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Nanosphere Says Test Menu Must Expand Before Product Revenues Can ‘Accelerate’

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Nanosphere reported a 42-percent increase in third-quarter revenues, but company officials forecast that revenue growth in coming quarters will be modest until new tests the firm is currently developing enter the market.
 
Its existing US Food and Drug Administration-cleared assays for hypercoagulation and warfarin metabolism “continue to generate customer interest, but we do not expect to see accelerated growth until we expand our test menu,” Nanosphere President and CEO William Moffitt told investors during the company’s third-quarter earnings call.
 
Nanosphere’s revenues for the three months ended Sept. 30 rose to $283,231 from $199,005 year over year. The firm said sales of its Verigene System and test cartridges swelled to $210,000 for the quarter from $6,000 during the comparable period in 2007. It said those revenues came from test cartridge sales and rental agreements.
 
Meanwhile, revenue from contracts and government grants declined to $73,000 from $193,000 year over year.
 
The company’s product revenue, principally derived from its Verigene System and cartridges and its hypercoagulation and warfarin-metabolism test — “was essentially flat” in the third quarter, according to Chief Financial Officer Roger Moody.
 
However, during the call company officials noted the possibility that some of Nanosphere’s competitors may be leaving the warfarin-testing space as a result of FDA’s tightened regulation on analyte-specific reagents. In such a scenario, Nanosphere officials discussed opportunities to scoop up additional customers for its FDA-cleared test.
 
Additionally, new products that can bring in revenue for the company going forward include a cystic fibrosis assay and a respiratory assay panel that tests for influenza A/B and RSV A/B viruses. Nanosphere filed 510(k) submissions to the FDA for both of these assays during the third quarter.
 
Revenue Potential
 
Nanosphere filed for 510(k) clearance from the FDA for two tests — a cystic-fibrosis assay and a respiratory assay panel — that it hopes will add to its future revenue growth.
 
The CF assay comprises a panel of mutations recommended by the American College of Medical Genetics and the American College of Obstetrician Gynecology. According to the company, the test, which costs $65, is being targeted for a market with 1.8 million potential customers.
 

“While early uptick of [the warfarin-dosing test] has been below our expectations, we believe the value proposition is compelling and the testing will expand as payors, clinicians, and laboratorians align with improved patient care associated with use of this test.”

For its part, the respiratory assay panel marks Nanosphere’s first foray into the infectious-disease space. The panel, which tests for influenza and RSV viruses, will initially be introduced on the Verigene System, requiring external sample preparation. However, Nanosphere has said it plans eventually to introduce a second-generation assay that will run on the Verigene II System, which is fully automated.
 
In addition, the company is currently in the process of fling a 510(k) submission for an ultrasensitive cardiac troponin assay designed to diagnose myocardial infarction and to stratify acute coronary syndrome patients for risk. For this test, Nanosphere is conducting an international pivotal trial of 1,500 patients to demonstrate clinical utility.
 
Additionally, Nanosphere is in the process of preparing an HFE assay for clinical trials slated to start later this year. Mutations in the HFE gene cause hemochromatosis, which can lead to other diseases such as cirrhosis to the liver, liver cancer, thyroid cancer, diabetes, pancreatic cancer, renal failure, and heart attack.
 
“When we receive FDA clearance to market this test, we will be the only FDA cleared assay on the market” for the indication, Moffitt said. “Although more prevalent than cystic fibrosis, HFE is not that well known, but awareness is on the rise,” Moffitt said. “A number of customers in our pipeline are awaiting this test.”
 
Finally, Nanosphere plans to develop a more streamlined version of the Verigene platform for use by hospital emergency departments.
 
“Dubbed the Verigene POC, we expect this to reduce production cost to the system and enable us to offer a less expensive, dedicated platform for protein assays,” Moffitt said.
 
Warfarin Uptake
 
Nanosphere’s warfarin-metabolism test, one of its lead revenue-driving products, is the first FDA-approved assay for the indication, but physician adoption of the test has not been robust. Company officials blamed this on requirements by payors for data showing clinical utility.
 
In August 2007, the FDA updated the label for warfarin to note that people with variations of the genes CYP2C9 and VKORC1 may respond adversely to the drug. The agency did not require physicians to genetically test their patients, however, noting that additional outcomes studies would be necessary [see PGx Reporter 09-05-2007]. 
 
Despite the update, most national insurers have decided to not cover genetic tests for warfarin dosing, maintaining that there is insufficient evidence confirming the clinical utility of the technology.
 
The Centers for Medicare and Medicaid Services, which is home to Medicare and Medicaid, is currently investigating whether to reimburse for pharmacogenomics-based warfarin dosing [see PGx Reporter 10-29-2008].
 
“While the market awaits the decision on reimbursement from CMS, many customers continue to develop their own data to support testing programs,” Mike McGarrity, Nanosphere’s chief marketing officer, said during the earnings call.
 
“We believe we have a critical advantage to capitalize on this developing market opportunity based on our FDA-cleared status in light of the recent guidelines associated with the ASR assays,” McGarrity said, referring to the agency’s final guidance on ASRs, issued in September 2007, which notified device manufactures that it considers bundled ASRs to be IVDs, which do not fall under the ASR rule.
 
“While early uptick of this test has been below our expectations, we believe the value proposition is compelling and the testing will expand as payors, clinicians and laboratorians align with improved patient care associated with use of this test,” he added.
 
One advantage on Nanosphere’s side, according to company officials, is the possibility that some of its competitors in the warfarin-testing space have decided to exit the market following the FDA’s tightening of regulatory rules governing the marketing of ASRs.
 
Competitors’ tests using bundled ASRs have come “under increased scrutiny from the FDA,” Moffitt noted. “So, it does put us in a good position to pick up some additional customers.”
 
A spokesperson for the company told Pharmacogenomics Reporter that the investor community has been discussing the possibility that two rivals in particular, Hologic and Luminex, might exit the warfarin space.
 
Mimi Torrington, director of investor relations at Luminex, told Pharmacogenomics Reporter that the company is not necessarily “exiting” the warfarin testing space. Rather, it had planned to submit a CYP2C9 ASR to the FDA but has now decided to offer it for investigational use only.
 
According to Torrington, the decision to not submit the ASR to the FDA was not related to the agency’s ASR rule. Rather a combination of factors, including customer demand, led Luminex to make that decision. The company also offers a warfarin diagnostic for investigational use, though it has no timeline for submitting the test for FDA clearance.
 
Meantime, Hologic, which recently acquired Third Wave and its warfarin genetic-marker reagents, has said it is developing a test kit on its Invader platform that it plans to submit to the FDA for clearance. Pharmacogenomics Reporter could not confirm Hologic’s plans to leave the warfarin testing space as company officials were not immediately available for comment.
 
Financials
 
In the third quarter, Nanosphere’s net loss narrowed to $9 million from $27.1 million, when the company was privately held. Loss during the third quarter of 2007 for the company, which went public during the fourth quarter of 2007, included $16.8 million in charges related to the value of its convertible derivative liability and its preferred stock warrants.
 
The company’s R&D spending declined 2 percent to $5.7 million from $5.8 million, and its SG&A spending dropped 23 percent to $3.4 million from $4.4 million.
 
This increase in spending reflects investment in new products such as our protein assay to detect cardiac troponin I, additional human genetic and infectious disease assays, and our Verigene II platform,” the company said in a statement.
 
Despite flat product revenues and modest future revenue projections, Nanosphere’s “spending and cash position are both in line with our plans and expectations,” Moody told investors.
 

Nanosphere finished the quarter with $83.7 million in cash and cash equivalents.

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