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Analysts Blame Affy's 'Disappointing' Q2 Revenues on Sequencing Adoption, Loss of Market Share


By Justin Petrone

Affymetrix last week said that it expects to report that its second-quarter revenues declined between 9 percent and 11 percent year over year.

And while Affy officials attributed the decline on weakness in sales to academic customers, especially in North America, several industry analysts this week linked it to increased adoption of next-generation sequencing and to competition in the array market from its main rival, Illumina.

The Santa Clara, Calif.-based microarray vendor on Wednesday reported preliminary Q2 revenues of between $64 million and $65 million, compared to $71.7 million during the same period last year. It also said that product revenues are expected to be between $58 million and $59 million, which would represent a decline of between 9 percent and 11 percent from last year's product revenues of $65.1 million.

Within product revenues, consumables revenues are anticipated to come in at $55 million, while instrument revenues are expected to total $3.5 million. The company said service revenues are expected to be about $5 million and license and royalty revenues to be about $1 million.

"During the second quarter we experienced decreased sales to academic customers across all regions, particularly in North America," Andrew Last, executive vice president and chief commercial officer, said in a statement. "Our consumable revenue was down by about 10 percent from last year."

Tim Barabe, executive vice president and chief financial officer, said in a statement that the company was "disappointed" with the results, but noted that it still expects to generate approximately $10 million in positive cash-flow for the second quarter and to have a net cash position of more than $155 million.

The company is scheduled to report its second-quarter earnings on July 27.

But David Ferreiro, an analyst from investment bank Oppenheimer, said that while Affy attributed sales declines to academic customers from all regions, with a focus on North American markets, the company "remains heavily levered to a contracting microarray market."

In a note, Ferreiro added that he "continues to believe that microarray will lose ground to newer technologies like next-generation sequencing, creating a fundamental overhang for [Affy's] stock."

Ferreiro also noted that his "channel checks have indicated that funding has become more challenging for microarray-focused grants in both the US and the EU." He added that those grants are being shifted to sequencing, which he said "represents a fundamental headwind" to Affy's business.

Meantime, Goldman Sachs analyst Isaac Ro argued that Affy's drop in Q2 sales had more to do with competition in the array market than the company's rationale of weak sales to academics.

In a note, Ro said that the "main driver of Affy's 2Q weakness was driven by market share loss to [Illumina], and not [National Institutes of Health] funding pressure. He also noted that Illumina's fourth-quarter 2010 microarray system revenue managed to "more than double" year over year in a market experiencing "sluggish" demand for array technology (BAN 2/15/2011).

"This would imply that Illumina has been steadily gaining share in arrays that is now manifesting in lower product revenues" for Affy, Ro said. He also said that discussion with Affy's management following the company's announcement suggested that the Q2 weakness in sales to academic customers was "more complex than just NIH funding — which suggests the NIH environment was not the primary source of the 2Q pressure." He did not elaborate.

Because of this, Ro speculated that other big life-sciences firms like Illumina, Life Technologies, Qiagen, and Thermo Fisher Scientific were unlikely to report similar softness in sales to North American researchers.

"We believe this is more an [Affymetrix]-specific issue that is not closely correlated to any macro funding trends," Ro said.

RW Baird analyst Quentin Lai reached a similar conclusion. In a note, he said that other life-sciences firms would not be affected by the sales issues impacting Affy. Specifically, Lai said that Affy's "organic growth performance and its end-market comments have historically been relatively uncorrelated to the sector."

He concluded that it "may be premature to suggest negative implications for others in our space" — such as Illumina and Life Tech — "with academic exposure."

This month Frank Witney replaced Kevin King as Affy's CEO (BAN 6/7/2011). All three analysts said this week they hoped that the new management would be able to steer the company back toward growth.

"While these results are clearly disappointing, we continue to believe [the] new leadership's goal will be to refocus the company on returning to top-line growth," said Lai. He also said that "one bright spot" in this week's announcement was the fact that the firm will remain cash-flow positive for the quarter.

Have topics you'd like to see covered in BioArray News? Contact the editor at jpetrone [at] genomeweb [.] com

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