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With Split from Acacia Imminent, CombiMatrix Renews Focus on Molecular Dx Product Pipeline

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On the face of it, CombiMatrix’s second-quarter results were not pretty. The firm announced last week that revenue for the three months ended June 30 decreased to $1.3 million from $1.8 million during the same period last year. Meanwhile, product sales declined 60 percent to $458,000 and net loss increased to $3.6 million from $3.4 million year over year.
 
However, an increase in service revenues, a steady flow of government contract revenue, and a split from parent Acacia Research scheduled in two weeks’ time indicate that the firm’s bumpy transition from research market array vendor to premier testing service could find a soft landing over the next few quarters.
 
During the second quarter, government contract revenue rose 20 percent to $680,000; and services revenue was up more than 230 percent to $199,000 from $60,000. Meantime, R&D spending fell to $1.1 million from $2.2 million.
 
According to CEO Amit Kumar, the increase in services revenues and the decrease in R&D spending reflect the fact that the firm is settling into its role as a diagnostics-focused array firm and can now turn its attention to building a strong sales and marketing team and becoming a full-fledged public company while continuing to roll out more tests over the next two quarters.
 
It was necessary for us to enter the research market to validate our technology and product, but our eventual goal was to sell to physicians, patients, and clinical laboratories in a way that provides meaningful and sometimes life-saving benefits to patients,” Kumar said during an earnings call last week.
 
“While we will continue to sell to researchers, our goal is to leapfrog this market and focus on the larger, more meaningful molecular diagnostics market,” he said. “We have launched and are operating more microarray-based diagnostics than any company in the world [and] we already have a rich pipeline of tests to be launched during the second half of 2007 and beyond,” he said.
 
Referring to that pipeline, Kumar said customers should expect another version of the firm’s Constitutional Genetic Array Test to come online by the end of this year. CMDX first began offering the CGAT in 2006, and has subsequently upgraded the content on the bacterial artificial chromosome-based screening tool several times. This month, the company launched its most recent version, the CA1000, which includes more than 200 new, validated probes obtained through partnerships with theCenter for Applied Genomics in Toronto and the Erasmus University Medical Center in the Netherlands (see BAN 7/17/2007).
 
The CGAT helps physicians diagnose genetic abnormalities and guide treatment for patients, and Kumar said that the next generation of the array will include coverage of known genetic aberrations associated with autism.
 
“The prevailing theory about autism is that there are genetic predispositions that can be triggered by environmental factors,” Kumar said during the call. “So we are gleaning the information from these studies and putting it on our array so that [for] children that exhibit the physical symptoms of autism, we will be able to provide their parents and their physicians with information on what we think the progression of that disease is going to be.”
 
Another portfolio that should be extended before year end is CMDX’s line of HemeScan tests. Earlier this year, CMDX began offering HemeScan, a comparative genomic hybridization assay designed to detect prognostic markers in chronic lymphocytic leukemia. In June, the company added a prognostic test to predict treatment outcome in acute lymphoblastic leukemia. Kumar said that customers should expect more HemeScan tests in the short term.
 
“Additional areas we have considered include tests for solid tumors such as prostate, breast, and other cancers. For strategic reasons as well as technical issues, our near-term products will focus on hematological disorders but we are addressing the solid tumor market as well and will provide additional information later in the year,” he said. Kumar could not be reached to comment on what kind of technical issues have affected CMDX’s ability to get solid tumor tests on the market.
 
Kumar added during the call that CMDX is in the early phase of developing a loyal customer base and that its performance plus the company’s growing sales and marketing team would enable the molecular diagnostic initiative to pay off.
 
“Typically in situations like this you have early adopters of new products as well as thought leaders who will publish their results and physicians who will speak about the benefits of these products amongst themselves,” he told an investor during the call. “All of that builds and is supported by sales and marketing efforts by us and we anticipate that we will be able to increase our revenues as we go further,” he said.
 

“While we will continue to sell to researchers, our goal is to leapfrog this market and focus on the larger, more meaningful molecular diagnostics market.”

According to Kumar, in addition to hiring Dindyal Ramkissoon as vice president of sales and marketing in May, the company has “also hired several very stellar sales people from the laboratory business to come on board [that] are highly experienced and understand the lab and diagnostics business.”
 
New DoD Contract
 
During last week’s call, Kumar said that he anticipated that CombiMatrix’s biothreat collaborations with various US government agencies would continue to supply the firm with significant contracts. “We have provided a number of technologies and capabilities to them that are very valuable. As such we expect that relationship to continue. I am incredibly bullish about this relationship,” he said.
 
This week, the source of Kumar’s bullishness was revealed when the firm announced that it has been awarded a one-year, $2.2 million contract to continue developing its microarrays to detect pathogens and toxins for use in bio-terror defense.
 
The work builds on earlier contracts with the government to use its array technology in developing biothreat analysis applications. In October 2006, CombiMatrix won two million-dollar allocations under the 2007 Defense Appropriations Bill to develop these technologies, including a microarray for the H5N1 avian influenza virus (see BAN 10/10/2006).
 
Last May, the company won a sub-contract for an undisclosed sum from Northrup Grummon to help develop a handheld sensor to detect bio-threats for the Defense Advanced Research Projects Agency (see BAN 5/23/2006).
 
David Danley, director of homeland security and defense programs at CombiMatrix, said in a statement that the company is designing products to address biothreat agents as well as infectious diseases “of public-health concern,” including influenza A and the avian flu subtype.
 
Additionally, the firm noted that its devices using its electrochemical-based detection systems are already being used “at several military and government laboratories as well as civilian installations.”

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