Affymetrix lower, Millennium up on guidance; amid rotation into small caps Amgen, Genentech slide

By Ronda Fears

Nashville, Jan. 6 - Buyers sent the biotech sector firmly into positive territory Friday, which traders characterized as an obvious rotation into the sector and a positive signal for the group this year. At the same time, though, it was a shift out of Big Biotechs as Amgen, Inc. and Genentech, Inc. both declined.

"What a great day," said a sellside biotech stock trader. "You had to look real hard to find anything in the red."

Well, it actually wasn't too hard if you looked at the top of the biotech lists. Genentech shares fell $2.90 on the day, or 3.08%, to $91.33 and Amgen lost 72 cents, or 0.91%, to $78.10. But the biotech group as a whole was largely on the upswing Friday, as they have been for most of the short week starting 2006, and most without any news, again.

In pockets, biotech players were mumbling about takeover targets, with people taking positions ahead of the traditional Merger Monday, but for the most part traders referred to the day's movements as a simple shift in putting money to work in smaller biotech stocks.

"There's not a lot of real news that I can find. [It] looks like the whole biotech sector is moving. My whole screen is very green," the sellsider said. "Look at these [listed in the next paragraph] - all with 4%-plus gains today. Hopefully rotation into this sector is just beginning."

He specifically mentioned Celgene Corp., Cephalon, Inc., Vertex Pharmaceuticals Inc., Human Genome Sciences, Inc., Amylin Pharmaceuticals, Inc., Imclone Systems, Inc., and Elan Corp. plc, although there were plenty of others with gains of 4% or better.

Another sellside source agreed, saying biotech stocks in general looked "cheap, cheap" but later added, "The lemmings are coming in." The latter remark was couched in context of novices jumping into the biotech sector ahead of a couple of biotech conferences coming up, including the high-profile event sponsored by JPMorgan that begins Monday in San Francisco.

Affymetrix drops almost 8%

There were isolated declines, too, however, mostly generated by specific news. Affymetrix, Inc., for one, took a big hit from making another warning after Thursday's close that weak sales of its biotech instruments will thwart its fourth-quarter revenue guidance, which had already been lowered once before.

Santa Clara, Calif.-based Affymetrix makes genetic analysis systems used in clinical diagnostics, such as its GeneChip. Affymetrix shares on Friday fell $3.63, or 7.74%, to $43.27, climbing from an after-hours low of $41.02 on the announcement after Thursday's closing bell.

Affymetrix said it now expects, based on preliminary financial data, that product and related revenue for fourth quarter will be roughly $15 million below previous guidance. Sales for those products are now targeted at about $105 million, while total revenue would fall to $108 million.

In October, the company said sales would fall $10 million below previous expectations to $120 million, with total sales hitting $123 million. At the time, Affymetrix said it was unable to produce enough of its gene-analysis equipment.

Third quarter results were similarly affected. In September, Affymetrix had warned that third-quarter sales would fall by $10 million to $12 million because of an inability to produce its microchip used in genetic research and drug development. The company's third quarter profit then tumbled 44%.

Affymetrix affirms strength

Despite the warning, Affymetrix said strong demand through 2006 is expected to help boost profit going forward.

"Affymetrix is experiencing growing pains as it both innovates and commercializes new products in high potential markets," said chief executive Stephen Fodor. "We are carrying record orders into 2006 and expect to achieve around 15% top-line growth for the full year."

Still, analysts were somewhat skeptical given figures revealed for the first time by the company. Specifically, one sellside analyst noted that for the first time Affymetrix has disclosed, for 2005, the breakdown of revenues between gene expression - roughly 75% of the total in 2005 - and genotyping - the remaining 25%. In 2005, he said gene expression sales were about $275 million of total revenue, which is only slightly above the $268 million of product and royalty revenue some three years prior, in 2002.

Millennium rises about 2%

After initially taking a dive on its 2006 guidance, Millennium Pharmaceuticals, Inc. shares were getting snapped up on the dip by the bulls, and the stock managed to end the day on higher ground.

The stock was off more than 3% in after-hours activity Thursday but recouped on Friday as the market digested the news. Millennium shares closed up by 17 cents, or 1.69%, at $10.22.

"There was a knee-jerk reaction to the net loss figures, then as folks really looked at what they were saying that reversed itself," said one buyside market source.

Cambridge, Mass.-based Millennium projected a net loss of $95 million to $115 million next year but said it expects to be profitable after excluding one-time items. On an adjusted basis, Millennium projected a 2006 profit of $5 million, compared with analyst estimates for a loss of $9.8 million.

The company also estimated that sales of its cancer drug Velcade will rise by 17% to 30% in 2006 to between $225 million and $250 million. Millennium said 2006 royalty revenue is expected to be in the range of $115 million to $125 million, while operating expenses are expected to be around $425 million.

Millennium capital need seen

Merrill Lynch analyst Thomas McGahren said in a report Friday that while Millennium may turn profitable in 2006, the company "will likely require additional sources of revenue for significant EPS growth going forward." He is looking for Millennium to seek additional in-licensing, partnerships and the like.

The afore-mentioned buysider said, "I think Millennium said all along that expense will be reduced if revenue falls short, either by delaying certain programs, clinical trials, or by terminating specific programs, so I'm not too concerned about that."

Another buysider, however, said that some Millennium watchers don't believe the company will hit its Velcade sales target, saying they are "overblown." He also pointed out that Millennium's projection for "profit does not include expected amortization costs of about $34 million, restructuring charges of between $25 million and $30 million, and stock-based compensation expenses of $40 million to $50 million."

Millennium said it will go into more detail about its business update during the JPMorgan Healthcare Conference next week. The company is scheduled to make a presentation on Wednesday.

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