CombiMatrix was founded around technology for the construction -- molecule by molecule -- of arrays of compounds. This has applications in a multitude of areas. From among those, we chose DNA arrays as the first area to develop. We did this because it is one of the best fits with the technology and because we believe that there is great opportunity for DNA arrays. DNA arrays have a large number of uses in genomics. They are used for helping to discover gene function, changes in gene expression related to disease or to treatment, splice variants, genetic makeup (as with single nucleotide polymorphisms or “SNP’s”), and drug targets, among many other aspects. We feel that this market will continue to grow in importance and will be a major contributor to advances in biotechnology and pharmaceutical industries.

In addition to genomics applications, CombiMatrix’s technology is well suited to nanomaterials development, which we pursue with partners, and defense applications, such as biowarfare-agent detection and infectious-disease tracking. CombiMatrix has been awarded nearly $10M in contracts for development of defense applications. We think this is an excellent business arena because resulting products can be sold to the government and military sectors, into civilian markets (such as detectors for the HVAC systems of skyscrapers and shopping malls, of which there are many in the world), and contracts fully fund all research and development to go after these potential markets.

So far, this explains CombiMatrix’s work with DNA microarrays and associated defense areas. Our technological and scientific advances are well known and understood by our shareholders. In addition, looking at the biology-oriented industry strategically, there are two areas where wide rivers of money flow in from the external source, namely end consumers like you and me. These two areas are diagnostics and drugs, each a multibillion-dollar market. Interestingly, these two areas also represent idealized products -- you can’t get a more desirable product than one that increases a person’s quality of living or one that saves lives. From the earliest days of CombiMatrix, strategically we have wanted a presence in these two areas, diagnostics and drugs, but we wanted our presence here to be synergistic -- an elegant, low-cost fit with our core technology.

Many people and companies, CombiMatrix included, believe that DNA arrays are the future of diagnostics^[1]. DNA arrays can allow one to identify infectious agents or tell what type of cancer is in a tissue sample without guesswork. DNA arrays might be applied to early diagnosis of problems to come, such as with metabolism, diabetes, or Alzheimer’s. DNA arrays might be used to decide which drug a patient should receive. Each diagnostic indication requires a DNA array with different design or “content” (content being the particular choice of DNA that is in the array). A DNA array for diagnosing cancer type would be different from a DNA array for diagnosing Alzheimer’s. Thus, there is a potential universe of DNA array designs needed for diagnostics. Up until recently, it was a common opinion that such use would start in the indefinite future. This belief existed in part because it was thought that the FDA had not determined its policy on DNA arrays and that FDA approval for each design would take a very long time. However, diagnostic application of DNA arrays is starting now for a few reasons. First, a DNA array with one particular content (for examining two genes thought to play a role in metabolizing some drugs) received FDA approval in December, 2004. Second, in March, 2005, the FDA issued new guidelines on approval processes, including those in general for diagnostic DNA arrays. It is now much easier to get FDA approval for each new DNA-array content. Third, many reference laboratories (the labs that run physician-ordered tests) are now becoming interested in developing various DNA-array-based tests. The leaders tend to be the small, specialized labs at the moment -- this is how it always starts.

CombiMatrix feels that our DNA arrays are the best choice for development of diagnostics for two reasons. First, our CustomArrays(TM) provide fast turnaround through design-and-test cycles, which is ideal in developing diagnostics. Second, a diagnostic company can, using a CustomArray synthesizer, make and use high-quality arrays in its own facility, which has some great advantages under current regulatory guidelines. These two reasons, coupled with the belief that DNA arrays are the future of diagnostics and that this future is starting now, make it clear how diagnostics fit into CombiMatrix’s strategy.

Finally, with regard to drug development, some drug-development companies spend $100-$800 million and ten years developing a limited number of drugs. Sometimes, they spend that much, and the drugs do not materialize. Although atypical and rare, there do exist opportunities to develop drugs for a fraction of that cost and time. CombiMatrix has kept its eye out for such opportunities existing both externally and internally. The Leuchemix deal gives CombiMatrix 1/3 ownership of an excellent drug-development program for only $4M paid out over several years. The Benitec deal gives CombiMatrix licensing access to important RNAi patents in exchange for access to our RNAi-library technology. The irsiCaixa deal gives CombiMatrix exclusive rights to RNAi compounds for HIV and HCV for less then $500,000 paid out over several years. Our internal programs on RNAi technologies and the KM and KA family of compounds are giving us excellent results at very, very low cost. Our internal programs draw upon interesting aspects of our intellectual property, and both external and internal programs can benefit from CombiMatrix’s expertise in DNA arrays, such as in toxicology or gene-activity screening.

In conclusion, our development programs fit together strategically and synergistically. Overall, CombiMatrix wants the same thing our shareholders want: ever increasing shareholder value as quickly as possible. We believe the way to do this is:

1. At the tactical level, build the best products possible from our technology.
    
2. At the strategic level, build a presence in the most lucrative, synergistic areas we see.
    
3. Do it all in a framework of maximum mutual benefit, where advances in one area give low-cost or zero-cost advances in others.

^[1] Selling a diagnostic product directly in the US first requires FDA regulatory approval. CombiMatrix will be seeking appropriate FDA regulatory approval for DNA-array-based diagnostics as they are developed and does not currently sell any FDA-approved diagnostics.