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Affymetrix Cuts Q2 Revenue Outlook by $6M To $14M as Demand for Chips, Spotters Falls

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Affymetrix reduced its revenue expectations sharply for the second quarter, saying that both sales of GeneChip products and do-it-yourself arraying equipment have slowed significantly in recent months.

The company said its revenues for the quarter would total between $44 and $50 million, or between $6 and $12 million less than previously predicted second-quarter revenues of between $56 million and $58 million.

Affymetrix attributed the drop in GeneChip revenue to the economic uncertainty and to financial pressures affecting its larger customers, as well as to the company’s problems with its defective U74 murine arrays.

“At the individual customer level, we are seeing erratic ordering patterns from certain [large] GeneChip accounts,” said Affymetrix president Susan Siegel in a conference call to discuss the revised revenue figures.

Siegel explained that year-end budget surpluses and promotion programs had caused large customers to develop a buildup of inventory in the fourth quarter of 2000 and the first quarter of this year, leading to a dropoff in new second-quarter orders. A downturn in the economy has also affected the company’s business.

“The current economic climate had created a challenging business environment for selling into the research departments of some key pharmaceutical companies,” Siegel said.

The impact of the company’s program to replace defective U74 murine arrays “has also indirectly affected sales at pharmaceutical customers more than we initially expected,” Siegel said.

Affymetrix disclosed in early March that its three-chip U74 murine set contained incorrect sequence on 25 to 60 percent of the genes, and told customers it would ship replacements within six weeks. The company also previously said it had expected to lose $15 million to $20 million in revenues as a result of the defective chips.

Recently, Affymetrix began replacing the chips on a one-for-one basis. While this replacement program has been proceeding smoothly, some users have complained that the replacements were not enough to compensate for the additional expense of the wasted reagents and the time that went into doing faulty experiments.

With regard to the lower sales of do-it-yourself equipment such as the Affymetrix 417 arrayer, the company said this was due to a shift among academic users from homemade to prefabricated arrays.

When the company acquired instrumentation maker Genetic Microsystems in early 2000, “we believed that [the do-it-yourself] array business was one of the fastest growing market places,” said Siegel. But now, she said the trend toward prefabricated arrays is “accelerating.”

“CDNA arrays are not giving [users] the rigorous performance they know they need in order to take these studies further down the pharmaceutical pipeline,” she said.

Scott Greenstone, an analyst for Thomas Weisel Partners who covers Affymetrix, said he remained optimistic about the company’s prospects despite this revenue warning. “This is a short term issue — an inventory buildup due to customers filling out their budgets at the end of their budget cycles, and some consolidation in the pharmaceutical industry,” he said.

Since the shelf life of GeneChip arrays is only a few months, any slowdown in orders due to overstocked inventories would be resolved within the next quarter or so, said Ed Hurwitz, Affymetrix’s chief financial officer.

But other analysts were less optimistic. James Reddoch of Banc of America Securities downgraded Affymetrix stock from a “buy” to a “market performer,” saying that the company’s long-term prospects for the spotting business were poor. Reddoch also cited the lower revenue outlook and the murkier picture for the next two to three quarters.

Looking ahead, Affymetrix said it would not reduce its R&D spending as a result of the lower earnings forecast, noting that this would hinder growth in the long-term. “We are taking steps to prepare for a second wave of growth,” said Siegel.

In the conference call, Affymetrix also announced its plans to launch a NetEffects online information service this summer to give customers access to annotations, probe sequences, “and other repositories of genetic and biological information.”

Affymetrix expects to report a net loss for the quarter of $4 million to $7 million, excluding non-cash, acquisition-related charges. Based on 57.6 million outstanding shares, the company expects a loss of between 7 cents and 12 cents a share. Wall Street expected the second quarter loss to come in at two cents a share, according to a poll conducted by First Call/Thomson Financial.

Some $3 to $4 million in second quarter revenues will come from Affymetrix subsidiary Perlegen Sciences.

— MMJ

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