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CombiMatrix Abandons R&D Market, Pins Hopes on Push Into Molecular Dx Segment

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Forced to reallocate limited resources towards its nascent line of molecular diagnostics, CombiMatrix has made a strategic decision to distance itself from the R&D market, where a lack of capital has arrested its ability to gain significant market share, CEO Amit Kumar told investors during the company’s fourth-quarter earnings call last week.
 
The firm has also decided to cut back on its headcount as it prepares to shift its focus mainly to molecular diagnostics, a choice that Kumar said had an impact on its business during the fourth quarter of 2006, and will buoy the company’s finances in coming quarters.
 
“We are in the midst of a major strategic transition,” Kumar said during the call. “This transition is driven by market conditions, scientific advances and challenges, capital resources, and promising opportunities to build value.”
 
“To most efficiently utilize our capital, we have made some cuts in our cost structure which includes cuts in headcount as well as other measures,” Kumar said. Some of these cuts were made in the fourth quarter of 2006 and others in the first quarter of 2007. “Therefore we will see the full financial impact of these cuts over the coming quarters of this year,” Kumar added.
 
It is unclear to what extent CombiMatrix has reduced its headcount. Kumar could not be reached for comment this week.
 
According to Kumar, most of the changes are due to the company’s decision that its future lies in molecular diagnostics rather than the research market, which the company has targeted through product launches over the past two years. Kumar said that CombiMatrix simply did not have the resources to compete in an R&D market dominated by large life sciences companies like Affymetrix, Agilent Technologies, and Illumina.
 
“We have never had the resources to market effectively our products in [the R&D] market, especially against much larger and better financed competitors,” Kumar said. “As a result our revenues in this market have been modest, and have declined as a part of recent actions taken by the company.
 
“Because we’ve made cuts in [R&D] sectors to reallocate resources into the diagnostics sector, we’ve seen a decline in that revenue,” Kumar said. “Our intent is to continue to service our existing clients in R&D, but we are not going to push into that market, instead we will push into the diagnostics market.”
 
Kumar said that CombiMatrix will continue to serve existing clients in the R&D market despite its switch in strategy.
 
Banking on Dx
 
The results from CombiMatrix’s decision were driven home by a weak performance in Q4. The company reported last week that revenues for the three months ended Dec. 31, 2006, plummeted 76 percent to $859,000 from $3.5 million during the same period last year (see sidebar).
 
At the same time R&D spending increased 87 percent to $2.8 million. The release of the results also coincided with the announcement that Matt Wilson, CEO of Combi’s Molecular Diagnostics subsidiary, would step down and would be replaced by current President and Chief Operating Officer Mansoor Mohammed. Watson will remain a consultant to the company for three months, the company said.
 
The shake-up in strategy is also occurring during a time when CombiMatrix’s hopes of profitability are becoming further removed. In October, after reporting a slight up-tick in third-quarter revenue, the company told investors that it had burned through $11.8 million since the beginning of 2006, and that the $8.3 million it retained in cash, cash equivalents, and short-term investments was only enough to carry it through the end of 2007 (see BAN 10/31/2006).
 

“Our intent is to continue to service our existing clients in R&D, but we are not going to push into that market, instead we will push into the diagnostics market.”

In December, CombiMatrix secured $10 million through a private stock placement, a cash infusion that Kumar last week said will allow the firm to stay afloat into 2008 as it hopes to grow its portfolio of diagnostic tests.
 
“The capital that we have raised is enough to take us into the first quarter of 2008,” Kumar said. “Our goal is to generate revenues and relationships that will bring capital into the company, but young biotech companies are constantly resource-constrained.”
 
Since autumn, CombiMatrix Molecular Diagnostics already has offered two tests through its labs in Irvine, Calif.: a comparative genomic hybridization-based constitutional genetic analysis test for patients with genetic abnormalities, and an expression signature-based test for early-stage melanoma diagnosis.
 
Kumar said last week that the company’s CGAT test generated $50,000 in the second half of 2006, earning roughly $25,000 in both Q3 and Q4. “We just launched the test, and as the medical community accepts that test, we’ll see an uptake,” he said.
 
“Our CGAT test is being used after karyotyping has failed. Eventually we will not get the patients for whom karyotyping has failed; we will get the patients who have not even had karyotyping done,” Kumar said. “Right now we are augmenting an existing approach [karyotyping] for genetic analysis. Eventually, we will replace that existing approach,” he added.”
 
Kumar also said that a new generation of the CGAT test is in the pipeline, as well as other tests that the company is looking to offer later this year.
 
“We are working on a number of applications which include solid tumors as well as a number of hematological tumors and more advances versions of our constitutional genetic-analysis test,” Kumar said. “Our goal is to have on the market by the middle of 2007 the broadest portfolio by far of array-based genetic tests in the industry.”

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