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Neomorphic s Drug Discovery Efforts Halted; Affy Needs Bioinformatics

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Neomorphic, which entered the genomics scene back in 1996 as a software company, tried earlier this year to refashion itself as a drug discovery company. But its new owner, Affymetrix of Santa Clara, Calif., is not going to let that happen. At least not right away.

Affymetrix, which last week bought Neomorphic for an eye-popping $70 million in stock, plans to use Neomorphic’s armory of leading bioinformaticists to help develop tools and generate data that will help Affymetrix’s GeneChip microarray technology to stay ahead of the competition.

Neomorphic of Berkeley, Calif., which is now being referred to as Affymetrix Berkeley, will also be involved in developing tools that can be used by Affymetrix’s new single-nucleotide polymorphism subsidiary, Perlegen Sciences.

“What these guys have done is take raw genomic sequence data and develop algorithmic tools to sort through sequence data and to query and visualize the data,” Edward Hurwitz, Affymetrix’s CFO, said about Neomorphic’s staff. “They are world class.”

Speaking at an investor conference sponsored by ING Barings in New York, Hurwitz noted that Neomorphic’s software has been used by companies such as Celera Genomics and Monsanto as well as by the Institute for Genomic Research.

While industry insiders have generally applauded Neomorphic’s ability to develop cutting-edge software, many wondered whether the company had the right business model to survive. Affymetrix, meanwhile, has been known for dominating the DNA chip market, while lacking strong bioinformatics tools.

Together, some experts said the fit between the two could prove beneficial for both.

But other industry insiders questioned the high price Affymetrix payed for Neomorphic, a company with only 40 employees and $2.6 million in revenues in 1999, and wondered whether the deal did not indicate Affymetrix’s intentions to expand or change its focus.

“Neomorphic is a great company but with the level of density Affymetrix has on its chips did they really need these tools?” asked Nat Goodman, an independent consultant for the genomics industry. “Perhaps this is part of a bigger strategy.”

Hurwitz said, however, that Affymetrix intended to stay focused on the chip market, adding that Neomorphic’s expertise in mining the genome would allow the company to add more useful information to their chips.

“Neomorphic will bring the next generation of mining and visualization tools,” said Hurwitz, adding that he did not expect Affymetrix to continue selling Neomorphic’s software. “We wanted to stay ahead by integrating Neomorphic’s data and tools.”

Neomorphic can also be expected to offer up any novel genes it may have found in order to beef up Affymetrix’s chips. Over the next 12-18 months, Affymetrix said it will increase the density of its chips by putting between 25,000 and 100,000 genes on a chip, up from 13,000 today.

In addition to helping improve Affymetrix’s chip business, Neomorphic will also work to advance discoveries at Perlegen Sciences. One day after announcing the acquisition of Neomorphic, Affymetrix said it was forming Perlegen, a new subsidiary that would focus on genotyping 50 genomes in an effort to link SNP data to disease.

“What we can do in the context of Perlegen was one of the drivers for Affymetrix acquiring us,” said David Pritchard, executive vice president at Neomorphic.

“We will be involved in identifying genetic variation and, to the extent that that is predictive, then we are going to have a role in what they are doing,” Pritchard added.

Pritchard added that Neomorphic’s team of bioinformaticists would also work on developing the click-through channels that will allow users of Affymetrix’s chips to access underlying genomic databases via the Internet. Affymetrix said it does not expect to sell subscriptions to its databases, but added that a Web-based portal would allow researchers to gain access to any new data the company generates.

So, for right now, Neomorphic will have to be content returning to its software-developer roots. But in the long term, Neomorphic hopes that its relationship with Affymetrix will allow it to spread its wings.

“It’s true there is more of the tool provider element here,” said Cyrus Harmon, Neomorphic’s CEO, who will become vice president of computational genomics once the acquisition is finalized.

“But over time we will be able to do things in the collaborative discovery mode that we were moving towards at Neomorphic.”

—Jennifer Friedlin

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