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Affymetrix Eyeing Tuck-In Acquisitions to Bolster Downstream Market Presence

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By Justin Petrone

It's a "buyer's market" if you're considering acquisitions, and Affymetrix is open to acquiring new technologies in the near future, company officials said last week.

If the array vendor buys a company or platform, it will most likely be in the biomarker-validation market, where the company sees its future, and definitely not in the next-generation sequencing space.

"It is a buyer's market; there are a lot of interesting technologies … that are in play," said Doug Farrell, Affy's head of investor relations. "Tuck-in ones are certainly on the table, though it's hard to imagine a dilutive acquisition or something with a big burn rate when we are at the bubble of profitability."

Farrell discussed Affy's acquisition strategy last week at the Deutsche Bank Securities Healthcare Conference in Boston. He noted during his presentation that the firm ended the first quarter with around $100 million in cash, putting it in a position to purchase companies or technologies that meet its business goals.

Historically a conservative buyer, Affy bought three companies in a single year in 2008, when it paid $75 million for Ohio reagents maker USB, $25 million for Bay Area startup True Materials, and $73 million for Fremont, Calif.-based Panomics (BAN 12/16/2008).

While the USB acquisition provided Affy with the resources to provide more reagents directly to customers, rather than relying on external partners, the Panomics and True Materials buys were in line with the company's ambition to reposition itself in the downstream, biomarker-exploration and -validation market.

Panomics' branched DNA-based QuantiGene platform, for instance, is being targeted for exploration and validation studies, while Affy said during its first-quarter earnings call in late April that the digitally encoded microparticle "liquid arrays" for low- to midplex genotyping that it acquired with True Materials moved recently from research to product development.

CEO Kevin King said during the Q1 call that Affy is "really bullish" about its ability to compete in the low- to midplex space, "not only with the products of USB and Panomics, but also by marrying those with True Materials into the future."

A company spokesperson this week told BioArray News that Affy has no "hard dates" yet for a commercialized liquid-array product.

Because of these acquisitions, Farrell said the company currently has the platforms to address its key markets. "If we look at our strategic goals over the next few years we have the pieces in place to execute to that plan," Farrell said at the conference. "I don’t feel there are any holes that need to be filled."

Looking Downstream

If Affy decides to buy a company or new technology, it will likely be focused on biomarker exploration and validation. Affy's legacy gene-expression business continues to provide the firm with a base of reliable consumables sales, but those sales are declining, and the company is more interested in biomarker validation opportunities than in providing tools for marker discovery, according to the firm.

"Just a few years ago, virtually 100 percent of our revenue was generated in the discovery market," said Farrell. "One of the overarching themes of the company has been moving the technology downstream. Clearly the market opportunity in discovery has been exciting, but that is becoming a crowded market.

"As you move downstream you get more recurring revenue streams, better pricing, and other things that make the market attractive for us in the long term," he added.

Beyond Panomics' QuantiGene kits, which compete directly with RT-PCR, Affy also hopes other of its platforms will be adopted for exploration and validation work. These include the shop's next-generation, fully automated GeneTitan system, which debuted at the end of 2008, and its lower-throughput, benchtop GeneAtlas, which debuted last quarter.

Farrell said that Affy installed 45 GeneTitans last year, and has been "encouraged by the uptake" of GeneAtlas, noting recent placements in India and other Asian markets.

"In expression, there is a shift in the revenue from the legacy products to newer products," Farrell said. He added that Affy's strategy going forward is to "protect and defend" its share of the discovery market, and to "use new technologies and platforms to branch into biomarker validation."

Farrell pegged the biomarker validation market at $700 million.

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Though Affy's chief rival, Illumina, has positioned digital gene-expression applications performed on its sequencing platforms as an alternative to array-based gene expression, Farrell said that Affy has not seen any impact from sequencers thus far in its core business.

"While there has been a proliferation of new technologies, [and speculation] about the latest generation of sequencing technologies eating into the array market, the data does not bear that out," Farrell said, citing an unnamed external market report.

He said that the array market grew 10 percent in 2009 and that "arrays continue to do well" despite the emergence of new technologies. "We think the robustness of arrays, particularly in the clinical field," will continue this growth, he added.

'Mining for Gold'

Analysts and investors have continued to ask Affy about its view on sequencing in recent years, especially since its rivals, such as Roche, Applied Biosystems, and Illumina, have decided to acquire platforms and bring them to market. But the Santa Clara, Calif.-based company has reiterated that its future is in downstream validation, not in what it sees as upstream discovery driven by next-gen sequencing.

Farrell reiterated this position last week, but stressed that by creating more content that could be placed on its chips, sequencing did more to complement Affy's business than to detract from it.
"We have a gene-expression portfolio of about 400 products, and we didn't generate any of that sequence," Farrell said. "Every bit of that sequence was generated by others, and we made products out of it."

Farrell likened work being done on next-gen sequencers to "mining for gold." While sequencers "churn out data," arrays "help you pick through that and decide what is most valuable to take forward," he said.

Farrell also dismissed the idea that sequencing platforms could be used in downstream applications, especially in the clinic. "The error rates with sequencers, even though they are improving considerably, are such that they have almost no utility in the clinical arena," Farrell said. "While they are very powerful discovery engines, their utility to be used in clinical setting or trials isn't going to be there in any time horizon that anybody cares about, that's for sure."

Others would likely disagree, however. As reported by BAN sister publication In Sequence, diagnostics firm BioMérieux last week invested $5 million in genome analysis firm Knome as part of a five-year strategy that BioMérieux kicked off in March to develop sequencing-based in vitro diagnostics (IS 4/27/10).

Also last week, Amgen announced that it used the Roche 454 Life Sciences platform to sequence samples from a clinical trial of the EGFR inhibitor Vectibix and find new biomarkers to predict response to the drug (IS 4/27/10).

Correlagen Diagnostics, the National Center for Genome Resources, ARUP Labs, and Emory University, are using next-gen sequencing for diagnostic and clinical purposes.

'Arms Race'

Separately this week, Affy said that it began shipping custom Axiom genotyping arrays for a 100,000-sample genotyping project. The new array, optimized for European populations, was developed with researchers from Kaiser Permanente and the University of California in San Francisco as part of a $24.8 million National Institutes of Health-funded project to create a new resource for studying disease, health, and aging.

Affy first announced the Kaiser/UCSF deal in October (BAN 10/20/2009). The effort is part of the Kaiser Permanente Research Program on Genes, Environment, and Health, which aims to enroll and collect DNA samples for research from 500,000 Kaiser Permanente members in Northern California by 2013. To prepare for the custom genotyping project, the Kaiser/UCSF researchers completed two pilot projects on 6,000 samples using Affy's Axiom Genome-Wide Human Array Plate, the company said.

While Affy has not disclosed the impact the large study has had on its genotyping revenues, Farrell said at the conference that the sales related to genome-wide association studies were up 25 percent in the first quarter, compared to Q1 2009 figures.

Farrell noted that Affy has seen increased competition from Illumina in the space, and that the market continues to demand new offerings from both companies. "The level of technological innovation has shifted pretty rapidly, and I would argue that we remain a leader in our key markets, but there has been a shorter product lifecycle, so it's become a bit of an arms race where the killer [application] at any given point can take share," he said.

Farrell said that the availability of Axiom genotyping, which debuted in October, also gives Affy the ability to get into the targeted genotyping market, which he said is currently worth between $200 million and $250 million per year, and take some share from competitors.

Chief Commercial Officer Andy Last, who also spoke during the Boston conference, said that Affy's main advantage over rivals is its ability to offer custom genotyping arrays, like the chip designed for the Kaiser/UCSF study.

"Fixed-content GWAS have had limited yields so far in terms of in the scientific community and their studies," Last said. "We believe that there is a transition going on from fixed-content GWAS, for which we still sell products because they do have utility for certain people, to custom genotyping as people have a better understanding of what they can study."

He added that Affy is now in the process of rolling out its custom genotyping array capability worldwide.

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