By Matthew Willett

Nanogen Inc., of San Diego, has signed a long-term agreement with Hitachi Instruments Service Co. Ltd., of Tokyo, for the development, manufacturing and distribution of instrumentation technology. The deal is estimated to be worth more than $200 million over a 10-year period.

The arrangement between the companies dedicates $57 million to application development over 10 years, and could include more than $140 million for instrument development, manufacturing, marketing and commercial development.

Nanogen Senior Vice President and Chief Financial Officer Kiernan Gallahue said the deal should benefit Nanogen in at least two ways.

"It's an extremely encouraging sign that a company like Hitachi that has a long and successful presence in both the research market and the clinical market in developing instrumentation has selected Nanogen as a core technology for their future efforts in the biotech area," Gallahue said.

"The second major thing to note is that this is a major step forward for Nanogen in addressing the execution risk in developing platforms," he added. "The development of instruments is a resource-intensive process, and this allows us to focus our energy on developing our technology while leveraging the resources and strength of Hitachi."

Nanogen agreed to a manufacturing deal with Hitachi in January, beginning production of the company's NanoChip Molecular Biology Workstation at the Hitachi factory in Hitachinaka City, Japan. The deal also began a relationship between the companies that grew steadily.

"There was a mutual interest," Gallahue said. "As for Hitachi, who began to take steps to establish themselves as a premier genomics company, I believe they were looking to identify core technologies that could provide significant definitive value over time, and, on our side, we were very interested in finding a partner with experience in both the research and regulated diagnostics markets. We wanted someone with very significant experience, and Hitachi rose to the top as the preferred partner in that area."

Gallahue said the $57 million in application development costs will be shared by the companies. The work will focus on Nanogen's NanoChip Molecular Biology Workstation.

NanoChip workstations are designed to automate DNA analysis and array using electronically accelerated hybridization techniques designed to eliminate problems with DNA conformation and secondary structures. Nanogen says its accuracy is equal to or better than DNA sequencing and other methods of single nucleotide polymorphism confirmation.

The lion's share of the deal, $140 million, Gallahue said, will go toward the expensive process of instrumentation development.

"It's a series of downstream instruments that have the potential for development together, which may include both products for the research market and clinical marketplace, including the development over time of potentially reduced-sized instruments and reduced-cost instruments," he said.

The agreement also includes an undisclosed equity investment on Hitachi's part in Nanogen. Gallahue said that's more of a gesture of alignment than aid to the company, which, he said, is in good standing financially. As of March 31, Nanogen had $111.6 million in cash and cash equivalents.

"Nanogen completed a second offering in the springtime of this year," Gallahue said. "We are very well positioned from a financial perspective to invest in the launch of our NanoChip product and continue to invest in applications and technologies where we intend to develop a leadership position in the sector."

Gallahue said the alliance will boost Nanogen's positioning in the instrument industry, allowing the company to stretch itself beyond its current boundaries.

"When you're talking about instrument development, there are players like Hitachi who are very experienced in that area, whereas at a company like Nanogen, that's not our core skill set. In essence, we would have to invent to get to market parity. On the instrument side, Hitachi is well beyond that, and that puts us in a market leadership position on the instrument side. The combination then takes the strength of both of us and reduces the development risk in getting to market," Gallahue said.

Nanogen's stock (NASDAQ:NGEN) closed Wednesday at $28.56, up 81.25 cents.

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