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Ditching Slow-Growth, Costly Microarray Biz, Nanogen Seeks Buyer with ‘Deeper Pockets’

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For the second time in a year a company with a significant commitment to turning microarray-based assays into a viable segment of the molecular diagnostics business has called it quits.
 
Last December it was GE Healthcare who pulled the plug on its CodeLink bioarray business, calling the platform unsuitable for clinical applications. Now it is Nanogen who has decided that the fabled array-based diagnostics market could materialize in the future, but not quickly enough to offset the high costs that are keeping the San Diego firm from reaching profitability.
 
Nanogen last week announced its decision to seek “strategic alternatives” for the technology, the oldest of Nanogen’s three main business areas, which include RT-PCR assays, point-of-care tests, and microarrays. Nanogen has enlisted Credit Suisse to assist in the evaluation of alternatives, which may include a sale, partnering, or closure of the array business. The company expects to complete its evaluation of strategic alternatives within 60 to 90 days.
 
The decision to walk away from its array business is a milestone for the company. Unlike the PCR assays and point-of-care tests it has acquired over the past few years, the array technology was actually developed by Nanogen — the company’s name even references the platform’s nanoscale microarray cartridges.
 
During a call last week to discuss the decision to offload its array unit, CEO Howard Birndorf made it clear that the business — centered around its NanoChip 400 electronic array platform for molecular diagnostics — had not performed as anticipated and Nanogen could no longer afford to wait for the market to catch up to its technology.
 
Nanogen originally sold a research-use-only platform called the Molecular Biology Workstation, but had focused its marketing efforts on promoting the NC400 for clinical use since its launch in 2005.
 
“The microarray business is the least developed and the most costly part of our business. Adoption of our industry leading technology has been positive, but slower than we expected,” Birndorf said. He added that that the current array-based tests in the market, such as Roche’s AmpliChip CYP450 for drug metabolism, have received plenty of attention but have not sold as well as the industry had expected.
 
“The clinical market for multiplex tests remains nascent as clinical and regulatory practices change slowly,” he said. “Further, the adoption of tests for genetic-related disease conditions and drug metabolism are widely discussed but narrowly adopted in the healthcare industry.”
 
According to Birndorf, the firm still believes that a market for the NanoChip 400 will appear in the future, but the company — now in its 10th year and still not profitable — is in no position to continue to bankroll the platform.
 
“It is clear that this will become a very real and large market,” said Birndorf. “The unknown is how long that will take to happen. Our current view is that broad adoption of multiplex disease testing outside of the current proprietary tests for HIV and other sexually transmitted diseases is at least several years away,” he said.
 
Birndorf added that to “successfully move this program forward, we would need to develop a broad product menu including clinical trials and [US Food and Drug Administration] filings while also funding the development of the clinical market and funding an instrument platform.”
 
The platform, Birndorf said, is “ahead of its time and ahead of the investment horizon that Nanogen can afford.”
 
No More Expectations
 
Commensurate with its announcement last week, Nanogen also began laying people off. In an 8-K filed with the Securities and Exchange Commission on Sept. 17, the company said that it had reduced its microarray workforce by 13 employees, roughly 4 percent of its total staff.
 
The company estimated in the 8-K that it will incur severance-related expenses of around $335,000 for the layoffs and noted that “additional reduction in workforce in the microarray business may be required in the future depending on the final plan of exit.”
 
Nanogen’s Chief Financial Officer Robert Saltmarsh told BioArray News this week in an e-mail that 75 people are now “directly or indirectly supporting the array business” at Nanogen.
Saltmarsh said that the decision to offload the array business was made over time. “We have been supporting this business for years in the expectation that growth would accelerate,” he wrote.
 

“It is clear that this will become a very real and large market. The unknown is how long that will take to happen.”

“Unfortunately, while well received, the NC400 business wasn’t growing to our expectations and we therefore decided to focus on our real-time and point-of-care product lines where the market is well developed and does not involve [as much] risk and cost,” he added.
 
Saltmarsh said that offloading the business will shave $15 million off Nanogen’s annual operating costs, improving the firm’s cash flow by roughly 50 percent per year. Nanogen spent roughly $75 million on product sales, R&D, and SG&A in 2006.  
 
Though Nanogen is evaluating its options, it is clear that the company is preparing to sell the array business. As part of that preparation, Nanogen is pushing ahead with its submission of an array-based cystic fibrosis carrier detection assay to the FDA. Saltmarsh wrote this week that clearance of the CF assay could make the platform more attractive to potential buyers.
 
“We are continuing to seek FDA approval for the NC400 and CF assay as we seek buyers for this portion of our business,” he wrote. “FDA approval should help someone with deeper pockets than us to develop the market for this product.”
 
Nanogen also has assays in development for warfarin resistance and factor V and factor II clotting mutation detection. It additionally sells a CF panel for Middle Eastern populations (see BAN 8/14/2007).
 
According to an FAQ posted on Nanogen’s website, the firm will support customers throughout the evaluation period. Depending on its decision, it could then either transfer the product and customers to a third party or will implement a transition plan that will allow its customers a “reasonable period of time” to continue to purchase NanoChip microarray cartridges and reagents and transition to another method.
 
It is unclear how large Nanogen’s current installed base is. The firm has only publicly discussed a handful of deals involving the NC400, such as one announced in June with the Canadian Food Inspection Agency (see BAN 6/12/2007).
 
A search of PubMed revealed around 40 studies that have used Nanogen’s electronic array technology, though roughly a dozen of the papers reference Nanogen’s research-use-only Molecular Biology Workstation, which preceded the NC400.
 
One former Nanogen user, Nick Saunders of the UK’s Health Protection Agency, said that he had evaluated Nanogen’s RUO platform, but never acquired one because of a lack of applications available for infectious disease studies.
 
Børge Nordestgaard, a physician at Herlev University Hospital in Denmark, said he too had abandoned the platform for cost and throughput reasons. ”We changed to Applied Biosystem TaqMan assays, that are much easier to to get to work, using the assay-by-design service, and also much faster and cheaper per assay,” Nordestgaard wrote in an e-mail to BioArray News.
 
“Nanogen only used a roughly 90-sample format while TaqMan assays can be run in a 384-sample format,” he wrote, noting that Nanogen’s proposed sale of its platform “will no longer affect our research.”

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