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Affymetrix Posts Q3 Revenue Gains; Eyes Genotyping, Diagnostics Growth

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Affymetrix last week reported steady gains in revenue and a sharp increase in net income for its third quarter.

The Santa Clara, Calif.-based firm reported third-quarter revenue of $79.9 million, a 4.9 percent increase over revenue of $76.2 million in the third quarter of 2003.

Although it fell short of analysts’ expectations of third-quarter revenue of $86.8 million, Affymetrix noted that product orders during the quarter exceeded product revenue by $9 million. More than $4 million of this amount is from array and reagent orders that did not match the firm’s inventory for those products and are expected to ship early in the fourth quarter.

Greg Schiffman, Affymetrix’s chief financial officer, noted in a conference call following the release of the financial results that GeneChip array revenue, which totaled $37.5 million in the quarter, would have been 20 percent higher compared with third-quarter 2003 GeneChip array revenue of $34.3 million if the firm had been able to ship all ordered products on time.

Although its instrument revenue declined to $16.4 million from $18.1 million in the comparable period last year, the firm sold 49 GeneChip instruments during the quarter compared to 44 sold in the third quarter of 2003. In addition, the company’s installed base of GeneChip platforms grew to more than 1,120 — an increase of more than 200 systems from the end of the third quarter last year.

“Royalties and other revenue were $2.7 million in the quarter, roughly $1 million favorable to prior guidance, as a result of signing a new licensing agreement,” Schiffman also noted in the conference call.

In addition, the firm’s product and product-related gross margin was 74.5 percent, compared to its gross margin of 65.3 percent in the third quarter of 2003 and better than the 71 percent gross margin Affymetrix had forecasted.

The company maintained its previous guidance of product and product-related revenue of $330 million to $335 million for full-year 2004.

Affymetrix reported net income of $15.4 million, or $.25 per share, for the quarter, a sharp increase over its 2003 third-quarter earnings of $5.8 million, or $.10 per share, and handily beating analysts’ expectations of $.19 per share for the quarter. The firm raised its guidance for earnings per share from $.60 to $.70 for full-year 2004.

Genotyping, Molecular Diagnostics in Focus

Despite its position as the clear dominant player in the gene expression space, company officials spent the majority of the firm’s conference call discussing its progress in the genotyping space and potential diagnostic uses for its microarray technology.

“Sales of our 10K and 100K mapping arrays have been increasing steadily, and customers are expressing tremendous interest in, and are already placing orders for, our new 500K mapping array set, which will launch early next year,” Stephen Fodor, chairman and CEO of Affymetrix, said during the conference call.

The firm launched the mapping arrays earlier this year and has signed several agreements over the past six months intended to grow its genotyping business. It has an ongoing distribution pact with ParAllele, under which the firms are selling ParAllele’s MegAllele genotyping reagents for use with Affymetrix’s arrays.

During the quarter, the firm signed an agreement with the Broad Institute of the Massachusetts Institute of Technology and Harvard University to use Affymetrix’s recently launched GeneChip High-Throughput system in research projects in RNA expression analysis, SNP genotyping, and DNA resequencing.

The firm’s Perlegen Sciences spin-off will be using arrays made by Affymetrix to genotype more than 2.3 million SNPs in 270 samples — or more than 600 million genotypes — from four populations being studied in the second phase of the International HapMap Project. “Affymetrix will, in turn, use these data to design future products to grow the market,” Fodor said.

“How big are those markets? You could imagine those markets could be quite large… It could be, in fact, the birthrate of the planet eventually,” Fodor said. “The challenge is the evolution of those markets and the adoption of the technology.”

The most significant event for Affymetrix, however, was probably the European clearance of the GeneChip platform for use in in vitro diagnostics — the first microarray-based instrument approved for such use. The CE Mark, which was obtained at the beginning of September, also was granted to Roche’s CYP 450 AmpliChip test — the first diagnostic test to run on the platform. (see BAN 9/8/2004).

Affymetrix announced its $70 million, 18-year AmpliChip agreement with Roche in January 2003. Under terms of the agreement, Roche paid a one-time fee of $70 million to Affymetrix and will pay additional fees for chips, royalties, and milestones.

In addition, Affymetrix gained ISO certification for the GeneChip System 3000Dx and the firm’s chip manufacturing facilities during the quarter.

“We believe that these accomplishments set the stage for Affymetrix to capture a meaningful share of the rapidly emerging market for complex molecular diagnostics,” Fodor said.

He declined to speculate when the firm might seek US Food and Drug Administration approval for the diagnostics platform, but noted that Roche would seek 510K approval for the chip. “We are certainly working both with Roche and the FDA to assure that there is no area where we would be a roadblock to getting this product to market,” Fodor said.

Although company officials declined to provide a figure for the market potential of these newer spaces it has entered, Fodor noted, “There’s huge potential growth in each of these markets. We’ve put a stake in the ground in terms of how fast we think these will grow year over year, and at this point, certainly for 2004, we’re comfortable with the metrics we have given you.”

Schiffman said the firm would update specific numbers in January and would probably be able to give a better sense of its expectations for the market at that time.

— EW

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