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Nanogen Continues Push into Molecular Diagnostics with Epoch Biosciences Buy

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In an ongoing quest to reshape its business focus, broaden its offerings, and bring in near-term revenue, Nanogen last week agreed to acquire Epoch Biosciences in an all-stock transaction worth roughly $60 million.

The deal is expected to give Nanogen a boost in its efforts to sell products to the clinical lab and research markets. “I think it benefits us in several ways,” Nanogen Chairman and CEO Howard Birndorf told BioArray News last week. “For the same infrastructure, we’ll have more products that the sales force is currently selling to the same customers. They will broaden out our customer base because their analyte-specific reagents are real-time PCR reagents, and our system is for complex assays, as well as simple. So, we’d be able to go into the customers and offer them more solutions. It also broadens our product line in the research market, since they sell a number of research reagents as well.”

Generating satisfactory sales has proved a difficult task for Nanogen over the past few years. In fact, Birndorf said during a conference call last month reviewing the firm’s second-quarter results, “I am disappointed that we continue to have difficulty penetrating the clinical laboratory space with our molecular diagnostic products. This resulted in second-quarter product revenues that fell short of our expectations.” (see BAN 8/11/04)

David Ludvigson, president and COO of Nanogen, explained that the firm’s inability to ring up expected sales in the clinical lab market was “primarily due to performance issues with our CFTR ASR, which is used to develop tests to detect gene mutations associated with cystic fibrosis.” He said during the conference call, “One of the largest molecular testing markets for clinical labs continues to be the CFTR ASR. We’ve made a lot of progress with our ASR but continue to fall short of our customer requirements for moving into clinical testing.”

Because of its difficulties in gaining traction in the clinical lab market, Nanogen had shifted its primary sales force efforts to the research and clinical research laboratories, where its molecular biology workstation is used for research and assay development efforts.

Last month, Nanogen posted a decline in revenues for the quarter ended June 30, marking the fourth straight year of decreased revenues in its second quarter. The firm took a net loss in the quarter of $12.3 million, or $.38 per share, driven by its April acquisition of SynX Pharma, a Toronto-based point-of-care diagnostics firm.

The total purchase price for SynX was $15.5 million and marked a significant shift for the company as it sought to diversify its product mix and gain access to a product that would bring in near-term revenue — and it coincided with Nanogen’s decision to cease the operations of Recognomics, its Frankfurt, Germany-based joint venture with Aventis.

Microarrays and Molecular Diagnostics

Now with the purchase of Epoch, Nanogen has made another step toward adding to its top line — and soon — without having to pursue a new market. The firms have several complementary products in the molecular diagnostics field. Specifically, Epoch’s MGB Eclipse Probe System, including recently launched analyte-specific detection reagents, complement Nanogen’s NanoChip molecular biology workstation. Both products are used for analyzing gene expression in vitro, detecting SNPs and mutations, and identifying infectious organisms, the companies said.

Asked if the acquisition was another step away from Nanogen’s previous focus on microarrays, Birndorf said, “We are moving forward in our own business, and we have really great technology that offers solutions that other technologies can’t do, and we’ll continue to offer both microarray and in vitro diagnostics products.”

The firms anticipate incorporating some of Epoch’s technology into Nanogen’s microarray products. “One of the reasons that we ended up in this merger situation was we started talking with them over a year ago about incorporating their technology into our current product in terms of their temperature-insensitive probe. So, we will be integrating their technology into the Nanogen products,” Birndorf said.

However, the ASRs will not initially be run on the NanoChip platform, as they are currently manufactured for use on real-time PCR instruments, such as Roche’s LightCycler or Applied Biosystems’ 3000 series.

Two months ago, Epoch launched 21 Eclipse detection reagents for detecting infectious diseases and mutations associated with cancer, drug toxicity, and cardiovascular and genetic diseases.

Nanogen said it intends to retain Epoch’s R&D capabilities and reagent-manufacturing operations in Bothell, Wash., while administration, marketing, and sales will be merged into Nanogen’s genetic diagnostics business at its San Diego headquarters.

Birndorf couldn’t say whether or not there would be layoffs associated with the integration. Nanogen currently employs about 165 people, compared with Epoch’s roughly 45 employees.

Epoch reported revenues of $1.9 million, with a net loss of $570,000, or $.02 per share, for the second quarter ended June 30, 2004. As of that date, Epoch held $9.2 million in unrestricted cash and cash equivalents. Although Epoch’s losses were narrowing, its stock has dropped slightly more than 20 percent since the beginning of the year.

The firm has licensed its technologies to several molecular diagnostics firms including Applied Biosystems, Celera Diagnostics, and Qiagen. It has been five years since Epoch first licensed its MGB technology to ABI, which incorporated it into its widely popular Taqman system. Since that deal in 1999, ABI went on to embed the MGB technology in more than 150,000 products it sells as part of its SDS real-time PCR business.

The following year, Epoch licensed its Dark Quencher fluorescent dyes to Third Wave Technologies, which used it in its Invader assays, and two years later Epoch released its MGB probe system, which Amersham Biosciences and Qiagen agreed to distribute worldwide.

Yet despite the big-name partners, Epoch’s good fortune began to fade. In June 2003, Epoch sold its money-losing oligonucleotide-manufacturing facilities in San Diego and Liege, Belgium — the latter for a $1.2 million loss.

And as total revenues fell by 25 percent between 2002 and 2003, Epoch blamed Amersham, a mar-keting partner, for “disappointing performance” and decided in August to scuttle its distribution agreement with the British company. The events forced Epoch to move back its profitability goals to 2005 from its original forecast of the fourth quarter of 2003.

As a result of its difficulties, Epoch has been in the process of transforming itself from a second-party tool vendor to a direct molecular diagnostics provider. The shift, which began earlier this year, was in response to poorly performing distribution collaborations and a tightening market.

That shift in strategy was certainly viewed favorably by Nanogen in considering Epoch as an acquisition candidate. “That was one of the positives we saw and one of the positives they saw,” Birndorf said. “They would have had to invest in a marketing infrastructure that’s very expensive, and we have that infrastructure in place. We have over 30 people in marketing and sales, and they had several.”

Under the terms of the agreement, Nanogen has agreed to an offer price of $2 per Epoch share, which is a 30 percent premium over the average closing price of Epoch’s shares for the 20 trading days ended Sept. 1, the companies said. Epoch shareholders will receive a number of Nanogen shares based on an exchange ratio determined by dividing the offer price by Nanogen’s issue price as calculated at closing. The firms agreed that the exchange ratio will not be less than 0.4673 nor exceed 0.6329 of one Nanogen share.

Epoch has roughly 29 million shares and shares equivalent outstanding. The directors of both companies have signed an agreement to vote in favor of the transaction, which, subject to approval by stockholders, is expected to close by the end of this year.

According to Nanogen, Epoch’s operations are expected to be cash-flow positive after its operations are integrated into Nanogen. Birndorf couldn’t offer a number on Epoch’s burn rate, but said, “I don’t think they’re spending very much money at all.” He pointed to their revenues of $3.9 million for the first half of 2004, and their $9 million in cash.

Meanwhile, Nanogen, following the precedent set by Affymetrix, will be seeking regulatory approvals of its NanoChip system for in vitro diagnostic testing applications. “I recently had a meeting with the FDA where they encouraged us to [pursue filing the system for IVD use],” Birndorf said. “I think they’re going to be quite open as to how regulatory approvals are gained, and they’re going to be quick because they want these products on the market. They assured me the timeframes are going to be relatively short.”

— EW

 

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