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Stock Focus
When The Bio Chips Are Down
Matthew Herper, 11.06.02, 8:30 AM ET

NEW YORK - Call it the other telecom bust. In the late 1990s, three phone technology companies, Motorola, Corning and Agilent, all decided to get into the business of making DNA chips, tiny bits of glass that help laboratory scientists link genes to disease.

It looked like Santa Clara, Calif.-based Affymetrix (nyse: AFFX - news - people ), which established the market for DNA chips in the early 1990s, was about to get crushed by the trio of multibillion-dollar companies. But a funny thing happened on the way to the genome: Motorola (nyse: MOT - news - people ) and Corning (nyse: GLW - news - people ) fell out of the running altogether, and Agilent (nyse: A - news - people ) managed to capture only a small sliver of the DNA chip market.

Banc of America Securities analyst Jim Reddoch says Affymetrix still has the vast majority of the DNA chip market. While Corning was reporting a $270 million loss and cutting 2,200 jobs, Affymetrix, which is off 36% from its 52-week high, beat analyst expectations with a third-quarter profit of $619,000, or 1 cent per share. Affymetrix sells for 59 times estimated 2003 profits of 45 cents per share.

Reddoch notes that Agilent doesn`t disclose its DNA chip sales, but he estimates it has a mere 10% of the market. Affymetrix, he says, has at least 50%. Its main competition is not another company, but frugal scientists themselves. Drug company researchers may use Affymetrix chips, but many academics make their own. Reddoch sees this as an opportunity for growth, as he believes academics will be lured by the prospect of a standard chip to use for exchanging genetic data.

"Not at this price they won`t," argues David Botstein, professor in the department of genetics at Stanford Univerisity. "Your average NIH grant is $200,000. You can hardly do anything at $1,000 a chip." Botstein says.

"It doesn`t cost people $1,000 a chip anymore," says Stephen Foder, chairman and chief executive at Affymetrix. "You can get chips anywhere from $100 to $500." More than that, Fodor says, sales to academics have increased dramatically in the past two years. In the last 12 months alone, they have doubled. Prominent biologists at places like the Massachusetts Institute of Technology are using Affymetrix chips.

One company that won`t be ignoring academics is Fremont, Calif.-based Ciphergen Biosystems (nasdaq: CIPH - news - people ), which makes a next-generation "lab-on-a-chip." "Scientific progress occurs at the biology bench top," says Chief Executive William Rich, who is relying on biologists in the laboratory to flock to his chips.

DNA chips focus on the genetic code, in which genes are recipes for proteins, the chemicals that actually do the work of creating and recreating living things. Instead of looking at genes, Ciphergen`s ProteinChip provides a way of looking at which proteins are present in the cell. Better yet, it does so in a box that`s small enough that an individual biochemist can have one in front of his workstation.

Ciphergen`s approach may already be bearing fruit. The biotechnology company got a taste of success when David Ho, a world-renowned AIDS researcher, used the ProteinChip to find a protein that may give some people resistance to the HIV virus. Some of Ho`s colleagues doubt that he has the right protein, but if he does, that could give Ciphergen`s prospects a boost by providing proof that its technology really does work.

Eric Schmidt, analyst at SG Cowen, predicts Ciphergen will eke out a slight profit in 2004. "They have top-line sales growth of 70% for the last six quarters running," he says. Ciphergen is off 62% from its 52-week high.

Chipping Away
Company Price YTD Price Change Latest Quarterly Sales ($mil) Latest Quarterly EPS Market Value ($mil)
Affymetrix (nasdaq: AFFX - news - people ) $26.76 -29% $73 $0.01 1,558
Agilent Technologies (nyse: A - news - people ) 15.07 -47 1,391 -0.48 7,033
Ciphergen Biosystems (nasdaq: CIPH - news - people ) 3.10 -61 10 -0.29 84
Corning (nyse: GLW - news - people ) 2.31 -74 837 -0.25 2,653
Motorola (nyse: MOT - news - people ) 9.88 -34 6,371 0.05 22,645

Prices as of Nov. 5; YTD=Year to date; EPS=Earnings per share; Sources: Bloomberg Financial Markets; FT Interactive Data and Multex via FactSet Research Systems