Cygnus' Comeback in Non-Invasive Testing

Cygnus is one of 1999's few great turnaround stories. A year ago, it was on the verge of collapse, but now it is about to get FDA approval of the first non-invasive glucose monitor for diabetes. Next, Cygnus needs to find a corporate partner without giving up too much, and to determine the true market potential of its device, the GlucoWatch Biographer, which got approved as an adjunct to, not a replacement for, traditional blood-glucose testing.

Cygnus' volatile history isn't all that unusual for successful device start-ups. So why did it survive when others failed?

By Wendy Diller

• Cygnus is one of 1999's few great turnaround stories. A year ago, it was on the verge of collapse, but now it is about to get FDA approval of the first non-invasive glucose monitor for diabetes.

• Key internal decisions were to jettison the company's flagship drug delivery business in order to focus on the GlucoWatch, shift senior management at a crucial point in the company's evolution, and pursue a financial restructuring that gave the company much needed time to pursue an FDA approval.

• Challenges now are getting a fair deal from a corporate partner and developing a second generation product that addresses limitations of the first generation device.

• The FDA approval of MiniMed's glucose monitoring device and the likely approval of the GlucoWatchbiographer is a morale booster for the frustrating field of minimally and non-invasive glucose monitoring. Although first to market, these products are limited and leave room for competition.

The December 6 meeting of the FDA Clinical Chemistry and Clinical Toxicology Devices Panel had a buoyant atmosphere. Several parents of children with diabetes spoke passionately about the benefits of a new glucose-monitoring device made by Cygnus Inc. , potentially the first minimally invasive diagnostic tool to track glucose trends in diabetics greater than 18 years old. For the next hour or so, Cygnus executives zipped through their presentations. Panel members spent some time asking questions. But they had little to debate and, at the end of the long day, they voted unanimously in favor of recommending approval. "This is quite a device, a huge undertaking," gushed FDA panel member Stephen Clement, MD, of Georgetown University Medical Center.

The panel's enthusiasm, as well as the FDA approval a few months earlier of a MiniMed Inc. device for continuous glucose monitoring, has boosted spirits in a promising field that has been tainted by technology glitches. To be sure, the panel suggested that the Cygnus device, the GlucoWatch Biographer, works as an adjunct to, not a substitute for, standard blood glucose monitors; thus, the panel recommended approval for tracking trends in glucose levels, not for discrete measurements needed to make decisions about insulin intake. Moreover, the company would have to undertake an extensive education program for physicians and patients, do post-marketing evaluation to assess hypoglycemic and hyperglycemic patients, and make certain label changes. The device still needs to get formal FDA approval.

But the meeting and the subsequent near-doubling of the stock price represented a tremendous triumph for Cygnus. Only a little more than a year ago, the company was on the verge of collapse, burdened by a huge debt and the lingering effects of losing its key marketing partner. The GlucoWatchBiographer had flaws, which no one was certain could be fixed.

That the company survived at all is testament to management's focus and flexibility, external and internal teamwork, and investors' belief in the technology and the potential of the market. The story is as much about the ability to recover from mistakes as about the triumph of prescience. Cygnus' decision to de-emphasize its position in its original drug delivery business in order to focus on development of a non-invasive glucose monitor was a turning point—and as much of a proactive strategy as one taken with its back against a wall. The drug delivery partnerships that formed the core of the company's operations proved problematic—one faltered at a critical juncture, another ended in a judgment that forced the company to make huge payments at a time when it could ill afford to do so. And financial arrangements made with lenders to keep the company going almost put it out of business. But Cygnus had several advantages, including, after some upheaval, the installation of a well-regarded management team, visible progress with the technology, though at a slower rate than originally planned, and continued loyalty of long-term investors, although at times their faith was sorely tested. Had any one of those three elements fallen through, the company probably would have collapsed.

Many small device and diagnostics companies undergo a dramatic metamorphosis before finding their place in the world—Cygnus' rollercoaster ride, although perhaps extreme, is hardly unique. Successful companies like Cytyc Corp. (See "Cytyc's Break Out Year," p. 114), NeoPath Inc. (now TriPath Imaging Inc. ), and Ventana Medical Systems Inc. also came close to shutting down before achieving their goals—others go through many contusions before investors give up. The question for biotech/ health care investors is when it makes sense to stay in—or to cut losses and get out. In Cygnus' case, the problems stemmed from bad financial deals. The investors remained enthusiastic about the technology—and perhaps they had too much to lose to let the initiative die.

Gettting Out

Gary Cleary, PhD, founded Cygnus in 1985 in the garage of his home to commercialize ideas for novel drug delivery technologies that his previous employers, Genentech Inc. and Alza Corp. , had no use for. In the late 1980s and early 1990s, interest in drug delivery was in its heyday, and the fledgling company quickly achieved moderate success in signing up clients. In 1992, Pharmacia AB (now Pharmacia & Upjohn Inc. ) got FDA approval for Nicotrol, a smoking cessation patch, which Cygnus developed. Pharmacia kept worldwide marketing rights, sublicensing North America to Johnson & Johnson [See Deal].

But patch-based drug delivery has not lived up to its promise, and the field's limitations, combined with specific missteps by the company, put it in a hole from which it almost couldn't recover. Pharmaceutical companies became disenchanted with the economics of drug delivery efforts, which were producing new niche products but no home runs. Sales of the nicotine patch and the hormone replacement patches were disappointing. As their clients lost interest the small drug delivery companies suffered. Most of the transdermal patch specialists, such as TheraTech Inc. (bought by Watson Pharmaceuticals Inc. ) and Sano Corp. (purchased by Elan Corp. PLC ) have not remained independent, observes Craig Carlson, Cygnus' SVP, finance and CFO [See Deal]. "The big pharmaceutical companies stopped selling the products because the markets are too small. Then, demand continued to drop because no one was supporting the products, further depleting small companies' cut."

In retrospect, Cygnus might have been better off partnering with mid-sized or specialty pharmaceutical companies, who could have devoted more attention to building demand for smaller products, says John Hodgman, who joined the company in 1994 to head the fledgling diagnostics business and who is now chairman, CEO and president. AHP spent $50-70 million on clinical trials of a female hormone replacement patch. But it ultimately withdrew from that and another hormonal patch project with Cygnus, although the former had FDA approval. The products were late to market and therefore weren't likely to generate sufficient revenues, says Carlson. Similarly, an estrodial development program for Sanofi took much longer than it ought to have, partly due to issues with the client, says Cleary.

"Historically, none of the drug delivery products have performed well," says John Hodgman. "We were late with the smoking cessation patch and if you are not first or second to market, you don't get meaningful market share. Then, we were first with an over-the counter patch, but we were outflanked by our competitors' marketing partner," SmithKline Beecham .

A Bright Idea Dawning

The company's interest in glucose monitoring grew out of its work in drug delivery. Its scientists had run into a dead-end with one technology, iontophoresis, the application of continual low-level electrical currents to the skin, which it was using to push drugs into the skin. The method worked but was prohibitively expensive to use for drug delivery, with the exception of pain medication. Efforts to seize that opportunity were abandoned, however, after Alza received a patent covering the use of iontophoresis for delivery of fentanyl, the most appropriate pain medication for the technology.

In 1988, Cygnus scientists began experimenting with reversing iontophoresis to pull molecules out of the skin. Their efforts languished until the early 1990s, when PaineWebber R&D Partners II LP put about $5 million into the company; more than a quarter went to support an effort to apply reverse iontophoresis to glucose monitoring[See Deal]. The project gained further momentum with the arrival on staff of a skin physiologist, Russell Potts, PhD, recalls Gary Cleary. But it still remained a small effort within the much larger drug delivery system.

The turning point came three years ago, recalls Craig Carlson, who arrived at the company in 1993 to head corporate communications and strategy. "When I came, we were a drug delivery company with a splinter group doing this. Then we realized that we were making progress with it and saw the business potential. We changed focus." Carlson draws an analogy: You are at a lake, with one foot on the dock and one foot in the boat and the boat slides away from the dock. You have to choose either the dock or the boat. Even founder Gary Cleary, who had devoted his career to drug delivery, strongly supported the transition—although he left the company this past summer because, he says, his interests didn't fit with the new Cygnus. In sum, the company's strategy had shifted from betting on lots of little successes to a single high-risk, potentially high reward product.

The field excited the investors because of the critical unmet need and staggering size of the market numbers. Diabetes is a chronic, life-threatening disease that affects the body's production of and response to insulin, a hormone produced by the pancreas that is critical to metabolism of glucose. Some 40 million people worldwide are diabetics, of whom 10 million diagnosed live in the US and the figure is expected to continue to accelerate due to the aging population, broader definitions of diabetes, and new diagnostic technologies. Diabetics must measure blood glucose levels to adjust their diet and insulin intake in order to prevent short- and long-term complications—the recommended rate of testing for typical Type I diabetics is four to six fingersticks a day—and recent studies show that even less severely ill patients can benefit from more frequent monitoring of their glucose levels.

Traditional glucose testing is one of the fastest growing and most profitable segments of diagnostics, with sales rising 15-17% a year. The standard technique is to stick fingers with a lancet, draw blood and place a drop of blood on a glucose strip, which is measured by a portable meter. Although the benefits of frequent testing are well-documented scientifically, most diabetics don't measure their glucose levels regularly—19% of patients accounted for 52% of tests used, one study showed. The reasons vary, but experts believe that the inconvenience and pain of repetitive fingersticks play significant roles in non-compliance.

As a result of this data, a flood of money poured into efforts to find less painful, more convenient ways to measure glucose levels (See"Just Around the Corner: Pursuing the Elusive Diabetes Market", START-UP, Dec. 1998 [A#1998900184). Companies like Biocontrol Technology Inc. , SpectRx Inc. , Futrex Inc. , Integ Inc. , MiniMed, Animas Corp. , and Technical Chemicals & Products Inc. have spent the better part of the decade working on new monitoring devices. But several false starts—notably Biocontrol and Futrex—and long delays in product development at other companies (with the exception of MiniMed)—meant Cygnus could take the lead. Even as others struggled and outsiders remained skeptical, Cygnus was making gradual and steady progress with its technology, says Neil Ackerman, PhD, SVP, R&D (See "MiniMed: High-Energy Model for Growth" INVIVO, November 1998 [A#1998800231).

Despite the enthusiasm, the transition from drug delivery to diagnostics has not been easy. Management, under the direction of then CEO Gregory Lawless, PhD, soon realized that drug delivery and diagnostics required very different skills and began hiring people to work specifically on the latter. For some time, the two sets of technologists worked side-by-side. But as drug delivery people saw their resources dwindling, they defected en masseto other jobs in the highly competitive labor market in the Bay Area, putting even more pressure on Cygnus to make the leap into glucose monitoring quickly, says Neil Ackerman. Some of the new hires came from EI DuPont de Nemours & Co. Inc. , which was downsizing parts of its business; DuPont, in fact, helped develop the biosensor, which is the key component of the GlucoWatch Biographer. DuPont became Cygnus' supplier of biosensor materials, which were combined with Cygnus' patented technology for measuring low molecular weight molecules that cross the skin, and placed in the GlucoWatch.

Moreover, the technology, though promising, was by no means certain to work—and outsiders couldn't distinguish glitches from major obstacles. The product was in development for seven years, four intensively, says Ackerman, as scientists struggled to perfect the extraction and sensing processes, the latter of which was particularly problematic. Most of the minimal and non-invasive devices obtain glucose from interstitial fluid, the relatively clear fluid that surrounds tissues and is easier than blood to draw out because it is closer to the surface of the skin. Glucose levels in interstitial fluid are about 10% lower than levels in the blood and don't rise and fall in exactly the same way as blood glucose, but they provide adequate trending information. Early tests demonstrated the feasibility of using Cygnus' reverse iontophoresis to collect small amounts of interstitial fluid through the skin. The glucose obtained in this manner was initially satisfactorily measured with a high performance liquid chromographer, a large laboratory instrument, but the company needed to find a way to make the monitoring device less cumbersome and began to look at biosensors.

Getting the sensor to work properly took three-and-a-half years. The company made promises to Wall Street and investors, then missed milestones. While preliminary data, for example, showed that the device could extract glucose painlessly, it wasn't consistent. Its performance varied, depending on the way patients put it on—those who applied more pressure to the biosensor got a better performance. So, the company standardized instructions for putting on the system and designed an automatic presser, which is inserted with each starter kit.

Investors' patience was rewarded in 1996, when the company entered into an collaboration with Becton Dickinson & Co. [See Deal]). BD, the largest supplier of insulin syringes, was eager to expand its diabetes franchise without plunging into the already crowded field of standard blood glucose monitors. The partnership put Cygnus at the head of the pack of companies working on similar devices, and its stock shot up. The relationship was expanded a year later to include the funding of a second generation monitor.

Financial Near-Death

Still, the BD deal could by no means compensate for Cygnus' dealmaking debacle with Sanofi. The French pharmaceutical company was one of the company's early corporate partners, interested in pursuing development of a female hormone replacement patch. But when Cygnus began working with AHP on another hormone patch, Sanofi protested, claiming that its agreement was exclusive for the field. In 1997, an arbitration panel in Paris sided with Sanofi, ordering Cygnus to pay its former partner $40 million—$14 million upfront, $6 million by the end of 2001, and $17 million in future royalties between 2001 and 2005, whether or not any patches get commercialized. "That was a massive amount of money and began problems with capital structure," recalls John Hodgman, then head of the company's diagnostics' business. "It hastened our decision to sell the drug delivery business and get on with the GlucoWatch."

Lawless and top management scrambled to raise money to pay the debt. But because the company kept missing deadlines, Wall Street had little confidence in management's promises. Cygnus couldn't complete a public $75 million convertible debt offering; instead, in February 1998, the company raised $13.8 million by selling slightly discounted stock to key long-term shareholders, Lone Pine Capital LLC and Deerfield Capital LP [See Deal].

Normal convertible debt has a floor below which investors can't convert their holdings. On the other hand, flexible floating convertible debt, often called "toxic converts," can be changed to equity at whatever price the stock reaches following a specified deadline, which in this case was February 1, 1999. The instrument works if the stock continues to go up; investors convert their debt into equity at a high price. Because the toxic convert has no floor, debtholders have an incentive to keep the stock price low until the trade-in deadline—there is, in fact, a built-in incentive to short the stock. That way, debtholders can buy the stock cheap, at the conversion deadline. Thus, while equity holders and companies typically share common goals, toxic converts divide the interests of the company and investors, observes Craig Carlson; the best-case scenario for holders of toxic converts is the worst case for equity shareholders—massive dilution as the debtholders convert to new equity at rock-bottom prices. And that's what happened to Cygnus. The company's stock was about $17 per share when the deal closed. A month later, the BD agreement terminated and the stock dropped 50%.

Cygnus' equity holders were furious. They hadn't known about the convertible debt deal but they immediately understood its implications, recalls Lisa Burns, who heads a public and investor relations firm, Burns McClellan Inc. They had bought shares in the mid-teens and the price had fallen to the low single digits with little likelihood of a rebound as long as the convertible debt hovered over the company. In July, Burns says, they asked for her help in talking to the company about the status of the GlycoWatchand assessing Wall Street's perception of the company.

The core investors were at a crossroads. Bill Slattery of Amerindo Investment Advisors Inc., Sarah Gordon of Lone Pine, and Ron Nordmann of Deerfield believed in the technology, despite glitches in development. "The financial problems had nothing to do with the quality of the technology. The technology appeared to us to be materially superior," says Ron Nordmann. If the investors had dropped out, the stock price would have dipped even further. And if the toxic convert went through, Diaz & Altschul clients would have owned more than 10 million shares, or nearly half of the company, a state investors didn't believed was acceptable.

Still, the board of directors, whose chairman was Gary Cleary and who included members Greg Lawless, Walter Wriston, the former chairman of Citibank, and Andre Marion, former chairman of Applied Biosystems Inc., appeared to be concerned but still unrealistic about the impact of the convertible debt on the stock, says Burns. They were so confident of the product that they believed the stock, which was now trading at $2 a share, would recover. Moreover, they felt that despite the consequences, the toxic convert was the only alternative for the struggling company.

The Scramble to Rebuild

Because of the precarious stock price, however, the board had begun delving more deeply into the company's situation. At that point, it initiated a management change that led to the resignation of Lawless and put Hodgman in charge, Hodgman says. Hodgman immediately sought to rebuild credibility on Wall Street, resolve the financial mess, and improve communications with the disgruntled shareholders and demoralized employees.

The Monday following the management shakeup, he met all day with employees, urging them to speak freely, which, he says, they previously hadn't been comfortable doing. The open discussion helped speed up development of the GlucoWatch, because management hadn't known the extent of the problems with inconsistency and thus hadn't dealt with it, says Hodgman. Most of the technological issues were resolved that fall, and the product was set to enter clinical trials in early 1999. "The cultural change provided a sense of liberation on the part of employees," recalls Craig Carlson. "They could address problem areas that they didn't dare to before." Adds Deerfield's Nordmann, "The development process has taken longer than we thought it would, but the new management team that came in August 1998 has brought a sense of stability and careful progress that gives us confidence it will complete the process without a hitch."

The next step was trickier. The new management wanted to renegotiate the debt with its lenders but had no way to force them to the table. In fall 1998, the board, with a more realistic picture of the timing of the GlucoWatch Biographerdevelopment, hired Misha Petkevich, PhD., a former BancBoston Robertson Stephens & Co. investment banker who had recently started his own boutique investment bank, to help facilitate a restructuring. Success was not guaranteed—the long-term investors were still livid, and the Diaz & Altschul group had no reason to relinquish their position in the company and the company had no leverage to convince them to do so.

Still, it had several arguments in its favor. First the long-standing relationships among the major parties—the biotech world, at a certain level, is small, and many of the players in this case knew each other. Second, the debtholders had nothing to gain if the company failed—they would get paid, but not nearly as much as if the company succeeded, and they would be left cleaning up the mess.

Cygnus argued for breathing room to continue development of the product. It was certain that the product's technical flaws could be fixed in the near-term and that the product soon would be ready for clinical trials. Misha Petkevich worked to find a middle ground that would give Diaz & Altschul investors a return but would leave the company intact. "Diaz & Altschul weren't bad guys," says Burns. "They had done this [toxic converts] before and it worked. They had no reason to budge but they did."

Marathon negotiating sessions led to a settlement: Cygnus agreed to repay $18.5 million to debtholders in October 1998, reducing the principal balance to $24.5 million. The debtholders agreed to a delay in the convertibility of the majority of notes to June 30, 1999 and modification of conversion prices of the notes (they converted $6 million of debt into equity at $3.54 a share at the signing of the restructuring agreement). Another $6 million in notes got converted out at $6.88 on February 1; another $12.5 million was not convertible until July 1, 1999. Most important, the company got the right to redeem the notes before they were converted—if it could come up with $12.5 million in cash. "This company could have gone under and the technology would have been lost. The restructuring was the key to its survival," says Hodgman. "The resolution wasn't ideal, but we were fortunate to get what we did."

The company's problems continued, during and even after the restructuring. With the stock at rock bottom throughout the fall, NASDAQ warned that it might be delisted. NASDAQ drops companies if the bid on their stock falls below $5 for 30 days, giving them 90 days to fix the problem. Cygnus' stock had been below $5 a share for months. To get its price up quickly, in December, the company got authorization from its shareholders to do a reverse stock split, in essence merging shares to artificially double the price. Because the technique is only a short-term fix—it doesn't address underlying problems and narrows the float, thereby discouraging new investors, management waited as long as possible to undertake the transaction, says Carlson. Then, just before the end of the 90-day period, the stock topped $5, buoyed by the successful completion of the restructuring and by the filing of a PMA for the product in January. This eliminated the need for the reverse split.

The next step was to raise money again on better terms. In June 1999, the company sold a much more favorable convertible debt package to a different investor, Palladin Group LP giving it cash to pay off the Diaz & Altschul group and fund operations. This instrument, with a fixed convertible rate of $12.70, was a premium over the then market price; moreover, it would be easier to work with one debtholder than a group of them. And the company established an equity line of credit, giving it access to $30 million in capital for the next two years—of which it has already tapped $9.5 million. Still, the bad days are not far gone—the key shareholders were so wary of the Palladin deal that company management set up a preliminary meeting with all parties to talk about plans and assuage fears.

The company further improved its financial position this fall with the sale of its drug delivery subsidiary to the Ortho-McNeil Pharmaceutical Corp.business unit of J&J for $20 million in cash upfront and up to $55 million, contingent upon meeting certain regulatory and commercialization milestones [See Deal]. The two companies were already partnering on development of Edra, the seven-day transdermal contraceptive patch, which was the only product in the portfolio with significant potential, says Hodgman. The patch has just completed Phase III clinical trials and is at least two to three years ahead of competition, he adds. J&J also got most of the discontinued drug delivery products and while these didn't drive the sale, the new owner is likely to get more mileage from them because it has infrastructure in place and vertical integration. For Cygnus, the J&J deal not only brought non-dilutive cash but also helped the company cut its burn rate.

This will help as it moves to the next challenge—getting through the FDA approval process and looking for a marketing partner for the GlucoWatch Biographer. Because it is sitting on nearly $40 million, the company won't need as much upfront cash from its partner; therefore, it hopes to get a much better payback further down the road.

First Generation

With finances under control, the company focused on preparing for the upcoming FDA panel meeting. It completed ten clinical studies, which it submitted as part of the PMA filing, representing an aggregate of 5,000 hours of use on 603 patients. The studies found the GlucoWatchto be as accurate as standard blood tests, which themselves are sometimes erroneous. Moreover, they demonstrated that the device is potentially more sensitive than ambulatory fingersticks because it captures a significant amount of datapoints (every 20 minutes), which allows the assessment of trends and patterns fingersticks can't capture.

The FDA panel saw the device as useful for tracking trends and patterns of glucose, but not as a replacement for standard blood glucose monitoring, particularly for insulin dose determination. It warned that 25% of the time, GlucoWatchreadings can differ from blood tests by as much as 30%—meaning if the GlucoWatch reads 150, the glucose level really might be anywhere from 135 to 165. Moreover, panel members raised several concerns: For example, since the device is known to occasionally skip readings and shut-off unexpectedly, they worried that the low glucose alert would not be reliable enough to warn of hypoglycemic events, especially while sleeping. They wanted more information on the use of the device in children. They were also concerned that other drugs a patient might take could affect the interstitial fluid readings. Nor did they know what effects mild to moderate skin irritation, which occurs in many patients, might have on the glucose measurement. They debated whether this needs to be addressed through further study.

Still, the trending information is extremely valuable, and the safety alarm features are useful for alerting sleeping diabetics that their glucose levels are too low, says Arlan Rosenbloom, MD, a member of the FDA panel and a pediatrician at the University of Florida in Gainesville. Another panel member, Nader Rifai, PhD, an associate professor of pathology at Harvard Medical School and Director of the Clinical Chemistry Laboratory at Children's Hospital in Boston, agrees, calling the device "an important advance. This [the GlucoWatch] certainly helps doctors and patients better plan when to use insulin," he says.

But the device can't be used for making decisions about insulin usage. To take the place of fingersticks, it needs better calibration methods and greater accuracy. The glucose concentrations in interstitial fluid are so low and vary so much among individuals, that correlating readings with traditional blood glucose monitors is difficult, says Rosenbloom. Furthermore, he notes, it has yet to be tested in children, who could benefit significantly from it.

Points out Doug Lind, an analyst with Morgan Stanley Dean Witter, "This is very much a first generation product." He notes that it is clinically cumbersome, requiring a three-hour warm-up period every morning and a change of patches every 12 hours. To be clinically meaningful, he believes, the device will need to be smaller, with a once-a-week calibration, and no more than a 20-minute warm-up period. "It isn't the dramatic break-through we had hoped for several years ago," he says.

Nevertheless, with FDA approval all but certain, the company is turning its attention to commercialization. While it isn't predicting market size, it expects to target first early adopters of new technologies, a group of diabetics who test themselves and inject insulin at least twice a day. If only 10% of the 1.6 million people in US who fall into this category use GlucoWatch, that's 160,000 people, says Hodgman. Although the reimbursement battle has yet to be fought, the company is optimistic. The product isn't likely to be more expensive than the point-of-care fingerstick strips on a test by test basis, but will cost more because it is used more frequently. A starter kit will cost under $300, and the disposable autosensors, which take three readings an hour and must be changed every 12 hours, are likely to be priced around $4 each.

Challenges Ahead

While the company's confidence is high, it faces several key challenges. The least of these is the manufacturing scale-up, an area that has been a stumbling block for several POC diagnostics companies. Cygnus has been developing specialized equipment and processes for large-volume production for several years and expects the cost structure to be reasonable, eventually giving the autosensors' margins of 70-75%, says Neil Ackerman.

Another issue is determining exactly how the product will used by those who want it—whether they will wear it constantly, or only at night, or only for short-term specified periods of time before making changes in a regimen. No one knows the answers to these questions because the concept is new, says Carlson.

Of greater concern is finding a corporate partner willing to give Cygnus the return its investors expect. While the management team under Greg Lawless opted for a strategy of selling direct in the wake of the failed deal with BD, Hodgman says that his executives early on in their tenure agreed self-reliance wasn't feasible—although Cygnus wants an opportunity to continue to participate in sales and marketing efforts. But it's not clear to which companies they will turn. So far, the big POC glucose testing companies have not expressed serious interest in non-invasive monitoring technologies, perhaps partly because they don't view the technology as ready for commercialization and also because of fear that the new methods would obsolete the most attractive segment of their business. Margins on glucose strips are much higher than those of most diagnostics tests—above 80%.

Roche and Abbott Laboratories Inc. have taken little steps—Abbott recently increased its small stake in SpectRx, which is developing laser-based continuous and discrete non-invasive glucose monitoring systems [See Deal] and J&J paid handsomely for LifeScan Inc. in the late 1980s.

Currently, the company faces limited competition from non-fingerstick alternatives, but over time more players will come into the field. The other great challenge for Cygnus, therefore, is to come up with a second-generation product that addresses the concerns about the first device. The company is working aggressively to build a monitor which will be smaller, with a transdermal patch to extract the interstitial fluid and transmit via radio frequency to a credit-card sized reader, and have a shorter warm up time, says Hodgman. The patch could control an insulin pump on a continuous basis, forming a closed loop system, which maintains near-normal glucose levels and mimics the pancreas.

MiniMed is the only company with FDA approval to sell a continuous glucose monitor—the device, which got approval in June, must be inserted under the surface of the skin and can be read only by physicians; its initial function is to provide them, not the patient, with trending information. The product didn't have huge sales in 1999, partly because MiniMed launched it last fall only on a limited basis in order to properly train health care providers, says Terence Gregg, MiniMed's president. But the company is planning a broader roll-out in March. The product, like the GlycoWatch Biographer, provides trending information, but because they are aimed at different users, they are complementary, not competitive, he says.

Still, MiniMed will be competing with Cygnus. It plans to submit a supplemental PMA application, probably in the fourth quarter of this year, to expand use of a slightly modified version of the device to patients so that patients too can read the trending information. MiniMed, which is currently in the midst of clinical trials for this indication, will seek approval to use its monitor as a replacement, not a supplement for the fingerstick.

Moreover, the MiniMed device, because it is geared to physicians, could be used to screen for previously undiagnosed diabetes. While the initial use as a trending information tool is likely to be a niche market, the screening application has significantly greater market potential, says Gregg.

This additional competition isn't entirely bad for Cygnus. The FDA panel's approval in June of MiniMed's continuous glucose monitor is further evidence of the agency's and the diabetes community's acceptance of interstitial fluid as a sample and support for continuous monitoring. This not only boosts morale for the field, it changes the dynamics of it.

"The FDA, with MiniMed clearance and Cygnus recommendation, has shown that it believes interstitial fluid is a viable medium for measuring glucose," says an executive at SpectRx. Abbott and SpectRx, for example, recently tightened their partnership and shifted the focus of their work from discrete to continuous non-invasive monitoring. The SpectRx device won't be implantable and will collect data once a minute based on continuous readings, says a SpectRx executive, noting that it will combine perhaps the best of both MiniMed's and Cygnus' devices. Still, SpectRx is far behind MiniMed and Cygnus in getting a product to the market. The company hopes to go to the FDA in late 2001.

For now, the competition doesn't bother Cygnus' executives. Still on a high from the FDA panel meeting and events of the past year, they envision using their biosensor technology for other areas of point-of-care diagnostics. "When I look back a couple of years ago, we had a real vision of what we thought Cygnus could become," says Hodgman. "We worked closely together in an environment that was uncomfortable. Now, the environment is friendly and open. We had a phenomenal FDA panel meeting." From his perspective, the company's growth is just beginning.