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Nanogen Wants to Slurp Revenues by Selling Reagents, Probes, Cartridges

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Platformation is still the word at Nanogen, Bruce Huebner, the company’s new president and chief operating officer, told BioArray News this week. The term, techno slang that former CEO Randy White recently used at a New York investor conference, refers to the idea of creating a system to meet the needs of a market.

But this word is being joined at Nanogen by a new, all-too familiar one: turnover. Last week, Huebner took the helm after the company announced the resignation of White, chief executive officer since May 2001, and Kieran Gallahue, president and chief operating officer. Nanogen founder Howard Birndorf, executive chairman, will take the reins as chief executive officer.

White, a former diagnostics executive who steered the company in the clinical diagnostics direction, is leaving due to health reasons — though not life-threatening ones — the company said. Gallahue resigned to seek other opportunities in the medical technology field, the company said.

Huebner joins in an official capacity after functioning for two months as a consultant to the company. Before that, he was executive vice president and chief operating officer for GenProbe of San Diego.

Huebner hopes to continue with the platformation of the company’s flagship product, the NanoChip Molecular Biology Workstation. The system, which uses the NanoChip Electronic Microarray, has an open-architecture design that allows researchers to define, select, and build their own 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 stringency to remove unbound and nonspecific ally bound DNA after hybridization. Nanogen has applied it in the analysis of SNPs and short tandem repeats (STRs) for diagnostic purposes.

At one time, the company hoped to derive revenue from selling these systems, which it priced at $100,000 to $160,000. But now, with the platformation strategy, it is rolling out instrumentation essentially for free and then making money on selling the cartridges, probes, and primers needed to run it. Some describe this strategy as the razor and razor blades business model, others as the Coca-Cola business model, where the company will install the soda fountains for free but charge for the syrup and the carbonated water needed to make a drink.

“It’s selling an instrument with multiple assays on it and, for Nanogen, it’s an open system that allows the customers to use Nanogen’s reagents or anything they want to,” Huebner said.

Previously, the company had promised to introduce 10 new tests by the end of the year. But Nanogen executives rolled back the plan in their third-quarter conference call. Thus far, the company has one assay on the market and two others in beta testing with an additional five assays in the pipeline.

“We are in a step-by-step mode for getting [assays] out to the market,” Huebner said.

If platformation follows the Coca Cola business model, the Diet Coke product would have to be its cystic fibrosis test, which is one of the products in beta, and is expected to be introduced in the new year.

“The real key for us is CF,” Huebner said. “It is by far and away the biggest market for assays.”

Selling Reagents, Getting Revenues

So, can Nanogen, which has been working under White’s leadership to transform itself from an array company with sexy but expensive technology, into a molecular diagnostics company, really ever succeed?

Financially, the company has $47 million in the bank, a year and a half of cash, said Jerry Wills, chief financial officer.

“The real key, being a diagnostic company, is that you earn revenues today through the sales of reagents, he said. “Those are much higher margin type sales and we are well-positioned to move forward and execute and make those sales happen.”

“That’s my job,” said Huebner.

“I’m the operating guy, I put the nuts and bolts together, getting the product day-in and day-out,” he said. “I come out of a sales and marketing background.”

The firm has six direct sales representatives, and 11 tech support workers in the US and a small contingent in Europe, he said.

“We are focusing on top-of-the-pyramid testing,” he said. “We are going to beat on the doors of the thought leaders in molecular diagnostics.”

The company is now targeting large reference laboratories for placing its systems, with six installations at these labs out of a total installed base of 80, Wills said.

Patently Comfortable

Nanogen has 48 US patents, 37 foreign patents, with another 90 applications in the process.

“They cover the core of our basic technology and we will leverage that for our core market,” said Huebner. Nanogen has taken in $1 million in cash, a 17 percent equity stake, as well as an ongoing revenue stream from the settlement of a trade-secrets lawsuit with Combimatrix of Seattle.

“That’s a good positive effect of our portfolio,” Wills said.

The company is seeking content to add to its platform, said Huebner: “We are hanging on to what we have and we are looking for more,” he said. “We want content that is significant for our business.”

Headcount: Flat

The company laid off 10 percent of its workforce at the end of the third quarter with the goal of cutting $5 million from its burn rate next year.

Huebner said he expects the number of employees (175) to remain flat and any growth to come by transferring within the firm.

“The only area where we will be adding is in tech support and customer training,” he said. “We anticipate we would take people from the research projects and use them there, [where] they would be the ideal people. We want to maintain balance across the board.”

Going Forward

Before Christmas, Huebner and the management team will ensconce themselves in a San Diego hotel to plot strategy.

“We have a lot of strategic plans to put together,” Huebner said.

The company is involved with projects for the US Army, producing a portable prototype capable of multiplex assays of anthrax and smallpox. It has contracts with NIH, NASA, and the National Institute of Justice.

All of these efforts have one thing in common, Huebner said. “They are all in the area of what we do commercially.”

Whether the biowarfare detection field is a lucrative business opportunity, or not, is something to be explored at the strategic meeting, he said.

“With the amount of money the government is going to spend, with the right efforts, we could get business from it,” said Wills.

“We can’t do everything,” said Huebner. “We have to identify the top opportunities and focus on what will get the best return. We’ll just stay right here in San Diego, in a hotel room, and let the creative juices flow.”

And perhaps have a sip of a platformation soda pop.

— MOK

 

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