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Nanogen Revenue Down in Third Quarter; Shareholders to Vote on Epoch Merger Soon

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This past week Nanogen reported third-quarter revenue of $1.1 million, flat with its second-quarter results and down from $1.7 million in the comparable period a year ago. Product revenue for the quarter also declined to $671,000 from $752,000 in the third quarter of 2003.

The decline marked yet another quarter of shrinking revenue for the microarray-based diagnostics instrument maker, which is in the process of diversifying its product offerings in an effort to quickly add to its top line.

“While not the results I would like, I believe we are making good progress on transforming our business and laying the foundation for a more successful company,” said Nanogen Chairman and CEO Howard Birndorf said during a conference call. “We are putting in place a variety of initiatives that will improve our results in 2005.”

Birndorf’s statement echoed comments that he and President and COO David Ludvigson made at the end of the second quarter (see BAN 8/11/2004). Their optimism is based on three recent events: the acquisition earlier in the year of SynX Pharma, a point-of-care diagnostics firm; the pending acquisition of Epoch Biosciences; and the upcoming launch of its NanoChip 400, a second-generation microarray-based diagnostic instrument (see BAN 11/3/2004).

“These three additions are expected to significantly boost revenues in 2005 and beyond,” Birndorf said. “Assuming approval of the Epoch merger, you will begin to see initial results of our transformation efforts in Q1, and I expect that the impact will accelerate as the year progresses.”

Nanogen’s net loss grew by 32 percent to $9.4 million, or $.28 per share, for the period, compared to a net loss of $7.1 million, or $.33 per share, for the third quarter last year.

The results include the first full quarter of activity related to SynX. The subsidiary made a $1 million license payment during the period related to a marker used in its congestive heart failure assay, which is slated for launch in the middle of 2005.

Nanogen also recorded an additional $900,000 inventory reserve in the third quarter due largely to the introduction of the NanoChip 400. “We believe that sales of the original molecular biology workstation will continue and this reserve will permit us to competitively position the first-generation system” against the second-generation system, Lud-vigson said.

The San Diego-based micro-array and diagnostics firm reported a slight increase in research and development spending to $4.5 million from $4.3 million in the third quarter of 2003. It finished the quarter with $53.1 million in cash, cash equivalents, and short-term investments.

Company officials expect to report fourth-quarter revenues consistent with the third quarter.

Investors were unimpressed with the results, sending Nanogen’s stock down 6.4 percent to close at $3.82 in the first full day of trading after releasing the financial results. The shares have since regained a little ground, closing at $3.95 in Monday trade on the Nasdaq.

Shareholders to Vote on Merger Soon

Nanogen is in the process of acquiring Epoch Biosciences in an all-stock transaction valued at roughly $60 million (see BAN 9/15/2004). Shareholders of both firms are scheduled to vote on the merger on Dec. 8, and the merger partners expect to complete the deal by the end of the year.

With the purchase of Epoch, Nanogen is aiming to quickly add revenue 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 and the new NanoChip 400. Both products are used for analyzing gene expression in vitro, detecting SNPs and mutations, and identifying infectious organisms, the companies said.

Birndorf said during the conference call that Epoch is “expected to contribute significantly to both our revenue and operating margin next year.” The Bothell, Wash.-based firm will add around 30 real-time reagents to Nanogen’s offerings.

“We intend to leave the R&D and manufacturing organizations largely intact, [and] eliminate duplicate functions in sales, marketing, and administration, as well as duplicate public company costs,” Birndorf said.

“We have strengthened our sales management and have refocused our direct-selling efforts on the research market,” Ludvigson said. “Additionally, we have already trained our sales force on Epoch’s ASR product line and have started introducing these products to both new and existing customers.”

The firm has had difficulty penetrating the clinical diagnostics market, but believes that the launch of the NanoChip 400, combined with the acquisition of Epoch Biosciences will provide it with the ability to make greater inroads. The new instrument, which will launch in January or February 2005, will initially be targeted at the research market, followed a few months later by a push into the clinical diagnostics market, Nanogen Chairman and CEO Howard Birndorf told BioArray News in last week’s issue.

Epoch, which has roughly 29 million shares outstanding, recently reported third-quarter revenue of $2.4 million, up from $2 million for last year’s third quarter.

— EW

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