News World: Affymetrix: The Gene-uine Article?

Affymetrix: The Gene-uine Article?

By Brian Graney (TMF Panic)
September 13, 1999

DNA chipmaker Affymetrix (Nasdaq: AFFX) jumped ahead this morning on a couple doses of good news. First, the company announced its first acquisition since coming public three years ago in the form of privately held Genetic MicroSystems (GMS), which it will gobble up for one million shares. As interesting as that move may be to genomically inclined investors, it pales in significance to Friday's patent ruling by the U.S. Patent and Trademark Office in favor of Affymetrix in a dispute with rival Incyte Pharmaceuticals (Nasdaq: INCY). The ruling, which solidifies Affymetrix's competitive lead in the gene chip business, sent Affimetrix's shares skyward for a 15% gain and lopped off 33% of Incyte's market capitalization in early trading today.

Before breaking into the specifics of the news, a little background information on the two companies' businesses is in order. Affymetrix's claim to fame is its GeneChip, which is a system that allows researchers to quickly and efficiently screen for mutations on sequences of DNA. While that may not sound like a big deal, it is. Understanding the human genome is the greatest scientific puzzle of our time, since it will usher in entirely new ways of delivering healthcare by treating disease on the molecular level. This is more than just your run-of-the-mill shifting of the paradigm plates; it is more akin to a "paradigm earthquake."

Because there are more than 3 billion nucleotide pairs and 100,000 genes within the human genome, researchers involved in gene identification and sequencing efforts have their work cut out for them. Affymetrix's GeneChip helps speed up the process. "The chip allows us to quickly lay down probes that scan thousands of these sequences at once and reveal overnight not only whether they contain mutations but also how strongly the genes are expressed," one of the company's top scientists told Scientific American in an article way back in 1996. "In essence, it reduces hundreds of experiments down to one."

Granted, a lot of things have changed in this field since 1996. But the efficiency gains that the GeneChip allows in genomic research is still the fundamental value driver of Affymetrix's business. Not surprisingly, the firm has attracted competitors.

Incyte offers a competing high density array products for gene expression similar to those sold by Affymetrix, and the patents related to those arrays are the subject of ongoing litigation between the two firms. On Friday, the U.S. Patent and Trademark Office issued an "intereference" ruling on the disputed patents in favor of Affimetrix. In a press release, Affymetrix was quick to point out the judge's view that Incyte... failed to establish a threshold case." Incyte shot back that it will appeal the ruling.

Analysts are not waiting for the appeal and view the ruling as a further extension of Affymetrix's dominant position in the DNA chip business. The company's lead in this area has prompted a slight revision of its valuation by the market over the last 12 months -- to the tune of a more than 400% share price gain. Analysts at BancBoston Robertson Stephens have already gone so far as to compare Affymetrix and its DNA chip-induced value explosion to the recent break-out of communications chip firms such as PMC-Sierra (Nasdaq: PMCS) and Broadcom (Nasdaq: BRCM). Other observers have reached even higher than that, suggesting the young Affymetrix resembles the DNA chip equivalent of microprocessor giant Intel (Nasdaq: INTC).

Whatever the ultimate fate of Affymetrix may be, investors interested in "peering around the corner" to see where healthcare is going should sit up and pay attention to the genomic companies, which includes Affymetrix and Incyte on top of genome sequencer Celera Genomics (NYSE: CRA) and genomic drug developer Human Genome Sciences (Nasdaq: HGSI). Investors interested in getting up to speed in this important emerging area may want to start their due diligence by reading about the Human Genome Project itself on the National Institutes of Health's website.

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