In all sectors of the market, the winners are sometimes lost amid the combined performance of their brethren, losers included, and that's certainly the case for the components of the Amex Biotech Index. Looking at the changes in those 17 stocks during the past 52 weeks reveals one clear winner, and by a sizable margin: Affymetrix ( AFFX), a maker of chips used to analyze the effects of drugs on genes. As of June 17, its shares are up 68% in the past year. What investors are trying to determine is whether Affymetrix's performance is the start of a long-term trend or something that can be erased as quickly as it developed. Views are mixed, but looking at how the company got to be the best performer of the last 12 months could provide some clues as to what the future will bring. In the short term, Affymetrix stands to benefit from interest in the in-depth testing of drug toxicity that has emerged in the aftermath of Merck's ( MRK) withdrawal of Vioxx and Biogen Idec's ( BIIB) suspension of Tysabri sales. Affymetrix, based in Santa Clara, Calif., makes products that help researchers observe the effects of drugs on patients by monitoring changes in gene expressions. The company expects to launch several DNA-analysis products, as well as automated target preparation hardware developed jointly with Caliper Life Sciences ( CALP), in the not-too-distant future. While these new products are expected to be well-received by academics and Big Pharma, the long-term effects of a shift in the standards of pharmaceutical development may have even greater implications for the company and for its sector.
Achieving TargetsEven after the run-up in the past year, Paul R. Knight of Thomas Weisel Partners still sees room for additional gains in Affymetrix stock. In the near term, the stock's performance will be driven by demand for tests to screen out compounds that are likely to fail later in development because of toxicity or lack of effectiveness. Longer term, the benefits could come as tests are used to analyze an individual's genetic makeup and the responses caused by drugs, Knight says.
"We've seen a lot of momentum from the
Food and Drug Administration as well, really embracing the idea of personalized medicine," Affymetrix Chief Financial Officer Greg Schiffman said at the Thomas Weisel Partners Growth Forum last week. Earlier this year, the FDA issued guidance for companies submitting pharmacogenomic data, or information about how drugs affect patients' genes, as part of a new drug application. Although the agency admits pharmacogenomics is still in its early stages, the guidelines encourage the use of the technology to help identify predictors of safety, effectiveness or toxicity and to promote the development of individualized drug therapies. In March, Knight upgraded the shares of Affymetrix to outperform from peer perform, citing increased pharmaceutical spending for discovery and diagnostics. He also sees longer-term growth thanks to a partnership with Roche for the AmpliChip Cyctochrome P450 chip used to test for patient responses to drugs. While academic institutions currently make up the bulk of Affymetrix customers, Leerink Swann's John Sullivan expects pharmaceutical companies to become high-volume users of the company's technologies. Affymetrix's prospects were bolstered in May, after doctors at the annual American Society of Clinical Oncology meeting drew attention to the need for diagnostic tests to identify patients who will respond best to expensive targeted cancer drugs, with limited toxic effects. "Many of these drugs work for 15% to 20% of the patients, and you can't necessarily start everybody on a drug that's $30,000 a year," Schiffman said last week. "You need to try and identify those folks." Although he still has a positive outlook on the company, Sullivan lowered his rating on the stock when the shares reached a price he didn't expect to see until the end of 2005. Barring more good news, he expects the stock to hover in the high $40s to low $50s until the end of the year, but "it is important to note that our rating downgrade is not intended to be a negative comment on AFFX's business fundamentals," Sullivan wrote in a research note. Shares were recently at $52.19. Leerink Swann makes a market in Affymetrix stock.