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Affymetrix Makes $62.5M in Payments for Oxford Gene Technologies Royalties

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Affymetrix on Monday said it would make a one-time payment of $42 million to Oxford Gene Technology, the UK-based firm that manages the intellect-ual property developed by microarray pioneer Edwin Southern of Oxford University.

Additionally, approximately $20.5 million in royalty payments held up by Affymetrix will be released to fully pay any obligations on its license to OGT’s patents for the life of the patents, which is regarded as 10 years, according to the Form 8-K filing with the US Securities and Exchange Commission.

It is not clear whether Affymetrix previously reported the $20.5 million as part of a 2001 settlement of litigation between the company and OGT. Affymetrix did not return calls seeking clarification.

The $62.5 million buyout announcement, made after the close of trading on the New York financial markets on Monday, ends a legal saga that stretches back almost as long as microarrays have been commercially available.

Affymetrix expects the payment to boost its gross margins above 70 percent for the rest of the year. In its SEC filing, the company said it expects the transaction will result in an additional $6 million in net income, or an additional $0.10 a share for 2004. This bump is expected to occur in the fourth quarter and does not affect the company’s financial expectations for the third quarter, Affymetrix said in its filing.

Greg Schiffman, Affymetrix’s chief financial officer, in a webcast presentation made at the Thomas Weisel Partners Growth Forum 6.0 Tuesday, described the transaction as a “modification with a licensee.”

“We have been looking at ways to work through getting a buyout,” he added, saying discussions were held over a three-year period.

“They got serious over the last little window,” he said.

The cash to be transferred to OGT represents nearly a quarter’s worth of revenue for the Santa Clara, Calif.-based leader of the mass-produced microarray industry, which recorded $76.8 million in total revenues for the first quarter ending March 31.

Representatives of OGT were not available for comment and Southern did not reply to a BioArray News request for comment.

By the end of 1999, OGT had four separate legal actions in progress against Affymetrix in the US and the UK. Two of the suits were for patent infringement, and two in the UK were suits to revoke two patents held by Affymetrix.

“Affymetrix did not invent the array,” Southern said in a 1999 statement. “Yet they appear to be attempting to patent all arrays and achieve a monopoly over all arrays. This conduct may hinder the emergence of competitive array technologies, such as the computer-controlled printing techniques disclosed in our original filing. If not checked this could ultimately drive people away from arrays altogether. It would be a catastrophe not to make full use of such a powerful analytical tool.”

“We could not allow Affymetrix simply to spend its way out of trouble, and so we were forced to make our own financial position absolutely secure,” Southern said in the statement issued in December 1999, one day after Agilent Technologies announced that it would license OGT technology to enter the microarray business, and two days after Incyte announced its license of OGT patents.

Affymetrix in 1998 acquired Beckman Coulter’s microarray business, and with it, Beckman’s license to microarray patents based on intellectual property developed by Southern at Oxford. OGT contested this license acquisition but did not prevail.

In the deal, Affymetrix paid Beckman $5.9 million and issued a credit of $5 million for research and development services to be performed by 2005. According to its 2003 10-K filed with the SEC, Affymetrix amortized $3.7 million of the funds in 2003, after amortizing $3.0 million in 2002, and paid Beckman $5 million to settle the remainder of its services obligation. In July 2003, the two companies announced a joint venture, called Array Automation, to research and develop non-photolithographic arrays of polynucleotide sequences and instruments. Any net income generated by the joint venture would be split 51 percent to Affymetrix, and 49 percent to Beckman, after the recovery of any cumulative losses Beckman might generate.

In March 2001, OGT and Affymetrix settled all litigation. Affymetrix, in a statement at the time, said it did not receive any additional license rights from OGT and that the terms of the Beckman license remained unchanged as a result of the settlement. In SEC filings, Affymetrix disclosed that it took a charge of approximately $18.6 million in the fourth quarter ending Dec. 31, 2000 above amounts previously accrued and payable to OGT under the license.

For Affymetrix, this payment clearly marks the end of a long and costly trek. Instead of paying a license fee of $20 million to OGT in 1998, the company ended up paying $11.7 million to Beckman, according to SEC filings, plus $18.6 million in the OGT settlement, and nearly $2 million in legal fees on the deal, as well as at least $42.5 million announced on Monday. That doesn’t include the legal fees and valuable time spent resolving the issue.

—MOK