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CombiMatrix 'Not Satisfied' with Pace of Molecular Dx Business Growth

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By Justin Petrone

CombiMatrix said last week that demand for its menu of array-based molecular diagnostics is growing but not at a rate fast enough to offset a decline in government contract and product-derived revenues.

The Mukilteo, Wash.-based company, which maintains a diagnostics subsidiary in Irvine, Calif., has found it more difficult than expected to secure reimbursement for its tests. In addition, test acceptance has been constrained by the firm's limited sales and marketing infrastructure, according to its highest official.

CombiMatrix last week reported total revenues of $1.1 million for the three-month period ended Dec. 31, 2009, compared to $1.2 million for the fourth quarter of 2008. Contributing to the 8 percent decline was a decrease in government contracts, where revenue fell to $269,000 from $338,000, as well as in products, which declined to $229,000 from $247,000. Services revenue, derived mostly from sales of diagnostic tests through its lab in Irvine, was the only part of CombiMatrix's business that grew during the quarter, increasing to $588,000 from $549,000.

The results mirrored CombiMatrix's full-year 2009 performance. The company reported revenues of $4.9 million, a decline of 22 percent from $6.3 million in 2008. Government contracts revenue fell more than half to $1.2 million from $2.7 million, while product revenue fell to $1 million from $1.6 million. Only its services revenues rose to $2.4 million from $1.7 million year over year.

CEO Amit Kumar said during an earnings call last week that while there has been growth in the diagnostics business, CombiMatrix is "not satisfied with the pace." Some of the key hurdles to faster growth include a "difficult reimbursement environment, limited resources for clinical testing and validation, and limited sales and marketing infrastructure," Kumar said.

Regarding reimbursement, Kumar said that payors' resistance to reimbursing tests based on new technologies, like CombiMatrix's, are "headwinds faced by all molecular diagnostics companies," but that he "personally underestimated the degree to which this would be an issue."

Despite this, Kumar said that CombiMatrix has made "good progress" in getting payors to reimburse customers for its tests. "While we are not happy with where we want to be regarding reimbursement of our tests, we predict improved reimbursement and improved average revenue per test," he said.

Kumar also provided an update on the company's Comprehensive Cancer Array. This assay measures microRNA expression patterns to detect the presence of cancer and distinguish between cancers. CombiMatrix said previously that it plans to launch clinical trials for the CCA by mid-2010 and to debut the test by the beginning of the third quarter.

CombiMatrix has completed three internal, double-blind studies, Kumar said. While the first two demonstrated "high sensitivity and specificity," the third, which relied on patient samples from multiple sites and multiple collection methods, demonstrated a "good, but poorer, performance than the first two trials," he said. CombiMatrix is now analyzing the results and intends to provide a report in the near future.

During the call, Kumar said he anticipates a turnaround in the government contract portion of the firm's business. He noted that CombiMatrix recently received a new contract and an extension of a previous contract with the US National Aeronautics and Space Administration that should contribute a total of $800,000 to its revenues through early 2011. The company last March announced a partnership with NASA's Ames Research Center to design and test a microfluidic system that incorporates CombiMatrix's semiconductor arrays as part of an integrated genetic analysis platform that can be deployed in satellites (see BAN 3/17/2009).

Kumar also provided an update on a supply agreement inked with San Diego-based Illumina in October. While he said he is unable to specifically comment on the deal, he confirmed when asked by an investor that Illumina plans to launch a product based on the cooperation, most likely later this year.

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CombiMatrix's net loss for Q4 was $3.6 million, compared to $4.1 million for the comparable period of 2008. Its R&D expenses were roughly flat at $1.3 million, while its SG&A spending dropped to $2.1 million from $2.4 million.

CombiMatrix's net loss for the year was $17.6 million versus $15 million for 2008. R&D expenses for the year totaled $5.2 million versus $4.9 million the prior year, while its SG&A spending increased to $10 million from $9.2 million.

The firm finished the year with $5.4 million in cash, cash equivalents, and available-for-sale investments. However, that amount was boosted by its recent settlement of litigation with National Union Fire Insurance, under which CombiMatrix received settlement proceeds, net of attorneys' fees, of $19.4 million.

CombiMatrix said that it believes it will be able to meet its cash requirements through approximately June 2011.

"While our cash position does not give us infinite time, it does provide the longest operational runway we've had for some years," Kumar said of the settlement. "Now with the litigation behind us, we are in a position to focus on our business as well as the various strategic options that are before us."

CombiMatrix hired investment bank RW Baird in September to help it consider future strategic options, including alliances, divestitures, and business combinations. Kumar said during the firm's third quarter earnings call that talks with "potential suitors" for strategic deals that may include the sale of the company or its businesses have been "progressing" and the firm is ready to evaluate offers from interested parties (see BAN 11/17/2009).

Kumar said at the time that some companies with which CombiMatrix has held discussions "appear interested in acquiring our whole company, while others seem interested in components that are a strategic fit for them."

Retired Debt

CombiMatrix said separately earlier this month that it had fully repaid its secured convertible debenture held by YA Global Investments.

The debenture had an original principal amount of $10 million and was sold to the investment firm in July 2008. The note was due in July of this year, or within four months after CombiMatrix receives payment from National Union.

CombiMatrix said that as a result of retiring the note, it also has retired the potentially dilutive reserve of approximately 1.1 million shares of common stock that could have been issued in the conversion.

CombiMatrix Chief Financial Officer Scott Burell said in a statement that retiring the debt "strengthens our overall financial position and better positions CombiMatrix for future growth as well as attaining our strategic objectives."