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Wafergen Cash Reserves Dwindling as it Preps SmartChip for Market

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Over the last year, Wafergen has been pumping plenty of cash into R&D and working with several early-access partners to further develop and test its SmartChip real-time PCR system in anticipation of a commercial launch later this year.

But the company faces the prospect that it will run out of cash before it can launch its flagship product, according to a prospectus filed this month with the Securities and Exchange Commission.

Wafergen's current funds will finance operations only through June of this year, the company said in the prospectus, which provided information on the offering by its shareholders of nearly 4.4 million shares of common stock, and detailed the company's 2009 financial results.

After that, Wafergen said it will need "additional working capital," likely obtained "through the sale of additional equity securities or otherwise," to support future operations, including the commercialization and manufacture of the SmartChip system.

The company warned its investors that it may be "unable to raise sufficient additional capital when we need it or to raise capital on favorable terms," which would force Wafergen to "curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms."

As of Dec. 31, 2009, the company had $6 million in cash and cash equivalents, according to the SEC filings. The documents did not disclose the company's cash position as of April 9, the document filing date.

Wafergen's condition has been exacerbated by a difficult 2009 that saw its full-year revenue drop 39 percent to $380,000 from $622,000 in 2008; and its net loss swell 26 percent to $10.1 million from $8 million in the prior year. As of Dec. 31, 2009, Wafergen's accumulated deficit was $30.3 million.

The Fremont, Calif.-based company said that the revenue decrease resulted primarily from "challenging economic conditions, a reduction in sales to new distributors, and reductions in government funding causing potential customers to defer their planned expenditures."

The company's only source of revenue has been sales of SmartSlide, a microfluidic-based cell incubation system. But even as Wafergen is leaning on SmartSlide sales to fund operations, it has begun looking to the future and potential revenue from the SmartChip system.

"SmartSlide system sales have been generated from a handful of customers only, although we believe that there is an extensive market of more than 35,000 research laboratories around the world that are potential SmartSlide system customers," Wafergen said in its SEC filing.

"However, the company is primarily focusing on the development and commercialization of the SmartChip system, which we believe has significantly greater potential than SmartSlide," Wafergen added.

According to a March report from UK-based analyst Edison Investment Research, the SmartChip system costs approximately $150,000 and, on average, is expected to use 400 to 500 SmartChip consumables per year, with each chip costing $800 to $1,100.

If Wafergen can successfully navigate a SmartChip launch this year, it may realize revenues of as much as $6.3 million based on sales of 15 SmartChip systems and 2,000 to 4,000 SmartChip consumables, CEO Alnoor Shivji said in a presentation earlier this year (PCR Insider, 1/14/2010).

To support the commercialization of the SmartChip system, Wafergen has continued to increase its R&D expenditures in the hopes that it can push SmartChip to market as soon as possible: In 2009, the company upped its R&D spending 11 percent to $5.1 million from $4.6 million in 2008.

The increase "resulted primarily from a reduction in activity related to the SmartSlide system, which is in production, offset by an increase in activity related to development of the SmartChip system, including the cost of leased equipment, and of accelerated depreciation on, and expensing of, capital equipment related to both SmartChip and SmartSlide assesses as providing no future benefits," according to the filing.

"We believe a substantial investment in [R&D] is essential in the long term to remain competitive and expand into additional markets, and in the short term to complete testing and establish the commercial viability of the SmartChip system," the company said. "Accordingly, we expect our [R&D] expenses to remain at a high level of total expenditure as we grow."

The SmartChip system comprises consumable SmartChips, a nanodispenser, and a thermal cycler. The company is developing the system with two chip configurations and two instrument configurations: a 5,184-assay chip preloaded with primer content for studying gene panels or candidate genes of interest; and a high-throughput whole-genome version with 30,000 assays per chip.

Wafergen maintains that researchers using the system can conduct gene expression research at a fraction of the time and cost of existing instrument systems. Its primary competitors in the space include Life Technologies, Affymetrix, and Illumina, Wafergen said.

In addition to upping its R&D spending, Wafergen has been forging partnerships with a variety of academic institutions and companies, and offering contract gene expression profiling services, to gain feedback on SmartChip prior to its launch.

These partners include Duke University, Stanford University, University of California-San Francisco, University of Southern California, University of Texas Southwestern Medical Center, University of Pittsburgh (PCR Insider, 2/4/2010), Ghent University (PCR Insider, 3/18/2010), two undisclosed Japanese organizations, and an undisclosed US biotech company.

The company also said in March that it received CE Mark certification in Japan and Europe for two components of the SmartChip system: the thermal cycler and nanodispenser (PCR Insider, 3/10/2010).

Wafergen issued the prospectus earlier this month in connection with the resale from time to time by certain named selling stockholders of nearly 4.4 million shares of its common stock, which includes 3.4 million shares issued to those stockholders in a December 2009 private placement; and another 967,000 shares in January of this year.

These placements garnered Wafergen approximately $4.7 million in net proceeds. The company also raised approximately $5.6 million in a private placement in June and August 2009; and $13.4 million from two private placements in 2008 and 2007.

Wafergen said that it will not receive any proceeds from the sale of the 4.4 million shares, but will receive approximately $2.4 million from selling stockholders "if they exercise their warrants in full, on a cash basis, which we will use for working capital and general corporate purposes."

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