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Nanogen Pins Future on New Sales Force, Products After Year of Slumping Revenue

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Nanogen officials last week pinned the future of their company on the success of a new sales organization, royalties from a company it acquired late last year, and a broadening line of products for the clinical diagnostics market.

“We are a very different company than we used to be,” Robert Saltmarsh, the company’s chief financial officer, told BioArray News last week.

The San Diego-based company reported a 51-percent slide in revenues and an 89-percent increase in net losses for the fourth quarter of 2004.

Nanogen had slightly more than $1 million in total revenues, down from $2.1 million during the same quarter in 2003. Product revenues were $410,000 for the fourth quarter of 2004, compared to $1.1 million for the prior-year period.

R&D costs for Q4 2004 were $5.2 million, a $700,000 increase in spending from $4.5 million during the same period a year ago.

Net loss for the quarter amounted to $11.2 million, or $.31 per share, compared to a net loss of $5.9 million, or $.25 per share, during the fourth quarter of 2003.

As of Dec. 31, 2004, Nanogen had a cash position of $51.9 million. Of that, $15.4 million is in the form of cash and cash equivalents, with the remainder in the form of short-term investments.

Howard Birndorf, Nanogen’s CEO and chairman, said during a conference call that the revenue was close to the company’s expectations, and that the significant costs Nanogen had incurred during 2004 — mostly from the acquisition of SynX Pharmaceuticals in April 2004 and Epoch Biosciences in December 2004 (See BAN 12/22/2004) “should not” recur in 2005.

Instead, Birndorf said he expects revenue to increase three-fold in 2005. He said receipts would be stabilized by royalties from Epoch Biosciences’ line of clinical diagnostic tools, several new products, and a shakeup in the company’s sales force. Investors didn’t share his optimism and shares of Nanogen declined 11 percent since the company announced it’s earnings on Feb. 23.

Saltmarsh told BioArray News that the decline in the company’s revenue derived from product sales was attributable to “sales organization issues” that he said have since been rectified.

“We have new sales leadership and the effects of that should be evident in the first quarter of 2005,” Saltmarsh said.

The leadership is Robert Bush, a 20-year sales and management veteran who has held positions at Novartis Pharmaceuticals and Thermo Electron. The CFO explained that prior to hiring Bush in August 2004 the company had assigned the sales and marketing responsibilities to one position. By hiring Bush, Nanogen now has a permanent head of sales.

Saltmarsh added that the company also had approximately seven additional salespeople in the United States and distributors in Europe that would be crucial in selling its new line of products.

New Line of Diagnostic Products

Central to Nanogen’s new product offering is the NanoChip 400, a microarray-based molecular diagnostics platform aimed at the research and clinical diagnostic markets.

Nanogen is touting the NanoChip 400 as a competitive 400-site array that will allow researchers to run their own testing panels. Saltmarsh said that the product would be available in mid-2005 but declined to reveal the exact launch date. The chip will be manufactured by Hitachi, and the CFO added that it “will help [Nanogen] broaden [its] impact on the clinical market.”

Nanogen first announced the creation of the NanoChip 400 in November (See BAN 11/3/2004) with an earlier launch date of January or February 2005. During the conference call Saltmarsh attributed some of the company’s losses to unrealized revenue from clients waiting for the Nanochip 400 to launch.

Another new product the company is hoping will help drive revenue growth is a clinical diagnostic test from Toronto-based SynX, which has become a subsidiary of Nanogen. The new test, according to David Ludvigson, Nanogen’s chief operating officer, will provide a “15-minute rapid test result for congestive heart failure.”

Ludvigson estimated in the conference call that a $300 million market exists for the test. He also said that the company had received two patents in Europe related to a stroke diagnostic, and that a similar test would be available sometime in 2006.

Nanogen had previously said that it planned to reissue its cystic fibrosis ASR, which Birndorf told BioArray News in November 2004 would be out in 2005. Saltmarsh said that last week the new CF assay remained in R&D. It was unclear when assay would be available.

The third pillar of Nanogen’s 2005 financial outlook is the royalties it is set to gain through its $97 million acquisition of Bothell, Wash.-based Epoch Biosciences, a biotech firm that provides a line of analyte-specific detection reagents, similar to Nanogen’s line of ASRs (See BAN 12/22/2004). Epoch has licensing agreements with several big biotech and pharmaceutical companies including Third Wave and Celera Diagnostics.

The acquisition closed in December 2004 (See BAN 12/22/2004).

Saltmarsh said that the acquisition will result in a broad line of diagnostic tools that will put the company ahead of smaller rivals, and that royalties from Epoch would add “predictability to Nanogen’s revenues.”

Saltmarsh expected that the first quarter results that would validate whether Nanogen’s growing pains had paid off would be available in May.

— JP

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