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Nanogen Struggles Through Another Quarter, Targets 2005 Revenue Growth

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Nanogen last week reported a decline in its fiscal 2004 second-quarter revenues and an increase in its net loss, as the firm struggled with lagging sales of its molecular diagnostics products to clinical laboratories.

The San Diego-based firm posted revenues of $1.1 million for the quarter, compared to $1.7 million for the comparable quarter in 2003. Its product revenues were $477,000 for the quarter, down from product revenues of $662,000 in the second quarter of 2003.

The beleaguered biotech firm has posted declining revenues in the second quarter of each of the last four fiscal years (see graph p. 4).

Nanogen 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. The firm’s net loss for the second quarter of 2003 was $6.9 million, or $.32 per share.

The SynX acquisition 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.

The purchase of SynX coincided with Nanogen’s decision to cease the operations of Recognomics, its Frankfurt, Germany-based joint venture with Aventis. The alliance was formed in 2001 to combine Nanogen’s NanoChip microarray platform with Aventis’ technology, with a focus on developing analyte-specific reagents to test for genes associated with Canavan disease.

The company has incurred negative cash flow from operations since its inception in 1993, and as of the end of 2003, reported federal net operating loss carryforwards of approximately $157.5 million. Fed-eral regulations allow companies to carry losses to future returns with time frames dependent on the type of loss. Nanogen said that its federal carryforwards will begin to expire in FY 2006.

The company has added net losses of $17.7 million since the beginning of this fiscal year.

Nanogen finished the second quarter with cash, equivalents, and short-term investments of $60.3 million, roughly $2.7 million less than at the end of the previous quarter. But its cash on hand includes $7.4 million the company received during the quarter from the sale of common stock. It also includes $34 million in proceeds it recognized from a private placement of common stock during the first quarter.

David Ludvigson, president and COO of Nanogen, would not comment on how many NanoChip platforms were sold during the quarter, but he said that the firm’s installed base stands at 100, the same number at the end of the first quarter. But that doesn’t necessarily mean the firm didn’t sell any instruments during the quarter. “The installed base is affected by a number of items including sales and returns of units that have been installed under non-revenue strategic marketing agreements,” he told BioArray News.

Howard Birndorf, chairman and CEO of Nanogen, said during a conference call reviewing the 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.”

Ludvigson 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.”

Ludvigson told BioArray News, “We’ve had some difficulties in getting that assay to be at a pro-duction level. We have numerous labs that are in the evaluation stage but they have not yet brought it into the validated production stage. It’s part the qualification procedures and it’s part product performance.” He declined to elaborate further.

Because of its difficulties in gaining traction in the clinical lab market, Nanogen has 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.

“As you know, research labs were our first customers and we’ve continued to sell to them even as we added clinical laboratories to our sales efforts,” Ludvigson said during the conference call. “So, we have solid momentum in the research market that we think can be sustained. We anticipate that the majority of our product revenues in the next six months will come from these customers.”

The delay in getting the CFTR ASR to market is just one problem the firm faces. Although its infectious disease microarray-based products are on target to hit the market by the end of the year, SynX’s congestive heart failure assay is now being pushed back to next year, “due to a schedule slip at a supplier,” according to Birndorf.

Investors punished Nanogen for the delays and poor revenue showing. The firm’s shares dropped 20 percent in the first full day of trading after releasing its results, dropping to $3.81, well off of its 52-week high of 14.95 set earlier this year.

Revenue Acceleration in 2005?

Despite its difficulties, company officials were bullish about the revenue-growth prospects for fiscal 2005. Ludvigson said he expects the adoption by clinical reference labs of the firm’s molecular diagnostics products, the launch of its CFTR ASR, as well as the infectious disease panels Nanogen is developing and plans to launch at the end of the year as the key drivers of revenue next year.

“Then we have several products in the immunoassay area that we think are good growth drivers as well around congestive heart failure and stroke,” he told BioArray News. “These products all address significant markets and should provide stimulus for significant revenue acceleration … in 2005.”

As far as the future is concerned, Nanogen said that it would seek to license or develop products that have or would likely have significant test volumes within the clinical lab market.

“We look at the molecular diagnostics and genetic diagnostics area as having limited markers today of high volume, [but] CFTR is one of those,” Ludvigson said in the interview. “We think there are a lot of interesting things that are coming along in terms of potential indi-cations for oncology, neurology, and maybe pharmacogenomics. We’re actively looking for new markers that we think can approach the volume levels that it takes to have clinical labs run these on a production level.”

“What we see today is that microarrays are strongly accepted in the research and clinical research settings for research on new markers or development of diagnostics,” Luvigson said. However, “We think that most of the clinical laboratory testing that’s being done in the molecular/genetic area can be done with technologies that are not as sophisticated as microarrays.”

This is why the firm is focusing on the development of the CFTR ASR and other predictive or prognostic indicators. “The microarray that we have has a lot of sophisti-cation and a lot of power [and] …the fact is we don’t see the clinical reference laboratory market as yet having high levels of demand for that,” Ludvigson said. “We see the demand back in the research and clinical research areas.”

— EW

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