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Outgoing CombiMatrix CEO Calls Firm 'Attractive Acquisition Prospect'

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This story was first published May 7.

By Justin Petrone

CombiMatrix's recent restructuring activities and "strong" balance sheet have made the firm a potential buy for companies looking to enter the molecular diagnostics market, according to the firm's top official.

CombiMatrix CEO Amit Kumar, who plans to step down by the end of next month, said last week that the company has "become a much more attractive acquisition prospect" since it decided last month to cease all activities not related to its diagnostics business and to consolidate its operations.

According to Kumar, CombiMatrix has been engaged in discussions with potential suitors for six months and will very shortly either announce a transaction or will "cease these activities and focus on our operations and cash flow."

Kumar discussed the Mukilteo, Wash.-based firm's future during a conference call last week to discuss the company's financial results for the first quarter, during which revenues fell 13 percent, with its government contracts and products revenues both declining year over year.

Total revenues for the three-month period ended March 31 were $1.3 million compared to $1.5 million for the first quarter of 2009. Government contract sales dropped to $200,000 from $525,000, while product sales fell to $204,000 from $257,000. Service revenues, however, increased to $788,000 from $696,000.

CombiMatrix posted a first-quarter profit of $15.3 million due to a $19.4 million payment it received to settle litigation with National Union Fire Insurance Company. In comparison, it posted a net loss of $6.1 million for Q1 2009.

R&D expenses for the quarter increased 36 percent year over year to $1.5 million from $1.1 million, while SG&A spending declined 4 percent to $2.7 million from $2.8 million. CombiMatrix finished the quarter with $13.5 million in cash and cash equivalents.

Given the results, Kumar said that CombiMatrix has the "strongest balance sheet" it has seen in years. "For the first time in years, we did not receive a going concern opinion from our auditors," he said.

CombiMatrix recently announced that it would restructure its operations, which includes layoffs, moving its headquarters to Irvine, Calif., and finding a new CEO (BAN 4/20/2010). The company expects to reduce its annual cash burn roughly by half to $5 million from the $10.6 million it spent last year. While it cuts its other activities, the company's plan is to renew its focus on its diagnostics business, which, Kumar noted, is growing.

"The first quarter was our highest revenue quarter to date for our diagnostics business," he said, adding that the division posted 29 percent sequential growth compared to the fourth quarter of 2009 and 13 percent growth year-over-year, though he did not disclose revenues for the business.

"The drivers for this growth include a number of factors — one is the progress we have made regarding reimbursement," he said. "We have been working with multiple third-party payors to demonstrate the value and corresponding pricing of our tests."

CCA Launch Postponed

CombiMatrix currently offers a number of tests through its CombiMatrix Molecular Diagnostics subsidiary, including the BAC and Oligo HDScan tests for identifying congenital chromosomal abnormalities; the Prenatal Scan test for identifying genetic disorders in utero; the ATScan test for identifying copy number variants associated with autism spectrum disorder; the HemeScan test for chronic lymphocytic leukemia; the HERScan test for HER2 analysis in breast cancer patients; and the Prostate Cancer Microarray test to stratify cancer patients according to risk of recurrence and metastasis post-prostatectomy.

The firm was also planning to launch later this year its Comprehensive Cancer Array, which is designed to measure microRNA expression patterns to detect the presence of cancer and distinguish between cancers (BAN 3/16/2010). However, the company has now decided to shelve that project until it is cash flow positive, Kumar said.

"When making cuts, one obviously sacrifices or delays future opportunities," Kumar said. "While such decisions were difficult to make, we had to make them to become cash flow positive with existing cash on our balance sheet," he said. "Our goal is to not seek additional dilutive capital before reaching the break-even point."

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With regards to the CCA project, Kumar said that the firm has performed three blinded clinical studies using this product. Though sensitivity and specificity for two of the studies was 85 percent and 90 percent, it was roughly 20 percent lower for the third, he said. CombiMatrix believes the poorer performance of the third CCA study was due to sample collection and handling issues.

"It kills me" to shelve the project, Kumar said, "but there is some additional technical work that needs to be done, and very recent rhetoric [coming from regulatory agencies] indicates to us that there is going to be additional clinical validation and trial work that will need to be done that we didn't anticipate, so we made this strategic decision to cut our costs."

'Self-Driven Vortex'

While adoption of CombiMatrix's tests continues to increase, the firm has said in recent months that it is "not satisfied" with the pace of growth in the business (BAN 3/16/2010). The company said this week that it has overcome obstacles to adoption, including reimbursement issues, which should now allow its diagnostics service business to grow at a more rapid rate.

"With such clear clinical value for our tests, why haven't we seen greater adoption and why do we believe that we are poised to see appreciable uptake in demand for our tests?" asked Mansoor Mohammed, president of CombiMatrix's CMD subsidiary, during the call.

Mohammed said that "successful sales and marketing in the diagnostic service sector" relies on "rigorous validation of one's tests, followed by initial market education and concomitant early adoption by select clinicians by use for their patients in parallel filing claims to insurance providers." Successful reimbursement of tests will "encourage more doctors to utilize one's test, resulting in the generation and dissemination of more clinical data," and in turn will "educate more doctors at more scientific meetings," he said.

This chain of events creates a "self-driven vortex of market traction and acceptance that builds upon itself," Mohammed said. CombiMatrix now "strongly believes that it is entering precisely that phase of enabling critical mass," he added.

In addition to predicting a pick-up in the pace of growth, Mohammed said that, in spite of its restructuring activities, the firm is on track to continue to roll out more tests in coming quarters.

According to Mohammed, CombiMatrix sees "attractive markets in genomics-based disease risk assessment," particularly in "cardiovascular and related areas."

He said that while the "opportunity for oncology" — where most of the firm's tests are currently positioned — is "large," the opportunity for "future products in the cardiovascular and related arenas, is even larger." Mohammed did not elaborate.

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