MBI reorganization raises questions about potential of ultrasound contrast

Company restructures to reduce high cash-burn rate

Ultrasound contrast developer Molecular Biosystems of San Diego announced a corporate restructuring this month to slow the rate at which the company is burning cash. The move poses troubling questions about the long-term potential of the ultrasound contrast market, as practitioners still appear reluctant to embrace ultrasound contrast technology on a wide scale.

Market watchers have grown accustomed to rosy predictions about the potential of the ultrasound contrast market, with various estimates claiming the market will grow to between $1 billion and $1.5 billion in the next five years. Those forecasts have yet to be borne out, however. Of the few ultrasound contrast agents launched on U.S. and European markets prior to this year, such as MBI's Albunex and Schering's Levovist and Echovist products, none has registered meaningful sales revenues.

Things were supposed to be different with Optison, because the agent does not have the short persistence times of Albunex, a characteristic widely believed to be behind slow sales of that product. Certain they had a winner on their hands, MBI and its marketing partner, contrast firm Mallinckrodt of St. Louis, put an abundance of marketing resources behind the launch of Optison after it was approved by the Food and Drug Administration in late December (SCAN 1/14/98).

But as 1998 progressed, the market failed to mature. By the end of September, Mallinckrodt met its target for customer penetration, putting Optison in users' hands at more than 1100 U.S. hospitals, each selected for its extensive use of echocardiography. But the agent did not catch on.

Of these 1100 users, slightly more than half purchased the agent, and only about 300 reordered. The lack of interest in Optison is two-fold, according to Dr. Barry Goldberg, a professor of radiology at Thomas Jefferson Medical College in Philadelphia, whose research is focused on the assessment and development of ultrasound contrast media. First, the use of ultrasound contrast requires a change in the practice of medicine. The sonographer must administer a contrast agent, rather than just scan. Second, and perhaps more important, reimbursement for the use of contrast agents is spotty.

"Until ultrasound contrast is paid for the same as CT and MR contrast, most (practitioners) won't even consider using it," Goldberg said. "There has to be national payment policies for these agents."

MBI's recent financial results reflect the difficulty the agent is experiencing. Sales grew only slightly in the company's third quarter (end-September), with MBI's share of product revenues (including Optison sales) growing to $1.41 million from $1.37 million in the second quarter of 1998 (SCAN 10/28/98). The results also indicated that the company is generating a sizable amount of red ink. MBI reported a net loss of $7.1 million, and spent more than $10 million.

Unless this burn rate is reduced, MBI's cash reserves of $22 million (as of Sept. 30) could be seriously depleted. On the positive side, in the two quarters ahead, the company is due to receive $6.3 million from Japanese partner Chugai Pharmaceuticals as part of the $22.3 million in up-front payments from a licensing agreement struck earlier this year. Also, Mallinckrodt can be expected to continue making milestone payments.

MBI's restructuring program is an effort to stanch the bleeding. The company cut its staff by almost 30%, letting go 40 of the 140 employees at its San Diego facility. The list included staff in administration, finance, manufacturing, and product development. One of the pink slips was handed to the director of product development.

Officers of the company were exempted, as were personnel considered critical to continued production of Optison, expansion of the Optison label, or development of the company's proprietary CT liver imaging agent. Similarly, personnel involved in transferring technology to Chugai were also protected, but that will not last long. Over the next 18 months, all staff involved in manufacturing will be cut, as MBI completes the technology transfer and outsources its own Optison manufacturing operation.

MBI executives have acknowledged that Optison is not performing as well as the company might like. But the firm is still optimistic about the product, according to William Ramage, vice president of marketing and business development at MBI.

"The market is developing more slowly than we would like to see," he said. "But we're still confident that ultimately there is a triple-digit market (worth hundreds of millions of dollars) for ultrasound contrast agents."

MBI's reorganization is expected to reduce payroll and related expenses by about $5 million annually. Additional savings will accrue as the company contracts out the manufacturing side of its business, which will result in further savings in labor and related costs. It will take at least a year to outsource the manufacturing, primarily because the new facility must go through FDA validation to make commercial Optison, Ramage said.

"It's possible the outsourcing might be a stepwise process, because the manufacturing process itself is a multistep process," he said. "So, we could start making the changeover in six or nine months. We won't achieve the full savings until the outsourcing is complete, and that is probably more like 15 to 18 months away."

Other firms will most likely be watching MBI's progress closely, especially those with ultrasound contrast products nearing market. Bracco Diagnostics of Princeton, NJ, received clearance in October for its SonoRx oral gastrointestinal agent (SCAN 11/11/98), while EchoGen from Sonus Pharmaceuticals will probably be approved some time in 1999.

These companies may ultimately benefit from MBI's pioneering efforts, and clinicians may warm to ultrasound contrast as reimbursement and clinical practice issues are overcome. But that will take time, according to Goldberg.

"Being the first company into a new market is difficult," he said. "Being the first in a market that is not being (routinely) reimbursed is really difficult."