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Affymetrix Posts Increase in Q1 Revenues, but Expects Future Losses Due to Mouse Arrays

NEW YORK, April 25 – Affymetrix reported a 36 percent increase in first-quarter revenues Wednesday, but said it expected to lose $15 to $25 million in revenues for the year due to its defective mouse arrays.

Affymetrix disclosed last month that 30 to 50 percent of the sequence on its U74 murine arrays was incorrect and offered to completely replace any defective chip sets for customers. The company said then that it would incur charges of up to $4 million. This quarter, the company reported that it had incurred a charge of $1.9 million for the fourth quarter of 2000, as well as a charge of $800,000 for the present quarter.

The company also estimated that it lost $8 million to $10 million in revenues for the first quarter due to the defective mouse arrays, including at least $3 million in murine and other array sales. The company also said that it lost $2 million to $3 million in business from its scanners due to distractions caused by the defective arrays. Affymetrix lost an additional $3 million in royalties from the arrays, it said.

Affymetrix said it would suffer the effects of the defective mouse arrays more acutely in the second quarter, with a $7 million to $10 million production shortfall and that revenues for the third quarter would also be down $3 million to $4 million for the third quarter.

“While we realize that the near-term impact of the murine array replacement program is not the news you want to hear, we are absolutely convinced we made the right decision,” said Edward Hurwitz, the company’s chief financial officer, in a conference call to discuss the quarterly results.

Additionally, the company reported that sales of its spotted arrayers were weaker than expected. This weakness was caused by a shift in the market for arrayers from small laboratories to large core facilities, which have higher throughput needs than the current Affymetrix 417 arrayer can provide, said Affymetrix president, Susan Siegel, in the conference call.

Because of these setbacks, Affymetrix said it was cutting its overall revenue expectations for the year to $260 million, at the low end of the $260 to $290 million it predicted earlier in the year.

Nevertheless, strong sales of GeneChips boosted Affymetrix’s revenues for the quarter to $54.9 million, from $40.2 million in the year ago quarter. As a sign of the increasing demand, the company has begun packaging the chips in sets of 30, rather than only in sets of 5, said Siegel

“Despite the challenges we encountered this quarter,” said Hurwitz, “Affymetrix’s core operations…and its gene chip business made considerable progress.”

The company’s first quarter expenses surged  to $67.8 million from $47.9 million for the comparable quarter of 2000. These expenses included $19.3 million in R&D expenditures, compared with $12.2 million for the first quarter of 2000. Selling, general, and administrative expenditures rose to $25.5 million from $19.8 million for the first quarter of 2000. And the cmpany posted $3.2 million in amortization of deferred stock compensation and $1.6 million in amortization of purchased intangibles.  

Included in the expenses were the expenses for the mouse arrays, as well as $4.5 million in connection with subsidiary Perlegen and $1.9 million in attorneys fees for the settlement of the patent infringement litigation with Oxford Gene Technology, which it completed in late March. The company also incurred a fourth-quarter 2000 charge of $18.6 million to pay damages and royalties in the OGT settlement.

Affymetrix’s losses for the quarter totaled $10.8 million, or 19 cents per diluted share, up from $6.3 million, or 12 cents per share, for the first quarter of 2000. These losses significantly exceeded Wall Street’s expected losses of 7 cents per diluted share, according to a poll of 10 brokers conducted by FirstCall/Thomson Financial.

During the quarter, the company completed a $100 million outside financing of Perlegen. Currently Affymetrix owns 53 percent of Perlegen, but the company has put 8 percent of Perlegen’s stock in a voting trust. Accounting rules allow Affymetrix to avoid realizing any of Perlegen’s losses on its future balance sheets, Hurwitz said. Instead, the company will record wafer GeneChips sold to Perlegen as revenues, which are to be broken down in a separate category from other revenues.

Affymetrix said it plans to introduce a higher throughput 437 arrayer during the second quarter, as well as a web-based portal that will link the company’s current human genome chips to Golden Path, the publicly available human genome sequence database. Later in the year, the company expects to release a new human genome set with the entire genome.