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

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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.

-- Chris Womack ([email protected])

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