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CombiMatrix Hopes Upcoming Cancer Array Will Rally Investors Spooked by Solvency Doubts

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This article has been updated from a previous version to include information on $10 million in financing that the company raised in July.
 
With a dwindling cash position and investor concerns over an unpaid $35.7 million settlement owed to CombiMatrix, the company announced this week that it is developing a microRNA-based screening test for cancer at multiple organ sites that could play in a potential $12 billion market.
 
News of the CombiMatrix Cancer Array comes as the company’s stock price has declined around 20 percent since mid-September when it sought to reassure investors that it would indeed be paid the $35.7 million that a court had required National Union Fire Insurance Company to pay.
 
The insurance company, which is appealing the decision, is a subsidiary of beleaguered insurer American International Group, and investors believe this tie could hurt CombiMatrix’s chances of seeing the cash.
 
The litigation between CombiMatrix and NUFIC reached a head in May when the US District Court for the Central District of California decided in favor of CombiMatrix, saying that the insurance firm had refused to defend and indemnify CombiMatrix under its director and officer’s insurance policy.
 
Since Sept. 12, the business day before CombiMatrix issued a statement announcing the court’s final judgment in the suit, its share price slid 20 percent to $11.55 on Oct. 7, the day it updated investors with the development plans for the array.
 
Investors are spooked despite assurances by CombiMatrix CEO Amit Kumar that the court award will be delivered.
 
Kumar stressed in two separate statements in September that the court-awarded damages are secured by the bond, and whatever happens to AIG will not affect the award. The bond is “severed from the assets and liabilities of National Union and AIG,” Kumar told investors at the time. “No matter what happens to those companies financially, these funds are safe and payable to us upon success in the appeal process.”
 
As of June 30, the firm held around $3.8 million in cash, cash equivalents, and available-for-sale investments compared to $8.2 million in the fourth quarter of 2007.
 
In announcing its second-quarter earnings, the company determined that its financial position was “sufficient to meet [its] cash requirements through September of 2008.” However, ”in order for our company to continue as a going concern beyond this point and ultimately to achieve profitability, we will be required to obtain capital from external sources, increase revenues and reduce operating costs,” the company said in a statement at the time.
 
In July, CombiMatrix raised $10 million in convertible debt financing that it said will enable it to meet its cash requirements through the third quarter of 2009.
  
Now CombiMatrix officials are rallying investors behind the upcoming launch of the new cancer array, which CombiMatrix hopes will attract deep-pocketed marketing and development partners.
 

These potential partners could even support the development costs for the array, Kumar noted.

“We expect significant demand for this test,” Kumar told investors during a call held to discuss development plans for the array. “If this test penetrates even 1 percent of the market, it represents $125 million in revenue, which is significant for this company.”
 
In the quarter ended June 30, CombiMatrix reported $2.1 million in revenues, an improvement over the $1.3 million it generated in the year-ago period.
 
Kumar emphasized to investors that the array would be a screening test for cancer and not a test for diagnosing cancer. It will be able to show patients that “something is going on” in a specific tissue at a particular organ site. Armed with such information, a doctor could decide to follow up with traditional methods to try to confirm the presence of cancer.
 
“This test is taking advantage of a trend in medicine today, which is preventative,” Kumar said.
 
During the presentation, Kumar often compared the multiplex cancer array to the prostate-specific antigen test to emphasize that what CombiMatrix is developing is a screening test and not a test for disease prognosis.
 
However, according to Kumar, such a test could present a significant partnership opportunity for drug companies that develop certain cancer therapeutics and for diagnostic companies that make assays that gauge therapeutic response.
 
These potential partners could even support the development costs for the array, Kumar noted.
 
Although Kumar noted that CombiMatrix has been planning to develop such a test for several years, the company still seems to be in the very early planning stages for the test. It expects to take between 18 and 24 months to launch the test as a homebrew assay in its own CLIA-certified laboratory and add to the array new miRNA associations to various cancers every couple of quarters.
 
Kumar said the company would not yet announce which cancers the multiplex array would test for and noted that there might not be known associated miRNAs in some cancers. Furthermore, Kumar could not say yet how early the screening test would be able to discern a problem in patients. Ideally, he noted, the company is shooting for detection of Stage I-II cancers.
 
“This is an approach to identify disease early enough to the benefit of the patient and the healthcare system from a cost standpoint,” Kumar said.
 
CombiMatrix’s $12 billion annual market potential for the test is based on the assumption that the test will have utility for the 50 million people in the US who are 40 years or older. The company plans to charge between $250 and $300 for the ability to simultaneously screen for cancers at multiple organ sites. The CombiMatrix Cancer Array will likely be marketed as a screening test that can be integrated into one’s annual physical exam.
 
As it develops the test, CombiMatrix said it plans to publish data on the array, identify marketing partners, and bring on thought leaders who will give the company technical advice on the test and who “may be valuable in marketing the test.”
 
“As we continue with the development process, we will establish strategic partnerships that enable access to the large market opportunity,” Kumar said.
 
Exiqon, Asuragen, and Rosetta Genomics, to name a few, have entered the miRNA-based cancer diagnostics space. 

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