West Coast Editor

Affymetrix Inc. plans to add assay technology to its tools arsenal with the $120 million stock buyout of collaborator ParAllele BioScience Inc., in a deal expected to close in the third quarter.

"It's really about the technology," said Russell Gilbertson, analyst with Caris & Co. in San Diego, who reiterated his "buy" rating on the stock.

"The [Affymetrix] chip is a sort of 2-dimensional test," he said. "When you add on ParAllele's technology, you essentially bring in another axis. It's much more powerful."

Under the terms, the price is subject to certain adjustments, including changes in ParAllele's working capital prior to closing. Affymetrix's stock (NASDAQ:AFFX) closed Wednesday at $52.96, down 53 cents.

Santa Clara, Calif.-based Affymetrix has been partnered with ParAllele, of South San Francisco, for two years. A big part of the latter's platform is its Molecular Inversion Probe assay, which lets the firm handle up to tens of thousands of reactions in a single tube, and is said to work with particular efficiency when teamed with an Affymetrix GeneChip universal tag array.

For fiscal 2005, Affymetrix expects to incur a merger-related charge for in-process research and development of about $15 million, as well as operational charges in the range of $4 million to $7 million, including non-cash amortization of about $2 million. Affymetrix said the transaction will be financially neutral to operating results in 2006 and accretive to net income the following year, although "I think we need a little more color on that," Gilbertson told BioWorld Today, noting that Affymetrix is going to give more guidance in the next earnings call in July.

"There will be probably be some cannibalization of clients," he added, but the degree is "a little unclear." Most important, he said, is the potential for leveraging the combined technologies.

ParAllele, founded by a team of leading researchers from the Stanford Genome Technology Center and Uppsala University in Sweden, has other deals, recently making news by way of a licensing and co-marketing agreement in April related to an assay panel with Genaissance Pharmaceuticals Inc., of New Haven, Conn., to investigate genes involved in drug metabolism and transport pathways.

In March, ParAllele entered an agreement with the University of Iowa Cell Biology and Functional Genomics Laboratory, the university's ophthalmology department and its Center for Macular Degeneration to boost discovery of genes associated with that disease.

Affymetrix, for its part, has been able to survive the marketplace as a tools company by constantly innovating, Gilbertson said.

"They keep advancing the technology," he said. "The new chips slated to be rolled out in the second half of 2005 are based on a five-micron technology. The older chips are based on 11 microns. Just like semi-conductors, it keeps getting better and better."

Affymetrix scientists invented the world's first microarray in 1989 and began selling the first commercial microarray in 1994. Since then, more than 1,200 systems have been shipped around the world and more than 3,000 peer-reviewed papers have been published using the technology, the company said.