With its genetic-probing technology, Affymetrix (AFFX ) is sure to be a key player in making drugs safer and in reducing their development cost. So argue some pros who are buying shares, which have climbed sharply -- from 25 in August to 44 on Apr. 13. Affymetrix' proprietary GeneChip for DNA analysis is "now the No. 1 system for studying complex genetic data used in researching the link between genes and diseases," says Marion Schultheis, managing director at J. & W. Seligman, which has bought shares. GeneChips are dime-size glass wafers that contain massive genetic data harvested by scientists.
Medical researchers use them to monitor genetic mutations that correlate with specific diseases. The GeneChip, primarily sold to pharma and biotech companies, researchers, and clinical labs, is becoming a vital tool in conducting clinical trials -- and Schultheis figures this will become a big market for Affymetrix. GeneChip can reduce the risk of adverse reactions to drugs by checking the recipient's DNA against the drug's profile. "In this post-Vioxx period, drugmakers are under more pressure to come up with less toxic drugs fast -- and Affymetrix helps in such a process," says Schultheis, who sees the stock at 59 in a year. John Sullivan of securities firm Leerink Swann, who rates Affymetrix "outperform," says some 60 drug trials since 2003 have used GeneChips to help analyze clinical results.
Sullivan expects operating margins to widen from 16.5% in 2004 to 30% in 2007. He estimates earnings for 2005 at 87 cents a share on sales of $404 million, for 2006 at $1.27 on $494 million, and for 2007 at $1.70 on $589.5 million.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial