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Will Affy s Acquisition of ParAllele Turn Ally Roche Into an Affy Rival?

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Clinical Data will spin off its vilazodone business and replace its chief executive and chief financial officers in a reorganization that casts its PGxHealth division squarely as a molecular diagnostics player.

As part of its third reorganization so far this year, Clinical Data has replaced CEO Israel Stein with Drew Fromkin, the former executive vice president and president of the PGxHealth division. Also, CFO Mark Shooman has stepped down, and Stein will take his place as interim CFO until the company can find a permanent replacement. Clinical Data did not offer a reason for either change.

On the vilazodone front, instead of finishing Phase III trials of the selective serotonin-reuptake inhibitor that Clinical Data began in February the firm will spin off the business to a new company called Precigen Therapeutics that will finish the project. Clinical Data's PGxHealth division will continue developing a companion diagnostic for identifying patients likely to respond to the SSRI.

Clinical Data has said in company statements that it plans to finish clinical trials by the middle of 2007, file a new drug application based on these data in 2008, and, depending on US regulators, possibly launch a drug-diagnostic companion product one year later. Even though Precigen Therapeutics has not yet been staffed, "nothing has changed with that; in fact, we're on target," Fromkin told Pharmacogenomics Reporter this wee

Affy is buying ParAllele for about $120 million in stock.

The transaction, assuming it is approved by regulators and stockholders, will give Affy a genotyping platform that it hopes will propel revenues through the short and long term with customizable assays that may capture more of the SNP-genotyping market, as well as smaller, specialized markets occupied by Roche and others.

"There is still room for large-scale genotype association studies," said Steve Fodor, Affy CEO, in a conference call with investors this week. Out of these association studies, the company "anticipate[s] that there will be panels of genetic markers that come out, and certainly the ParAllele technology will be very applicable toward those panels," Fodor said.

An interesting and little-mentioned result of Affymetrix's purchase is that the company will own MegAllele DME-T, a drug-metabolism assay with the potential to become a competitor to Roche's CYP450 AmpliChip. Both microarray-based assays operate on Affy's FDA-cleared GeneChip reader, but the FDA has only cleared the Roche CYP450 chip as an in vitro device so far. When ParAllele and co-developer Eli Lilly introduced the DME-T assay in March, Aaron Solomon, the ParAllele's vice president of business development, told Pharmacogenomics Reporter that the assay would be filed with the FDA within 12 months. The company does not offer DME-T as a product yet.

While both assays are intended to examine which drug-metabolizing-enzyme alleles a person carries, the CYP450 chip interrogates two genes: 2C19 and 2D6. ParAlleles boasts that its DME-T assay investigates "roughly 29 genes," including CYP450 enzymes, non-cytochrome enzymes such as acetylases and transferases, and transporters, Solomon said.

But Affy officers didn't mention the DME-T assay during this week's conference call. Instead, that assay appears to be only one iteration of MegAllele's wider uses beyond SNP genotyping. "The immediate benefit [of the acquisition] will be products based on the combination of Affymetrix' GeneChip Tag arrays and ParAllele's custom assays," said Fodor. "We expect that the DNA analysis market will continue to be a key growth driver for Affymetrix."

Affy did hint that the MegAllele system may lead to FDA-cleared diagnostic products, however. "We'll be looking at this technology to access many of the different niche opportunities that reside out there that can be consolidated under a technology, and in the long term, of course, into the regulated market," said Greg Schiffman, Affymetrix's CFO, during the conference call.

The acquisition grew out of a long-standing collaboration between Affy and ParAllele, beginning in 2003, when Affy began providing its GeneChip platform for ParAllele to use with its genotyping assays.

Last year, the two companies extended the collaboration into a distribution partnership under which ParAllele agreed to design assays for Affymetrix to market for use with the GeneChip platform.

Earlier this year, PaAllele announced plans to partner with Eli Lilly and Genaissance to design and market its upcoming MegAllele DME-T assay panel.

In the research market, Affy expects that customers will use the two firms' technologies to customize their own experiments to examine one SNP to "tens of thousands" of SNPs at the same time, using a single chip, said Fodor. "We will also be looking at how to merge this with other designs — aside from the Tag designs — in expression, in DNA methylation, and so on," he said.

What Affy wants, company officers said, is ParAllele's Molecular Inversion Probe technology. This system is based on a universal Tag chip, identical versions of which are used for every assay, said Fodor. The reagents themselves are customizable — they are designed to complement tags on the universal chip as well as specific, customizable portions of the genome, he said.

Other uses for ParAllele's technology mentioned during the call were the analysis of chromosome copy number, the study of multi-allelic diseases, and targeted RNA analysis. Using the MegAllele Human Immune-Inflammation Genotyping Kit, mentioned by Fodor as a "pretty good" example of the system's uses, researchers from the University of Southern California are conducting association studies on childhood-onset lupus, while Baylor scientists are studying the genetic basis of variability in immune response to the flu vaccine, along with human response to respiratory pathogens in general. The panel is currently offered through a service by ParAllele and will be commercialized as an Affy product.

The acquisition was announced as Pharmacogenomics Reporter went to print this week, and Affymetrix and ParAllele representatives could not be reached for comment before deadline.

Collaborations

Although Affy was reluctant to offer specific details of MegAllele's future, Schiffman, Affy's CFO, gave a brief overview of collaborations relevant to the system. Affy will "take the lead on commercialization" of the Tag chips, selling tag SNPs and "custom genotyping solutions for any region of the genome" to particular customers, he said. "We have a number of different panels of SNPs and markers, and so on, that will be coming out in the future," he added.

ParAllele, on the other hand, has been interacting with pharmaceutical companies in "collaborative research programs" involving genotyping and the company's Mismatch Repair Detection SNP-discovery program, said Schiffman.

Financials

Affymetrix expects to pay about $120 million in stock for privately held ParAllele in the third quarter, subject to regulatory approval and other closing conditions, said Schiffman during the conference call. "We expect to incur a merger-related charge for in-process R&D of approximately $15 million, as well as operational charges in the range of approximately between $4 million and $7 million," including a non-cash amortization of about $2 million, he said.

"We expect this transaction to be financially neutral to our operating results in 2006, and accretive to net income in 2007," said Schiffman.

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"I think that we're going to get a lot more aggressive here, in terms of our interest in … looking at biomarker discovery and validation and leveraging those biomarkers to commercialize genetic tests."

"We are focused on what PGxHealth endeavors to do in the diagnostics and genetic testing side, and vilazodone had really nothing to with the clinical chemistry side, which is our Vital Diagnostics" division, the incoming CEO said. "Vilazodone was our sole product from a therapeutic perspective, so it's not the sort of thing that we're pursuing at this time."

Selective serotonin reuptake inhibitors generated around $13 billion in combined revenue last year, according to industry figures. Two popular SSRIs, Pfizer's Zoloft and Wyeth's Effexor, had 2005 sales of $3.1 billion and $2.6 billion, respectively, according to IMS Health. Yet the efficacy rates of SSRIs are spotty, and all carry adverse events that could be severe or even lethal. No drug currently owns more than 30 percent of market share, and vilazodone may be able to "differentiate" itself with a companion diagnostic, Carol Reed, Clinical Data's CSO, said in a February interview.

How Much Change?

Unlike Clinical Data's previous two reorganizations this year, this one is limited to the spin-off and the management changes. "The three divisions [of Clinical Data] are as-is, the management of those divisions are exactly the same, so there's no change to the daily operations," said Fromkin.

Indeed, spinning off the vilazodone project fits with the general course the company has been following since it announced plans to acquire Genaissance last June, and seems likely to continue following under Fromkin. "I think that we're going to get a lot more aggressive here, in terms of our interest in … looking at biomarker discovery and validation and leveraging those biomarkers to commercialize genetic tests," he said.

"There are numerous things that we're going to do, in terms of finding ways to move this science into clinical utility, and our primary objective is to focus more on how these biomarkers can improve outcomes for patients" in order to decrease drug unit costs and drive down the cost of medical care, Fromkin said. He declined to specify how the company planned to do this.

And What Is This Precigen?

Details about Precigen are scarce. Until Clinical Data files documents with the US Securities and Exchange Commission related to the spin off, its officers are constrained from issuing any information that might appear promotional. Asked when Clinical Data would file the relevant documents, Fromkin said, "We'll know that better in the next couple of weeks."

The new firm will be separately financed, and Clinical Data said it will issue shares of the company to its own current shareholders as tax-free stock dividends. Separate financing will "allow us to optimize those assets," said Fromkin. On the diagnostics side, Clinical Data will be doing things the same way it would have if the compound had stayed in-house, he added.

Clinical Data will relate to Precigen in "exactly" the way that it relates to other drug makers wanting to develop diagnostics, said Fromkin. "PGxHealth will provide to this organization the same types of services it would to many of its other pharmaceutical and biotech clients," he said.

Precigen may not have exactly the same relationship with Clinical Data as other clients in every respect, however. Given its beginnings as a project of Clinical Data, it is not unreasonable to assume that some of Precigen's employees will be drawn from the parent company — possibly including managers. But in its statement announcing the spin-off, Clinical Data said recruitment for the new company's management is currently underway.

When asked whether Precigen might draw employees from Clinical Data, or whether the two firms might share directors, Fromkin said, "Some of those things will also continue to be looked at within the coming weeks and months." He declined to elaborate.

Heading for Molecular Diagnostics

Clinical Data inherited vilazodone with its acquisition of Genaissance last June. Genaissance licensed the drug from Merck KGaA after it twice failed clinical trials — for reasons other than toxicity — and Genaissance committed to developing a companion diagnostic capable of identifying responding patients.

So far, Clinical Data has yet to produce a molecular diagnostic of its own, but it provides Genaissance's Familion test for predicting the risk of Long-QT Syndrome, and it has also inherited from that firm the thiopurine S-methyltransferase intellectual property licensed to Prometheus Labs.

Clinical Data also has other tests in the molecular diagnostics pipeline, including a test to identify patients likely to suffer an adverse reaction from the schizophrenia drug clozapine. The company plans to offer that test as a service from its own CLIA lab before the end of the year, Carol Reed, the firm's CSO, said in an April interview.

This week, the firm announced a project with Duke University to discover genetic variants associated with baseline lipid parameters and the response of these parameters to statins (see Snippets).

— Chris Womack ([email protected])

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