Shire said today it will sell to Organogenesis assets related to its money-losing living skin substitute Dermagraft for full-thickness diabetic foot ulcers. The deal, which will bring Shire $683 million, is the company’s latest move to shed underperforming operations and focus on key specialties such as rare diseases.

Shire said it will record a loss on disposal and associated impairment charges of about $650 million in the fourth quarter of 2013, which will be excluded from non-GAAP earnings. Shire will receive no money up front from Organogenesis but could get up to $300 million in milestone payments if Organogenesis meets annual net sales targets between now and 2018 that increase from $70 million in 2014 and 2015 to $250 million.

In the nine months ending September 30, 2013, Dermagraft lost $324 million on a U.S. GAAP basis, including the impairment of goodwill ($192 million recorded in Q1 2013).

Shire CEO Flemming Ornskov, M.D., said the company’s ability to engineer a turnaround had been wounded by Medicare’s decision late last year to cut reimbursements for advanced wound-healing products such as Dermagraft by requiring they be combined with lower-priced therapies.

“The business environment has changed, and the prospects for the product have reduced significantly. We believe the best path forward for the patients who benefit from Dermagraft is to transfer it to new ownership in order to provide continued care and availability of their treatment,” Dr. Ornkov said in a statement.

Two other factors also undermined Dermagraft within Shire. One was an ongoing U.S. Department of Justice (DoJ) investigation into sales and marketing practices of the skin substitute, opened after Shire acquired Advanced Biohealing for $750 million, then folded the business—which it renamed Shire Regenerative Medicine—into Shire.

Shire will retain legacy liabilities relating to Dermagraft, including the DoJ investigation, while disposing of key Dermagraft operating assets relating to the development, manufacture, and sale of the product. They include intellectual property including patents, trademarks, and knowhow; regulatory filings and registrations; certain manufacturing plant, equipment, and materials; product inventory; and accounts receivable.

The other factor that doomed Dermagraft within Shire was a restructuring of the company launched in May by Dr. Ornskov. Under the restructuring, dubbed One Shire, the company is narrowing the focus of its therapeutic areas and R&D to specialties such as rare disease and eye care, in addition to the company’s traditional strength in psych drugs such as Vyvanse for ADHD.

“We have been prioritizing investments that are of the greatest strategic, clinical, and commercial value to our company. Dermagraft no longer meets these criteria, and this divestment will allow us to focus our resources on other projects,” Dr. Ornskov said.

Shire signaled a shift in its wound-care strategy as of November 20, when it terminated a Phase III study of safety and efficacy of its dermal substitute therapy ABH001 for the rare skin disorder epidermolysis bullosa in patients with wounds that are not healing, according to Shire will instead develop the preclinical lead product candidate of Lotus Tissue Repair, which it acquired early last year. The drug is an intravenous protein replacement therapy consisting of a recombinant form of human collagen Type VII (rC7) for a severe form of the disease, dystrophic epidermolysis bullosa (DEB).

The shift also reflects how, as part of One Shire, the company has cut by about half its preclinical pipeline consisting of programs outside of developing rare-disease drugs.

In an interview earlier this week during the JP Morgan 32nd Annual Healthcare Conference in San Francisco, Philip J. Vickers, Ph.D., head of global research and development, told GEN the move does not mean Shire will ultimately do less preclinical work: “I would say it’s a matter of having a real sharp focus on what we do in preclinical.”

“We’re going to have fully integrated R&D, from idea right away to post-approval in the rare disease space,” Dr. Vickers said. “In other therapeutic areas, we’ll certainly [provide] support… We are looking for assets to fill the pipeline, but they will have a particular focus on the later stage, maybe post-clinical proof-of-concept, where we’ll also be interested in rare disease.”

The shift to the Lotus program also reflects Shire’s desire to grow in another key specialty, eye disease. The company last month reported mixed results from its OPUS-2 Phase III trial of itsdry eye syndrome treatment lifitegrast, missing one endpoint by failing to show inferior corneal fluorescein staining after 12 weeks compared with placebo—but meeting a second endpoint by demonstrating significant change in patient-reported dry eye score over the same period. The earlier OPUS-1 trial met the staining endpoint. Shire won’t decide how to proceed with development until it meets with the FDA—something Dr. Vickers said was expected this quarter.

Shire acquired global rights to lifitegrast along with its original developer SARcode Bioscience in March 2013 in one of Dr. Ornskov’s first deals for $160 million up front, plus undisclosed milestone payments. Shire also bolstered both its eye disease and rare disease pipelines, and expanded them into neonatology in March when it bought Premacure, the developer of a protein replacement therapy now in Phase II development for prevention of retinopathy of prematurity (ROP).

There as with lifitegrast, Dr. Vickers said, Shire sees opportunities for developing protein replacement therapies as successfully as it has three enzyme replacement therapies developed internally: “The core technology is the same. We’re building on our core strengths, but going into some new spaces as well.”

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