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Affy Bets Management Shake Up, New Products Will Counter Unacceptable Sales, Investor Flight

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Facing its third consecutive quarter of missed guidance, a rapidly declining stock, and unstable demand for its genotyping products and services, Affymetrix last week reshuffled management, promised to expand its product portfolio, made plans for new hires, and said it would halt publicizing its financial forecasting.

Affy last week reported that first-quarter profits dwindled as sales fell by more than 10 percent to $66 million and overall revenue declined 2.5 percent to $86.4 million year over year (see accompanying sidebar for complete first-quarter financial results). These results, led by weak genotyping product sales, caused Affy's share price to reach a new 52-week low after losing more than half its value since last July (see accompanying chart).


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The first-quarter results were clearly troubling for Affy, which has consistently failed to meet initial quarterly guidances since a manufacturing glitch soured the launch of its 500K Mapping Array Set for genotyping last autumn (see BAN 10/5/2005). During a conference call following the first-quarter earnings release last week, Stephen Fodor, the company's co-founder, CEO, and chairman, disclosed plans to turn things around.

During the call, Fodor called Affy's recent performance "unacceptable" and acknowledged that the company had "not performed up to the expectations we have for ourselves or that you as investors have for us."

"While our scientific and commercial opportunities continue to grow, we have failed to meet our financial goals over the last year," he said. "That is not acceptable to us."

Fodor blamed the company's inability to meet guidance on an unpredictable genotyping market and a systemic weakness in moving "increasingly complex" products from development to sales and marketing.

"While there is strong demand for genetic tools, we need to be more effective with our execution," Fodor said. "Our challenge has been the effective integration of the process from product development, through commercial introduction, to post-sales, service and support."

Management Shake-Up

As part of its plan to address that challenge, Affy will reshuffle its management. Most prominently, Affy President Susan Siegel resigned last week for "personal reasons." Siegel will now represent the company as "president emeritus." It was unclear why Siegel stepped down, and Affy declined to provide further information on Siegel's resignation, or who might replace her.

Siegel had temporarily left her position once before — for "health reasons" in 2002 (see BAN 11/1/2002). She had served as president of Affymetrix since 1999.

Separately, BioArray News learned that Mitchell Kennedy, who recently served as the firm's vice president of global technical support and was general manager of Affy's international trading business unit, has also left the company.

It was not immediately clear why Kennedy left. Affymetrix declined to comment.

Meantime, the company has expand the role of Thane Kreiner, Affy's vice president of corporate affairs and an employee since 1993, who will also serve as senior vice president of marketing and sales.

The firm also made scientific co-founder Richard Rava head of product development, Fodor said. He added that the appointments could "result in a consolidation of activities in marketing and sales, as well as product development … and will address the delays the company has experienced in the commercialization of new products."

Affymetrix is also seeking new blood. Fodor said the company will "recruit seasoned, senior-level operational talent to help us grow the business."

In the meantime, absent a president, Fodor will direct the administrative changes at Affymetrix. "During this process I will oversee the integration of these operational functions," he said.

Guidances Discontinued

Affy has also decided to end its policy of forecasting quarterly and annual financial performance, according to Greg Schiffman, Affy's chief financial officer.

"Although we continue to project [general] year-over-year revenue growth, we will not be providing [specific] guidance on a quarterly or annual basis," Schiffman said during the call last week.


"We have not performed up to the expectations we have for ourselves. …"

"Our top priority will be introducing new products so that we can continue to benefit from the rapid growth in the market for molecular biology tools," he continued. "Until we get the activities and actions back in line, we don't think it's prudent to provide specific point guidance." He also said that Affy will provide analysts with periodic updates on the company's progress.

Affymetrix took this step after failing to meet its forecasts for the past three quarters. In the case of the third and fourth quarters of 2005, Affy was forced to revise its guidance weeks before reporting its earnings for those periods (see BAN 1/10/2006). Affy's first-quarter revenues were 5 percent below a forecast it made in January.

Although Affy did not revise this guidance, it did file a statement with the Securities and Exchange Commission one month later stating that the timing of 500K Mapping product reorders could fluctuate and that it believed that the genotyping market may have temporarily slowed (see BAN 3/14/2006).

During the call last week, Schiffman attributed the revenue shortfall to Affy's genotyping business. The company had originally expected genotyping revenue of about $19 million, but came up more than $5 million short, at $13.7 million.

"With the exception of genotyping, all other areas of the business were either consistent or exceeded our guidance," Schiffman pointed out.

More Products

While genotyping has been Affy's Achilles' heel over the past eight months, Fodor said that the company plans to pull itself out of its slump by launching new products for genotyping.

"A host of new products are in development," Fodor said. "We are entering a phase now where we are going to increase dramatically the number of new products in genotyping and clinical applications as well as diagnostic applications."

Affy's Q1 Sales Sink 10 Percent as Profit Dwindles

Affymetrix last week said that first-quarter sales declined more than 10 percent as overall revenue fell 2.5 percent year over year amid growing R&D expenses and shrunken profits.

Product sales for the three months ended March 31 fell to $66 million from $73.6 million year over year. Product-related revenue, however, increased 16.8 percent to $13.2 million and revenue from Perlegen Sciences more than doubled to $5.3 million, Affy said. Royalties and "other" revenue" increased 18.8 percent to $1.9 million year over year.

Total receipts for the period declined to $86.4 million from $88.6 million in the year-ago quarter.

R&D spending in the quarter grew 38.2 percent to $23.5 million from $17 million year over year.

Profits fell to $1.8 million, or $.03 per basic share, from $16.2 million, or $.26 per basic share, one year ago.

Affy said it had around $104.5 million in cash and equivalents and around $150 million in short-term securities as of March 31.

Affy declined to provide specific information on any new products. However, the company has been no slouch in expanding its catalog recently. Over the past year, Affy has launched 15 individual products, including an automated ArrayStation, exon and tiling arrays, and a 500K Mapping Set.

The company will also continue to sell the technology it obtained through its acquisition of ParAllele in October 2005, and in a recent interview with Affy partner CapitalBio, the company's CEO hinted that the firm is developing an updated model of its standard GeneChip (see BAN 2/14/2006).

But while Affy remains ambitious about its product development, Fodor stressed last week that the company must hone its ability to move its products from R&D to the customer.

"The issue as we introduce more and more new products is how to integrate the path of how they are used in research and product development, and through the launch and support issues to the customer," Fodor said.

— Justin Petrone ([email protected])

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