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Affy Promises Light at End of the Tunnel After Trimming Q4 Guidance, Closing ParAllele Buy


Beset by an inability to produce enough high-resolution 500K mapping arrays to meet demand, Affymetrix will not be able to generate as much revenue in the final quarter of this year as it had previously anticipated, officials from the Bay Area firm said this week.

The announcement comes less than one month after Affy was forced to pare down its revenue expectations for Q3 and, separately, delay its acquisition of ParAllele BioScience, which closed last week (see BAN 10/05/2005).

The revised prediction out of Santa Clara is that shareholders and customers alike may have to wait until the first quarter of 2006 to see production yield back to where it should be.

"Although we expect orders consistent with achieving our previous [Q4] revenue guidance of around $130 million, we will remain capacity-constrained in array shipments in the fourth quarter," Greg Schiffman, Affy's chief financial officer, said in a conference call last week.

Therefore, he said, "We currently expect product revenue to be down at least $10 million due to array production constraints, to approximately $120 million. If demand for arrays is higher, [revenue] could be lower."

Schiffman said that final Q4 revenue results would depend on which particular arrays are in higher demand during the quarter. If arrays that are easier to manufacture are in high demand, then Affy will be able to meet guidance. If they are for the 500 K chips, it could place further constraints on production yield.

"Although we expect orders consistent with achieving our previous [Q4] revenue guidance of around $130 million, we will remain capacity-constrained in array shipments in the fourth quarter."

Last week, Affymetrix reported a 44-percent drop in profits for the quarter ended Sept. 30 and total revenues of $88.3 million — an increase of 4 percent over $79.9 million in the comparable period of 2004.

The company's product-related revenue of $79.5 million represented a 4.8-percent increase over $76.2 million for the third quarter of 2004, but were 13.5 percent below previous guidance of $92 million due to its manufacturing limitations.

Last week, Affy said that its full-year revenues will also suffer a hit. It anticipates product and product-related revenue of around $365 million in 2005 — 6.4 percent below its previous guidance of $390 million.

To cope with the manufacturing constraints behind this expected drop in product and product-related revenue, Schiffman said Affy will invest $60 million in its Sacramento, Calif., manufacturing facility — where the company already fabricates its arrays — as well as in Singapore — where it is building its first international manufacturing plant. Schiffman said the company spent $30 million on manufacturing investments last year.

Affy CEO Steve Fodor said during the call that the company expects the production constraints to be dealt with by the end of Q4 and that the firm does not anticipate further diminished revenues in Q1 '06.

"We have seen quite dramatic improvements in yield, but when we look at the effect it had on Q3 and then its [effect on] Q4 and the demand we have, and the production capacity that we have, it all comes together to form these shortfalls," Fodor said.

Fodor promised that Affy "is in a position now where we can say — even with current yield and capacity — [that we] should eliminate any constraints by the end of Q4."

In the call, Fodor said that Affy is facing "growing pains" as a "result of growth, technology evolution, innovation, and customer demand." The company pinned the manufacturing constraints on its failure to receive and install aligners for the Mapping 500K Set.

"Beginning in 2004 we ordered additional aligners, for which the lead time is about nine months. By the end of this quarter we will have completed the Sacramento installation of half of these next-generation aligners," Schiffman said.

Schiffman added that capacity had now been increased by about 30 percent and that the remaining half of the aligners would be installed by the first quarter of next year.

ParAllele and Powered by Affymetrix

Affymetrix also closed its acquisition of ParAllele Bioscience on Friday in a stock-and-cash transaction worth around $121 million.

Affy said in a statement that ParAllele stockholders approved the acquisition on Oct. 20, and that it was completed on Oct. 21. ParAllele stockholders will receive around $120.8 million in the form of $11.7 million in cash and around 2.29 million shares of Affymetrix common stock, Affy said.

The cash part of the transaction is new. In June, Affy said it expected the transaction to be wholly in stock (see BAN 6/8/2005).

Fodor said in last week's conference call that he expects "a quick and successful integration of companies" in the wake of the acquisition.

Specifically, Affy will launch a series of "new products, including a product covering 20K coding DNA SNPs, several disease-specific SNP panels including inflammation and cancer, and an expanding range of custom SNP panels spanning 1,500 to 20,000 SNPs," Fodor said.

Affymetrix said in a statement that it will add 1,500 new SNP custom assays and 20,000 non-synonymous coding SNP assays to its product portfolio as a result of the acquisition. Fodor said that Affy's emerging position in the whole-genome genotyping marketplace would make a good entry point for introducing new assays derived from ParAllele's technology.

"When you think about ParAllele, there [are] a couple areas where [these assays are] going to be targeted very aggressively," Fodor explained.

"Given the emergence of this whole-genome genotyping marketplace that is really driving Q3 chip growth as well as Q4, we are going to take this technology and insert it into very focused places in [that] marketplace," Fodor said. He added that Affy would target clinical diagnostics with the new technology.

According to Affy, the company has also signed agreements with two new companies through its "Powered By Affymetrix program," which enables firms to develop diagnostic tests on the Affy platform in a similar manner to the CYP450 AmpliChip Roche released earlier this year (see BAN 1/05/2005).

The two companies are PathWorks Informatics, a 2-year-old, San Jose, Calif.-based company developing expression-based diagnostics for cancer, and ArraDx, formerly ArraGen, a Craigavon, UK-based company that has similar goals in oncology. ArraDx is also an authorized Affymetrix service provider, according to its website.

Affy currently has similar agreements signed with Veridex, a J&J company, and French diagnostics firm BioMérieux, and Fodor said last week that the new agreements expand the "breadth [of the Powered by Affymetrix program] from large enterprises to more focused diagnostic ventures."

— Justin Petrone ([email protected])

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