This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
Affymetrix officials last week said that weaker demand from pharmaceutical customers combined with restructuring charges resulted in a first-quarter loss and a 7 percent decline in revenue.
Separately this week, Affy subsidiary Perlegen disclosed that it has withdrawn its initial public offering around one year after it originally filed (see related brief).
The first-quarter results, which failed to meet Wall Street expectations, caused a sharp drop in Affymetrix’s shares the day after the earnings were announced. But the firm is hoping that the upcoming launch of its 1 million SNP chip will help it take market share from rival Illumina and grow revenue in the second half of the year.
Affymetrix’s total revenue for the three months ended March 31 fell to $80.4 million from $86.4 million year over year. Its product and product-related revenue decreased 10 percent to $71.3 million; royalties and "other" revenue increased 33 percent to $2.4 million; and receipts from Perlegen rose 26 percent to $6.7 million.
“We did see continued softness in the pharma side of our business, and pharma customers have adjusted their spending to reflect recent organizational, outsourcing, and consolidation changes,” said Kevin King, president of Affymetrix’s life science business, during the firm’s first-quarter conference call last week.
The weaker demand from pharma was particularly noticeable in sales of gene-expression products, according to company officials.
“The expression market … has continued to decline slightly,” said Jamie Kole, Affymetrix’s vice president of finance, during the call. “It’s pretty stable but … there has been some softness in the pharma sector and that did contribute to a little softness also in the RNA side.”
Consumables “continue to be the key growth driver for the company,” she said.
Affymetrix shipped 41 GeneChip systems during the first quarter. The firm said 65 percent of its revenue came from academic customers, while 35 percent came from industry sales.
The company’s R&D spending decreased to $19.7 million from $23.5 million during the quarter.
Affymetrix has not booked any revenue from a recent favorable jury decision in its ongoing patent infringement battle with Illumina. Two months ago, a jury for the US District Court for the District of Delaware ruled that Illumina infringed all five Affymetrix patents at issue in the case and awarded Affymetrix $16.7 million in damages (see BioCommerce Week 3/14/2007).
Follow-up phases in the trial, including counterclaims by Illumina, are scheduled to begin in the fall, and Illumina has said it would appeal the jury’s decision.
Asked during the conference call whether the firms would engage in settlement discussions, Stephen Fodor, chairman and CEO of Affymetrix, said, “That’s a pretty tough discussion to have. We’re only at phase one right now.
“We are very happy, obviously, with how the jury trial went, and the progression of the entire suit,” he said. “But predicting exactly the timing and consequences of a lot of the legal procedures are a pretty tough thing to do. We’re very confident, from the perspective of infringement and validity on our patents, but the timing of any revenues that flow through from that would be pretty hard to predict.”
Affymetrix officials said they expect the initial phases of the trial to finish this year, but said it is likely that appeals would be heard next year.
Affymetrix’s first-quarter net loss was $4 million, or $.06 per share, down from a profit of $1.8 million, or $.03 per share, in the year-ago period. Affy said the disparity was the result of $5.4 million in restructuring charges, due to facilities consolidation.
King said the company is “on schedule” to complete the transfer of its GCS instrument manufacturing from Bedford, Mass., to Sacramento, Calif., and remains on track to record $15 million in restructuring charges for the full year.
He said that the first-quarter results were in line with the firm’s internal expectations. However, the results fell short of Wall Street’s expectations of $89 million in revenues and EPS of $.03, excluding the $.05 per share in restructuring costs.
Investors punished Affymetrix for missing the estimates, sending its shares down 11.4 percent to close at $27.88 on Thursday, the first day of trading after the results were released. Affy’s stock has continued its decline since then, closing at $25.90 on Tuesday this week.
Banking on New Genotyping Chip
“From the beginning of 2006 to now, the business has gone from having a lot of trouble in early 2006 to now more of a question of how exactly we execute these single-chip products out into the growing market this year.”
Affymetrix officials said the firm expects to post 2007 revenue of between $365 million and $385 million, compared with revenue of $355.3 million in 2006. The firm expects sales in the back half of the year to be driven by its genotyping chips, including the impending 1 million SNP chip, dubbed the SNP 6.0 Array.
Asked by an analyst during the call how the firm expects to meet its full-year 2007 revenue guidance after a shaky start, King responded, “We built our plan based upon a series of sequential quarterly growth numbers, after having come off a fairly tough 2006.”
King also noted that last year’s first quarter included roughly $10 million in revenue from a backlog of products from the last quarter of 2005 — a phenomenon that did not repeat in this year’s first quarter.
The firm is betting that its 500K array, called the SNP 5.0 Array, and the upcoming SNP 6.0 Array will help it take market share from Illumina. However, like Affy, Illumina is planning to launch its Human 1M BeadChip this quarter as well.
“We continue to believe that the genotyping market is an elastic market,” said Fodor. “It is driven by how many samples we can run.”
He said that Affymetrix’s next-generation products, which are produced in a single format, give the firm “the flexibility to get these out in the marketplace at the right price points to sort of hit the sweet spot of the volume curve versus revenue.
“When you look at this from that perspective, from the beginning of 2006 to now, the business has gone from having a lot of trouble in early 2006 to now more of a question of how exactly we execute these single-chip products out into the growing market this year,” said Fodor.
Last July, Affymetrix cut in half the price of its 500K array set. The new $250 price tag boosted sales in the second half of 2006, and according to Affymetrix officials helped the firm regain some market share
King said in the second half of last year Affymetrix saw a “pretty dramatic shift in our share [in the genotyping market] in our favor. I think at the end of the year we saw the market on the whole genome side be split roughly 50-50 between ourselves and our key competitor, and I think that trend has held here in the first quarter of the year.
“Going forward, we’re looking for additional market expansion from the 6.0 market,” said King. “I think this is a real game changer for the industry.”
The SNP 6.0 array is currently in beta testing, “but is near the end of this,” said King. The firm expects to release the chip during the second quarter.
King said that with the new genotyping chips, its Exon Array, and its Human Genome U133 Plus 2.0 Array, Affymetrix believes it has “the ability to address a wide array of customers.”
He also said that as the firm begins to look at moving from discovery to development on the pharma side, “we think there are opportunities for us to grow there as well. We don’t quite have all the products we need on the development side yet … but we’re making progress,” said King.
Affy said it had around $96.3 million in cash and equivalents and $146.9 million in short-term investments as of March 31.