When you think of a 149-year-old glass company, the first word that comes to mind usually isn't "innovative." That is, however, exactly what Corning (NYSE: GLW) has become in recent years. CEO Roger Ackerman has placed high priority on research and development (R&D) and has hired more than 700 scientists and engineers over the last three years. The dividends on that investment are already rolling in.

When tension in the Asian markets sent optical fiber prices down 25%, Corning volleyed with the introduction of its large effective area fiber (LEAF). LEAF was a significant improvement over the basic optical fiber of the time, allowing light waves to travel over much greater distances and lessening the need for costly optical amplifiers. Although LEAF was two to three times more expensive than traditional fiber, it reduced total network costs by up to 30%. Telecommunication companies gobbled up the improved fiber and propelled Corning to a commanding lead in the optical fiber market with an estimated 36% share.

Not resting for a beat, Corning introduced another specialty fiber in March of this year that is geared toward large metropolitan networks. And this past August, Corning launched the third generation of LEAF. The latest edition offers a fiber polarization mode dispersion (PMD) specification that is improved by 50% over previous generations of LEAF. What the heck does that mean? This enhancement enables carriers to increase the maximum transmission distance and data rates of long-haul networks without signal regeneration. And there will be more designer fibers to follow. Corning's chief technology officer, Mr. Charles Deneka, states the company has more types of fiber in development at this time than at any point in the past six years.

Enter genomics
Now Corning is casting its research and development eye toward the emerging genomics research market, using its numerous innovative technologies already in place to process DNA microarrays. Microarrays are DNA chips that allow researchers to analyze thousands of genes at once, greatly accelerating genetic research, disease target identification, drug screening, and the development of new drugs. Each microarray is a glass slide measuring about 1 inch by 3 inches that carries about 10,000 genes.

Corning not only believes that it has the capacity to be a major player in the biochip field, it actually plans to ascend to or near the top rung of the "double helix" in as little as four years.

According to the company, it will use its high-volume processes to manufacture one DNA chip per minute, which is 10 to 20 times faster than the processes in place today. In addition, Corning's new process will allow it to produce thousands of arrays in a single production run, compared to conventional processes that are typically limited to less than 500 chips, thus reducing costs on both ends. Corning also feels that its production process will deliver a very high level of consistency and reproducibility from one array to the next, overcoming a significant challenge that exists today with variance.

The DNA microarray market is expected to grow from annual sales of $250 million today to $1 billion by 2005. This figure may be conservative considering the numerous diagnostic and treatment possibilities that will be produced by deciphering the human genome, a task Celera (NYSE: CRA) is leading. Corning is not without company in the biochip market, however, and there will be a lot of hands reaching in this cookie jar.

The current biochip leader is Affymetrix (Nasdaq: AFFX), and several newcomers are coveting the crown. In August, Motorola (NYSE: MOT) joined forces with Incyte Genomics (Nasdaq: INCY), using Incyte's gene sequence databases and patents with Motorola's production capacity to develop DNA chips. Agilent Technologies (NYSE: A) made its first volume shipment of microarrays in early September. Hyseq (Nasdaq: HYSQ) and Applied Biosystems (NYSE: PEB) are other players in the field.

Even if Corning does become one of the top two microarray producers and grab a fair share of the $1 billion in projected sales, its core business will still be telecommunications and related fiber, where it is expected to record sales of over $5 billion this year. This is still a very attractive match for Corning as it already has the technology and resources in place for DNA chip production.

The shopping spree continues
In my last column, we discussed Corning's insatiable appetite for complementary companies. It's dinner time once again. Italy's largest tire maker, Pirelli SpA, has agreed to sell its 90% stake in the fiber optic telecommunications company Optical Technologies to Corning for $3.6 billion. The remaining 10% of Optical Technologies, which is based in Delaware, is owned by Cisco Systems (Nasdaq: CSCO).

Corning believes the deal will improve the company's high-margin optical transmission product line and build up more high-speed optical systems. The deal also gives Corning control of production facilities and an expanded presence in Europe. The purchase is expected to be less than 5% dilutive to Corning's 2001 pro-forma (or "on a continuing basis") earnings per share and accretive, or additive, thereafter.

The deal, approved by the companies' boards, is subject to customary regulatory approvals and is expected to close by the end of the of the year.

We'll close here for tonight and look a little closer at the numbers behind Corning next time, as well as the competition. In the meantime, visit us on the Drip Companies board to talk about Corning.

Drip on, Fools!

-- Vince Hanks, TMF Elwood on the Fool discussion boards

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Corning's Lead in Fiber Optics, Drip Port, 9/20/00

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