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Buying Epoch Biosciences, Nanogen Continues Shifting Market Identity

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In a move billed as an integration of complementary technology companies, Nanogen plans to acquire Epoch Bioscience in a stock swap worth $58 million. Should shareholders approve the plan, which is expected to close in November or December, the acquisition will cap a difficult year for Nanogen, while pulling several related research products into the struggling company’s tent.

The move should also allow Nanogen to increase its share of the molecular diagnostics and research markets, according to Nanogen and Epoch company officials.

The acquisition also illustrates the value of bringing together complementary technologies under one roof, and, if successful, may portend additional mergers and acquisitions in the near term in the molecular diagnostics industry.

“Based on our diagnostic R&D benchmarking experience, the closer you integrate instrument, software, and reagents development under one roof, the better the chances are for your success,” Carrie Cresenzi, senior market analyst for Boston Biomedical Consultants, told Pharmacogenomics Reporter in an e-mail this week. “This is especially apparent in the in vitro diagnostic nucleic-acid testing market.”

For Epoch and Nanogen, the decision to bring together their technologies was clear: “There’s the same customer in the diagnostic space, whether they’re selling instruments or assays,” said Epoch CFO Bert Hogue. “It accelerates the commercial efforts we’ve undertaken in the past two years to get our products and technologies into the market.”

The companies began to recognize their compatibility when they launched a project last year to incorporate Epoch probes into Nanogen products. If the acquisition goes through, Epoch’s real-time PCR reagents will be intended mostly for the clinical and research laboratory markets, while “larger labs, and the ones that want to do multiplex, more complicated mutational analysis,” are more suited to Nanogen’s NanoChip molecular biology workstation, Nanogen CEO Howard Birndorf said.

Another immediate goal of the deal is to incorporate Epoch’s temperature-insensitive probe system with the NanoChip workstation, said Birndorf. He said this would likely happen in three or four months after the deal closes.

Nanogen will maintain separate R&D facilities in San Diego and Bothell, Wash., Hogue said. He declined to comment on potential layoffs, but said if there were any they will be “very, very few” since R&D, manufacturing, and related quality functions will remain in Washington, he said. Nanogen employs about 165 people; Epoch employs approximately 45.

Epoch’s 21 MGB Eclipse Detection Reagents, which the company began to market as analyte-specific reagents in July, also will be incorporated into Nanogen assays, said Nanogen spokesperson Pam Lord. No change is planned for any of Epoch’s products, according to Hogue.

In addition to combining technology, Nanogen’s sales and marketing infrastructure is expected to accelerate sales of Epoch’s products, Hogue said. Nanogen has “a larger direct-sales force, a distributor network in Europe, and plans to proceed into Asia in the not-too-distant future,” he added.

“We compete primarily in the research space with ABI,” said Hogue. “In the diagnostic space it’s a little more wide open, which is why most of the combined company’s distribution efforts are going to be pointed toward the diagnostic space.”

Birndorf said the combined company will employ between eight and 10 field representatives and as many as 40 sales-and-marketing employees. The company’s competitors will include Roche, Applied Biosystems, and Cepheid, he said.

The acquisition is part of a larger search by Nanogen for advantage within the industry, which has seen the company describe itself in the past year as a developer of molecular diagnostic products, and as a developer of point-of-care and molecular diagnostic products.

Birndorf said in May that the company, faced with lackluster sales in the reference-lab market, was interested in expanding into genomic and proteomic diagnostic markers, as well as reinforcing its position in the market for virus- and bacteria-detecting tests.

In a conference call in August describing the company’s second-quarter earnings, Birndorf said, “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.”

In the conference call, Nanogen President and COO David Ludvigson blamed the poor sales on “performance issues” with the company’s CFTR ASR, which is used to develop tests to detect gene mutations associated with cystic fibrosis.

The acquisition also caps a recent move by Nanogen to adjust its course. Earlier this year the company ended its association with Frankfurt, Germany-based Recognomics, a joint venture with Aventis, for a charge of $870,000. Shortly thereafter, Nanogen purchased Toronto-based point-of-care company SynX Pharma, announcing it would invest between $6 million and $8 million to bring its congestive heart-failure diagnostic to market.

The purchase of SynX raised Nanogen’s net loss for the quarter ended June 30 to $12.3 million, or $.38 per share, from $6.9 million for the same period in the previous year. Second-quarter revenues fell to $1.1 million from $1.7 million year over year. Nanogen had $60.3 million in cash, cash equivalents, and short-term investments as of June 30.

Nanogen originally planned to sell the SynX heart diagnostic by the end of the year — first in Europe, followed by the United States. But that timeline has been pushed back to 2005, said Lord. She declined to say whether the diagnostic has been filed for approval as an IVD on either side of the Atlantic. The company will seek in vitro diagnostic approval of its NanoChip system from the FDA, Birndorf told BioArray News, PGx Reporter’s sister publication.

“I recently had a meeting with the FDA where they encouraged us to [pursue filing the system for IVD use],” Birndorf said. “I think they’re going to be quite open as to how regulatory approvals are gained, and they’re going to be quick because they want these products on the market. They assured me the timeframes are going to be relatively short.”

For Epoch, the deal comes at a turning point. Once a second-party tool vendor, the company made a name for itself by supplying reagents and probes for use in Third Wave’s Invader assays and ABI’s TaqMan. In addition, Qiagen and Amersham Biosciences, now GE Healthcare, agreed to distribute Epoch’s MGB product worldwide.

But Epoch fell on hard times, selling its unprofitable oligonucleotide-manufacturing facilities in San Diego and Liege, Belgium. Blaming Amersham for “disappointing performance,” annual revenues plummeted 25 percent in 2003 [see 3/4/04 PGx Reporter].

For the second quarter ended June 30, the company reported a net loss of $570,000, or $.02 per share. It reported revenues of $1.9 million, compared with $2.5 million in the year-over-year period, and $9.2 million in unrestricted cash and cash equivalents, compared with $4.6 million in unrestricted cash and cash equivalents year-over-year.

Epoch repositioned itself in early 2004 as a molecular diagnostics provider, selling its MGB Eclipse by Design product directly to the clinical market, a move that left the firm without the marketing and distribution arrangements of its former incarnation. It resolved to hire between four and six sales and marketing employees to sell to pharmas and core labs. Two or three of these hires are expected by the end of the year. [PGx 3/4/04] It narrowed losses through the second quarter, expanded a licensing agreement with Celera in May, and launched 21 ASRs in July.

Under the agreement, Nanogen will pay an offer price of $2 per Epoch share — a 30 percent premium over Epoch’s average closing price for the 20 trading days ended Sept. 1, the companies said. Epoch shareholders will receive a number of shares based on an exchange ratio determined by dividing the $2 per share offer price by Nanogen’s closing issue price.

Meanwhile, Birndorf said Nanogen would apply in November for National Cancer Institute Nanotechnology Cancer Initiative grants. Since Nanogen’s chips work on a molecular scale, he said, many of their products qualify as nanotechnology. Birndorf singled out in situ mutation detection, environmental monitoring and “more far-out things like chip-based nanodevices for monitoring or manipulating individual cells.” Nanogen’s plans are not related to Epoch, he added.

— CW

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