In yesterday's column, we looked at whether biochip making is important and emerging -- a Rule Breaking industry. I doubted that fabbing biochips for big drug makers, biotechs, and other researchers alone was important enough to qualify as a Rule Breaking investment -- especially with Corning (NYSE: GLW), Motorola (NYSE: MOT), and Agilent Technologies (NYSE: A) moving in. Corning puts that target biochip market at $1 billion in five years. Small potatoes for so many players.
But when looking at a larger consumer universe -- biochips as diagnostic devices for doctors' offices and home -- the industry grows. Imagine a world of affordable, widely available tests sensitive to individual genetic variation and conditions. Years off, yes, but worth it for Rule Breaker investors to ponder.
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Biochip news flying
Just three weeks ago, we asked whether biochip manufacturing is a Rule Breaking industry. Affymetrix (Nasdaq: AFFX) is the largest company that makes biochips -- DNA microarrays, microarrays, gene chips -- with projected 2000 sales of $170 million. The other dogs in the pack include Hyseq (Nasdaq: HYSQ), Incyte Genomics (Nasdaq: INCY), and Gene Logic (Nasdaq: GLGC), though chip making is not Incyte and Gene Logic's main business, and Hyseq is leveraging its chip expertise for functional genomics and drug development.
At least five other companies have designed other technology (presumably that avoids Affymetrix's patents) to test genetic material: Aclara Biosciences (Nasdaq: ACLA), Caliper Technologies (Nasdaq: CALP), Lynx Therapeutics (Nasdaq: LYNX), Nanogen (Nasdaq: NGEN), and Rosetta Inpharmatics (Nasdaq: RSTA). Nanogen's technology offers a low price more suitable for the diagnostic market. Rosetta creates customized arrays using ink-jet technology. There are also companies toiling to develop high-volume tests for the proteins that DNA tells the cells to make. Their protein chips may provide even more information.
Look at these changes in the last three weeks:
- Leading chip maker Affymetrix's (Nasdaq: AFFX), a component of Fool UK's Rule Shaker Portfolio, entered the genomics business last week, with its $70 million purchase of bioinformatics company Neomorphic, and the $100 million formation of Perlegen for functional genomics. (Paul Larson reported Friday that Affymetrix joined the mouse genome consortium and promises profitability by the fourth quarter's end.)
- Advanced materials giant Corning muscled in on the biochip market, joining Motorola (partnering with Incyte Genomics) and Agilent Technologies (partnering with Rosetta Inpharmatics).
- We learned that Gene Logic was not primarily a biochip business, but a pharmacogenomics business. Doh! More on its business in future articles.
The goal of pharmacogenomics is to produce and align drug treatments with a patient's particular genetic roadmap. Here's the long road to that goal:
- Knowledge of the genome itself (sequencing, Celera Genomics (Nasdaq: CRA))
- Ways to test for gene expression and gene function, to make use of the raw genome data (all the folks named above)
- Databases of what we learn about gene expression and gene function data (Gene Logic, Incyte, Celera, and now Affymetrix)
- Treatments based on the gene info (Human Genome Sciences (Nasdaq: HGSI), Millennium Pharmaceuticals (Nasdaq: MLNM))
- Ways to test people quickly and affordably for conditions for which we have data
- To know both what conditions are present and what would be the most effective treatments, including not only doctors' offices and prescriptions, but consumer uses
I'm not going to hang this analysis on a company president's few words in a conference call quoted in a press release, but they are the words a Rule Breaker investor wants to hear. It raises the possibility that Rule Breaker criterion #5 -- the stronger the consumer brand, the better -- might be in the cards.
Biochips -- not big enough for Affymetrix
At one point, high-density biochips for high-volume research testing may have had potential for Rule Breaker-type returns. Think gene discovery companies developing targets for drug makers and collecting royalties for those alliance partners' future drug products. But I'm told that Affymetrix's early customers understandably balked at royalties for products developed from research using Affymetrix's GeneChips, threatening GeneChip sales. So, Affymetrix capitulated and charged more for the chips to compensate for the lack of royalties.
The $2,000 GeneChip street price encouraged other companies' more-affordable alternatives -- and made it imperative for Affymetrix to defend vigorously its patent estate. The company's been embroiled in lawsuits with Hyseq, Incyte Genomics, Applied Biosystems (NYSE: PEB), and the U.K.'s Oxford Gene Technology. Where its chips are the issue, Affymetrix asserts that its patents apply to every technology for putting anything on a chip for genetic testing.
But, management made two moves not to bet the company on lawsuits to keep competition out: First, Affymetrix bought Genetic Microsystems, maker of more-affordable biochips, earlier this year. Last week, it went further.
Affymetrix enters genomics
Affymetrix stunned the biotech world last week with its sweeping entry into genomics. It purchased a computational genetics company, formed a functional genomics unit, joined the mouse genome consortium, and announced profitability by the end of its fourth quarter. Without stopping for breath.
This looks like Affymetrix is gearing up to compete with its largest GeneChip customer, Gene Logic, and other database companies, such as Incyte Genomics and Celera. Without reach-through royalties from its chips, Affymetrix will pursue alliances to profit from the genomic information it develops and might patent various gene uses. But it's well behind Celera, Incyte, Human Genome Sciences, Millennium Pharmaceuticals, Gene Logic, and probably others.
Affymetrix is the top dog and first-mover in biochips, trying to capture a huge share beyond its top-of-the-line, high-density chips. But, can it be the top dog in the future of personalized medicine, with consumer applications? With its move into genomics, is it too far behind its largest customer, Gene Logic, and the first-mover and top dog in bioinformatics, Celera? Sound off in this poll!
Which of the following do you agree with?
- Biochip making is small potato chips, not Rule Breaking.
- Biochips, including diagnostics, are big, and Affymetrix leads.
- Biochips, including diagnostics, are big, but there's no top dog.
- It's about the road to personalized medicine, and Celera's already the top dog.
- It's about the road to personalized medicine, but Affymetrix, the biochip king, is tops.
-- Tom Jacobs, TMF Tom9 on the discussion boards [owns CRA and HGSI shares].