Affymetrix

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Affymetrix
E298A.2/BA290C Intl Trade and Competition in
High-Tech
Jill Alvidrez, Igor Bailo, Rahul Shah
April 11, 2002
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How has Affymetrix become the dominant player in
the biochip market?
Industry Competition Igor Bailo
Technology Rahul Shah
Technology Rahul Shah
The Firm Jill Alvidrez
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Biology 101
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DNA Base Molecules
A
T
Thymine
Adenine
C
G
Guanine
Cytosine
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DNA Microarray
4x4 Array or Biochip
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Hybridization
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Scan DNA chip
Florescent chip segment DNA match
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DNA Microarray Experiment
With Microarray 12,000 gene analysis
Isolate DNA
React Chip
Scan Chip
Analyze data
2 to 3 days
weeks/months
Replaces 12,000 test tube experiments
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Genomic Technologies

• cDNA microarrays (Incyte)
• Oligonucleotide microarrays (Affymetrix)
• Electrokinetic microarrays (Genometrix)
• Fiberoptic microarrays (Illumina)
• Gel based microarrays (PE Biosystems)
• High-throughput gene expression microarrays
  (Genometrix)

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Manufacturing DNA Chips

• Photolithography
• Very low chip variation
• Expensive to develop photomasks
• Mechanical microspotting
• Low cost and versatile
• Difficult to produce maintain DNA samples
• Ink jetting
• Low cost, higher density than mechanical
• Difficult to produce maintain DNA samples

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Power of Photolithography
Features Per Chip
500,000
16,000
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Applications of DNA Chips

• Human Health
• Drug discovery and development
• Diagnostics
• Genetic profiling
• Nutrition
• Crop Production
• Industrial Products

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Industry Competition Igor Bailo
Technology Rahul Shah
The Firm Jill Alvidrez
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The Biochip Industry

• Generally includes 3 types of devices
• DNA chips (90)
• Protein chips (about 5)
• Lab-on-chip (about 5)
• Year 2000 545m ? 2005 2.9bn
• High growth market 40 per year (CAGR)
• Demand for gene sequencing is, for the
  foreseeable future, effectively infinite (from
  sequencing of species to sequencing of
  individuals)
• Market saturation is decades away

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How do DNA chips create value?
Screening Optimization (3 years)
Developmt (8-9 years)
Target Identification (3 years)
Pharmaceutical Giants (Merck, Pfizer etc.)

Human Genome Projects (Celera etc.)

DNA chips manufacturers (Affymetrix)

• Reduce research time in Target Identification
  phase
• Reduce total costs of the drug discovery process

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Competitive Environment

• Four factors shape the industry
• Intense competition
• Consolidation and strategic partnerships/alliances
  
• Alternatives to DNA chip technology
• Intellectual property disputes

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1. Intense Competition

• Market growth has attracted many companies
• Incyte, Corning, Nanogen
• Over half a dozen private firms
• Recently, big companies have entered
• Motorola BioChip Systems, Texas Instruments
• Two reasons
• To offer full product lines, including data
  management software (ex. IBM)
• Existent capabilities in chip technology and
  miniaturization

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Consolidation and strategic partnerships/alliance
s

• Lack of resources and managerial experience
• Small companies become easy targets to be
  acquired by competitors interested in know-how
  (e.g. Incyte and Synteni)
• Exchange of know-how and access to complementary
  technologies
• Motorola licensee of Incytes technologies to
  develop complementary instrumentation
• Sharing of RD and marketing/distribution costs
• Co-marketing agreement between Corning and
  BioDiscovery

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3. Alternatives to DNA chip technology

• High-throughput gene sequencing
• Polymorphism analysis arrays
• Open array technologies
• Disease management arrays

Likely to introduce uncertainty and pressure on
current competitors
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4. Intellectual Property Disputes

• Patents usually considered effective competitive
  advantages but not in biotech
• Continuous introduction of alternative
  technologies weakens effectiveness of existing
  patents as entry barriers
• Highly dynamic environment makes it hard to
  monitor patent infringements activities
• Usually resolved via cross-licensing agreements
• The result plenty of lawsuits
• Affymetrix patent infringements w/ Hyseq, Incyte,
  Applera
• Settlement with Oxford Gene Technology in 2000
  required a charge of 19 million

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Key success factors in the DNA chips industry

• Switching costs for customers
• First mover advantage becomes relevant if
  switching costs are significant
• Economies of scale
• Lower costs encourage use by large customers
• Solid distribution network
• Requires skilled people (e.g., PhDs)
• Reputation
• Lower risks of technology adoption
• Ability to introduce/control an industry standard

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Industry Competition Igor Bailo
Technology Rahul Shah
The Firm Jill Alvidrez
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The Firm

• Companys History
• Customers
• Products
• Financials
• Market Share

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Companys History
Roche signs up
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
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Roche signs up
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
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Customers

• Global pharmaceutical firms (19 of top 20)
• Pfizer, GlaxoSmithKline, Merck, Eli Lilly, Bayer,
  Novartis, ProctorGamble, Bristol-Meyers Squibb
• 300 Public and private biotech firms
• 150 Academic researchers and institutes
• National Cancer Institute, AMDeC, UC
• European and Japanese markets

Collaboration
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Affymetrix Products
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GeneChip Probe Array
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GeneChip Instrument System
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Affymetrix 428 Array Scanner
Affymetrix Spotted Array Systems
Affymetrix 417 Arrayer
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Human Genome U133

• Launched January 2002
• Leverages Moores Law (first product at 18
  microns)
• Most comprehensive and up-to-date version of
  genome sequence currently available
• Highest density (500,000 features)
• 39,000 unique transcripts from over 33,000 genes
• Expected to be important revenue driver
• AFFX continues to be first mover

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Financials Moving Towards Profitability
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Moving Down the Experience Curve
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Controlling Legal Expenses
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AFFX Stock Price (1996-present)
160 Feb. 8, 2000
13.98 Sept. 21, 2001
Source clearstation.com
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Market Share
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DNA Chips as Percent of Total Biochip Market
Source BioInsights
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Current Position

• Strengths
• Dominant market share? large installed base
• Large portfolio of readily available products
• Far down the experience curve (chip fab process)
• Solid reputation and strong sales force
• Collaboration for product development, marketing,
  and distribution
• Weaknesses
• Premium pricing
• Flexibility and customizability

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Conclusion Reasons for AFFX success

• Technology enabled experiments at cost, speed,
  scale previously unattainable
• Strong first mover advantage
• Supply-side economies of scale patents
• Demand-side product complements increase
  customer lock-in Scientists
  propensity to use familiar technology
• Controlled disputes over intellectual property
• Penetrated both research and biotech/pharma
  markets
• Robust distribution network established through
  collaborative agreements

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BACK UP
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Alternatives to DNA Chips

• High-throughput gene sequencing
• Polymorphism analysis arrays
• Open array technologies
• Disease management arrays

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Biochips used across Genomics

• Relationships between
• different genomes
• Identify SNPs
• (Single Nucleotide
• Polymorphisms)

• Functions of
• different genes
• Assess effect
• of mutations

• Develop physical
• maps of genes/proteins
• Design of medicinal
• compounds

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Market Share Total Biochip Market
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RD Expenses By Year
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Growth Rate of AFFX vs. Total Market
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Selected Gene Expression Profiling Customers