I'm unhappy. Our Monday, June 29 column reviewed an undiscovered lower tier stock named Hyseq (HYSQ). This company is engaged in gene sequencing, and I had intended to shortly write about another company in this field. In fact, this past Monday I told a colleague that the next column would be about that company, Affymetrix. My unhappiness is due to the fact that Affymetrix (AFFX), was recommended today by a large brokerage house which initiated coverage with a buy rating.

Affymetrix had been in a prolonged slumber, and closed yesterday at 23 5/8 down 1 on 143,000 shares. What a difference a day and a recommendation makes. AFFX opened today at 24 5/8 up 1, ran up to a high of 27 3/8, and closed at 27 up 3 3/8 on 327,000 shares. Gee, I wonder if sponsorship is important.

I own some shares, and would like to add to my position when the stock price and my buying power are compatible. I began following this stock some years ago when it was a majority owned subsidiary of Affymax, a Dutch firm. They subsequently took Affymetrix private, only to have it emerge as a public company again, after Affymax was acquired by Glaxo Wellcome which now owns almost 37 % of Affymetrix. Confused? No problem. Just remember that Glaxo is loaded, and they aren't known for making dumb moves. In April, 1998 Glaxo bought $50 million in convertible preferred stock, convertible at $40 per share.

Affymetrix went public on June 6, 1996 at around 15 per share. They went down to 9 in July, 1996, but by September, 1997 they had reached 49 7/8, only to drop to 21 1/8 on June 18, 1998 when another major brokerage house initiated coverage with a neutral rating. Gee, I wonder if non-sponsorship is important.

AFFX was the first company to commercialize high-density probe arrays for use in pharmaceutical research and disease management. They have integrated semiconductor fabrication techniques, solid-phase combinatorial chemistry, molecular biology, robotics, and software.

They have around 25 million shares outstanding. including the potential conversion from the convertible preferred sold in April. For the first quarter ended March 31, 1998 vs March 31 1997, their revenues were 9.7 and 2.8 million, net operating loss was 7.0 and 6.4 million, and per share loss was .26 and .22. At 3/31/98 they had over 60 million in cash and short term investments, before they raised the 50 million in the preferred sale. This 110 million war chest should last about 3 years at their present cash burn rate of 30 million per year.

Their clients and collaborators include: Glaxo Wellcome, Stanford University, Hewlett-Packard, Bristol Meyers Squibb, Millennium Pharmaceuticals, Whitehead Institute/MIT Center for Genome Research, Hoechst Marion Roussel, The Salk Institute of Biological Studies, Harvard University, F. Hoffmann-La Roche, Pfizer, Case Western Reserve University, Princeton University, USC/Norris Cancer Center, Washington University School of Medicine, Warner Lambert, Baylor College of Medicine, University of Wisconsin, Cleveland Clinic Foundation, National Heart and Lung Institute, UC Berkeley, University of Milan, Molecular Dynamics, Amersham Pharmacia, Novartis, Mount Sinai School of Medicine, Genetics Institute, UC San Diego, UC San Francisco, Rhone Poulenc Rorer, and Howard Hughes Medical Institute.

This is one hell of a company, as you can see. While doing some research on them, I found that Hyseq was suing them for patent infringement, which is how I learned of the existence of Hyseq. I don't consider that a very big problem, as after all, Affymetrix may win the suit. And should they lose, these matters are most frequently settled through licensing agreements.

In any event, this is one company that bears close watching. During periods of market apathy toward Biotech stocks, this baby could go to 9. But if the market gets the fever for Biotechs, and should Affymetrix start to make some serious money, it could be a real stock gorilla. Stay tuned.

The Market Pro - July 8, 1998