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Nanogen Sees Growth of Assay Product Line Closely Aligned to Revenues, Company Goals

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The focus at San Diego-based Nanogen has clearly shifted to assays. The company last week released its first-quarter financial results in a statement that concentrated on the firm's introduction of seven new products for its NanoChip platform in the first quarter — taking 150 words before reaching top-line figures that the company CEO said fell “short of expectations.”

The release of products, and first-quarter total revenues of $1.2 million — compared to $1.5 million for the same period in 2002 — are tied together, said Howard Birndorf, Nanogen's chief executive officer and chairman, in the company's conference call.

“The disappointing first-quarter revenues directly relate to a limited menu of products,” he said.

The company had at one time promised to introduce 10 new tests by the end of 2002, but delayed the entrance of the products until the first quarter. The company now offers a total of nine products including: five Aanalyte specific reagents (ASRs); one research-use-only product released in Europe; and Assay ToolBox reagents to be used for protocol and assay development on the NanoChip platform. In the second quarter, the company will introduce applications management software, Birndorf said.

“With our current menu and future products, management's vision of ‘platformation’ will gain market acceptance,” he said.

Platformation is techno slang that company executives have adopted as a mantra for the strategy of placing the $150,000 NanoChip Molecular Biology Workstation at minimal cost to customers with the hope of selling NanoChip electronic microarray cartridges and associated chemistries and tests.

The NanoChip system is an open-architecture design that allows researchers to define, select, and build test panels, or select from Nanogen-developed analyte specific reagents. The array works by applying an electric current to biotinylated DNA samples, hybridizing complementary DNA probes, and applying stringent wash conditions to remove unbound and non-specifically bound DNA after hybridization.

The Financials

The company sold one partial system, comprised of its reader, in the first quarter and realized $228,000 in product revenues from the reader and sales of cartridges and reagents, compared to $812,000 for the same quarter in 2002.

The firm now has 156 workers after firing 20 percent of its workforce in a layoff in early April, a result of economic conditions, Birndorf said. The company will take a charge of approximately $500,000 in the second quarter for costs associated with the layoff, and expects to save $5 million in operating expenses for the year.

Nanogen had a net loss of $10.7 million in the first quarter, compared to $7.5 million for the year-ago quarter. The net loss included a loss of $3.6 million recorded on a sale of CombiMatrix securities that the company received in settlement for a patent-infringement lawsuit.

Last year, Nanogen received 17.5 percent (approximately 4 million shares) of CombiMatrix common stock valued at $2.70 a share, the offering price when the Acacia Research (Newport Beach, Calif.) subsidiary was launched as tracking stock in the fourth quarter of 2002. Nanogen said it sold three million of the shares in the first quarter at $1.50 a share, for a cash influx of $4.5 million. The company has 1 million shares of CombiMatrix remaining, putting the company in the position of having an enthusiastic interest in a competitor's success. (At press time, CombiMatrix stock was on an uptick, nearing $2.45 a share.)

Nanogen reported cash, cash equivalents, and short-term investment balance of $36.9 million as of March 31. The company anticipates losses of $27 million to $29 million for the year and product revenue of $7 million to $9 million on the year.

“We expect the release of ASR to have a positive impact on instrument and consumables revenue, spread over three to six months, due to the time it takes to complete the evaluation and validation process,” Bruce Huebner, the company president, said.

The company's flagship product, its cystic fybrosis ASR, is in a controlled release, said Huebner. “It's very complex and we want to make sure our customers receive quality service from Nanogen,” he said.

The company has four labs that are developing and validating ASRs from its Assay Toolbox, and another six to 15 labs with workstations installed, with another three waiting for the installation of workstations.

The firm is also working with Scientific Application International, a defense contractor with offices in San Diego and Washington. The two firms are collaborating to make proposals for biowarfare applications.

Huebner and the management team ensconced in a San Diego hotel in late December to plan an expansion of Nanogen's government business. The firm is currently producing a portable prototype capable of multiplex assays of anthrax and smallpox for the US Army, and it has contracts with NIH, NASA, and the National Institute of Justice.

— MOK

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