In separate presentations at the Bank of America Healthcare Conference in Las Vegas last week, officials from Affymetrix and Illumina mapped out their long-term strategies for growth and discussed topics as diverse as the genotyping and gene expression markets as well as their ongoing patent litigation.
Affy officials said the company’s path forward will be driven by the launch of new genotyping and expression products, cuts in operating expenses, and the expectation that ongoing work on as many as 20 molecular diagnostics by its partners will begin to bear fruit. On the other hand, though Illumina increasingly links its future to its Genome Analyzer sequencing instrument, it too believes that the molecular diagnostics market will pay off the most in the end.
During their presentations, both firms addressed their ongoing patent dispute. Affy reminded analysts of a March ruling that found that Illumina had infringed on the IP central to the case, while Illumina reiterated earlier statements that it is amenable to a settlement if the right “economic relationship” can be reached (see BAN 3/20/2007).
According to Doug Farrell, Affy’s head of investor relations, the company is expecting annual revenue in 2007 to be in the range of $365 million to $385 million, an increase of 3 percent to 7 percent over the $355 million Affy posted in 2006. Affy’s 2006 revenues were a 3.3 percent swing into red from its 2005 annual revenues, and Farrell said that Affy will rely on product proliferation and cuts in its operating expenses in order to move back into profitability this year. In regards to cuts, Farrell was referring to Affy’s decision to transfer its Bedford, Mass., manufacturing facilities to California, a choice that has cost the firm $15 million.
In terms of products, Farrell said that the company expects its recently launched 1.8-million feature SNP Array 6.0 to drive growth in its DNA Analysis business, which typically comprises 35 percent of its revenues. In particular, he said that Affy believes that pharma and biotech clients will begin adopting its genotyping tools, although the majority of its whole-genome genotyping array users continue to be in the academic sector.
The week earlier at the Citigroup Healthcare Conference in New York, Farrell made similar claims. “We think that [overall] market is [in] the early-adopter phase of market development. In our case 75 percent of our revenues in this market come from a concentrated academic revenue base,” he said. “We are seeing more uptake from pharmas and biotechs, but they are not as nimble as academics because they have to think about whatever work gets done before and after this in their workflow,” said Farrell. “We do expect to see increasing industrial demand for these products going forward.”
In order to meet expected demand for its genotyping arrays in this setting, Affy has also made improvements to its automation equipment. The company recently released a high-throughput scanner and has also made its arrays available in a 96-well format favored in pharma and biotech R&D.
“We are moving on with second generations of automation,” he explained at Citigroup. “The size and scope of studies has been growing pretty dramatically, particularly in genotyping. In gene expression typically it would be normal to study hundreds of samples; in genotyping what we are seeing is tens of thousands of samples,” he said. According to Farrell, instrument sales average 15 percent of Affy’s annual revenues.
In Las Vegas, Farrell said that Affy is also looking to geographic expansion to drive growth in its genotyping and gene expression business. About half of Affy’s business is done in North America and another third in Europe, Farrell said. To date, about 12 percent of Affy’s international business occurs in Japan, but the company is laying the groundwork to build up a customer base in China. Specifically, Farrell said that Affy is building a new sales force in China.
Another growth driver for Affy should be the molecular diagnostics market. According to Farrell, there are at least 20 diagnostics being developed by various partners on its platform and “most of those are expression-based tests for looking at cancer.”
However, Farrell said that there are “certainly opportunities for infectious disease and it's also true for pre-natal testing where there might be lots and lots of tests with a small number of markers that you can aggregate onto a similar format and standardize that using this technology.”
Affy has signed agreements with companies like Roche, BioMerieux, Almac Diagnostics, Veridex, and Pathwork Diagnostics to develop tests. During his presentation, Farrell discussed two newer partners that Affy is also working with, including Skyline Diagnostics, a Dutch firm that has developed a test for acute myeloid leukemia, and Sysmex, a Japanese firm that is developing a chip for human papillomavirus.
Eyeing Molecular Dx
Illumina CEO Jay Flatley also highlighted molecular diagnostics at the Bank of America conference, noting that the company’s digital microbead-based BeadXpress reader is better than array platforms for running “lower-multiplex” assays, which detect just a few markers, rather than the dozens of markers in gene-signature-based diagnostics, like the MammaPrint breast cancer prognostic sold by Agendia.
According to Illumina’s calculations, molecular diagnostics is a $2 billion market. This easily dwarfs the genotyping market, which Flatley estimated at $600 million with the possibility to grow to $1 billion over the next three to five years, and the gene expression market, which Flatley said is worth roughly $800 million and growing very slowly.
Flatley said that in the molecular diagnostics segment, Illumina’s strategy is to “initially focus on acquiring proprietary content.”
“If there were such an economic settlement then we’d love to see it, but so far that hasn’t happened.”
“You've seen us do a number of deals with companies that have access to content that they've discovered, DeCode certainly being one of those; we are working with the Mayo Clinic on that. And we feel that our entry into the market needs to be on the back of a proprietary content marker set that will allow us to command the kind of pricing that we want to get in the molecular diagnostics space,” he said.
Flatley did not discuss pricing further.
Flatley said that Illumina hopes to get an assay cleared by the US Food and Drug Administration for clinical use by the end of 2008. The firm has yet to articulate a commercialization strategy for any tests that would come out of its partnerships, and Flatley said that Illumina is mulling a “hybrid strategy depending on what tests make it through and who the customers are, we may sell [the tests] through a partner or we may sell them direct.”
“We could sell through third parties or through even CLIA labs,” he said. “Those strategies will evolve and as we get closer we will articulate the strategies.”
Expression and Litigation
While Flatley characterized the array-based expression market as growing slowly and one where Illumina’s current products are merely taking market share from larger players like Affymetrix and Agilent Technologies, he said that a growth driver in that space might be its Genome Analyzer sequencing instrument which is capable of “digital gene expression.”
“Today whole-genome genotyping is done largely on arrays using analog fluorescent measurements, and with the Solexa technology we will begin to convert that to digital analysis,” he said.
Flatley noted that he had recently conferred with an unnamed but “very prominent expression scientist” who had told Illumina after trying out its digital gene expression technology that “array-based gene expression is going to die out pretty fast” once the application became popular.
Finally, Flatley said in response to a question from an investor that Illumina is amenable to settling its ongoing litigation with Affy, so long as an “economic relationship” can be worked out between the two companies.
“I think in any litigation, the ultimate outcome is determined by the willingness of the two parties on what an appropriate economic relationship is between those two companies based on the intellectual property in question,” Flatley said.
“While it may seem very straightforward for investors to speculate how a settlement might arise, it’s perhaps more difficult than that to get the parties to agree on what the right economic balance is that makes a settlement rational for both companies to resolve,” he said.
“If there were such an economic settlement then we’d love to see it, but so far that hasn’t happened,” he added.