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Fodor Defends Affymetrix’s Manufacturing Technology

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Steve Fodor, chairman and chief executive officer of Affymetrix, spent considerable time on the company’s conference call with financial analysts last week explaining the manufacture of the company’s GeneChip microarrays.

The subject came up in reaction to the announcement by Applied Biosystems that it would be entering the microarray manufacturing business with a single, whole-human-genome microarray and an instrumentation system available before the end of the year.

ABI said its platform, using 60-mer synthesized probes and chemiluminescent detection, would be more sensitive and reproducible than any technology currently on the market.

Affymetrix, without a doubt the microarray market leader and on track to earn revenues of $280 million this year, manufactures its GeneChip microarrays with probes of 25 mers in length, densely packed and photolithographically deposited in situ on a quartz substrate.

“When you are in the range of 15 to 30 [mers], you are in the range right now that is in fact the industry standard,” said Fodor. “When used properly, oligonucleotides in this range are in fact very specific to sequence changes and actually detecting the sequence that you are trying to detect.

“The success of what has happened with Affymetrix is because we actually have the technology
that allows us to properly use highly sensitive pieces of DNA,” he said. “That allows us to go in and ask very, very specific questions and monitor for these high-sensitivity, high-specificity signals.

“If you have very, very long pieces of DNA, yes, you can get signals, but you then have a question of what is actually binding to it. It can bind to a lot of things.

“Our direction is to go to higher and higher resolution, with higher and higher density of coverage. We are at 500,000 today. Over the next revisions, we’ll probably go up above a million.”

Fodor agreed with an analyst comparison of ABI’s microarray scheme with one floated by Incyte, a Palo Alto, Calif., company that offered a 5-chip glass slide microarray set covering the human genome, along with its database of genomic information. Incyte exited the microarray business in late 2001.

“This is a little bit of déjà vu all over again,” Fodor said. “This is not particularly a new issue, but again, I guess, we’ll learn the lessons all over again.”

Affymetrix that day opted not enter what has suddenly become a horse race to create a whole-human-genome single microarray, although Trevor Nicholls, chief commercial officer, global operations, told analysts: “We are seeing more and more people wanting to look at the whole genome, not just in human, but across all the model organisms.”

In its 2002 annual report, Affymetrix said that its research labs have created a prototype chip containing up to “60 million fragments of DNA.” This format would support the content of a whole human genome on a single chip.

The company did not reply to requests for comment on a commercialization target date for this format.

Financials

The company reported net income of $5.2 million on revenues of $68.6 million for the second quarter ending June 30, compared to a loss of $1.6 million on revenues of $71 million for the second quarter of 2002, and a turnaround from its first- quarter net loss of $12.7 million on revenues of $67 million.

Gains were attributed to record instrument revenue of $15.6 million on top of revenues of $30 million from sales of its GeneChip-brand arrays.

Wafer sales to Perlegen Sciences accounted for an additional $2.8 million, compared to $5.6 million for the same period a year ago.

Affymetrix reported R&D expenses of $16.6 million for the quarter, compared to $17.3 million for the year-ago quarter.

The company reported cash and cash equivalents of $37 million and $303.4 million in available for-sale securities on June 30, compared to $68 million in cash and cash equivalents and $293.6 million in available for-sale securities on Dec. 31, 2002.

The Market

Affymetrix said its GeneChip revenue dropped by $2.6 million compared to the year-ago quarter, while instrument sales rebounded from last quarter’s drop. However, GeneChip shipments to clinical partners increased, and academic growth “has continued at very strong levels,” said Nicholls. “That has offset declines we have seen in the biotech database sectors.”

The company recorded $3.5 million in amortization of its $70 million 18-year deal with Roche to supply its technology for the diagnostics giant’s AmpliChip-brand microarrays.

In the quarter, Affymetrix sold 39 of its $250,000 GeneChip systems to bring its global installed base to approximately 860 systems.

The company said it also sold 60 scanner upgrades, at prices ranging from $100,000 to $125,000, and some 100 fluidic station upgrades for $20,000 each.

The company has said that it intends to introduce an autoloader for its GeneChip 3000 scanner, a product that will increase the throughput of array scanning on its platform, and said it has already received “significant” orders for this loader. The company is also working on microtiter plate applications for high-throughput screening.

Buying back debt obligation

The company took a $1 million expense for the buyback of approximately $101 million of outstanding convertible notes, a move that Fodor said would cut the company’s interest income expense nearly in half.

The company also said that it signed 12 new service providers into a network that now numbers 25 worldwide, lessening its short-term need for capital investment, and for providing access to technical expertise, said Greg Schiffman, CFO.

ABI and Roche

Sue Siegel, Affymetrix’s president, was measured in her response to a question about whether Affymetrix might consider taking legal action over possible patent issues with ABI.

“It would be premature to make any comments,” Siegel said. “We haven’t seen their products. What we heard is an announcement of a product they plan to launch.”

Siegal also said that any comment would be premature on the FDA’s letter to Roche Diagnostics over the propriety of marketing its Affymetrix-manufactured AmpliChip as an ASR.

“As the component supplier, we need to make sure we support Roche on a go-forward basis,” she said.

— MOK