surgeries, all of which lead to hospitalizations of highly variable, unspecified length. 

The technology platform provides potential for new products through genetically enhanced tissues, applied topically, that produce elevated levels of natural wound healing and antimicrobial factors. Phase I development is underway in diabetic foot and venous leg ulcers, with other potential applications under consideration.

"The addition of this highly durable, cutting-edge development portfolio and technology platform to our hospital growth business is an excellent example of Mallinckrodt's Acquire to Invest strategy," said Mark Trudeau, chief executive officer and president of Mallinckrodt. "We believe Stratatech's technology has the potential to transform the standard of treatment for wound care. Additionally, the acquisition will bring world-class Stratatech researchers with deep expertise in cell-based, differentiated regenerative medicine to Mallinckrodt's research team."

"Stratatech brings dedicated scientific and development know-how to Mallinckrodt, along with a broad, innovative progenitor keratinocyte technology platform," said Lynn Allen-Hoffmann, chief executive officer of Stratatech. "In our next phase of development, the unique cell line used to produce living tissue in StrataGraft can also be genetically modified to potentially increase production of a variety of factors to support and promote wound healing, such as antimicrobial and vascular endothelial growth factors. This could offer utility in a number of skin injury settings beyond burns."

StrataGraft is an investigational product in phase III development for treatment of severe, deep partial thickness burns, with a FDA approval decision anticipated by 2020. Phase II development of StrataGraft is underway for treatment of severe, full thickness burns. In 2012, the FDA granted StrataGraft orphan product status, and the product is being developed as a biologic to be filed under a BLA that would confer regulatory protection until 2032.

Stratatech is currently executing two contracts which support advanced development including manufacturing, clinical studies and eventual product procurement by the U.S. Department of Health and Human Services, Office of Assistant Secretary for Preparedness and Response, and the Biomedical Advanced Research and Development Authority (BARDA). Under the terms and conditions of the contract with BARDA, Mallinckrodt is required to continue seamless execution of all contractual obligations. Stratatech also has independent contracts with the U.S. Department of Defense covering other aspects of product development.

In the U.S., approximately 10,000 patients annually are hospitalized for treatment of severe burns, and the U.S. market for skin graft products used in this application is estimated at approximately $300 million. Additional opportunities exist internationally, and the acquisition includes worldwide product rights.

The strength of Mallinckrodt's overall business is expected to offset slight dilution to the company's near- and longer-term adjusted diluted earnings per share. Guidance on the impact of the acquisition to the company's GAAP5 diluted earnings per share has not been provided due to the inherent difficulty of forecasting the timing or amount of items that would be included in calculating such impact. Subject to customary terms and conditions, the company anticipates the transaction will close in the second half of calendar 2016.

If approved, Mallinckrodt expects the products to be commercialized by the company's existing hospital-focused organization, enhanced by Mallinckrodt's strong relationships with hospital networks, insurance companies and group purchasing organizations to more quickly expand patient access to this unique treatment option.