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In 2004, Microarray Industry Appears Poised to Surpass the $1 Billion Plateau

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The microarray industry should produce an estimated $1 billion in revenues in 2004, clearly a major milestone to measure progress as the industry reaches its 10th year of existence.

But $1 billion in revenues a commercial revolution does not make. For that, the industry, which this year will see a number of new competitors entering the arena, will have to push the technology to new heights of accuracy and provide a wider set of applications, while enticing new customers.

The industry is in the initial phases of reaching toward the molecular diagnostics market, which some analysts peg at $20 billion a year, with the idea that this chip technology will one day become deeply embedded in clinical practice to a point where disposable, cheap chips will provide instantaneous, accurate test-based data to healthcare professionals.

In 2003, the industry trimmed its sails to weather the economic storm that affected all segments of the global economy. At the end of the year, signs pointed to an upturn in the economy as the public market indices inched upwards. On Monday, the Nasdaq closed over 2,000, its highest finish in some two years. The macroeconomic indicators breathe hope of opportunities for initial public offerings, which represent a chance for raising capital, and a payoff for early-stage investors. Will that assure a $1 billion payoff this year?

Are We There Yet?

Today, Affymetrix is in clear command of the industry’s high ground. The company, which in 1994 produced the first commercial prototype DNA microarray, is the pacesetter in a market where the majority of users rely on home-brew technology. The Santa Clara, Calif.-based company boasts “thousands of users,” of its photolithograph-ically manufactured GeneChip-brand arrays.

The company says its HG-U133 Plus 2.0 Array, a single chip containing Affymetrix’s choice of content for the whole human genome (see correction, page 2), is available for public purchase, at a price ranging from $300 to $500.

In the pre-printed arrays market, Affymetrix today faces competition from Agilent Technologies, which entered the field in 2001, and Amersham, which entered the field in 2002 by purchasing the CodeLink Bioarrays product line from Motorola.

Agilent, regarded as the No. 2 player in the field, gained market share in 2003, although it is unclear whether the company did so by enticing newcomers to the field, converting users of home-brew technology or Affymetrix users, or becoming a second platform for those already invested in other equipment.

Amersham, on the other hand, has been slow to reach cruising altitude, taking most of 2003 to fully integrate its CodeLink purchase and build a new fabrication facility in Chandler, Ariz. In 2004, the company is facing another integration challenge as it joins General Electric as part of a $9 billion acquisition, which is expected to close early this year.

Patents

IPCura, an intellectual property consulting firm in San Clemente, Calif., lists Affymetrix’s US Patent No. 5,744,305, “Arrays of materials attached to a substrate,” issued in 1998, at No. 5 in its list of the top 20 most valuable patents of 2003. That is just part of Affymetrix’s portfolio, with s pipeline of patent applications working through the US Patent and Trademark Office. Hardly a week goes past without at least one Affymetrix patent granted (see Patents, page 2).

The courts are settling some the big underlying questions about licensing under the key patents needed to conduct business in the sector, and Affymetrix has seem-ingly backed away from microarray patent infringement lawsuits. This void has been filled by Oxford Gene Technology, which has several patent infringement lawsuits that may come to trial in 2004. OGT has actions pending against Motorola, Mergen, BD Biosciences Clontech, and PerkinElmer..

However, Affymetrix and Oxford Gene Technology may not have an armlock on the intellectual property needed to go forward. San Diego-based Nanogen, which is commercializing an electronic microarray platform, saw its shares soar 50 percent in December after the company received a patent investors regarded as a nanotechnology-based technology.

Products

Perhaps the most awaited product introduction of 2004 will be the Expression Analysis System trumpeted by Applied Biosystems. The company missed its initial target release of the fourth quarter of 2003 but said it expected to make a launch announcement in January. Other products that are expected early in the year would include an autoloader for Axon scanner products.

Users will continue to clamor for cheaper chips and the addition of new competitors should provide constant downward pressure on chip prices, with a sub-$100 array perhaps providing the key factor to convert the home-brew faithful to pre-printed arrays en masse.

Leadership

In 2004, some significant hires from 2003 should begin to make their presence felt in new positions. Among those are likely to be Stanley Rose, who was appointed president and chief executive officer of Madison, Wis.-based NimbleGen Systems, and Robert Ellis, who was promoted to president and CEO of BioTrove, after leaving a position as executive vice president of Affymetrix in May.

Others to watch will include Darlene Solomon, who in 2003 was named vice president and director of Agilent Laboratories after a stint as director of life science technologies for Agilent and serving on the external advisory board for the National Science Foundation’s Nanobiotechnology Center; and Alessandra Rasmussen, who was named business unit leader for proteomics and array systems for PerkinElmer.

Finance

As the year starts, Affymetrix is planning for the redemption of $102 million in convertible subordinated notes due in 2006, and $165.5 million in notes due in 2007, while at the same time offering $100 million in senior convertible notes redeemable in 2008, which it will use, along with available cash, to fund the redemptions, the company said in a statement.

Other notable 2003 financial transactions that should provide fiscal traction in 2004 include a $12.5 million Series D round of financing for NimbleGen Systems led by European glass giant Schott; the $7.5 million Series C round raised by NuGen Technologies of San Carlos, Calif.; a $19.5 million Series C round raised by SomaLogic to develop its aptamer-based protein arrays; and another Series C round, raised by Nanostream, a Pasadena, Calif.-based microfluidics developer.

Other fund-raises included Tm Biosciences of Toronto closing a $CA 12 million ($9 million) private placement in December; a $4.9 million private placement by Combimatrix parent Acacia Research; and a €3 Million ($3.8 million) Series B for biochip developer Friz Biochem of Munich, Germany.

But one of the largest financial transactions of last year was the £19.2 million ($29 million) for Randox Laboratories to commercialize Evidence, its biochip-based protein detection technology. Part of the funds — £16.2 million ($26 million) in employment grants and financing repayable in preferential shares, and an additional £1.8 million ($3 million) toward the cost of establishing a center of excellence – will come from Invest Northern Ireland.

Financially, one ray of hope over the past two years has been Federal funds for biomedical research. But that gravy train may be ending as the initial US budget proposal for fiscal year 2005 would provide an increase of 3 percent or less for the National Institutes of Health, according to a Jan. 5 report in The New York Times. Federal NIH funding has doubled over the last five years, reaching $27 billion in 2003.

Adult Supervision

The FDA ended an eventful 2003 with a suggested guidance document on pharmacogenomics data submissions. After an industry workshop on the document in November, the agency said it would rewrite the guidance. Expect that guidance, as well as others, to emerge this year from the agency.

—MOK

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