By Randall Osborne

West Coast Editor

By way of a stock swap valued at about $70 million, Affymetrix Inc. said it aims to acquire the privately held computational genomics firm Neomorphic Inc.

The definitive agreement, expected to close in the fourth quarter, will let Affymetrix integrate genomic data with expressed sequence tag information, "which is really what the game is all about now," said Susan Siegel, president of the Santa Clara, Calif.-based firm, known for its GeneChip technology.

GeneChip consists of disposable DNA probe arrays containing gene sequences on a chip, reagents for use with the probe arrays, a scanner, and other instruments to process the probe arrays and software to analyze and manage information.

Siegel said the system already fits almost 13,000 genes on one array.

"In 2001, we're looking to double that number," she said. Neomorphic's expertise will help develop new software to be used with the GeneChip system.

Under the terms of the deal, Affymetrix will issue about 1.4 million shares of its stock in exchange for all of Berkeley, Calif.-based Neomorphic's outstanding shares and options.

The transaction, based on the near-$50 closing price of Affymetrix's shares Friday (NASAQ:AFFX), is worth about $70 million. The stock ended Monday at $47.062, down $2.812.

Cyrus Harmon, president and CEO of Neomorphic, co-founded the company four years ago with other graduate students at the University of California. Neomorphic uses proprietary software algorithms and a computing infrastructure to analyze, assemble and annotate genomic and expressed gene sequence data, working with such collaborators as Celera Genomics, of Rockville, Md.; Millennium Pharmaceuticals Inc., of Cambridge, Mass.; and St. Louis-based Monsanto Co.

Harmon said the firm has been working with Human Genome Project information and publicly available data for several years.

"Our role in this has really been analyzing the draft sequence to identify all the genes," he said, as well as exploring "higher-order features within the genome."

Acquiring the new firm, Affymetrix plans to develop new products based on information from the Human Genome Project and from the genomes of model organisms such as mouse, rat, Drosophila and Arabidopsis, with whole genome, high-density GeneChip arrays, and new data analysis tools.

Also in the works, thanks to the addition of Neomorphic's technology, is a series of Internet-accessible information products.

Siegel said, "We, along with our customers, recognize that, to get biologically relevant answers quickly, the results of array-based experiments must be seamlessly connected to the repositories of genetic knowledge." The Internet connectivity will provide that, she said, adding that the first new products made possible by the buyout of Neomorphic likely will be commercialized by the middle of next year.

Ed Hurwitz, vice president and chief financial officer of Affymetrix, said the transaction will be recorded using purchase accounting.

"We would expect . . . nine cash charges of between $10 million and $20 million per year, for the next three to five years," he said.

"The transaction has a floor and a ceiling feature," he added, "that calls for an up to $20 million cash or stock adjustment to the purchase price, if Affymetrix's share price at the time of the registration statement becoming effective [in the first quarter of next year] is trading above or below certain defined prices."

Neomorphic brings more than 40 new employees, Hurwitz said, but "because we have actively been building this group, you should assume the impact of this acquisition will be an acceleration of [research and development] expense that we would have incurred over the next few quarters anyway."

The upshot, Hurwitz said, is a minimal impact on profitability next year, and accelerated profitability afterward.

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