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Affymetrix Outshines Competitors in Q1; Targets Toxicology, Diagnostics

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In the past year, Affymetrix has focused on becoming a microarray virtuoso, while other companies have dabbled in proteomics, diagnostics, and other applications.

Now Affymetrix’s single-minded discipline seems to be paying off richly: During the company’s first quarter conference call last week, executives virtually sang their way through a litany of good news.

“The company exceeded expectations in terms of both revenue and profitability,” said chief financial officer Gregory Schiffman. “During the quarter the company shipped over 95,000 arrays— a new record shipment level — reflecting the continued adoption of gene chip microarrays as the industry standard in gene expression analysis.”

For the quarter, Affymetrix reported a slight pro forma profit of $400,000 on revenues of $68.1 million. Excluding non-cash compensation and amortization of purchased intangible assets, the company lost $3.6 million for the quarter.

The revenue included $57.2 million from the company’s microarrays and other products, with its microarray revenue growing more than 16 percent for the quarter. Meanwhile, expenses dropped compared to the first quarter of 2001, due to the lack of litigation costs.

Based on this better-than-expected performance, Affymetrix raised its second-quarter revenue projections to $70 million and its 2002 revenue projections to between $285 million and $290 million, including product revenues of $248 million: It expects to break even by the year’s end, including non-cash compensation and amortization of purchased intangible assets, according to Schiffman.

Meanwhile, Genomic Solutions, Luminex, and Illumina each reported under $10 million in quarterly revenues: While Genomic Solutions showed revenue gains of 52 percent to $6.7 million for the quarter, the company’s balance sheet also showed that it only has $7.2 million in the bank. Luminex’s revenues dropped to a low of $2.3 million, compared to $3.9 million in the first quarter of 2001. Illumina reported revenues of $1.3 million.

 

Why Affy’s Winning

 

Why are some of these companies still struggling, when Affymetrix has demonstrated that gene expression tools business can be profitable?

Part of the answer is obvious: Affymetrix’s has the first-mover advantage, having staked its claim on prime IP real estate and won scientific mindshare early on. The company is also five years older than Luminex and Genomic Solutions, and six years older than Illumina, so it could be argued that comparing these companies is akin to grading fifth graders and tenth graders on the same scale.

But another issue is that while Genomic Solutions is still struggling to sell big-ticket instruments to a few key players, and Luminex has relied on collaborators to develop myriad applications for its technology, Affymetrix is focusing on improving its gene expression chips.

This chasm between Affy and others widened as a result of Affymetrix’s conscious strategy, which president Sue Siegel outlined last June after two quarters of disappointing results and a fiasco with the U74 murine chip that caused the company to do some deep thinking about its future direction. Siegel signaled the company’s intent to focus in on its microarray business, and deemphasize the array spotting instrument business that Affymetrix had acquired when it gobbled up Genetic Microsystems in 2000.

Since then, Affymetrix has ramped up its array manufacturing process, launched its NetAffx website, revealed the sequences on the chip probes, released a new statistically-based data mining tool and in January, unveiled its new whole human genome set, the U133 array.

Affymetrix has so far refused to say what proportion of its human genome chip sales are now U133, compared to its U95 array. Siegel did, however, note that 50 percent of U133 users were using the entire two-chip set, as opposed to 10 percent of U95 users. This trend can be at least partly attributed to the fact that the U133 chips cost roughly the same amount per array as the U95 chips, making a whole genome U133 set only 40 percent the price of a U95 set.

Affymetrix is also saving money with the new chips. “Every reduction of 50 percent in feature size results in a 75 percent reduction in manufacturing costs,” said Schiffman. As a result, the company “will continue to invest in feature size reduction,” he said.

While Affymetrix continues to hone its microarray making expertise, the company is also seeking to make a market for its arrays in drug development, not just drug discovery, said Siegel.

This rebuts the prediction FrontLine Strategic Management made in its recent functional genomics market report, that Applied Biosystems and Gene Logic will overtake Affymetrix in the drug discovery tools arena as the bottlenecks move from target discovery to target validation.

 

Affy’s Game Plan

 

Siegel and CEO Steve Fodor went out of their way in the first quarter conference call to outline the directions the company is planning to take to expand its business downstream.

One area of particular interest to the company is high-throughput systems for predictive toxicology. (See story bottom of p. 1). In addition to toxicology, the company has also targeted genotyping as an area of growth. It plans to introduce whole-genome genotyping arrays for the research market by 2004, based on data from subsidiary Perlegen’s study of human genetic variation in 50 people as well as public data. Affymetrix has a collaboration with Orchid Biosciences of Princeton, NJ, to develop such a genotyping chip.

Finally, Affymetrix has set its sites on “health management,” its user-friendly term for pharmacogenomics and diagnostics. In its 2001 annual report, filed March 29th, Affymetrix stated, “We are focusing on the development and commercialization of health management products in cancer, infectious diseases and other areas, including drug metabolism.” The report mentions the company’s existing partnerships with BioMérieux to develop DNA probe arrays for viral clinical diagnostic tests as well as food and industrial testing; and with Roche Molecular Systems to develop array-based diagnostics. Affymetrix also has an agreement with Beckman Coulter in which Beckman can develop diagnostic arrays that could use elements of Affymetrix’s chip technology. During the first quarter conference call, the company did not reveal any further details about these plans.

— MMJ

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