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Affymetrix Eyes Strong Growth in Genotyping as GeneChip Sales Rise

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Affymetrix, the market leader in microarrays, is looking to its genotyping business to open up another market with significant growth potential, company officials asserted in a conference call last week following the release of the firm’s second-quarter results.

Although several genotyping instrument manufacturers have sought to diversify their businesses and stay afloat by expanding into the microarray sector, Affymetrix has made the reverse move.

Stephen Fodor, the firm’s chairman and CEO, said, “We’re going to start looking at huge populations to understand genetics. Downstream, it creates a new market for these high-resolution tools. That will open up the beginning of the market, just like what happened in expression.

“The opportunities in DNA analysis are quite broad, and we will continue to provide next-generation tools.”

Company officials pointed to biobanking initiatives being undertaken by governments around the world as one area for future growth in the genotyping business.

Affymetrix recently began selling 10K and 100K GeneChip Mapping Arrays and announced a series of collaborations that will utilize the new genotyping tools. The collaborations include a project led by Jeffrey Friedman at Rockefeller University to genotype the entire adult population of the Micronesian island of Kosrae in studying the genetics of obesity, a study into the genetics of autism funded by the National Alliance for Autism Research, and a genetic study of 20,000 diabetics conducted in concert with John Todd of Cambridge University and ParAllele.

“We’ve been surprised at how fast adoption of the 100K product has been. In fact, in pre-release we had something like 27 customers before we even launched the product,” Fodor said. “There are a significant number of customers that are buying the system to go after the DNA market at the same time [as gene expression].”

In an effort to further its genotyping offerings, Affymetrix signed a distribution deal with ParAllele in May, under which the firms are selling ParAllele’s MegAllele genotyping reagents for use with Affymetrix’s arrays. The partnership enables researchers to perform large-scale genotyping in their own labs with their own panels of SNPs.

GeneChip Array Sales Drive Q2 Revenues

While Affymetrix looks to genotyping applications to bolster future revenues, the majority of its second-quarter revenues came from gene-expression uses, Affymetrix’s vice president of investor relations Doug Farrell told BioArray News.

The firm boasted a 20 percent rise in GeneChip revenues and increased sales of its instruments for the second quarter ended June 30, 2004. It reported total revenues of $79.8 million, with product and product-related revenues accounting for $75.2 million of that amount. This compares with total revenues of $68.6 million and product and product-related revenues of $63.2 million in the second quarter of 2003.

The Santa Clara, Calif.-based firm rang up GeneChip array sales of $35.4 million, an increase of 20 percent over GeneChip array sales of $29.4 million in the comparable quarter a year ago. Instrument revenues were $20.1 million, compared with instrument revenues of $15.6 million in the second quarter of 2003.

Greg Schiffman, Affymetrix’s chief financial officer, said during the conference call that the firm had sold 46 GeneChip systems and 72 scanner upgrades, plus additional instrument components during the quarter. Its installed base of GeneChip systems grew to around 1,070.

According to Schiffman, the customer mix for GeneChip system sales in the quarter was evenly divided between new applications for pharmaceutical firms and new customers in the academic community. Company officials also noted that there are now more than 50 pharmaceutical clinical trials employing its GeneChip technology.

Commenting on the recent spate of genotyping collaborations, Schiffman said, “For long-term, top-line growth, each of these projects is a reasonable revenue piece on their own. When you look at it from a gross margin standpoint, we’ve guided gross margins essentially to be flat to this quarter, around 71 percent for the remainder of the year. We don’t expect [these alliances] to have any negative implication on gross margin.”

The firm’s revenue growth was matched by a steady increase in profits. The company posted net earnings of $7 million, or 11 cents per share, for the quarter, easily beating Wall Street estimates of 3 cents per share. For the second quarter in 2003, the firm had net income of $5.2 million, or 9 cents per share.

Looking forward, Affymetrix raised its guidance for the second half of 2004 from 50 to 60 cents per share, based largely on the recent payout to Oxford Gene Technologies. The firm said last month that it would convert a patent licensing pact with OGT to a one-time payment of $42 million, plus $20.5 million in royalties over 10 years.

For the third quarter, Affymetrix is forecasting product and product-related revenues of $80 million to $85 million and total revenues of $83 million to $88 million. For the full year, the firm expects product and product-related revenues of $330 million to $335 million, with instrument revenues expected to be up roughly $10 million on sales in 2003. Affymetrix is predicting total 2004 revenues of $345 million to $350 million.

So, “We see very strong adoption and growth across both of our business segments, DNA analysis and expression,” Schiffman said.

Affymetrix also had reagent sales of $6.2 million during the quarter, a significant gain on the $4.2 million in reagent sales in the second quarter of 2003. The company used to sell Enzo Life Sciences’ reagents with the GeneChip microarrays. However, that relationship fell apart last year when Enzo terminated the pact and filed suit against Affymetrix, claiming misappropriation of Enzo assets and the manufacturing and selling of Enzo products in violation of their agreement. Affymetrix has since counter-sued and the case is ongoing.

Susan Siegel, Affymetrix’s president, said, “We are very pleased with our reagent growth, year-to-date, since we launched our own reagents last year. The adoption rate by customers has been very strong.”

The firm expects earnings per share of 18 cents in the third quarter and 60 cents for the full year.

Fodor noted the company is on track to meet the financial goals it outlined at the beginning of the year.

— EW

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