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Affy Blames 21-Percent Q3 Revenue Slide on Increased Competition in Academia, Pharma

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Affymetrix last week reported that total third-quarter revenues declined 21 percent amid weak sales to pharma and academic customers, while restructuring charges helped swing last year’s profit to a loss in the current period.
 
A senior company official said the numbers “disappoint us” and do not reflect Affy’s “long-term potential,” and said the firm has created a three-point plan to revitalize sales.
 
Total receipts for the three months ended Sept. 30 fell to $75.2 million from $95 million in the third quarter of 2007. The company had warned of the decline earlier this month, noting that it was due to “increased competition for academic research funding and continued softness in industrial spending” (see BAN 10/14/2008).
 
Third-quarter product sales declined 5 percent to $66 million. Arrays and reagents generated $59.8 million, up $1 million from the year-ago period, while instruments generated $6.2 million for the quarter, down 38 percent, year over year. Service revenue declined 4 percent to $6.1 million, while royalties and other revenue fell by nearly 80 percent to $3.1 million for the third quarter of 2008.
 
Geographically, global sales fell below Affy’s expectations for the quarter across both academic and industrial segments, Chief Financial Officer John Batty said last week during the company’s third-quarter earnings call. He also warned that Affy sees no “catalyst to make us expect that our fourth quarter will be significantly better than this past quarter.” Affy reported $107.6 million in total revenue during the fourth quarter of 2007.
 
During the call, Affy President Kevin King said that Affymetrix has a three-prong strategy designed to help revive demand for its products.
 
King, who will succeed Stephen Fodor as CEO in January (see People, this issue), said the company intends to re-engineer its technology platform, expand into new markets such as targeted genotyping, and restructuring to improve profitability.
 
Last quarter, Affy announced a plan to consolidate its array, reagent, and instrument manufacturing by the second quarter of 2009. As of September 30, King said that Affy has transferred over 70 percent of its array manufacturing to its Singapore facility (see BAN 7/29/2008).
 
Saying during the call that the third-quarter numbers “disappoint us” and do not reflect Affy’s “long-term potential,” King conceded that the three initiatives “will not yield results overnight.” However, he said that “we believe they are the right steps to take Affymetrix to renewed growth. We’ll leverage our installed base, our intellectual capital, and brand to achieve these goals.”
 
‘Underperforming’ Pharma
 
As in previous recent quarters, Affymetrix has not been able to secure the sales to pharmaceutical and biotech customers that it had previously forecasted. Last week, King pinned weak pharma sales on “structural changes” within the pharma market.
 
“We know that four of our top eight pharma customers have eliminated their resources in spending on core genomics-discovery laboratories, [and] the remaining four customers have moved [a] significant amount of spending from target and biomarker discovery to drug development and clinical trials,” King said, without naming the firms. “As a result, our pharma business has underperformed compared to the prior year. Many [pharma customers] have told us not to expect that they will be placing large orders because their budgets haven’t materialized,” he said.
 
In explaining the structural changes taking place in the broader pharma market, King referenced Merck’s decision last week to lay off 7,200 employees over the next three years. ”We are continually surprised by the dramatic changes of the current pharma” environment, he said. “This comes as new news to us.”
 

“Many [pharma customers] have told us not to expect that they will be placing large orders because their budgets haven’t materialized.”

Despite the slump in pharma demand, King said that Affy is concentrating on winning back pharma clients by focusing its R&D efforts on products that address the expanding market for drug development and clinical trials. He cited Affy’s Drug Metabolizing Enzymes and Transporters panel, launched as a service earlier this year, as an example of the kinds of downstream analysis tools that Affy hopes to cultivate.
 
King also mentioned that Affy expects to soon launch the low- to midplex liquid array technology developed by True Materials, the Bay Area startup it acquired for $25 million in July (see BAN 1/28/2008, BAN 8/12/2008), though he did not provide a specific timeline for the launch
 
King said Affy also hopes its new, automated GeneTitan instrument platform and accompanying peg-array format will help breathe new life into pharma sales. Affymetrix earlier this month launched the GeneTitan, along with a whole-genome expression-profiling assay made available for the firm’s 24- and 96-peg array plate format (see BAN 9/30/2008). While Affy originally said the $300,000 GeneTitan could hypothetically be used by all kinds of researchers, King said last week that it would be targeted to “roughly 50 percent of our marketplace, sort of the mid- to high-throughput facilities.”
 
“These new products provide pharma with higher levels of performance than current offerings,” King said. They offer “lower cost for sample, they require fewer [full-time employees], and they deliver highly consistent sample-to-sample data reproducibility,” he said. “We expect the adoption of these technologies will take time. In the near term, the growth in the drug-development and clinical-trial segment will not offset the decline in the research segments of pharma,” he added.
 
Steady Product Flow
 
Demand for Affy products is also contracting from academics. To combat this decline, King said that Affymetrix will launch a high-throughput genotyping assay on the GeneTitan in mid-2009 in order to address “key customer needs for new levels of increased genetic contents, greater flexibility, higher sample throughput, and hands-free automation.” He said the new expression assay on the GeneTitan could similarly encourage more spending from academic customers.
 
In terms of genotyping products, Affy’s newer chips will contain new content generated in an internal screen of 1,300 individuals. Outgoing CEO and Executive Chairman Stephen Fodor said during the call that the screen has been “largely completed” and that Affy is in the process of optimizing the genotyping assay.
 
Fodor said that Affy could launch the new arrays by mid-2009, but it will “have to make a decision what this portfolio will look like in terms of portion of targeted genotyping versus a series of new whole-genome association products.”
 
Fodor also commented on the development of the sequencing-on-array technology he first discussed earlier this year at the JPMorgan Healthcare Conference in San Francisco (see BAN 1/15/2008). “It’s essentially doing a one-base sequencing reaction,” Fodor said last week. “Incorporating that type of technology and that type of enzymology onto our platform opens the door to us to take a look at how that might go to the future.”
 
‘Marketplace Disruption’
 
While describing Affy’s pending product launches as a “major re-launch of the entire platform,” Fodor acknowledged that that there are questions about the future of array platforms at a time when many researchers are starting to move their projects to second-generation sequencers.
 
“This field is changing very rapidly,” Fodor said. “Just in the last week or so, we have heard the companies come out and say, ‘Well, by Q2 next year we’re going to be able to sequence genomes for $5,000.’ So there’s going to be a lot of disruption in this marketplace,” he said.
 
Fodor said that Affy plans to compete in this new market by improving its products and gathering more and more information from “low-throughput discovery technologies,” and put them on its arrays for high-throughput applications. He did not elaborate.
 
“There has been speculation about the future of array-based technologies,” Fodor said. “The reality is that a very high synergy exists between discovery technologies and high-throughput technologies like the array,” he said.
 
“Arrays will continue to be a platform of choice because they are robust, cost-effective, and generally accessible through researchers around the globe,” he added. “That [being] said, science is moving at a rapid pace, and we need to stay at the forefront of technological advances.”
 
Q4 in Full
 
For the three months ended Sept. 30, Affymetrix reported total revenue of $75.2 million, compared to total revenue of $95 million in the third quarter of 2007.
 
Third-quarter product sales declined 5 percent to $66 million. Arrays and reagents generated $59.8 million and instruments generated $6.2 million for the quarter.
 
Service revenue declined 4 percent to $6.1 million, while royalties and other revenue fell by nearly 80 percent to $3.1 million for the third quarter of 2008.
 
Third-quarter R&D spending rose 26 percent to $20.7 million from $16.5 million; while SG&A expenses decreased nearly 15 percent to $28.4 million from $33.3 million.
 
Affy reported a net loss of $31.8 million, or $.46 per share, compared to net income of $2.6 million, or $.04 per share, in the comparable period of 2007.
 
The current quarter’s loss includes a pretax restructuring charge of $14.6 million, while the year-ago period includes a pretax restructuring charge of $5.7 million.
 

Affymetrix said it expects its fourth-quarter revenue to be “essentially flat” to third-quarter levels. The company anticipates total revenue for the year to be in the range of $408 million to $415 million, including a $90 million payment it received from Illumina in the first quarter. Affy generated $371.3 million in full-year 2007 revenues.

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