Cygnus Inc - Failed Deal With Sankyo

Failed Deal With Sankyo

Cygnus's troubled relationship with Sankyo Pharmaceutical began on an optimistic note in November 2001 when the two companies signed a co-promotion agreement for marketing the newly approved GlucoWatch Biographer. Under this agreement, Sankyo's primary responsibility was promoting the glucose monitor to health care professionals. Meanwhile, Cygnus was responsible with the marketing, distribution, customer service, along with the R&D, regulatory, and clinical activities. Sankyo promised to pay $10 million to Cygnus as milestone payments. In the early months of 2002, the first generation GlucoWatch Biographer began selling on the market while second generation GlucoWatch G2 Biographer was approved. Subsequently, in July 2002, the agreement was expanded to increase Sankyo's responsibility to marketing, managed care and government contracting, and distribution of the product. An additional $15 million in milestones was to be paid by Sankyo, therefore taking the total milestone payments up to $25 million. Sankyo got an increased percentage of net sales in return. To put this agreement into effect, Sankyo took important steps such as using retail channels for marketing, increasing the specialty sales force for GlucoWatch Biographer, and devoting additional managed care resources to support reimbursement.

Despite the FDA approval later in 2002 for pediatric use, the sales of the GlucoWatch Biographer were never encouraging as customer and physician complaints kept pouring in. The deal turned sour on October 2, 2003 when Sankyo ceased to honor the contract, citing California Commercial Code, Section 2609, which allows a party to cease contractual obligations until the counterparty assures the party of due performance. Additionally, Sankyo refused to pay the $6 million that it owed Cygnus. As a result, Cygnus had to cut its workforce by 60% and decided to file a litigation suit seeking $450 million in damages. However, the litigation was brought to a premature end by an out-of-court agreement under which Sankyo paid Cygnus $30 million and transfer all the titles and inventory related to GlucoWatch Biographer back to Cygnus. After the departure of Sankyo, Cygnus was in no position to market the GlucoWatch itself.