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Affymetrix Eyes ‘Opportunistic’ Buys in ’09 As Cash Remains Stable, Biotechs Weaken

After closing its $73 million acquisition of genetic- and cellular-analysis company Panomics this week, Affymetrix will likely be an “opportunistic” acquirer in 2009, according to a company official.
“Given the fact that we have access to liquidity right now, we likely will be opportunistic over the next year,” Chief Financial Officer John Batty said last week at Piper Jaffray's Healthcare Conference in New York.
Affy picked up privately held Panomics to bolster its menu of lower-throughput multiplex assays for target validation studies. Affy said the buy will give it “a more complete customer workflow, beginning with whole-genome Affymetrix microarray studies and then focusing on genes and proteins of interest with the Panomics products.”
Fremont, Calif.-based Panomics, which offers reagents and products for use in intracellular pathway analysis, cell signaling, and gene-expression profiling, is the third company Affymetrix has acquired over the past year to attain a broader menu of tools and services.
In January, it paid $75 million to buy Cleveland-based reagent maker USB, and in August it paid $25 million for True Materials, a Bay Area start-up developing liquid arrays for target validation.
With these shops now in-house, Affy said it has the main components to help it provide genomic-analysis tools for studies ranging from target discovery to validation. At the same time, with a relatively robust balance sheet facing a cash-starved and bleeding biotech industry, Affy is in a good position to make additional acquisitions in 2009. Affy had $315 million in cash and equivalents as of Sept. 30.
“At this point, I would say that we have the large building blocks that we need to execute on our plan,” Batty said. “However, given the fact that we have access to liquidity right now, we likely will be opportunistic over the next year.
“It is pretty clear that access to capital has become very difficult for many private companies,” said Batty. Being acquired by a company “such as Affymetrix, which has global brand equity and sales and distribution channels, would be a very compelling” option for such companies, he said.  
Batty said that the company is weighing the possibility of moving into the next-generation sequencing market, but that current instruments have not piqued its interest.
“Ultimately, we do believe that sequencing technology will have a part to play in this business,” Batty said. “At this point, we don't believe the current solutions offer the price point necessary to move from basic research and discovery into routine use,” he said. “But we will continue to evaluate technology tuck-ins as appropriate.”
Affy had ruled out the idea of buying a next-generation sequencing platform in the past (see BAN 9/11/2007). Illumina, a main competitor in the array market, bought sequencing shop Solexa in 2006 (see BAN 11/14/2006). Another rival, NimbleGen, was acquired last year by Roche, months after Roche bought 454 Life Sciences. The firm has been pursuing opportunities to co-market the two technologies (see BAN 6/26/2007).
According to Plan
Despite its aggressive acquisitive stance, Affy has been hit hard by a drop in sales to pharmaceutical and industrial clients. Revenues for the three months ended Sept. 30 fell 21 percent to $75 million from $95 million in the prior-year period.
President and incoming CEO Kevin King at the time attributed the sales decline to weaker pharma accounts. “We know that four of our top eight pharma customers have eliminated their resources in spending on core genomics-discovery laboratories, [and] the remaining four customers have moved [a] significant amount of spending from target and biomarker discovery to drug development and clinical trials,” King said (see BAN 10/28/2008).
“As a result, our pharma business has underperformed compared to the prior year,” he said. “Many [pharma customers] have told us not to expect that they will be placing large orders, because their budgets haven’t materialized.”

“Ultimately, we do believe that sequencing technology will have a part to play in this business.”

Last week, Batty said that this evaporation caused Affy’s sales during the first nine months of the year to decline 30 percent in the pharma segment compared with the same period one year ago.
“Historically, Affymetrix has been very strong in the area of target identification,” Batty said. “This is an area where the large pharma companies have cut back on their research funding.”
“They have moved that research funding more to the drug-development part of their workflow because this is going to enable them to get new drugs to the marketplace and restore revenue growth for themselves,” Batty added.
Batty added that Affy has suffered over the past years from a stagnant NIH budget, which has made it more difficult to sell to its traditional academic customers. Sales to this sector accounted for around 70 percent of total sales per year.
“The NIH budget is a very large budget, but there is a relatively small amount of allocation towards genetic-analysis tools,” Batty said. “What we have seen is, particularly in the discovery end of the spectrum, a lot of the funding has been siphoned off towards next-generation sequencing types of technologies, and certainly that has had an impact on us.”
Taken together, Affy's predicament has caused its stock price to nosedive 87 percent since the beginning of the year. As of Tuesday morning, shares of the company were trading up 1 percent at $2.76, miles from its 52-week high of $24.86.  
King has said in the past that Affy has been knee-deep in a three-pronged strategy to restore its business that includes the introduction of its new GeneTitan array platform, launched for gene expression in October; reducing overall cost of goods by reducing operating costs; and making targeted acquisitions to expand revenue opportunities (see BAN 7/29/2008). 
Last week, Batty said the Panomics buy will enable Affy to place its products “more in the mainstream of pharma's drug-development workflow.” Panomics offers products for in situ RNA, RNA, DNA, protein, and cell analysis. Its flagship platform, QuantiGene, is based on branched DNA technology and delivers quantitative gene-expression analysis. QuantiGene assays are currently available in both single-plex and multiplex formats and many are developed to run on Luminex's bead-based xMAP platform.
“The Panomics acquisition takes advantage of some 5,600 installed instruments from Luminex,” Batty said. “So, here we can hit the ground with assays provided by Panomics and continue to use True Materials' technology with those new assays that we acquired.”
An Affy spokesperson said this week that the company sees “significant opportunities” to cross-sell Affymetrix and Panomics products to its academic and pharma customers. “Customers do not use a single technology in their studies but many different ones depending on where they are in the workflow,” the spokesperson said.
“Typically a customer may start looking at a handful of genes first to test their hypothesis and depending on the outcome may scale up to a genome-wide approach. Furthermore, after doing a genome-wide study they may also want to take a lower-plex approach to validation of their findings,” he said. “This would mean that they can use Affymetrix and Panomics products in complement with each other.”
'Planned Succession'
Beside its efforts to revive pharma sales and deal with a poorer academic sector, Affy has been working on internal changes. Last month it announced that King will replace CEO and co-founder Stephen Fodor on Jan. 1. Fodor, who will retain his position as chairman of the board, plans to develop new technologies for the company to commercialize.
Batty said that since King joined Affy in 2007, the company has been operating according to a “planned succession.” King has “for all intents and purposes been running the day-to-day operations of the company,” while Fodor “has stepped back into an area where he is strong, which is basic science,” Batty said.
“I think that straightening out the decision-making authority in the company will be helpful,” he said. “I think that will allow us to put more focus on execution, which certainly has been an area of concern and focus for the company.”