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Staff Writer: Carrie Warburton (11/2/00)
In the world of genomics, a license or a patent can make or break a company's stock price.
So, too, can a judicial decision.
After a week in which investors cautiously watched the movement of Affymetrix's (NASDAQ: AFFX - Quotes, News, Boards) stock in the wake of a stellar third quarter, the floodgates finally opened up Thursday, as Affymetrix shares rocketed more than 25% on news that the company had received a favorable legal ruling.
On Thursday, a high court of appeals in the United Kingdom overturned an April 2000 patent ruling against Affymetrix by privately held Oxford Gene Technology, sending shares of Affymetrix's stock up more than $21 to as high as $81.38 in early session trading.
"This ruling is very positive for Affymetrix," said Darren Mac, senior vice president at Gruntal & Co. "The Street had been split, but now they're reacting with this surge in pricing."
The U.K. judge ruled that Affymetrix had the right to use Oxford's technology after it had purchased Beckman Coulter's (NYSE: BEC - Quotes, News, Boards) microarray business, which originally held the Oxford license.
This means that Affymetrix has a better chance at winning a similar patent dispute currently being tried by the U.S. District Court in Delaware, said Phil McGarrigle, the company's chief intellectual property counsel.
On October 25, Affymetrix reported its third-quarter results. Analysts were expecting the company to lose $0.12 per share. Instead, Affymetrix broke even. Shares of its stock soared $17.44 to $69.75, up 33.3%.
But one week later, the stock was down, closing Wednesday at $60.08.
"They did respond well to third-quarter earnings, but that was followed by this trial," said Scott Greenstone, an analyst at Thomas Weisel Partners.
After reading earlier trial transcripts, Mac said he thought the judge in the U.K. would rule against Affymetrix.
Mac raised his six-month price target for Affymetrix to $77 and lifted his long-term target to $84. He also upgraded his recommendation on the equity to "outperform" from "short-term market perform."
"Now Agilent Technologies (NYSE: A - Quotes, News, Boards) cannot enter the high-density microarray market because Affy's patent will be blocking them," Mac said.
The ruling keeps Affymetrix firmly grounded as the leader in microarrays and will slow down price erosion upon entry of new companies into the high-density microarray market. Motorola (NYSE: MOT - Quotes, News, Boards) is one such competitor preparing to market its microarray in December, Mac said.
The company's Oxford license is crucial to setting Affymetrix's microarrays, called "GeneChips", apart from future competition, Mac said. The GeneChips are the company's most lucrative sources of constant revenue.
Product revenue was $45.4 million during the third quarter, 3% above Gruntal's projections and up $26.1 million from the third quarter of 1999. However, much of the excess revenue came from one-time licensing fees, which were higher than expected.
Mac said he expects that sales will grow by 12% to $50.8 million during the fourth quarter.
U.B.S. Warburg estimates that 38% of Affymetrix's revenue growth in 2000 has come from its ability to manufacture more of its high-density GeneChips to meet consumer demand. Affymetrix eliminated its backlog during the first quarter by boosting manufacturing capacity through its second factory in California. That facility will have the capacity to produce $500 million to $1 billion in chips annually, according to a report by U.B.S. Warburg.
Affymetrix's GeneChips are microarrays -- pieces of glass that have spots with DNA patterns on them that "catch" matching real DNA when the chip is washed in a gene-filled solution. Once the target gene is captured, the match shows up through a fluorescent indicator.
Microarrays are used to research genes that "turn on" when these genetic markers are associated with a specific disease. This research expands knowledge of the complexities and nuances of organisms from the map of the human "genome" that was completed in June.
U.B.S. Warburg estimates that the microarray market is worth $527 million in 2000, of which Affymetrix has a dominant 35% share.
Because of the increased manufacturing capacity, turnaround time is now at minimum-- a week or two compared to three or four months last year.
Each one of Affymetrix's GeneChips can analyze 10,000 genes. This allows scientists to perform hundreds of thousands of experiments simultaneously. Affymetrix has nearly 100 patents on its technology in the United States alone.
For drug companies, which paid an estimated $35 million to Affymetrix in subscription fees in 2000, high-density microarrays, like Affymetrix's GeneChips, lower their research and development costs.
The company also has placed 350 high-density GeneChip systems, into labs and is aiming to have a total of 400 in labs by year's end, Mac said.
"They have the manufacturing technology that allows them to produce high density microarrays," he said. "But this is called into question from the emerging competition."
The company has the advantage of being the first mover in this sector, but Motorola, Agilent and Corning (NYSE: GLW - Quotes, News, Boards) are planning to market competing products within the next six months.
Even if the average selling prices of Affymetrix's chips come down from today's premium, Mac said Affymetrix could perfect its technology to accommodate more genes, setting itself apart from these competitors.
"The fact that Affymetrix has the ability for scalability and can further increase in density is a plus," Mac said.
The pending competition doesn't trouble Greenstone.
"I don't think that will have a significant impact on Affy's growth," he said.
But Mac said that because so much of the third-quarter revenue was made up of one-time licensing fees, it's likely that profits will shrink to a loss of $0.06 per share in the fourth quarter. Affymetrix is not likely to reemerge from the red until mid-2001.
Bottom Line:
Affymetrix's legal victory today cements its first-mover advantage in the gene chip space. However, given the lack of visibility on the earnings front for the coming year and other legal rulings still to come, the shares will likely remain volatile. We recommend them only for aggressive investors.
Staff Writer: Carrie Warburton (11/2/00)
In the world of genomics, a license or a patent can make or break a company's stock price.
So, too, can a judicial decision.
After a week in which investors cautiously watched the movement of Affymetrix's (NASDAQ: AFFX - Quotes, News, Boards) stock in the wake of a stellar third quarter, the floodgates finally opened up Thursday, as Affymetrix shares rocketed more than 25% on news that the company had received a favorable legal ruling.
On Thursday, a high court of appeals in the United Kingdom overturned an April 2000 patent ruling against Affymetrix by privately held Oxford Gene Technology, sending shares of Affymetrix's stock up more than $21 to as high as $81.38 in early session trading.
"This ruling is very positive for Affymetrix," said Darren Mac, senior vice president at Gruntal & Co. "The Street had been split, but now they're reacting with this surge in pricing."
The U.K. judge ruled that Affymetrix had the right to use Oxford's technology after it had purchased Beckman Coulter's (NYSE: BEC - Quotes, News, Boards) microarray business, which originally held the Oxford license.
This means that Affymetrix has a better chance at winning a similar patent dispute currently being tried by the U.S. District Court in Delaware, said Phil McGarrigle, the company's chief intellectual property counsel.
On October 25, Affymetrix reported its third-quarter results. Analysts were expecting the company to lose $0.12 per share. Instead, Affymetrix broke even. Shares of its stock soared $17.44 to $69.75, up 33.3%.
But one week later, the stock was down, closing Wednesday at $60.08.
"They did respond well to third-quarter earnings, but that was followed by this trial," said Scott Greenstone, an analyst at Thomas Weisel Partners.
After reading earlier trial transcripts, Mac said he thought the judge in the U.K. would rule against Affymetrix.
Mac raised his six-month price target for Affymetrix to $77 and lifted his long-term target to $84. He also upgraded his recommendation on the equity to "outperform" from "short-term market perform."
"Now Agilent Technologies (NYSE: A - Quotes, News, Boards) cannot enter the high-density microarray market because Affy's patent will be blocking them," Mac said.
The ruling keeps Affymetrix firmly grounded as the leader in microarrays and will slow down price erosion upon entry of new companies into the high-density microarray market. Motorola (NYSE: MOT - Quotes, News, Boards) is one such competitor preparing to market its microarray in December, Mac said.
The company's Oxford license is crucial to setting Affymetrix's microarrays, called "GeneChips", apart from future competition, Mac said. The GeneChips are the company's most lucrative sources of constant revenue.
Product revenue was $45.4 million during the third quarter, 3% above Gruntal's projections and up $26.1 million from the third quarter of 1999. However, much of the excess revenue came from one-time licensing fees, which were higher than expected.
Mac said he expects that sales will grow by 12% to $50.8 million during the fourth quarter.
U.B.S. Warburg estimates that 38% of Affymetrix's revenue growth in 2000 has come from its ability to manufacture more of its high-density GeneChips to meet consumer demand. Affymetrix eliminated its backlog during the first quarter by boosting manufacturing capacity through its second factory in California. That facility will have the capacity to produce $500 million to $1 billion in chips annually, according to a report by U.B.S. Warburg.
Affymetrix's GeneChips are microarrays -- pieces of glass that have spots with DNA patterns on them that "catch" matching real DNA when the chip is washed in a gene-filled solution. Once the target gene is captured, the match shows up through a fluorescent indicator.
Microarrays are used to research genes that "turn on" when these genetic markers are associated with a specific disease. This research expands knowledge of the complexities and nuances of organisms from the map of the human "genome" that was completed in June.
U.B.S. Warburg estimates that the microarray market is worth $527 million in 2000, of which Affymetrix has a dominant 35% share.
Because of the increased manufacturing capacity, turnaround time is now at minimum-- a week or two compared to three or four months last year.
Each one of Affymetrix's GeneChips can analyze 10,000 genes. This allows scientists to perform hundreds of thousands of experiments simultaneously. Affymetrix has nearly 100 patents on its technology in the United States alone.
For drug companies, which paid an estimated $35 million to Affymetrix in subscription fees in 2000, high-density microarrays, like Affymetrix's GeneChips, lower their research and development costs.
The company also has placed 350 high-density GeneChip systems, into labs and is aiming to have a total of 400 in labs by year's end, Mac said.
"They have the manufacturing technology that allows them to produce high density microarrays," he said. "But this is called into question from the emerging competition."
The company has the advantage of being the first mover in this sector, but Motorola, Agilent and Corning (NYSE: GLW - Quotes, News, Boards) are planning to market competing products within the next six months.
Even if the average selling prices of Affymetrix's chips come down from today's premium, Mac said Affymetrix could perfect its technology to accommodate more genes, setting itself apart from these competitors.
"The fact that Affymetrix has the ability for scalability and can further increase in density is a plus," Mac said.
The pending competition doesn't trouble Greenstone.
"I don't think that will have a significant impact on Affy's growth," he said.
But Mac said that because so much of the third-quarter revenue was made up of one-time licensing fees, it's likely that profits will shrink to a loss of $0.06 per share in the fourth quarter. Affymetrix is not likely to reemerge from the red until mid-2001.
Bottom Line:
Affymetrix's legal victory today cements its first-mover advantage in the gene chip space. However, given the lack of visibility on the earnings front for the coming year and other legal rulings still to come, the shares will likely remain volatile. We recommend them only for aggressive investors.
