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Incoming CombiMatrix CEO Sees Room in Prenatal Testing Market for Both Arrays and Sequencing

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This story was originally posted on Feb. 28.

CombiMatrix, a publicly traded molecular diagnostics laboratory that specializes in microarray-based prenatal testing, does not see noninvasive, next-generation sequencing-based prenatal tests as a threat to its business, according to its new CEO.

Mark McDonough, who will take over the top position at the Irvine, Calif.-based company when current CEO Judd Jessup retires next month, told investors during the firm's fourth-quarter earnings call this week that while noninvasive prenatal testing, or NIPT, is becoming increasingly popular, the information provided to physicians by NIPT and chromosomal microarray analysis, or CMA, is different, and that NIPT adoption could actually lead to an increase in future demand for CMA.

Prenatal testing is CombiMatrix's main focus at the moment. During the call, McDonough and Jessup noted that the firm's Q4 revenues rose 25 percent year over year as revenues from its prenatal testing services spiked 161 percent.

That market continues to transition from traditional approaches like karyotyping to newer platforms such as arrays and, more recently, next-generation sequencing. In the past two years a number of companies, such as Sequenom, Verinata Health, Natera, and Ariosa Diagnostics, have introduced sequencing-based NIPT services that can detect chromosomal aneuploidies in fetal cells isolated from maternal plasma. For instance, Sequenom's MaterniT21 service tests for trisomy 21 and trisomy 18, which are linked to Down and Edwards syndrome, respectively. However, if one of these tests comes back negative, McDonough said that CMA could be a next step for concerned parents and their physicians since the method provides genome-wide information on potentially many more genetic abnormalities.

"It is important to keep in mind that those tests screen for specific conditions such as Down syndrome, and that the vast majority of these [noninvasive] tests come back negative," McDonough said on the call. "Many of the parents facing this uncertainty will want the broader information provided by a microarray."

Because of this dynamic, McDonough said that there are "more than enough opportunities for growth and expansion for both noninvasive testing and microarray testing" in the prenatal market.

Jessup also commented on the potential impact of NIPT on CombiMatrix's business. He said the firm estimates there are about 4 million pregnancies in the US per year, and that the number of cases that could be diagnosed by NIPT is about 5 percent of that total, or about 200,000 cases, although, based on Jessup's remarks, the overall estimated number of high-risk pregnancies per year that would qualify for NIPT is about 750,000.

Of these undiagnosed cases, Jessup said that about 175,000 would seek invasive prenatal testing because of an abnormal ultrasound, and an additional 200,000 would go on to CMA because of advanced maternal age, leaving CombiMatrix with an addressable market of close to 600,000 prospective cases per year.

"For a market size of $690 million, assuming reimbursement of $1,200 per array, which is conservative, we think the market is plenty large enough for everybody," said Jessup. In the call, Chief Financial Officer Scott Burrell noted that the firm currently receives reimbursement of about $1,700 per array, though the list price of the test is $3,250.

Another reason the company is confident in spite of the uptake of NIPT is that the segment of the prenatal testing market that relies on traditional karyotyping to make a diagnosis continues to migrate to CMA and other technologies, including NIPT. With that market segment "up for grabs," Jessup said the firm is "optimistic" that this shift will "cause a significant increase" in array-based testing.

A 'Much Different Company'

CombiMatrix announced this month that Jessup would retire in mid-March, to be succeeded by McDonough, who joined the company as chief operating officer last year after holding similar positions at other molecular diagnostics firms, including Pathwork Diagnostics, which also offers array-based testing.

Jessup portrayed McDonough's hire as part of a larger shift in strategy in the firm that saw it establish a "new core management team" and "streamline its organization to cut costs and reduce cash burn," evolving into a "much different company than it was a year ago." Perhaps the biggest change at CombiMatrix, though, was its decision last year to deemphasize its menu of array-based oncology tests and focus its sales and marketing efforts on prenatal and pediatric cytogenetic testing (BAN 8/14/2012).

During the call McDonough called this shift the "most important strategic decision in our history," and portrayed it as one that has seen CombiMatrix transition from a lab servicing several markets to "focusing on what we do best and where the market is growing, in prenatal and pediatric analysis, particularly CMA." He said that the market has responded "relatively well" to CombiMatrix's intensified outreach, and that the firm expects the growth to continue, noting that the fastest growth is coming from the area of miscarriage management.

CombiMatrix projects that CMA will represent about 10 percent of the overall invasive prenatal testing market in 2013, which Jessup had pegged at about $690 million, though he said the market will "expand rapidly as more women and physicians realize the clinical benefit of prenatal testing."

Q4 and FY

For the three months ended Dec. 31, 2012, CombiMatrix's revenues increased 25 percent to $1.5 million from $1.2 million in the prior year. Prenatal testing revenues more than doubled year over year to $791,000 from $303,000 in the same period of 2012.

CombiMatrix attributed the revenue growth in prenatal testing to a 172-percent increase in billable test volumes, noting that it performed 1,595 billable diagnostic tests for 108 customers during the fourth quarter, compared to 1,318 tests for 103 customers in the year-ago period.

Revenues from CombiMatrix's overall diagnostic services increased to $1.4 million from $1.2 million, while royalty revenues increased to $54,000 from $25,000.

Net loss widened to $3.8 million in Q4 from a net loss of $2 million in Q4 '12. In the fourth quarter, CombiMatrix took non-cash warrant derivative charges of $2.4 million resulting from the issuance of warrants to certain investors in the firm's Series A Preferred Stock financing, which closed in two tranches, it said.

Q4 R&D costs declined 18 percent to $297,000 from $361,000, while SG&A costs were down 19 percent to $1.7 million from $2.1 million.

In full-year 2012, revenues increased 15 percent year over year to $5.4 million from $4.7 million in 2011. Diagnostic service revenues improved to $5 million from $4.6 million, while royalty revenues increased to $180,000 from $100,000.

Prenatal test revenues doubled in 2012 to $2 million from $1 million in 2011, the company said, with billable test volumes growing 25 percent year over year to 5,787 tests from 4,634 tests in 2011.

CombiMatrix reported a net loss of $9.5 million in 2012 compared to a net loss of $7.6 million in 2011.

Full-year R&D expenses were relatively flat at $1.4 million. SG&A spending shrank 4 percent to $8 million from $8.3 million.

The company finished the year with $2.4 million in cash and cash equivalents.

During the call, an analyst noted that at the firm's current burn rate, it could run out of cash by the summer.

Jessup responded that the company is "doing a number of things" to address this, including modifying its warrants under its Series A financing so that they can be exercised immediately, which would generate as much as $1.7 million.

"Considering other financial opportunities in terms of raising capital, I'm optimistic that we will be able to raise additional money in both of these ways, and don't see a problem there," he said.

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