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Affymetrix Preparing to Make an Entry Into Applied Markets for its GeneChips

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Affymetrix is preparing to make a push into new marketplaces, Sue Siegel, the company president, said in a wide-ranging presentation last week at the annual UBS Life Sciences Conference in New York.

The company, which first produced a DNA analysis product in 1996, is making a reinvigorated push into DNA analysis with the introduction in July (See BAN, 7-30-03) of the Mapping 10K Array for whole genome SNP analysis and the CustomSeq Resequencing Array. Now it is preparing to enter entirely new arenas where its GeneChip-brand products can be applied to such tasks as paternity testing, feed testing and animal diagnostics, and crop testing, Siegel said.

Siegel’s comments, delivered before a near-capacity crowd in the ornate ballroom of New York’s Plaza Hotel, followed the company’s announcement that Johnson & Johnson Pharmaceutical Research & Development was the first customer to sign an early-access agreement for Affymetrix’s GeneChip HighThroughputArray, a platform containing a Human Genome U133 A GeneChip in each well of a 96-well plate format. The company expects the full commercial rollout of the industrial-scale product in 2004.

Meantime, the microarray market is estimated to reach the $800 million mark this year as Affymetrix holds a commanding share among the three industrial-scale microarray pro-ducers (Affymetrix, Agilent Technologies, and Amersham) and is regarded as the standard against which others are measured. The company expects to earn near $280 million in revenues this year. However, with the promised entry of Applied Biosystems in the market this quarter, and with others like Japan’s Canon, and Taiwan’s Phalanx Group, on the sidelines warming up their own entries, Affymetrix is seeking to expand its customer base.

Affymetrix was among 400 companies making presentations during the annual conference sponsored by UBS as a service to its clients, allowing investors the opportunity to hear a company’s sales pitch, or schedule a 1-on-1 meeting with presenting executives. Over the four days of the conference, there were nearly 1,000 such meetings. The conference drew many of the public companies in the microarray space including Illumina and Nanogen of San Diego, and CombiMatrix of Mukilteo, Wash., as well as newcomer ABI, no stranger to the meeting, or to investors.

For Affymetrix, the conference was an opportunity to look forward and to detail its strategy, which it describes as following the mold set by the Intel Inside branding campaign conducted by the semiconductor giant, and best exemplified by Affymetrix’s relationship with Roche, an 18-year, $70-million deal (See BAN, 02-07-03) where Roche markets Affy’s GeneChip technology under its AmpliChip brand.

Affymetrix, Siegel said, is seeing its products becoming adopted for clinical applications, such as clinical trials and patient care. The company said its products are being used in at least 12 clinical trials.

But its targets are broader than the $20 billion-a-year molecular diagnostics market, whose portals are guarded by the FDA, which is still studying how it can regulate the tools and data produced by microarray analysis, a technology developed in the mid-1990s and just now beginning to find application in arenas outside the realm of research science.

Siegel said that bioMérieux, the Marcy-l’Etoile, France-based in vitro diagnostics giant, will introduce an Affymetrix-based product, containing DNA probes derived from 40 animals that will be used to test animal feed products. BioMérieux, an Affymetrix partner since 1996, will introduce the product in the fourth quarter, Siegel said.

“It will tell if the pâté is goose or duck,” said Siegel, adding, “and that’s important.”

The widening of marketing targets comes for Affymetrix as competition heats up in the microarray industry with the entrance of sequencing giant Applied Biosystems, which is promising to deliver its initial platform entry into the microarray market sometime in the fourth quarter.

“The competitive landscape has gotten lots noisier,” Siegel said. Referring to Applied Biosystems as “the big gorilla” in life sciences, Siegel said: “We have tremendous respect for them.”

Siegel said ABI’s microarray platform would find “niches it can participate in

. “As the entrants in the field grow, there are an array of options,” she said. “The time to close a sale has lengthened. But, when we have been up for analysis of our technology versus others, there are very few times, and I can count them on two hands, when we have not won the actual sale. ABI said absolutely no chips, [and] now for them to come back . . . .Having competition out there is good news, and validating for us.”

Finding Strength and Muscle in Sacramento

Affymetrix manufactures its catalog microarrays of 5-inch by 5-inch quartz wafers in a 50,000-square-foot factory in an industrial park on the outskirts of Sacramento, which, in early 2003, celebrated the manufacture of its 1 millionth array.

“Our strength is in manufacturing,” said Siegel. It is manufacturing muscle the company is only beginning to flex. The factory, Seigel said, only uses “40 to 50 percent of its [manufacturing] capacity.”

And, the more than 700 instrumentation systems that the company has sold globally rarely operate at 24/7 capacity.

“Placing systems are 20 percent of our revenue stream and are not required for long-term chip growth,” said Greg Schiffman, Affymetrix’s chief financial officer, who shared the platform with Siegel in the breakout question-and-answer session that followed the formal presentation.

The company just announced a major leap in its manufacturing process, dropping from an 18-micron format to an 11-micron format (BioArray News, Sept. 10, 2003). And, there is room to increase the density of the features it etches photolithographically onto the glass substrates of its chips yet again, Schiffman said.

The company can also slice and dice its wafers to multiply the number of arrays it can produce, from 49 chips per wafer, to 400 per chip, or 6,400 “chiplets” per wafer, with each capable of containing 50 features per array.

Fueling long-term chip growth is what fuels the long-term health of Affymetrix, said Schiffman.

Pressure on Pricing?

Affymetrix manufactures its GeneChip arrays consistently at margins of better than 60 percent. The company reported product and product-related gross margin of 69.5 percent in the second quarter this year.

With profit margins like that, is there room for a price cut?

“Don’t expect to see [margins] drop below 60 percent,” said Schiffman, “unless price is seen as a key to growing the business” adding that in certain conditions of demand and price sensitivity, the company would accept margins of 50 percent — if that represented a growth in revenues.

Wall Street Reacts

In the five days after the Affymetrix presentation, the Nasdaq index dropped as much as 5 percent. Affymetrix’s share price dropped as much as 10 percent, closing Monday at $21.37.

Additionally, the brokerage firm of Thomas Weisel this week downgraded the company to under-perform status.

— MOK

 

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