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Working Through Transitional Stage, Genaissance Secures Loan, Narrows Loss

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Genaissance will likely continue on its way to becoming a diagnostic provider and drug maker despite a notice in a mid-March SEC filing that warned it may not be able to stay solvent — Ben Kaplan, the company's CFO, told Pharmacogenomics Reporter that the warning was based purely on assets reportable at the time of the writing, and an estimate was projected through the rest of the year.

The March 15 document said the company is examining "alternatives to financing our ongoing operations," including reorganization, strategic alternatives, and the potential sale of the company. "These circumstances raise substantial doubt about our ability to continue as a going concern and our ability to meet our obligations under certain of our material agreements," the document said.

Though the document didn't have an immediate effect on Genaissance's share price, the stock has dropped 41 percent since the date of the filing. Investors have been gradually losing faith in the company's ability to monetize its assets, causing shares in Genaissance to lose more than 74 percent of their market capitalization since this time last year.

But in April, things started to look a little bit brighter for Genaissance. First, the company's share price jumped after Genaissance said that it and ParAllele BioScience would co-market ParAllele's upcoming MegAllele DME-T assay panel on April 5. Soon after, it obtained a $4.5 million loan that replaced an existing $2.5 million loan and increased the company's cash on hand to $8.1 million (pro forma). Moreover, Genaissance's $3.1 million first-quarter cash burn, announced this week, included $1.3 million in non-cash charges, which means that cash loss for the first quarter was actually $1.7 million, Ben Kaplan, the firm's CFO, told Pharmacogenomics Reporter. According to CEO Kevin Rakin, this means Genaissance can remain solvent for a little longer than one year at the current cash-burn rate, considerably longer than the prediction that triggered the company's warning. Rakin added that Genaissance still plans to become cash flow positive by the end of 2005.

Yet how then to explain investor behavior? For example, the company's stock swooned 12 percent to $.95 April 28, prompting a puzzled Genaissance to issue a statement saying that "nothing fundamental in the company's operations has changed to cause the current market activity" in its stock.

And on May 3, the day Genaissance reported a 51-percent increase in total revenue and a 34-percent decline in net losses, the stock closed down 6.48 percent at $1.01. Why are investors beating up on Genaissance — and should the company's customers and collaborators start running for the hills, too?

"The issue is that these companies that get a ton of money to begin with are now going through their transitional stage," said Keith Batchelder, CEO of the consultancy Genomic Healthcare Strategies. "Any of these companies that started in genomics/genetics/IP space are now trying to figure out what business model will work for them," he said. "I predict there's going to be a roll-up of these companies by big pharma."

In a conference call discussing the company's first-quarter earnings with investors this week [see sidebar], CEO Kevin Rakin presented updates on the company's ventures. The newest deal is an agreement with ParAllele in which the companies will co-market a 1,500-SNP 160-gene drug-metabolism genotyping panel that runs on Affymetrix's GeneChip platform.

"We are now marketing this service to other pharmaceutical companies, and expect to start recording revenues in the third quarter," Rakin said during the call. The company will offer the service from its GLP-compliant facilities in Houston, Texas. The panel features about 400 SNPs from Genaissance's own IP [see Pharmacogenomics Reporter 3/17/2005].

Through its collaboration with Ipsogen, Genaissance "has a number of proposals for pharmaceutical companies for the molecular characterization of key genes in patients' tumors," such as EGFR and K-RAS, Rakin told investors. At the firm's Lark services lab, which Genaissance acquired last year [see BioArray News, 12/31/2003], Genaissance in April reorganized its sales teams and added a sales director, Rakin said. Talks are ongoing with a distribution partner to extend the company's reach throughout the United States and beyond, he added.

The company's only diagnostic, the Familion test, which checks for genetic predisposition to a heart abnormality, has grown to the point that Genaissance now receives more than five samples weekly from doctors for testing, said Rakin. The most common procedure, an index test for five genes related to Long-Qt syndrome, costs about $5,700 per sample, while a follow-up that tests family members for the presence of a single gene variant costs about $900. The company recently expanded Familion to try to identify people at risk for the drug-induced heart problem, but there was no mention of interest in the test on the part of pharma [see PGx Reporter 2/3/2005].

In agricultural genotyping, Rakin told investors the company "continues to see considerable activity." In March, Genaissance announced a soybean-sequencing deal with Monsanto and the US Department of Agriculture to add to two other genotyping studies from October 2004 [see PGx Reporter 10/14/2004] concerning sheep and cattle. Genaissance has "a number of traceability, trait-selection, and disease-susceptibility proposals pending," Rakin said.

Genaissance's Q1 Earnings

Genaissance this week posted a 51-percent increase in total revenue and a 34-percent decline in net losses in the first quarter.

Total receipts for the three months ended March 31 increased to $5.6 million from $3.7 million year over year. Revenues from licensing and research were flat at $2.9 million, though receipts from lab services swelled to $2.7 million from $860,000 in the year-ago quarter.

Genaissance said it spent $3.3 million on R&D, down from $5 million during the first quarter 2004.

Net losses in the period fell to $3.1 million, or $.09 per basic share, from $4.7 million, or $.21 per basic share, year over year.

Genaissance said it had around $5.9 million in cash and equivalents as of March 31.

As for the company's goals for the drug-repositioning market, Rakin told investors that both projects — involving the selective serotonin reuptake inhibitor vilazodone and the schizophrenia drug clozapine — had made progress in the first quarter. But in the case of vilazodone [see PGx Reporter 9/30/2004], a Merck drug that failed Phase II trials, the progress consisted of a meeting with the US Food and Drug Administration's Interdisciplinary Pharmacogenomics Review Group to discuss the company's development plans and get feedback on its approach to finding responders using pharmacogenomics, Rakin said.

In a September conference call with investors, Rakin said Genaissance hoped to begin enrolling patients in Phase II clinical trials for vilazodone during the first half of 2005. In an interview with Pharmacogenomics Reporter, Genaissance CFO Ben Kaplan declined to say when vilazodone trials might begin, but said the trials should not affect the company's financial position. "We have been looking at various alternatives to financing vilazodone without necessarily using the resources of Genaissance," Kaplan said. None of the $4.5 million in loans is earmarked for supporting clinical trials, Kaplan added.

Also during the first quarter, Genaissance has uncovered additional "compelling genetic markers" for identifying patients likely to experience life-threatening agranulocytosis induced by the schizophrenia drug clozapine, said Rakin. Novartis makes the drug under the name Clozaril, and generic versions are available from Zenith Goldline and Mylan Pharmaceuticals. The company hopes these markers can "substantially expand" the drug's sales, which currently stand at about $200 million annually, he said [see PGx Reporter 12/23/2004]. Genaissance hopes to validate the markers "during 2005," Rakin said.

In the IP arena, data related to clozapine is also useful for "other drugs that induce neutropenia or agranulocytosis," Rakin said. Additionally, the company recently "received a notice of allowance" on a genetic variant in CYP450 3A4, he added.

— CW

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