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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from              to             

Commission File Number 000-23541

NANOGEN, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (858) 410-4600

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $0.001 par value

Preferred Stock Purchase Rights

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the common stock on June 30, 2003 (the last day of the registrant’s most recently completed second fiscal quarter), as reported on the Nasdaq National Market was approximately $52,592,000. Shares of common stock held by each executive officer and director and by each person (including shares beneficially owned by Citigroup, Inc.) who own 10 percent or more of the outstanding common stock have been excluded in such calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the registrant’s common stock was 31,182,060 as of March 19, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders to be held in 2004 are incorporated by reference in Part III of this Form 10-K.

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NANOGEN, INC.

FORM 10-K

INDEX

Table of Contents

PART I

Item 1. Business

Forward Looking Statement

This Form 10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties that could cause our actual results to vary materially from those reflected in the forward-looking statements. Words such as “believes,” “anticipates,” “plans,” “estimates,” “future,” “could,” “may,” “should,” “would,” “expect,” “envision,” “potentially,” variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements contained in this Form 10-K include, but are not limited to, statements about matters including the following: (i) the development of the markets and demand for our products and services; (ii) our product development plans, including the introduction of new products, and anticipated activities designed to pursue these plans, including collaborations and other corporate partnering arrangements; (iii) our ability to generate substantial revenues from sales of products and consumable cartridges and reagents and continuing revenues from reagent rental agreements; (iv) the ability of our product platform to affect the market and become an industry standard; (v) our ability to generate license and other fee revenue in the future; (vi) the amounts we invest in research and development activities in the future; (vii) future levels of operating expenses associated with our business; (viii) future levels of interest income; (ix) any amounts we may be able to realize from the liquidation of our investments, including our investments in short-term securities; (x) operating results of joint ventures, mergers, acquisitions and other corporate partnering arrangements; (xi) the amounts and timing of our contractual obligations and capital commitments and (xii) our future capital needs and our ability to fund those needs. Factors that could cause or contribute to these differences include those discussed under the caption “Factors That May Affect Results” and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

Our internet address (presented as a textual reference only) is www.nanogen.com. We make available through our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with or furnished to the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

Overview

Molecular Diagnostics Market

Increased awareness of the role of genetics in regulating the functions of living organisms has generated a worldwide effort to identify and sequence genes and genomes of many organisms, including the estimated three billion nucleotide pairs of the human genome. In June 2000, the effort led by the Human Genome Project (sponsored by the Department of Energy and the National Institutes of Health) resulted in a first complete draft of the human genome sequence. While it is anticipated that many years of additional research will be required to understand the specific functions and roles in disease of each of these genes and their patterns of interaction, this research, commonly referred to as genomics, is leading to a new healthcare paradigm where disease is understood at the molecular level. It is believed that the use of genomics will lead to the introduction of new therapies, the development of targeted therapeutics and an abundance of new screening tests that will, in turn, shift the focus of medicine to proactive from reactive. Molecular diagnostic tools are integral to rendering genetic information accessible to researchers and clinicians.

The market for molecular diagnostics tools, assays and other products has been estimated in a report from SG Cowen to be approximately $1.2 billion in 2002 and is predicted to grow to over $3.0 billion in 2005. Of the $1.2 billion spent in 2002, the Company believes that approximately seventy-five percent (75%) was spent on infectious disease testing products for such diseases as Human Immune Deficiency Virus (“HIV”), Hepatitis C

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Virus (“HCV”), Chlamydia trachomatis (“CT”) and Neisseria gonorrhoeae (“GC”) and the remaining twenty- five percent (25%) was spent on other products such as those used in genetic testing. As the molecular diagnostics market grows, we expect human genetic testing to represent an increasingly larger percentage of this annual amount.

The molecular diagnostics market currently primarily consists of customers in (1) research institutions such as universities, research hospitals, private companies and government institutions, (2) high complexity CLIA (“Clinical Laboratory Improvements Act”)-certified clinical diagnostics laboratories and (3) clinical diagnostics laboratories in hospitals, private companies and government clinics. Such customers are developing tests and assays to screen, predict, diagnose, treat or monitor individuals who have certain single nucleotide polymorphisms (“SNPs”), short tandem repeats (“STRs”), insertions, deletions or other genetic mutations that are correlated with various disease states. Research customers normally develop and perform assays that are designed to correlate various SNPs or other mutations with certain disease states. High complexity CLIA-certified laboratories, which are regulated under the federal CLIA rules, normally develop and validate their own “home brew” tests or they may run assays purchased from platform manufacturers or others to help physicians diagnose and treat patients. In the development and validation of a “home brew” test, a laboratory may utilize Analyte Specific Reagents (“ASRs”). ASRs are reagents manufactured under the Good Manufacturing Practices regulations and are subject to Food and Drug Administration (“FDA”) ASR regulations. As such, ASRs do not require the filing of a 510(k) or Pre Market Approval (“PMA”) application. Clinical diagnostic laboratories normally run clinical assays to help physicians diagnose and treat patients with various diseases and typically such assays require a 510(k) or PMA application prior to being offered for sale or distribution.

We believe that molecular diagnostics customers seek a versatile, accurate, simple and cost-effective platform technology on which to develop, validate and run simple and complex research and diagnostics tests and assays. While there are a number of platform technologies currently available to such molecular diagnostics customers, including those utilizing gel-based techniques such as Restriction Fragment Length Polymorphisms (“RFLP”), sequencing using capillary and gel-based techniques, dot-blot and glass slide based arrays, real-time PCR (polymerase chain reaction) methods and enzyme-based micro-well assays, it is our understanding that these technologies do not consistently meet the basic customer requirements. These platforms lack the versatility to perform both simple and complex assays. The molecular diagnostics customers also demand a technology platform that consistently provides results at a level approaching 100% accuracy. They also insist on operational simplicity, so that the laboratory technicians of any skill level may be used for its operation, and are seeking a cost-effective technology platform that will assist in optimizing capital and labor costs.

The healthcare industry is also evolving as a result of advances in molecular diagnostics. The Company believes that genetic testing will lead to a greater emphasis on predictive diagnoses rather than just symptomatic diagnoses and that healthcare and medicine will become more individualized and patient-focused. The Company believes that this will lead to a greater emphasis on the development of new drugs related to genetic characteristics and to prescribing practices based on a patient’s own genetics. The development of predictive, patient-centered diagnosis is also leading to the development of new molecular diagnostic business models that reflect opportunities for companies to market and direct certain of their diagnostic products and services directly to consumers and to broaden the molecular diagnostics market to include a wider range of predictive healthcare products and services.

We believe that the technology used to develop human genetic testing could also be applied in the future to other markets such as food, water and animal testing among other fields.

The Company

Nanogen was founded on the vision of integrating multiple sciences to develop diagnostic products. Through advances in genomic and pharmaceutical research, we believed that diagnostics and therapeutics would become closely linked. Further, we believed that by using electronics, we could develop a highly accurate and flexible set

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of products that would facilitate the analysis of complex genetic relationships and the correlation to disease and therapies. This vision in turn led to the definition of the Company’s mission: to become a leading provider of high quality innovative advanced diagnostic products and services to patients, providers and pharmaceutical companies.

Nanogen currently develops and commercializes molecular diagnostics products and tests for the gene-based testing market for sale primarily in the United States, Europe and the Pacific Rim. By integrating microelectronics and molecular biology into a core proprietary technology platform, the Company seeks to establish the unique, open-architecture design of its primary products, the NanoChip^® Molecular Biology Workstation and the NanoChip^® Cartridge (collectively, the “NanoChip^® System”) as the standard platform for molecular identification and analysis. In furtherance of its mission to become a leading supplier of advanced diagnostics testing products, Nanogen is developing a broad menu of ASRs and other commercial applications for the NanoChip^® System. The Company continually conducts research and development by itself and with third parties, to improve the NanoChip^® System and to extend its technology to other applications such as biodefense, forensics, drug discovery and pharmacogenomics.

Nanogen believes that its technology platform provides a key advantage over conventional manual and mechanical platforms in that it provides an accurate, simple, versatile and cost-effective integrated microelectronic system that is capable of improving the quality of molecular diagnostic testing while reducing the overall cost of such testing. At the heart of Nanogen’s technology is a silicon chip called the NanoChip^® Electronic Microarray. Each Electronic Microarray has 100 microlocations or test sites upon which genetic tests can be conducted. DNA or RNA is moved and concentrated by controlling the electric current at each test site, improving accuracy, speed and flexibility. This electronic concentration of molecules greatly accelerates molecular binding at each test site. In addition, our technology allows the simultaneous analysis of multiple test results, or “multiplexing,” from a single sample. Current applications of the NanoChip^® Electronic Microarray include SNPs, STRs, insertions, deletions and other mutation analyses.

The Company’s current commercially available products include (1) the NanoChip^® Molecular Biology Workstation, an automated, multi-purpose instrument primarily used for DNA-based analyses, (2) the NanoChip^® Cartridge, which incorporates the NanoChip^® Electronic Microarray and provides a flexible tool for the rapid identification and precise analysis of biological test samples containing charged molecules, (3) various ASRs for detection of gene mutations associated with diseases such as cystic fibrosis and (4) Nanogen’s general purpose reagents and accessories used to facilitate assay and protocol development and validation on the NanoChip^® Platform. The Company also has several other ASRs and applications of its proprietary technology under development. The Company provides technical support and field applications assistance to service and support its customers.

In February 2004, we announced that we had entered into a definitive agreement for the acquisition of SynX Pharma Inc., a point-of-care diagnostics company based in Ontario, Canada. SynX currently markets point-of-care diagnostic tests for myocardial infarction in Europe and Canada, and infectious diseases and drugs of abuse in Canada. SynX is preparing to commercialize a diagnostic product for congestive heart failure (CHF). We expect the acquisition will provide us with a pipeline of complementary products in order to expand our market share in the in vitro diagnostics market and augments our technology platform for developing advanced diagnostic products. Additional information regarding the SynX acquisition can be found in Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Nanogen is a Delaware corporation and its stock is listed on the Nasdaq National Market under the symbol “NGEN”. Its corporate offices are located at 10398 Pacific Center Court, San Diego, California 92121. Our main telephone number is 858-410-4600.

Our Technology and Relevant Markets

Limitations of Current Molecular Diagnostic Assay Technologies

The initial technique for the analysis of genetic variations was hybridization, which was first developed in the 1970s. Hybridization relies on the principle that a unique piece of DNA will bind, or hybridize, most strongly to

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its exact complement. In hybridization, short synthetic segments of DNA, also known as probes, are used to locate and bind to their counterparts within a mixture of sample DNA or RNA. Hybridization is often performed using instrumentation that incorporates a detection medium that provides a signal to indicate whether the probe has hybridized to the sample DNA or RNA. However, initial hybridization techniques had several limitations. Even minute changes in testing conditions could dramatically affect the outcome of the hybridization reaction and, therefore, the reliability of test results.

Beginning in the 1980s, various techniques were invented with the objective of improving the reliability of hybridization. However, these methods did not generally provide a signal that was sufficient to be easily detectable. Therefore, in order to use these methods, it was necessary to first copy or amplify the segment of DNA or RNA to be analyzed using a technique known as polymerase chain reaction, or PCR. These initial techniques have significant limitations in meeting the need of molecular diagnostic customers, including:

Highly Complex Product Development Process: Conventional methods frequently require trial and error testing to validate tests or product designs. Therefore, with conventional technologies, the process of developing a test, or product, for analyzing a specific genetic variation is highly complex and cannot be automated easily.

Inaccuracy: Accuracy is essential to adequately detect and quantify genetic variations, which may involve the analysis of thousands of genetic variations per individual. Conventional methods can result in one or more data points in 10 being incorrect. These inaccuracies are magnified in tests for multiple variations.

Difficulty of Use: Many of the conventional analysis methods involve multiple technical steps requiring human intervention, which make the analysis difficult to perform and challenging to automate.

Lack of Flexibility: Many of the conventional analysis methods use a passive array in which what is done to one site on the array, must be done to all sites. This results in a lack of flexibility for the customer in using these technologies as they cannot mix different assays on a single array or may not fully utilize every site on the array.

Limited Clinical Viability: Because of the low degree of accuracy and difficulties associated with product development and use, conventional research methods have not been broadly applicable to clinical settings.

Beyond the limitations indicated above, in order to capture and expand the market for genetic analysis, one must provide cost-effective and highly reliable tests.

Despite recent advances in technology, many bioassays are too specialized or inflexible to be used throughout the various departments of a diagnostics or research laboratory. Current bioassay tools were designed for large scale data generation and the automation of repetitious tasks such as very high throughput discovery. In addition, many of these systems are not useful in molecular, protein, enzyme, cell biology, and forensics laboratories. These technologies fall primarily into three categories: high-density arrays; high throughput sequencing and SNP discovery tools; and gel-based methods. While these technologies each have certain advantages, they also have significant drawbacks that inhibit their broad applicability across the life sciences market and in particular in the molecular diagnostics market.

The Nanogen Microelectronic Solution

Today, clinical and research laboratories use a number of different platforms to perform a wide-range of different molecular tests. We are marketing the NanoChip^® System based on our proprietary microelectronic technology. The Company believes that the NanoChip^® System provides the following eight major advantages:

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Accuracy:  Accuracy is critical in laboratory analysis. To date, the NanoChip^® System has been shown to be exceptionally accurate when performing various genetic molecular analysis. Additionally, the NanoChip^® System embodies the technology that allows multiplexing capability. This means that it allows two or more tests to be performed simultaneously, speeding results to the laboratory technician. This capability has been critical in developing the ASRs for use in detecting the 25 mutations associated with cystic fibrosis.

Simplicity.  The NanoChip^® System is fully automated and once programmed and validated by the customer, has simple point and click software. It allows the laboratory technician to load samples and easily modify parameters to facilitate minimal hands on time.

Versatility:  One of the key attributes that positions the NanoChip^® System as the platform for molecular diagnostics is its unique, open architecture. The flexible, addressable nature of the NanoChip^® Cartridge enables assay development from a variety of sources. We believe this is particularly important to customers in an emerging and rapidly growing market like molecular diagnostics, where new markers are constantly being introduced. The ability of a molecular laboratory to respond quickly to customers who request a test for a new marker without having to procure a new platform is key to their success.

Profit Incentive:  Nanogen’s focus is to offer a compelling value proposition to end users by providing laboratories an alternative to sending out their tests to third party laboratories. With Nanogen products, these smaller laboratories should have the potential to earn additional profits by handling tests within their own facilities.

Fast Assay Design:  Experimental design of tests and assays on the NanoChip^® System is relatively straightforward. Our customers can develop, program and validate assays in their own laboratories, allowing for faster turnaround times (i.e., days versus weeks) for solutions to complex analyses.

Ease of use:  Assays are easy to develop, validate and perform on our NanoChip^® System. Our fully automated Loader allows the simultaneous programming and testing on up to four NanoChip^® Cartridges. A loaded Cartridge is inserted and then analyzed on the Nanogen Reader. The NanoChip^® System also includes proprietary software to automate testing operation. All test design and development must be validated by the end user prior to reporting any results. Data interpretation that is user defined is clear-cut and presented in a user-friendly format.

Throughput:  The NanoChip^® System’s ability to program as many as 100 test sites per Cartridge (and up to four Cartridges per run) allows for higher throughput than is achievable with many competitive technologies. As testing volumes in molecular laboratories continue to grow, throughput is becoming increasingly important. We believe that the NanoChip^® System is scalable to eventually utilize a Cartridge with 400 test sites at a time.

Cost effectiveness:  The NanoChip^® System has been designed to be a cost-effective solution for most molecular testing. The NanoChip^® System’s custom features allow users to employ their own reagents or Nanogen’s ASRs in designing and validating assays for their specific purposes. Moreover, much of 2003 was dedicated to developing and marketing a menu of ASRs that many laboratories perform routinely. Walk-away automation conserves direct labor while improving the overall effectiveness of the laboratory operation. In addition, user definability allows important experiments to be done quickly, both accelerating the discovery process and simplifying the validation of important targets.

Nanogen’s Core Technology

Nanogen’s patented microelectronics-based technology uses the natural positive or negative charge of most biological molecules. Applying an electric current to individual test sites on the NanoChip^® System enables rapid movement and concentration of the molecules. Nanogen’s technology involves electronically addressing biotinylated DNA samples, hybridizing complementary DNA and applying stringency to remove nonspecifically bound DNA after hybridization. The NanoChip^® System technology provides an open platform that allows customers to effectively develop, validate and run common assays as well as customize their own tests.

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The NanoChip^® System can integrate in a single platform the following electronic operational features:

Electronic addressing

Electronic addressing involves placing charged molecules at specific test sites on a NanoChip^® microarray. When a biotinylated sample solution is introduced onto the array, the negatively charged sample rapidly moves to the selected positively charged sites, where it is concentrated and bound to the streptavidin in the permeation layer. The array is then washed and another sample can be added. Site by site, row by row, an array of samples are assembled on the array. Such user-definable microchip arrays allow the customer to respond quickly to the ever evolving list of genes to be tested.

Electronic concentration and hybridization

In a standard SNP assay, following electronic addressing, red and green fluorescently-labeled reporter probes are used to discriminate between wildtype, heterozygote and mutant DNA. The ability of the NanoChip^® technology to very specifically control binding of samples to reporters is a key feature of the platform.

Stringency control

Stringency control enables removal of unbound and nonspecifically-bound DNA quickly and easily after hybridization, providing quality control and ensuring that any bound pairs of DNA are truly complimentary. Nanogen’s technology allows the customer to select electronic, thermal or chemical techniques, depending on the application, for precise, accurate stringency control. This provides extremely high discrimination and confidence in results.

Electronic multiplexing

The multiplexing feature is an extension of the open platform of the NanoChip^® System. The customer may analyze multiple genes from a single test site (representing one sample) or from multiple test sites (representing different samples). The customer also has the ability to electronically address multiplexed amplicons to a single test site.

The ability to control individual test sites permits biochemically unrelated molecules to be used simultaneously on the same microchip array. Conventional DNA arrays do not have this feature—all process steps must be performed on an entire array. Nanogen’s microelectronic array technology delivers increased versatility over conventional methods.

Strand Displacement Amplification

Strand Displacement Amplification, or SDA, is a proprietary target amplification process whereby very low numbers of diagnostic targets in a test sample are enzymatically amplified to exponentially higher levels, greatly simplifying accurate detection of these targets. Because this process does not require thermal cycling, it is extremely fast, and complex instrumentation for thermal regulation is not required. We believe that SDA may be an important element in the development of sample-to-answer applications for our technology platform. We also believe that SDA may potentially provide our customers with operational benefits such as being easier to use as well as cost advantages due to the high cost of the most common amplification method. Although the current NanoChip^® System does not utilize SDA, we expect to support SDA applications on future instruments.

Commercialization Strategy: Platformation^TM

What is happening today in molecular diagnostics closely mirrors the activities that occurred in clinical chemistry laboratories thirty years ago. The first clinical chemistry tests were done by hand—they were time intensive and required great skill—not unlike some of today’s molecular diagnostic assays. Ultimately, the laboratory migrated from manual assays to automated accurate systems that could perform multiple assays simultaneously, increasing the reporting efficiency and reducing the time to a reportable result.

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Nanogen has focused on capturing the molecular diagnostics market by creating an open platform that we believe can automate laboratory testing. The process of consolidating various molecular tests onto one platform is what we have termed “Platformation^™.” The Company continually seeks to increase the installed base of the NanoChip^® Systems and to establish our platform as a standard for the molecular diagnostics industry in order to reap the benefits of the higher margin profits on consumables such as the NanoChip^® Cartridges, ASRs and other products. The NanoChip^® System’s open architecture facilitates development of molecular tests from multiple sources, driving the growth in assay development far beyond where Nanogen could take it on its own. The NanoChip^® System could transform molecular diagnostics by, bringing to it the speed, efficiency and accuracy of a robust platform. As this market area grows and Nanogen’s market share increases, the NanoChip^® System could generate multiple revenue sources that will fuel next generation systems and the growth of the Company.

Nanogen’s strategy to establish the NanoChip^® System as the leading molecular diagnostics platform is five-fold.

Increase Installed Base of NanoChip^® Systems

Our first strategy is to increase the installed base of the NanoChip^® Molecular Biology Workstation in order to reap the benefits of the higher margin profits on consumables, such as the NanoChip^® Cartridges, ASRs and other products. The Company has provided its customers with three main types of commercial transactions to obtain the NanoChip^® System: outright sales, reagent rental agreements and/or cost per test agreements (collectively, “reagent rentals”) and development and strategic site agreements.

Nanogen typically sells its NanoChip^® Systems directly to its customers through the Company’s sales representatives in the U.S. or through distributors in Europe and other countries throughout the world. As of December 31, 2003, the Company had placed 100 NanoChip^® Systems.

The sale of NanoChip^® Systems is only one piece of the revenue stream. As is common with clinical instruments, the consumables form a substantial revenue segment. NanoChip^® Cartridges and ASRs that are a part of each customer developed and validated assay will normally be ordered by customers to meet their testing demand. Nanogen anticipates demand to grow rapidly for certain ASRs, such as those for the detection of mutations in the CFTR gene that are associated with cystic fibrosis. While there may always be customers who wish to purchase the NanoChip^® System outright, it is our belief that there will be many high complexity CLIA-certified clinical laboratories that will want to amortize the cost of the instrument over several years. These arrangements, called reagent rentals, have been the standard for the clinical instruments industry for the past 40 years, fueling the growth of industry leaders such as Beckman-Coulter, Abbott and Roche. Such agreements can span from three to five years and involve establishing a minimum monthly consumables ordering level. Based on that level and the term of the agreement, a premium is added to the cost of the consumables so that the total capital equipment cost of the NanoChip^® System is recouped by the end of the agreement. The advantage of reagent rental agreements for Nanogen is that it locks in a minimum revenue flow over the term of each agreement after a validation period that normally runs from 60 to 120 days. Nanogen believes that many of its customers will increase their consumable ordering levels as new ASRs and ultimately FDA-cleared assays are made available.

The final type of agreement whereby a customer may use and eventually purchase a NanoChip^® System, is a development or strategic site agreement. These agreements are normally with leading research organizations and laboratories or companies that could provide us with certain rights to commercialize the discoveries made using our system. These relationships have been focused on the discovery of the associations of specific genetic variations with major disease states, including cancer, hypertension, inflammation and cardiovascular disease. Nanogen installs a NanoChip^® System at a customer site for a period ranging typically from six to twelve months during which time the customer can test the System by developing, validating and running certain assays on the System. For the use of the System during this period, the Customer typically assigns to Nanogen rights to improvements to the System and Nanogen and the customer agree on certain Nanogen rights to any assays

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developed or other intellectual property discovered thereon. Once the agreement period has terminated, the customer may then either return the System to the Company or purchase it through a sale or a reagent rental transaction.

Increase the Breadth of the ASR Menu on the NanoChip^® System to further Penetrate the Clinical Diagnostics Market

The second strategy is to increase the breadth of the NanoChip^® System’s ASR menu for commercial applications. Each Nanogen ASR includes specific reagents that enable the customer to develop, validate and perform a molecular test that determines the presence or absence of certain gene mutations associated with certain disease states. As part of Nanogen’s Platformation^™ strategy, the Company seeks to increase the number of commercially available ASRs that it provides its customers to increase the attractiveness of the NanoChip^® System as well as to increase revenue from the sale of associated consumables.

During 2003, Nanogen introduced seven products, including five ASRs, which may be utilized by customers for development of tests that detect gene mutations associated with diseases such as cystic fibrosis, hereditary hemochomotosis, Canavan disease, beta thalasemia (in Europe) and Alzheimer’s disease.

In the future, we intend to file with the FDA for clearance to market both the next generation of the NanoChip^® System and certain of our products for clinical diagnostics. Nanogen is currently putting in place the internal procedures and groundwork necessary to submit such products for clearance. This may be a costly and time consuming process. FDA clearance will be essential to expanding our product offerings beyond CLIA certified laboratories.

Development and Introduction of Research Products

Our third strategy is to develop products that facilitate customers’ development and validation of their own “home brew” tests on the NanoChip^® System. We provide research customers with most of the tools and reagents needed to develop and validate their own “home brew” tests on our system and take advantage of our open architecture. During 2003, Nanogen entered into a license agreement with Institut Pasteur and began development work on research reagents for the European market involving the detection of gene mutations associated with the diagnosis of hereditary deafness. We also intend to develop and commercialize other products for our research customers. While researchers want to use high throughput devices to discover genes and genetic mutations, they will want to explore the function and impact of these genes and mutations with a more accurate and targeted technology.

Improve the NanoChip^® System and increase the depth of other applications of the NanoChip^® Electronic Microarray technology.

Our fourth strategy is to continually improve the NanoChip^® System through our engineering and advanced technology groups along with Hitachi, the manufacturer of the NanoChip^® System. Initial improvements will be focused on cost reduction and throughput. In the long term, we would like to develop sample-to-answer systems which integrate otherwise time-consuming and labor-intensive sample preparation procedures onto a disposable cartridge. The availability of this lab-on-a-chip technology would fulfill a substantial unmet need in both commercial laboratory and academic research markets.

We also intend to continue the development of other technologies that may complement and improve the NanoChip^® System, utilize the NanoChip^® Electronic Microarray technology or are designed and developed by our employees or collaborators. Such products include those under development in the forensics, defense and pharmacogenomics arenas.

Continue to establish strategic collaborations in order to strengthen our product menu, penetrate new markets, obtain new intellectual property and enter the service market when appropriate.

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Our fifth strategy is to enter into collaborations to expand applications of our technology platform and to accelerate the commercialization of products in order to strengthen our product menu, penetrate new markets, obtain new intellectual property and enter the molecular diagnostics service provider market when appropriate.

During the third quarter of 2003, Nanogen entered into a collaboration agreement with Prodesse, Inc., a biotechnology company focused on developing reagents that can be used by CLIA-certified laboratories to develop assays to detect infectious pathogens. The collaboration agreement involves the development of automated, highly sensitive microarray-based products to detect a number of infectious disease agents, including influenza, pneumonia, adenovirus, herpes, West Nile Virus, and SARS. The Companies will integrate Prodesse’s proprietary multiplex amplification technology with the automated NanoChip^® platform and jointly develop and market gene-based testing products to clinical reference labs and health care providers.

We will pursue additional collaborations in various forms, including research and development agreements, licensing agreements and joint ventures.

Nanogen’s Current Products

NanoChip^® System’s Components

The Company is seeking to establish the NanoChip^® System as the standard platform for the detection of genetic mutations and to develop applications for future clinical use. Nanogen markets its NanoChip^® Molecular Biology Workstation to research and molecular diagnostics laboratories.

The NanoChip^® System consists of a consumable Cartridge containing a proprietary semiconductor microchip, the NanoChip^® Electronic Microarray, a fully automated instrument and imbedded software that can be programmed by the end-user to control all aspects of microchip operations, processing, detection and reporting. The System has been designed so that once programmed, the end-user need only insert a consumable Cartridge into the instrument and all subsequent steps may be handled automatically under computer control.

The NanoChip^® Cartridge

The consumable NanoChip^® Cartridge consists of a proprietary semiconductor microchip with electrical and fluidic connections to the instrument. We expect that over time the consumable cartridge and microchip may be manufactured in high volumes at a low cost relative to many current technologies.

Semiconductor microchip

Our proprietary microchip (the “NanoChip^® Electronic Microarray”) is designed and constructed using microlithography and semiconductor fabrication techniques. The NanoChip^® Electronic Microarray is mounted within the consumable cartridge and is coated with a proprietary permeation layer. We have developed arrays of various sizes utilizing both passive and active CMOS microchips, as well as flip chip assembly technologies. Our current production of consumable cartridges employs 100 different test sites on a single NanoChip^® Electronic Microarray. We are additionally developing a cartridge that employs 400 different test sites on a single NanoChip^® Electronic Microarray for our next generation instrument.

Permeation layer

Our proprietary permeation layer, which is critical to the proper functioning of our System, is the reaction site of the microchip. The permeation layer isolates the biological materials from the electrochemical environment near the electrode surface and provides the chemistry necessary for attachment of the samples.

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Samples

Samples are electronically addressed to the desired microlocations and attached to the permeation layer. Because independent control can be applied at any test site on our microchip, different samples can be addressed on the same microchip, allowing multiple tests to be processed on the same Cartridge. Our open architecture approach allows the customer to address their specific samples onto a microchip to perform individualized analyses.

The NanoChip^® Molecular Biology Workstation

Our fully integrated NanoChip^® System consists of four major subsystems: (1) a freestanding microchip Loader to perform electronic addressing of blank microchips, (2) a highly sensitive, laser-based fluorescence scanner that detects molecular binding, (3) a fluid handling subsystem that controls test sample application and washing steps, ((2) and (3) are, collectively referred to as, the “Reader”), and (4) computer hardware and software that allow the operator to develop, validate and select protocols from a graphical user menu which controls all microchip operations, tabulates test results and prints test reports based upon user-defined inputs.

Microchip Loader

Our System includes a Cartridge/microchip Loader that will allow users to electronically address their own samples to selected test sites on up to four chips simultaneously. In addition, hybridization can be performed on the Loader or on the Reader. Multiple Loaders can operate concurrently under the control of one System.

Fluorescent array scanner

The fluorescent scanner component of the System uses optoelectronic technology to reduce instrument cost and size and eliminate the need for complicated array positioning mechanics. In its present configuration, the scanner is able to perform high sensitivity scans of arrays of 100 test sites in less than five minutes.

Fluidics

Within the fluorescent array scanner component of the System, the fluidics function automates the movement of the reagents and test sample onto the consumable Cartridge. The fluidic subassembly of the instrument includes a panel of precision syringe pumps, a cartridge-mounted sample assembly and fluidic connections between the instrument and the consumable Cartridge.

Computer hardware and software system

A multi-tasking operating system and microprocessor control all aspects of the systems operations, including bar-coded test selection, test operation, fluorescent signal detection and signal processing, calculation of assay results and report generation. The end-user must develop and validate the protocols used by the software as well as define the parameters used to calculate results and generate reports. Each of the individual array locations is separately controlled by the microprocessor. Fluorescent signals emanating from positive test sites are scanned, monitored and quantified.

NanoChip^® Analysis Process

Cartridge

The electronic microchip is mounted within a plastic molded Cartridge. The bar-coded Cartridge is delivered in a ready-to-address format with no genetic sequences pre-attached.

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Electronic addressing

Users design, create and validate their own genetic tests on the microelectronic chip with our automated System. A 96 well or 384 well microtiter plate containing genetic sequences is placed in the Loader. The System then automatically electronically addresses the microchip with user-defined tests.

Hybridization and stringency

Users may add test samples to the Cartridge and insert the Cartridge into the Reader. The customer may then select to have the instrument automatically perform hybridization and the appropriate stringency control is selected by the user, chemical, thermal or electronic. The electronically enhanced process speeds and improves the genetic analysis, allowing single-base accuracy.

Simple-to-read output

Within minutes of inserting the bar-coded Cartridge for analysis, easy-to-read and easy-to-interpret output is available based upon user-defined inputs. Data can be automatically downloaded to network systems and to standard software spreadsheet packages. The entire electronic addressing and data output process can be completed rapidly, allowing users to accelerate their research process by creating new genetic tests based on previous experimental results.

    Applications Manager Software (“AMS”)

Nanogen currently offers a separately priced software package designed to streamline routine or frequent testing for the same genetic markers (which must be validated by the customer). AMS enables users to run protocols they have written and validated for the NanoChip^® System in a simplified, menu driven, point-and-click fashion. This supplemental software offers the ease of use required of those laboratories that run the same set of tests on a regular basis. It was designed in response to high complexity CLIA certified clinical laboratories that are frustrated by the “research” orientation of most of the currently available software. We believe that this software provides a significant competitive advantage for the NanoChip^® System.

Analyte Specific Reagent (“ASRs”)

ASRs are the specific reagents that enable either research or high complexity CLIA certified laboratory customers to develop, validate and run certain SNP assays. Under the ASRs model, we sell not only NanoChip^® Cartridges, but also the specific reagents that can be used to develop, validate and perform DNA-based tests.

We currently have five ASRs that are commercially available for (1) Factor II/Factor V multiplex launched in the first quarter 2003; (2) CFTR launched in the first quarter 2003; (3) HFE launched in the first quarter 2003; (4) ApoE launched in the second quarter 2003; and (5) ASPA launched in the second quarter of 2003. Below is a more detailed description of the ASRs:

Factor II/Factor V Multiplex ASRs

Nanogen offers ASRs for the detection of two genetic mutations associated with thrombosis: the G1691A mutation on the Factor V (Leiden) gene and the G20210A mutation on the Factor II (Prothrombin) gene. CLIA certified high complexity laboratories may use the reagents to create and validate laboratory developed tests for detection of these two mutations. Currently, Nanogen believes that it is the only provider of the Factor V (Leiden) and Factor II (Prothrombin) mutations in a multiplexed format.

Nanogen’s Factor II/Factor V ASRs are multiplexed ASRs meaning that the customer can develop and validate multiple Factor II and Factor V gene mutations from a single test site (representing one sample) or from multiple test sites (representing different samples). The customer also has the ability to electronically address multiplexed

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amplicons to a single test site. The ability to control individual test sites permits biochemically unrelated molecules to be used simultaneously on the same microchip array. Conventional DNA arrays do not have this feature; all process steps must be performed on an entire array. Nanogen’s Factor II/Factor V ASRs are a prime example of how our unique microelectronic array technology delivers increased versatility over conventional methods.

CFTR ASRs

Nanogen’s CFTR ASRs enable the customer to develop and validate a test for the detection of the 25 CFTR mutations recommended by American College of Medical Genetics (“ACMG”)/American College of Obstetrics and Gynecology (“ACOG”) as part of a high complexity CLIA-certified laboratory “homebrew” assay.

In early 2003, we completed beta-site testing of our set of ASRs for use in developing and validating tests for the mutations in the CFTR gene, which are associated with cystic fibrosis, and commenced a controlled release of the product to market. Many people carry a single cystic fibrosis gene mutation, and they do not experience any significant health problems. In the general population, approximately 1 in 31 Americans carries the gene mutations. This is the reason ACOG announced that the Standard of Medical Care should include screening women contemplating pregnancy for cystic fibrosis. To meet the standard of medical care, a physician must at least offer screening to each woman contemplating pregnancy. If initial screening of the prospective mother is positive for the CFTR mutation, then further testing of the prospective father is warranted. When both parents are carriers, they have a 25% chance with every pregnancy of passing two copies of the defective gene to their child. The current recommendation from ACOG is for a 25-mutation screen. We believe that the ACOG recommendations may drive a significant increase in genetic testing for gene mutations associated with cystic fibrosis.

HFE ASRs

Nanogen offers ASRs for the development and validation of a test to detect the three mutations associated with hereditary hemochromatosis (HH). Hereditary hemochromatosis is an autosomal recessive disorder characterized by unusually high levels of iron in the blood due to polymorphisms in the HFE gene. Excess iron accumulates over a period of years in the patients’ major organ systems. Clinical indications of HH include type II diabetes (also known as “bronze” diabetes), heart disease, arthritis, and liver disease. Our reagents include oligonucleotides for the detection of nucleotides corresponding to the C282Y, H63D, and S65C mutations of the HFE gene. CLIA-certified high complexity laboratories may use the reagents to create and validate laboratory developed tests (LDT) for HFE. Currently, Nanogen’s HFE ASRs are the only ASRs for use in developing and validating a test for the three mutations in the HFE gene.

ApoE ASRs

In 2002, Nanogen non-exclusively licensed rights to develop and commercialize ASRs relating to ApoE gene mutations linked to the detection of Alzheimer’s disease. Nanogen’s ApoE ASRs consist of various reagents that may be used by laboratories to develop and validate a test for the detection of ApoE4, the main Apolipoprotein E allele associated with increased risk for Alzheimer’s disease. The Alzheimer’s Association estimates that approximately 14 million Americans will develop the disease by 2050.

ASPA ASRs

During 2002, Nanogen entered into a non-exclusive license agreement with a third party that provided it with rights to develop ASRs for certain mutations in the ASPA gene associated with Canavan disease, a disease that has highest prevalence in the Ashkenazi Jewish community. This community has historically been very proactive in the United States in advocating that its members undergo genetic testing prior to having children. The ASPA mutation detection test is a key member of a panel of multiple tests frequently used in an Ashkenazi Jewish

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genetic disease screening panel. Cystic fibrosis also is a key part of this panel and Nanogen offers the ASRs to enable customers to develop and validate an assay to test for the specific mutations associated with cystic fibrosis. Strategically, the ASPA ASRs are important as they provide patent licensure to the end user which has historically been a challenge for individual laboratories to obtain.

Other Current Products

Assay ToolBox^™

The Nanogen Assay ToolBox^™ is a collection of general purpose reagents and accessories used to facilitate assay and protocol development and validation on the NanoChip^® platform. The Assay ToolBox^™ components, together with oligos available from third party vendors, may be used to facilitate development and validation of laboratory developed tests by CLIA-certified high complexity laboratories or research laboratories. The unique, open-architecture of the NanoChip^® Electronic Microarray and instrumentation enables researchers to define, select and build their own test panels. Customers may be required to obtain third party licenses to the specific gene mutations for the assays that they seek to develop or validate.

Beta Thalassemia Research Reagents

Nanogen, working with a company in Europe, developed a product for the detection of certain genes associated with beta thalassemia, a disease that is most prevalent in the Mediterranean regions of Europe. These research reagents have been initially marketed through the European company as an alternative method for testing beta thalassemia. Nanogen’s research use only product for beta thalassemia consists of various reagents that can be used to detect mutations of the HBB gene, which is most commonly associated with beta thalassemia. Mutations in the HBB gene affect the production of hemoglobin, a protein in red blood cells that carries oxygen to tissues of the body. People whose hemoglobin does not produce enough beta protein have beta thalassemia, which can cause life-threatening anemia in children, for which there is no cure. The frequency of this mutation in the general population is about one in 300. However, people with Mediterranean (including North African), Middle Eastern or southeast Asian ancestry have a risk of about one in 30 for carrying this mutation, most likely related to the selective pressure from malaria. Beta thalassemia is an autosomal genetic disorder: if both parents have the HBB disease causing gene, each offspring has a one in four risk of being affected.

Products and Applications in Research and Development

We plan to further develop the NanoChip^® System, integrating new features and broadening the applications of the currently marketed System, including enhancing chip design and simplifying instrument design. Our scientists will investigate new opportunities and develop and validate new protocols, ASRs and products for use on the NanoChip^® System, while customers may create and validate new “home brew” assays by taking advantage of the flexible format of the System.

We also intend to pursue new opportunities utilizing electronics beyond the current microchip concept. For example, future technologies may include integration of sample processing and DNA amplification. The NanoChip^® System may be designed to provide analysis of other charged molecules and antigen-antibody, enzyme substrate, cell-receptor, and cell-separation techniques. The NanoChip^® System eventually may also become a portable lab on a chip for use in the field, away from the laboratory bench.

Below is a brief description of some of future products and applications currently in research and development at either the Company or with one of its collaborators.

Next Generation NanoChip^® System

As part of the Nanogen Hitachi collaboration, we have been working on improvements to the current NanoChip^® System and the development of a next generation NanoChip^® System. We believe our next generation NanoChip^® System should be more compact and less costly in order to access smaller hospital laboratories and other customers for molecular-based testing.

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Additional Potential ASRs and other Products

Infectious disease related products

We believe we have the potential to apply our technology in the field of infectious disease diagnostics to develop automated tests to replace the manual and time-intensive procedures used in hospitals and reference laboratories. The role of the clinical microbiology laboratory is to detect and identify disease causing microorganisms and to determine antibiotic sensitivity. To accomplish this task, colonies of microorganisms from patient specimens are grown, or cultured, in various growth media. Following colony growth, various direct and indirect techniques are utilized to determine the identity and, as required, the sensitivity of the microorganism to specific antibiotics. Using currently available technologies, the entire process may take days or weeks to complete. In the meantime, a patient requiring immediate therapy, must often be treated by the clinician based upon the best clinical facts available at that time. Upon receipt of the diagnostic analysis from the laboratory, the initial patient treatment protocol may need to be modified in order to treat the patient more effectively.

Current culture-based methods detect a single microorganism at one time. Because a particular infectious episode may be caused by one of many microorganisms or several microorganisms together, multiple tests may be required to determine the correct diagnosis. “Single tube” (one at a time) DNA probe diagnostics, which were first introduced to the marketplace in the mid-1980’s, have been unsuccessful in displacing culture based diagnostic tests in part due to their inability to identify several organisms simultaneously. Our technology addresses these shortcomings by allowing the simultaneous analysis of multiple microorganisms from a single patient sample. We believe our technology and integrated system may speed the time-to-result for diagnostic tests and offer our customers the opportunity to lower their costs and improve productivity by automating all or a significant portion of their labor-intensive testing.

In September 2003, we entered into a collaboration agreement with Prodesse, Inc. to develop automated, highly sensitive microarray products to detect a number of infectious disease agents, including influenza adenovirus, herpes, West Nile Virus, and SARS. The collaboration will integrate Prodesse’s proprietary multiplex amplification technology with the automated NanoChip^® and jointly develop and market gene-based testing products to health care and clini