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Affy Plans to Restructure Costs as Q2 Revenue Declines 4.7 Percent and Profit Swings to $10.1M Loss

NEW YORK (GenomeWeb News) – Affymetrix yesterday reported a 4.7-percent slide in second-quarter revenues as it veered from a $7.8 million profit in the year-ago period to a $10.1 million net loss.
 
In a conference call yesterday, CEO Stephen Fodor said that 2006 has been the “single most challenging year” in Affy’s 13-year history, “compounded by increased competition, especially in the genotyping market.”
 
As a result, and with the aim of reducing costs, Fodor said Affy will restructure its “corporate, general, and administrative expenses while continuing our strong focus on sales, product R&D, and product launches.”
 
The results caused shares in the company to decline nearly 14 percent in early morning trading today. The stock has lost more than half its value since the beginning of the year.

Affy’s total revenues slipped to $80.1 million for the quarter ended June 30 from $84.1 million in the second quarter of 2005.

 
Product sales declined to $61 million from $69.2 million in the comparable period of 2005, while product-related revenue increased to $14.4 million from $10.9 million in the year-ago period. The sale of products to Perlegen Sciences increased to $2.2 million from $1.9 million in the second quarter of 2005, and revenues from royalties rose to $2.4 million from $2.0 million in the prior-year period.
 
R&D spending increased to $21.6 million from $20.8 million in the year-ago period, while Affy’s total costs increased 15 percent to $89.2 million from $75.5 million in the second quarter of 2005.
 
Affymetrix posted a net loss of $10.1 million for the second quarter, compared to net income of $7.8 million in the year-ago period. The company said that its GAAP net loss for the quarter includes the effects of stock-based compensation expense related to the US Securities and Exchange Commission’s FAS 123R regulation. Excluding the impact of FAS 123R, Affymetrix said that its non-GAAP net loss for the quarter would be $6.2 million.
  
In addition, Affymetrix disclosed that its board of directors’ audit committee has been conducting an internal review of its stock option grant practices from January 1, 1997, through May 31, 2006. This review has revealed “certain documentation lapses” in that period, “including one instance where the company has determined that the option grant date should have been recorded differently,” Affymetrix said in a statement.
 
The company added that the review “does not indicate that there was any pattern or practice of inappropriately identifying grant dates with hindsight in order to provide ‘discounted’ or ‘in-the-money’ grants,” and that it does not anticipate the outcome of the review to impact its second-quarter results.
 
As of June 30, Affymetrix had $76 million in cash and cash equivalents.
 
According to Fodor, the company now has two objectives: to increase revenues with new products in the genotyping market, expression arena, and clinical diagnostics, and to decrease operational costs.
 
“Since we have entered into a period of operating loss, our general and administrative cost structure has become out of line for the revenue base of the company,” Fodor said during the conference call. “During this quarter we will reduce our expenses by restructuring corporate, general, and administrative expenses while continuing our strong focus on sales, product R&D, and product launches.”
In addition, Fodor said Affy has “opened a search for a senior level commercial operations leader. Our objective is to transition our established markets into long-term growth opportunities.”

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