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With SELDI Sales Slumping, Ciphergen Restructures, Awaits Dx Collaborations


How will Ciphergen Biosystems' recently lowered first-quarter revenue forecast — and the investor backlash that it triggered — affect the company's plan to draw revenue from diagnostic biomarker collaborations, sell additional SELDI instruments, and, in the short term, remain solvent?

Ciphergen said this week that disappointing sales will cause its revenues for the first quarter to fall significantly short of earlier expectations. The company now expects to generate between $6.3 million and $6.7 million in revenues — less than half of its receipts during the same period last year.

Earlier this year, Ciphergen projected its first-quarter revenues to fall between $8 million and $9 million. As a result of the shortfall, the company has initiated a "broad restructuring" of its sales program that the company stressed will not necessarily cut the sales budget, but will make better use of assets.

"We are disappointed with our anticipated sales results for the first quarter," CEO Bill Rich said in a statement.

Ciphergen's first-quarter revenues follow three consecutive first quarters whose revenue growth decreased significantly year over year. Last year, the company reported that Q1 revenues increased by 21 percent to $15.5 million from $12.8 million. In 2003, the company's Q1 revenues increased by 88 percent, and in 2002, Q1 revenues increased by 152 percent.

According to Pacific Growth Equities, whose analysts cover Ciphergen, the company's management blamed the lackluster first-quarter sales on "weakness in new system placements." In response to the disappointing sales, the company hired a new vice president of North American and European sales, Paul Smith, and plans to introduce a new public relations strategy.

Matthew Hogan, Ciphergen's chief financial officer, said the restructured sales program would not necessarily cut sales spending, but would make better use of assets in order to sell more of its flagship SELDI instruments and chips. "We will be focusing on how we use some of our assets like our field scientists," Hogan said.

Hogan declined to elaborate further, saying that more details about the sales program would be released when the company announces its first-quarter financial results on May 6.

Another factor that likely worries investors, customers, and collaborators is the fact that Ciphergen currently has about $30 million in cash, which will allow it to last about one year, given the company's current burn rate. This cash position reflects proceeds of Ciphergen's December 2004 divestiture of its BioSepra process-chromatography business, which it sold to Pall for $35.8 million [see PM 10/29/2004). The sale gave Ciphergen much needed cash, which Rich said would allow it to focus on "core research products and [its] emerging diagnostics business."

"The company's cash position is worrisome to us," Pacific Growth Equities wrote in a report that followed Ciphergen's lowered revenue forecast. "We think management is betting [the] company on Q2'05 results and a long-awaited diagnostics deal."

Ciphergen has been metamorphosing itself from a tools shop to a diagnostics company since 2002 (see ProteoMonitor's sister publication, GenomeWeb News 5/9/2002). The company has established numerous collaborations with government, industry, and academic research groups to develop diagnostics, based on its SELDI platform, for diseases ranging from ovarian cancer (see PM 11/5/2004 ; PM 8/20/2004) to Alzheimer's disease (see GW 11/10/2003) to AIDS (see GW 2/14/2002).

In February, Rich said Ciphergen expects to achieve major milestones in its diagnostics division this year, including commercialization partnerships and the potential launch of a first clinical diagnostic test.

One of the first commercial tests that Ciphergen is banking on is a test to detect early stage ovarian cancer. As of November, the company was about half way through conducting a 1,100-sample validation study on its ovarian cancer biomarkers, and preliminary results showed that the markers scored close to 90 percent for both sensitivity and specificity. After the validation study is completed, the company plans to present its results to the US Food and Drug Administration.

Would a commercial ovarian cancer test have the potential to generate enough revenue to bring Ciphergen back to positive revenue growth? Hogan seems to think so, though it is unclear when the test will become available.

In August 2004, Hogan noted that about five million CA125 tests are given each year, even though CA125 — the standard test for early-stage ovarian cancer — has a sensitivity of only 50 percent. "If someone has a test that proves early stage ovarian cancer, there's clearly a big market for that," Hogan said.

However, some investors are skeptical that a diagnostics deal will come through before the company runs out of money next year. Two months ago, a small group of shareholders drafted a no-confidence letter stating that they are dissatisfied with the company's progress and share values, and they seek to replace top management (see PM 2/25/2005).

"With diagnostics, you've got to ask, 'Are you putting all your marbles into one basket?'" one of these shareholders said on condition of anonymity. "If you look at the diagnostics market in general, it just takes time."

The shareholder, a former employee who owns 10,000 shares, noted that shares of Ciphergen are "dismal." The stock has fallen more than 56 percent since the beginning of the year; it was trading up .56 percent at $1.81 on Thursday afternoon.

The shareholder said that he hopes the no-confidence letter will result in a talent review and a discussion about how the company can execute a market strategy that could help grow revenue.

Still, there are some bright spots. Sales of Ciphergen's new Protein Chip System Series 4000 instruments, introduced in July 2004, were strong during the third and fourth quarters of 2004. However, though the company sold 51 of these new instruments during those two quarters, revenues for both those quarters decreased significantly: 31 percent in Q3'04, and 13 percent in Q4'04.

The high-end Series 4000 instrument sells for between $180,000 and $310,000, while the lower-end Series 4000 instruments sell for between $125,000 and $150,000.

Rich said that with restructuring of the company's sales program, he expects to see better sales during the coming quarters. "We anticipate that the effects of [our restructured sales program] will be seen during the coming quarters," he said. "Combined with the solid progress of our diagnostics division, we remain enthusiastic about the future growth of the company as we continue to address the emerging biomarker proteomics research, pharma, and diagnostic markets."



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