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CombiMatrix Awarded $32.1M in Suit Against Insurer; Will Use Cash to Grow Dx Business

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After a year spent rolling out new diagnostic products on a quarterly basis while at the same time looking to reduce its operating expenses, CombiMatrix may soon be swimming in cash.
 
The firm announced last week that the US District Court for the Central District of California awarded it $32.1 million in its lawsuit against National Union Fire Ins. Co., a Pittsburgh-based insurance company.
 
CombiMatrix sued the firm after it was denied coverage for legal expenses related to a lawsuit settled with Nanogen in 2002 (see BAN 10/4/2002). The award is slightly higher than the $31.4 million judgment in the case that CombiMatrix announced last month. CombiMatrix now intends to recover its attorneys' fees and costs associated with the litigation, it said.
 
According to CombiMatrix’s CEO Amit Kumar, while an appeal is possible, it is unlikely that the ruling would be reversed. Furthermore, the company believes the proceeds from the judgment could help fund the expansion of its diagnostics business and put it back on solid financial footing.
 
“This is a decision by a prominent federal judge and we feel an appellate court would agree should it get to that point,” Kumar said in response to a question from an investor during a fourth-quarter earnings call last week. “There are a number of things that will strengthen our cash position, including what happens in the court case.”
 
During the call, Kumar also discussed CombiMatrix’s financial results for the three-month period ended Dec. 31, 2007. Fourth-quarter revenues more than doubled in the period to $1.9 million from $859,000 in the comparable period of 2006, while net loss narrowed by 22.2 percent to $3.5 million from $4.5 million.
 
Over the past two years, CombiMatrix has been trying to establish itself in the array-based molecular diagnostics business while reducing its operating costs. As of Dec. 31, 2007, the firm had $8.2 million in cash, cash equivalents, and short-term assets compared to $14.3 million at the end of the fourth quarter last year. The company managed to cut its R&D and SG&A spending by 48 percent and 17 percent, respectively, during 2007.
 
In particular, over the past two years CombiMatrix has stopped selling directly to the research market and has instead decided to use a network of distributors to sell a product line that was, at one time, its main focus. According to Kumar, the company this year will stick to a strategy of array-based test proliferation while looking to beef up the sales and marketing efforts of its CombiMatrix Molecular Diagnostics subsidiary.
 
“Our primary focus in 2007 was building out our portfolio, and we will continue that in 2008,” Kumar said. “However a major focus for 2008 will be to increase adoption of our tests from early users to a broader group of customers and consequently increase our revenues,” he said. “To this end we will continue to grow our sales team, expand partnerships with other laboratories, and execute other activities that will expand the potential of our tests.”
 
Last year the company hired Dindyal Ramkissoon as vice president of sales and marketing at CMDX. CMDX CEO Mansoor Mohammed also said the company added several strategic sales and marketing personnel last year (see BAN 3/20/2007).
 
Most, if not all, of the sales effort will be devoted to pushing CombiMatrix’s diversifying test menu into the market. Over the past two years, CMDX has launched a number of diagnostics it makes available as laboratory-developed tests under the guidelines of the Clinical Laboratory Improvement Amendments. The company also offers its arrays to external labs through a “tech-only” service in which partner labs perform all data analysis and interpretation for their patients.
 

“It is important to note that these are revolutionary new tests and physicians aren’t used to using them.”

To date, CMDX has launched the Constitutional Genetic Array Test, which scans a patient’s genome for abnormalities associated with 61 congenital syndromes; HemeScan for diagnosing chronic lymphocytic leukemia; HerScan to assess the status of the HER2 gene in a breast cancer tumor; ATScan to identify copy number variations linked to autism; and a test that discriminates malignant melanoma from benign moles.
 
Going forward, Kumar said, CombiMatrix plans to launch at least four tests this year. He did not describe the indications, but in the past CombiMatrix discussed the possibility of developing tests for bladder, kidney, and prostate cancer (see BAN 10/24/2006).
 
While the diagnostics business remains CombiMatrix’s main focus, Kumar said during the call that the increase in fourth-quarter revenues actually came from all three segments of its business — diagnostics services, array sales, and government contracts.
 
Around $850,000, or roughly 45 percent of its Q4 revenues, came from government contracts related to developing instrumentation and arrays for specific diseases and warfare agents. Kumar said that “multiple US labs as well as international labs have purchased these systems to test for warfare agents as well as infectious diseases of concern to public officials.” According to Kumar, the company has a $15 million funding commitment from the US government related to ongoing development of these tools.
 
In addition, $740,000 of CombiMatrix’s Q4 receipts came from sales of its array products, including its benchtop arrayer, catalog custom arrays, and reagents. Kumar credited a better performance by the firm’s distributors with the increase in R&D orders.
 
“Over time and with training of our distributors, we are starting to see orders increase as they become more expert with the sales and marketing of our products,” he said. Kumar added that the company is seeking distributors in regions where it is not yet covered.
 
Diagnostics services generated the least amount of income during the quarter, contributing around $225,000, or 12 percent, to Q4 sales. During the earnings call, Mohammed said that it will take time for the tests to be more widely adopted, and that most of them were being used by early adopters.
 
“It is important to note that these are revolutionary new tests and physicians aren’t used to using them,” he said. “In situations like this you always have a number of early adopters who start using these tests and note the benefit for their patients,” said Mohammed. “Over a period of time, through discussions with their colleagues or through various clinical trials, the use of these tests expands, and then you have a tipping point where the market for the tests starts to grow rapidly. Each of our tests will go through this process.” 
 
Mohammed said that CMDX not only intends to invest in its sales and marketing structure, but will also look to partner with “leaders in the testing space” to sell the firm’s newest diagnostics, such as its HerScan breast cancer test.
 
In January the firm announced a partnership with Clarient, an Aliso Viejo, Calif.-based cancer testing company, to offer its HemeScan test for CLL. Mohammed said that the Clarient partnership is a “non-exclusive relationship” and that the firm is “looking for other partnerships and not only for that test.”
 
Q4 in Full
 
CombiMatrix last week reported that its fourth-quarter revenues more than doubled and the firm cut its net loss 22.2 percent as it continued transitioning into molecular diagnostics.
 
CombiMatrix reported revenues of $1.9 million for the three months ended Dec. 31, 2007, compared to $859,000 in the fourth quarter of 2006. The firm reported increased sales from products, services, and government contracts.
 
It also cut its net loss to $3.5 million, or $.58 per share, from $4.5 million. There are no comparable earnings figures for the year-ago period because CombiMatrix was part of Acacia Research during the fourth quarter of 2006.
 
During the quarter, CombiMatrix cut its R&D spending 47.6 percent year over year to $1.1 million from $2.1 million. Its SG&A expenses dropped 16.7 percent to $2.5 million from $3 million.
 
For full-year 2007, the Mukilteo, Wash.-based firm reported revenues of $6 million, up 5.3 percent from 2006 revenues of $5.7 million. Its net loss fell 37 percent to $12.6 million, or $2.10 per share, from $20 million in 2006.
 
CombiMatrix’s 2007 R&D spending declined 58.3 percent to $6 million from $9.5 million, while its SG&A expenses dropped 25.2 percent to $9.5 million from $12.7 million.
 
The company finished the year with $8.2 million in cash, cash equivalents, and short-term investments.