By Randall Osborne


Like a long, divorce-related court clash over pots and pans, Incyte Genomics Inc. and Affymetrix Inc. ended what had seemed like it might be an interminable judicial war. At issue were not such items as the refrigerator and microwave, but microarray patents held by Affymetrix and RNA amplification patents held by Incyte.

Both firms agreed to cross-license their respective intellectual properties. They did not disclose any financial terms of the settlement, but said they were looking into potential future agreements.

The marriage metaphor is apt. In November 1996, Incyte and Affymetrix, expanding a feasibility study begun that spring, undertook a gene-expression database joint venture in which each was to handle its own development costs, pledging to share equally in profits and in ownership of intellectual property that emerged from the deal.

Affymetrix had GeneChip technology for analyzing gene expression in diseased tissues. Incyte had its core database LifeSeq, which stands for the Library of Information for Expressed Sequences. The match seemed promising.

Things went bad between the companies later, with each side firing volleys in what became a battle that was much watched by the industry - for a time, anyway, when such spectacles held more interest than they do now.

Peace has been made. Affymetrix, a feisty defender of its intellectual property portfolio, came out of the Incyte matter looking especially good. The company already had settled its disputes with UK-based Oxford Gene Technology Ltd., and with Hyseq Inc.

In the former case, OGT and Affymetrix agreed to drop all pending actions in the U.S. and Europe. The deal with Hyseq was somewhat more complicated. Hyseq is starting up a majority-owned subsidiary, Callida Genomics Inc., to focus on the development and commercialization of its sequencing-by-hybridization technology. A subsidiary of Callida, known as N-Mer Inc., will develop a universal, high-speed DNA sequencing chip, using Affymetrix's GeneChip technology.

For N-Mer, Affymetrix will be the sole array and system supplier and distributor. As part of the arrangement, Affymetrix and Hyseq will give up their patent litigation against each other.

Settling with Incyte may seem only sensible and could be somewhat anticlimactic, but it may also get more complicated. Incyte recently declared it was backing out of "certain unprofitable custom genomics operations" - i.e., microarrays, public domain clones, transgenics and contract-sequencing services - to focus on database and intellectual property operations. Incyte even has licensed some of its database material to firms such as Agilent Technologies Inc. and Motorola Inc. for development of competing microarrays. (See BioWorld Financial Watch, Nov. 12, 2001.)

Will Affymetrix, then, go after the likes of Agilent and Motorola, thus jacking up legal costs again? The firm already has reduced expectations for second-quarter revenues, due to lower-than-expected GeneChip orders and a decline in the market for spotted array instrumentation. The firm predicted revenues will total between $44 million and $50 million, including $3 million to $4 million in revenue from subsidiary Perlegen Sciences Inc., with a net loss for the second quarter of $4 million to $7 million.

On the brighter side, Perlegen scientists recently published in the journal Science the results of a study on genetic variations across human chromosome 21, seeming to validate that whole-genome SNP and haplotype analysis with Affymetrix's whole-wafer microarray.

Alan Auerbach, analyst with Wells Fargo Van Kasper, said court skirmishes between Affymetrix and Motorola, Agilent, or both, are unlikely. As for Incyte, a few days after the settlement was disclosed, Auerbach raised his price target for the company from $23 to $26, and gave the stock - trading at around $20 last week - a "buy" rating.

"The specific patents involved here were those that Incyte was using in the microarrays that Synteni [Inc.] had, vs. the ones Affymetrix had in the GeneChips themselves," he said. "Motorola and Agilent were taking Incyte's content from the databases, and not utilizing the GeneChip."

In 1997, Incyte took over Synteni in a stock swap valued at around $88 million, having a year earlier acquired two other firms: Combion Inc., for $3 million in stock, and Genome Systems Inc., for about $7.7 million in stock.

Since then, the field for microarrays hasn't become much more crowded, with Affymetrix, Hyseq and Incyte (and more recently Agilent and Motorola) being the main players, Auerbach said, noting that the legal settlement between Affymetrix and Incyte was expected by most investors.

"I view it as win-win," he said. "For Affymetrix, it takes away a big legal burden, and a similar burden for Incyte. Microarrays is 100 percent of Affymetrix's business, but it was seen as a risk for Incyte, too. You're spending stockholders' money on litigation."

The only other competitor on the horizon is what Auerbach called "a small company in Seattle with a very intriguing technology." He's talking about Combimatrix Inc., a subsidiary of Acacia Research Corp., which in January closed an institutional private equity financing of $19 million to keep majority ownership.

Founded in 1995, Combimatrix filed for an initial public offering in November 2000, but hasn't gone public.

"They haven't yet gone to commercialization [either], so you can't really quantify it," Auerbach told BioWorld Financial Watch. "I've visited with them, and I don't know how much we're allowed to say, but they appear to have a way to compete that's cost effective."

As much in microarrays as in other sectors - and maybe more, given the diversified players - cost-effective competition is the name of the game. The whole area, though, is fraught with litigation peril, as Affymetrix and Incyte can attest. Could Combimatrix become embroiled, with Affymetrix or one of the others?

"I haven't looked at [Combimatrix's] intellectual property close enough to say whether there's a risk," Auerbach said. Combimatrix, anyway, along with Affymetrix, Incyte and Hyseq, are "the ones that I see as [the sector's main competitors] going out in 12 months, 24 months."

Meanwhile, how will Affymetrix handle its relationship with Incyte? "They dropped a hint in the press release," Auerbach said, but the two companies probably don't know yet how they will conduct business together, if at all. He outlined several potential scenarios.

One might be that Affymetrix makes a deal with Incyte similar to the one struck by Agilent and Motorola, under which Affymetrix gains the right to use Incyte content on chips. Another might be that "Incyte becomes an Affymetrix customer, and uses the GeneChip for the internal [research and development]."

The third possible scenario would be a combination of both of the previous two, and that's the situation Auerbach sees as most likely.

"You've got two very astute companies, when it comes to deal making," he said. "Both would have something to gain."

And the firms would not be the only ones to make out in the deal.

"From the market's perception, the litigation was very high profile," Auerbach said. "If they all of a sudden became collaborators or friends, investors would be very pleased."