Affymetrix, the Santa Clara, Calif., biochip manufacturing giant, used the fourth annual UBS Warburg Global Life Sciences conference in New York last week to introduce two products and lay out its strategy for an audience of financial analysts and institutional investors.
With red laser dots, PowerPoint slides and fiscal gravitas in a dark blue suit, CFO Greg Schiffman laid out the reasons why Affymetrix thinks it can continue to dominate the microarray industry and introduced the company’s 10,000-SNP chip and its Custom Seq chip to a standing-room-only audience in the second-floor Terrace Room of the glitzy Plaza Hotel.
The two new chips will be “generally” available in 2003, Schiffman said, while the 10K SNP chip is already available to the company’s “Early Access” customers. This club now includes, he said, most major pharmaceutical and biotechnology firms. Additionally, the company will roll out its CYP450 Assay, developed in partnership with Roche, for easy access customers this year, and for the full market next year.
The 10K SNP mapping array, which the company windily titles, GeneChip Human Mapping Set 10K XBA 130, will enable whole genome SNP analysis, at “fairly” high resolution, for mapping disease genes for population studies, according to Schiffman. It does not rely on locus-specific PCR or multiplex PCR and exceeds 99 percent concordance with other genotyping methods.
“Instead of having to use 100 microtiter plates and 10,000 primer pairs, scientists can look at over 10,000 SNPs using a fairly simple assay and array,” he said.
The Custom Seq product is a customizable resequencing array allowing analysis of up to 30,000 bases of double-stranded DNA on a single array. It will allow analysis of a single, contiguous section or multiple discontiguous regions.
Both products take Affymetrix in the strategic direction of clinical genomics.
“Over the last year, we have been very successful in seeing our product moving downstream into pharmaceutical development applications,” said Schiffman. The company derives a majority of revenue from the discovery process and target identification, but is also targeting validation and optimization, early-phase clinical trials, and the clinical diagnostic or health management market, which the Roche Cytochrome P450 drug metabolism chip will address.
Sell Low, or Sell High
While these products aim at the high-density segment of the market, Schiffman took pains to explain Affymetrix’s intentions and devotion to the low end of the market and how it will continue to use its semiconductor manufacturing techniques to wring out 60 percent margins.
“There is a misperception that manufacturing in high density means that everything we sell is high-information content,” he said. The array technology is flexible. Customers can buy entire wafers like Perlegen does, or buy by the chip. “Should the market evolve, we can dice wafers into thousands of pieces and deliver them potentially in 96-or 384-wellplate format,” he said.
“We can create custom arrays, with any degree of content up to 50,000 arrays.”
Taking a Market Advantage
The company may also be able to manufacture arrays, whether high- or low-density, more cheaply, now that it has completed outfitting its manufacturing facility, at a cost of $33 million, and expects its capital expenditures to be substantially less next year. That being said, the company is only using half of its factory capacity and has only just begun to descend from a 20-micron format on its chips to a technology-limited 10 microns, a milestone not expected to be reached for “several years,” Schiffman said.
The human genome array chip introduced earlier in the year was the first Affymetrix product manufactured at 18 microns.
The number of microns indicates the fineness of the method used for creating features on a chip. The lower the number, the more DNA probes and the more information that can be harvested.
The company has reduced the costs of making each wafer for several years while improving its margins consistently, said Schiffman. When it moves to 10 microns, the company will have slashed 75 percent of its manufacturing costs, he said. One day, it will essentially manufacture chips at no cost, Schiffman said, and the company’s only costs will be distribution.
Meantime, Moore’s law efficiencies, the rule of thumb in semiconductors that says that chips double in power and halve in cost every 18 months, are passed through to customers, Schiffman said.
Eyeing the Clinics
Affymetrix’s vision for DNA analysis is to become the platform of choice for analyzing DNA variation, basic research, and clinical genomics, Schiffman said. “Two areas for growth in the future are DNA analysis and combining expression and DNA analysis in the clinical genomics marketplace. In pharmacogenomics, whole genome analysis of DNA variation parallels very close to gene expression analysis and we expect that individuals are going to want to do follow-ups with specific markers for drug response.“
For the clinical genomics marketplace, Affy aims to be the platform for evaluating genomics information in clinical trial and clinical care. The company is partnering with pharmaceutical companies, providing the chips and taking a cut of any products developed. Chips are being used in early-phase clinical trials, testing for efficacy, safety and surrogate end points.
Wall Street Reacts
On Thursday of the conference, Salomon Smith Barney sent out a press release, announcing that it had initiated coverage of the company, the 13th brokerage firm to track its financial performance. In a seven-page paper released by Salomon, analyst Lakshmi Bhojraj said of Affymetrix: “We believe the company needs to seek new avenues of growth or acquire new businesses in order to sustain its current growth profile in the long term.”
The brokerage rated Affymetrix 2H -- which in its parlance means the stock is in-line with the analyst’s coverage companies, similar to a hold rating, and high risk (low predictability of financial results and high volatility).