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Affy Provides Guidance on Next-Gen Chips, Will Be ‘More Acquisitive’ After USB Buy

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Affymetrix last week provided an update on the next-generation chips it has in development, closed its $75 million acquisition of reagents maker USB, and reported financial results for the fourth quarter of 2007 that showed an uptick in revenue and a nearly 50-percent rise in profits.
 
The company also addressed the resolution of its litigation with Illumina, and how it is likely to acquire more companies like USB that complement its array portfolio going forward in an effort to cast a “pretty broad net across the whole field of genetic analysis.”
 
Last month, Affy CEO Stephen Fodor told analysts and investors at the JPMorgan Healthcare Conference in San Francisco that Affy has developed new surface chemistry technology that would allow customers to perform sequencing experiments on arrays (see BAN 1/15/2008).
 
During the firm’s fourth-quarter earnings call last week, Fodor said the first product that uses this technology will be a 30-million feature, three-chip set that is being designed for copy number variation analysis. Fodor said that the three-chip set will be “important” because current state-of-the-art products include about 1 million copy number markers.
 
“We will move this market forward this year by introducing a much higher-resolution product,” Fodor said during last week’s call. “Each chip will increase the resolution by a factor of 10 over any competitive offering at a cost that will enable high volume studies.”
 
According to Fodor, the three-chip set will enter an extended beta-testing phase and early access by mid-year. He added that despite the feature-shrink necessary to deploy the content on three arrays, the three-chip set can be used with Affy’s existing platform, and customers will not need to buy new instruments.
 
Affy is also using its new surface chemistry to create a new set of chips that will be used to screen 1,100 samples that will become part of an internal database of human genetic variation that the company will use as a resource to design next-generation products.
 
Fodor said that the products that eventually result from that screening will include whole-genome applications as well as targeted-genotyping applications that use the sequencing method. The new applications will fit on Affy’s standard instrumentation and could be deployed in a 96-well format like other GeneChip products, he said.
 
USB and M&A
 
During the call John Batty, Affy’s chief financial officer, discussed what kind of impact the USB acquisition could have on Affymetrix’s revenues. According to Batty, Affy will now seek to closely couple its arrays with USB’s reagents, and will fullly integrate USB into Affymetrix rather than maintaining the business as a separate unit within the company.
 
“Those [reagents] are going to very quickly get integrated into our core business, and over a period of time it’s going to be very hard to distinguish between those reagents that are part of our core business and those that are sourced from USB,” said Batty. 
 
According to Affy President Kevin King, the acquisition of USB is indicative of a new strategy to acquire more capabilities going forward. Prior to buying USB, Affy’s most recent acquisitions were of ParAllele Bioscience for $120 million in 2005 and Neomorphic for $76 million in 2000 (see BAN 6/8/2005).
 
“You’ll see us look more and be more acquisitive going forward,” King said. According to King, Affy is casting a “pretty broad net across this whole field of genetic analysis” and is at the same time “sensitive to concerns that investors have had about accretiveness. 
 
“I really do want us to be bullish and aggressive about growing our business for the long run so I think it’s going to be a fine balance and at the end of the day I think we are going to do more acquisitions going forward,” said King.
 
Last month, Pratima Rao, senior director of product marketing at Affy, told BioArray News that the company intends to spend the $90 million it won through a settlement with Illumina on R&D projects and acquisitions (see BAN 1/15/2008).
 
Last week, King said that he was “really pleased” with the terms of the settlement and that from Affy’s perspective, the “$90 million is one of the largest settlements certainly in the life sciences,” and that the company is “going to use those dollars to put back into our business for growth plans and so forth, to drive future growth.”
 
DGE
 
During the call, Fodor addressed the impact that digital gene-expression applications, like those offered on Illumina’s Genome Analyzer next-generation sequencing instrument, could have on the array-based gene-expression market, where Affy has long been the dominant player.
 
Fodor said that sequencers will continue to be a useful platform for researchers, but that he doesn’t envision next-gen sequencing replacing arrays in the expression market due to cost and volume issues.
 

“I really do want us to be bullish and aggressive about growing our business for the long run so I think it’s going to be a fine balance and at the end of the day I think we are going to do more acquisitions going forward.”

“I think that people will do digital gene-expression experiments but I don’t think the volumes will be anywhere near what they’ll be for microarray technology,” Fodor said. “I think there will always be these discovery techniques and people in science will use them, but long term I think the high volumes need to come from things like microarray technology.”
 
According to Fodor, in order to replace microarray applications “very, very, very high numbers need to be accomplished by counting in order to get signal averaging to a point where you can really equate what you can do on a microarray.”
 
Doug Farrell, head of investor relations, said that Affy users are typically going to use sequencing for “applications that may not yet exist in an array format because the cost difference is so great.”
 
He added that the expansion of next-gen sequencing is advantageous to Affy because the “vast majority” of studies that use sequencers are funded by the US National Institutes of Health, which “means that content will be in the public domain” and that Affy certainly “will look for opportunities to commercialize a great deal of that output going forward.”
 
Q4 in Full
 
Affymetrix last week reported modest fourth-quarter revenue growth, while its profits rose 47 percent.
 
The firm said that receipts for the three-month period ended Dec. 31, 2007, inched up 3.3 percent to $107.6 million from $104.2 million in the fourth quarter of 2006.
 
Results included GeneChip consumables revenue of $79.9 million, which consisted of array revenue of $61.6 million, reagent revenue of $16.3 million, genotyping services revenue of $1.4 million, and $600,000 in chip sales to Perlegen. Affymetrix said it had instrument revenue of $10.7 million in the fourth quarter.
 
The firm said that it shipped 44 GeneChip systems in the quarter, bringing its total systems shipped to around 1,722. But year over year, Affy's instrument sales for the quarter dropped from $15 million.
 
Affy posted net income of $12.8 million, or $.17 per share, which included a pre-tax restructuring charge of $2.4 million, or $.03 per share. Its profit was 47 percent higher than Q4 2006 net income of $8.7 million, or $.13 per share. That quarter included a pre-tax restructuring charge of $3.5 million, or $.05 per diluted share.
 
The firm’s R&D spending dropped 10.2 percent year over year to $17.6 million from $19.6 million, while SG&A costs climbed 15.2 percent to $35.7 million from $31 million.
 
For full-year 2007, Affy reported total revenues of $371.3 million, up 4.5 percent from revenues of $355.3 million for fiscal 2006. Consumable revenues for 2007 were $272.5 million compared to $251.2 million in fiscal year 2006. Instrument revenues for the year were $38.7 million.
 
Affy’s full-year profit was $12.6 million, or $.17 per share, which included a pre-tax restructuring charge of $15.3 million, or $.18 per share, compared to a net loss of $13.7 million, or $.20 per share for 2006, which included a pre-tax restructuring charge of $13.5 million, or $.20 per share.
 
Its R&D costs for the year fell 15.8 percent to $72.7 million from $86.3 million, while its SG&A costs declined 4.5 percent year over year to $138.5 million from $145.1 million.
The firm finished the year with cash and cash equivalents of $288.6 million.
 
Affymetrix projected 2008 revenue to be in a range between $505 million and $525 million. The revenue will include a one-time $90 million payment in the first quarter related to its recent legal settlement with Illumina.

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