StreetTalk: Hello, Mr. (Bio) Chips

A few months ago, I wrote a column on the rapid advancements in human genome technology and how Wall Street was treating those advances like a luckless poker player treats a pair of aces on the deal and two more on the flop. In other words, very enthusiastically. It turns out that genomics is only half the story. In Wall Street brokerage firms, in financial advisor circles, and on mutual fund trading desks, the other shoe has dropped in the form of the biochip — those DNA-styled microchips that more and more industry companies are starting to use to examine the genomic templates of various diseases (and hopefully to help them find ways to cure them). In laymen's terms, biochips are sliver-sized microarray disks that harbor tens of thousands of DNA segments (or "probes" as laboratories call them) that represent human genes.

Biochips are creating a great deal of interest in biopharmaceutical and investment circles. What can new chip technology offer investors? Apparently plenty.

According to a research paper on DNA chip technology released by the Swiss pharmaceutical firm Roche, individual DNA chips can provide "actionable information relevant for research, diagnosis, and treatment and open the door to more individualized medicine. The function of genes or predispositions for certain tumor diseases can be diagnosed, as can the tolerability of drugs. This facilitates the selection and dosage of active ingredients for treatment. In addition, unnecessary costs in the healthcare sector can be avoided."

How does the technology work? In a nutshell, scientists and clinicians use biochips to test diseased tissues. They do so by dropping a tissue sample onto the biochip and "tagging" the sample with a special dye. A device scans the chip, and a signal is triggered if the DNA in the test sample mirrors any of the genes on the chip. Repeat matches provide researchers with substantial clues on how specific genes may influence cancer, heart disease, and other critical health problems. Biochip developers say that the laser-based, fluorescence method provides a direct fingerprint of relevent molecules, unlike conventional biosensing methods. That makes DNA research faster and cheaper, advocates say.

But it ' s not all about disease treatment and prevention. Other biochip uses include handheld devices for testing microbes in food and DNA fingerprinting. The threat of bioterrorism and biowarfare are natural venues for biochip exploration. The chips can help researchers detect biological and chemical warfare agents much faster and more accurately than conventional laboratory analysis.

A HARMONIC CONVERGENCE?

Biochips were first developed in the late 1980s by Santa Clara, CA-based Affymetrix and have picked up steam, developmentally at least, in the last two or three years from Amersham, Agilent Technologies, Illumina, and Applied Biosystems. Firms like Genomic Solutions, Caliper, and Ciphergen all have large-scale DNA-chip projects underway, while other companies like Clinical Micro Sensors, ACLARA BioSciences, and Phylos have launched smaller-scale biochip campaigns.

The market for biochips, both near- and long-term, is potentially huge. According to a 2002 report by the consulting firm BioPerspectives, the protein biochip market will reach $700 million in sales by 2006.

"Though they get cheaper every year, just like their cousins in computers and electronics, (biochip industry) dollar-sales figures continue to rise — as much as 50% in 2003, to perhaps $500 million," Aaron Geist, an analyst at Robert W. Baird in Milwaukee, told Business Week.

According to Research and Markets, a leading source for international market research, the protein biochip market is underserved, despite growing from $70 million in 2001 to $100 million in 2002. Its Protein Biochips 2003 Report presents a detailed market model and thorough analysis of the technologies and business strategies of 38 leading protein biochip companies. Protein Biochips 2003 projects that the market will grow to more than $400 million in 2007, a compound annual growth rate of more than 35%

What does all this growth mean to the bean counters and stock pickers on Wall Street?

In a macro-sense, it means a great deal. Financial analysts have come to know and love the semi-conductor industry, making chip firms like Intel and Micro Devices Big Board favorites over the past 20 years. Investment types have also fallen head over heels for biosciences companies, where the thought process on Wall Street is that biopharmaceuticals is where you'll find the next big thing.

So it's not too difficult to order up the old drool bucket and strap it to the collective chins of the investment community, who are fairly slobbering over the possibility of an harmonic convergence of microchips and biosciences. That's why institutional investors — the vanguard of the Wall Street herd — have begun buying up shares of stocks of companies like Affymetrix and Nanogen. According to Wall Street insiders, these companies have achieved advancements in this genre by successfully integrating semiconductor technologies with drug development programs, resulting in a potential slew of sophisticated tools for speedy development of drugs and accurate diagnosis and understanding of biological mechanisms.

Cost-wise, it's not difficult to see why Wall Street is so into the chips. According to the analytical firm Technical Insights, DNA and protein biochips streamline drug development and significantly lower average drug-screening costs from $2 to less than a penny.

Speed comes into play, too. Technical Insights reports that biochip technology enables scientists to take a short cut to disease treatment and prevention by providing "quick and easy" access to critical information regarding DNA damage from cancer-producing compounds. The firm also says that biochips can mitigate or eliminate the need for trained personnel and expensive equipment to provide significant time and cost efficiencies.

PATH TO PATENT

Reportedly, FDA has begun clearing the path for an expected flow of both diagnostic and therapeutic forms of biochip patents. Firms like Affymetrix, Genomic Solutions, and Agilent have already met with FDA officials, hammering out guidelines and frameworks on data submission standards for new chip-based drug applications.

Wall Street followers will be watching the biochip patent parade closely, eyeing the reliability of biochip products in particular. Some studies have shown a wide variety of testing results using biochip research designs. Investors won't sign on and invest too much money until they are reassured that stability is in play and that the sheer volume of information that biochips must harness won't overwhelm industry efforts to harness the technology. They'll watch closely as traditional biologists give way to computer scientists and physicists who are more accustomed to working with sensitive semiconductor designs.

That kind of due diligence is necessary, of course, when profit and science collide. That said, there's little doubt that Wall Street's appetite for biochips has been whetted. Smart investors know computer chips, and they know the biopharmaceutical market. To Wall Street, a wedding between the two could mean wealth-creating bliss.