CombiMatrix's decision to focus all of its resources on its diagnostics business and abandon its play in the research arena appears to be paying off.
The company reported last week that its third-quarter revenues increased 68 percent on diagnostic testing sales, while its net loss for the quarter shrank by half.
Still, the firm's operations related to the research market have continued, albeit under a different mantle. During an earnings call last week, Chief Financial Officer Scott Burell said that a new private company, called Custom Array, has been established by a former distributor in Mukilteo, Wash., to continue manufacturing CombiMatrix arrays for research purposes.
According to Burell, CombiMatrix has licensed some of its IP to Custom Array, and CombiMatrix could benefit should the new entity's activities grow.
"We have licensed IP to them. Their operations are very small right now, but we do have ability to participate via downstream royalty should that business become successful," Burell said.
Founded in Mukilteo in 1999, CombiMatrix originally targeted the research market with its CustomArray Synthesizer and catalog and custom microarrays, including a system for detecting and monitoring influenza, as well as its ElectraSense portable microarray reader. In 2005, it established its CombiMatrix Molecular Diagnostics subsidiary in Irvine, Calif., and began to shift resources to the diagnostics business, a process that culminated with the decision earlier this year to scuttle the research business and consolidate the firm's operations in Irvine to focus solely on the molecular diagnostics market (BAN 4/20/2010).
Burell said the company had sought a buyer for its array tools business before deciding to shutter it, but that no successful offer materialized.
"There was a variety of interest from various parties, but nothing got to the stage where there would be a large M&A activity, so the business was shut down," he said.
While Custom Array is focused on manufacturing arrays for clients, it has inherited at least one CombiMatrix-era partnership. A 2009 supply agreement with Illumina has been transferred from CombiMatrix to Custom Array, Burell said. "The rights for Illumina to purchase DNA arrays have been transferred to Custom Array," he said, adding that he had "no insight as to Illumina's volumes."
Should the partnership with Illumina expand, Burell said it was possible that CombiMatrix could benefit via a royalty agreement. "There is potential upside in the future for that business," he added.
Growth in Diagnostics
While CombiMatrix's custom array business lives on with Custom Array, its own diagnostics business continues to grow. The firm's revenue for the three-month period ended Sept. 30 rose 66 percent to $1 million from $603,000 in the year-ago period. Its services revenue for the quarter rose 82 percent to $924,000 from $507,000 in the prior-year period, while product revenue declined 6 percent to $90,000 from $96,000.
In June, during the end of the second quarter, Medicare began reimbursing all of CombiMatrix's array-based tests (BAN 6/15/2010). The firm ran 967 billable tests during the third quarter of 2010, up from 551 in Q3 '09, a 75-percent increase that Judd Jessup, who was named president and CEO of CombiMatrix in August, attributed during the call to "sales and marketing penetrance" and "improved reimbursement."
According to Jessup, CombiMatrix currently employs three full-time sales people, and recently hired another sales- and business-development staffer who will focus on oncology. Altogether, the company has 40 employees, Jessup said.
According to Burell, CombiMatrix's product revenues have been largely generated by selling bacterial artificial chromosome arrays for comparative genomic hybridization to a single distributor in Asia. He said that it is likely that diagnostic array kit sales, which were down year over year, will continue to decline.
"We have recently been notified that one of our primary customers is considering buying arrays from other providers and, as a result, it is likely our array product sales will decrease and eventually phase out in future periods," said Burell.
CombiMatrix posted a net loss of $2.2 million for the quarter, down from a net loss of $3.3 million for Q3 2009. The third quarter of 2009 included a $1.5 million loss from discontinued operations, while this year the firm reported a $265,000 loss for those items.
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Included among the discontinued operations are two ongoing biodefense-related US Department of Defense contracts. According to Burell, one of the contracts is being completed and the other is being transferred, or "novated," to an undisclosed third party.
"Net activity from these contracts will continue to be listed as discontinued operations, [and] will be completed or novated by early 2011," he said.
The firm's R&D spending declined to $575,000 from $684,000, and its SG&A expenses increased to $1.7 million from $1.6 million. CombiMatrix finished the quarter with $7.9 million in cash and cash equivalents.
Going forward, Jessup said that among the firm's priorities are expanding its base of customers and partners and optimizing reimbursements for the firm's testing services.
Jessup said the firm is interested in expanding its menu of molecular diagnostic tests, including introducing sequencing-based tests for disease-related genes. However, formerly planned diagnostics, such as the company's microRNA expression profile-based comprehensive cancer array screen, have been frozen until the firm can muster more resources.
Though the company did announce that the US Internal Revenue Service awarded it $488,958 earlier this month for projects entitled "Array Comparative Genomic Hybridization, or 'aCGH,'" and "Comprehensive Cancer Array, or 'CCA,'" Burell said the CCA development program continues to be suspended.
"The CCA project has been put on hold," he said. "It is something that we could restart in the future, if we had the resources, but it has been on hold at the time." He confirmed by e-mail this week that CombiMatrix does not "have plans to continue that program at this time, but we are constantly evaluating our R&D budgets and projects and it is possible the project could be reconstituted at a later date." He declined to further comment on Custom Array or its activities.
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