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Beset by Weak Sales and Logistical Woes, Affy Again Revises Q4 and 2005 Guidances

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It's happened again.

For the second time in five months, Affymetrix has been forced to revise its guidance for product-related revenue just weeks before making its quarterly results official.

Affy announced last week that it had cut its fourth-quarter revenue projections by roughly $15 million, or 12.5 percent, below its previous guidance of $120 million. The company had originally projected its Q4 revenues to be $130 million, but cut this projection to $120 million when it announced its third-quarter 2005 results in October (see BAN 10/26/2005). Together, the two cuts shave 19 percent off Affy's originally projected 2005 product revenues [see accompanying chart].


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Before these revisions, Affy had adjusted its guidance on just two occasions since going public in 1996: once in 2001 and a second time in 2003, both to note poorer-than-expected quarterly sales (see BAN 4/11/2003).

In a statement and subsequent conference call, Affy said that contributing to the most recent cut were low fourth-quarter instrument sales and delays in completing genotyping processing under a services contract with the Wellcome Trust Case Control Consortium.

Greg Schiffman, Affy's chief financial officer, told investors and analysts during the call last week that two-thirds of the $15-million shortfall came from tepid instrument sales during the three months ended Dec. 31, 2005, while the remaining $5 million was the result of Affy's inability to process samples for the Wellcome Trust.

Schiffman said fourth-quarter product revenue derived from instrument sales fell 20 percent year over year, and pinned Affy's genotyping problems on the fact that it is a new venture for the company.

"Providing genotyping services is a new business for Affymetrix, and scaling up throughput to process the samples has taken longer than expected," Schiffman explained."

During the call, Affymetrix CEO Steve Fodor said that the $10 million shortfall in instrument sales could not be attributed to weak sales of any one product, but said that placements of the company's 3-year-old GeneChip Scanner 3000 instrument "were not as high as they were last year" during the same period and that demand for the automated Array Station, introduced last October, was "not as strong as [Affy] expected."

Fodor also admitted that it took Affy longer than originally projected to begin commercializing the consumables needed for the Array Station. Last October the company said that the high-throughput array plates that offer GeneChip arrays in a 96-well format would be available later in the year. As of Jan. 10, they have yet to be released, but Fodor said they should be available this quarter.

With regards to the Wellcome Trust genotyping project, "getting the logistics in place" to do the experiments had proven more difficult than expected, Fodor said. He pledged that the genotyping project would be completed this quarter.

Wellcome Trust could not be reached for comment by press time.

Weaker Year

This and other problems, such as manufacturing constraints that impeded third-quarter sales of Affy's Mapping Array 500K Set, (see BAN 10/05/2005), made 2005 "a challenging year" for the company, Fodor said last week.

The difficulties forced Affy last week to cut by 4.3 percent its total anticipated product-related receipts for 2005 to $350 million from $365 million, which was itself whittled down from an original figure of $390 million. Together, the two cuts shave 10.3 percent off Affy's originally projected 2005 product revenues.

Affy also cut its total 2005 revenue projection for the second time by $15 million, or 3.9 percent, to $365 million. In October it revised its original guidance of $405 million to $380 million (see chart).


"Providing genotyping services is a new business for Affymetrix, and scaling up throughput to process the samples has taken longer than expected."

The revised outlook for 2005 caused Affy's stock to stumble following the announcement. Shares of Affymetrix's stock were trading at $42.30 at midday on Monday, down 10 percent from Jan. 5 when the company made the announcement.

Citing the projection cuts, investment bank Caris & Company downgraded Affymetrix stock to 'Above Average' from 'Buy' on Monday.

On the Bright Side?

Fodor also said last week that Affy's genotyping business will probably bring in $90 million annually by the time the company reports fourth-quarter earnings on Jan. 26. The business is new for the company.

"A couple years ago you wouldn't have put Affy on the charts in terms of a major competitor in the genotyping market," Fodor said. He also said that the company's performance overall would not force it to refocus its energies, but has encouraged it to move forward with new products for genotyping.

"I think probably, given that this business for us now is in the $90-million range and we see this as a major opportunity, if anything we are going to accelerate the development of products and increase coverage and more accessibility to the customer base for this technology," Fodor said.

Part of that acceleration will include setting up a clinical laboratory. Fodor told attendees this week at the JPMorgan Healthcare Conference in San Francisco that Affy had plans to base Affymetrix Clinical Laboratories in its Sacramento, Calif. facilities, and that the new venture will develop CLIA-certified tests for diagnostic partners based on the firm's GeneChip technology.

Fodor said the tests would enable partners to get their assays on the market quicker than developing tests that have to be cleared by the US Food and Drug Administration's 510(k) process.

During last week's conference call, CFO Schiffman also said that Affy was making headway in ramping up its production capabilities. In September, he said that the company planned to increase capacity at its Sacramento facility by 60 percent by the first quarter of 2006, and had plans to open a facility in Singapore this year.

Last week he said Affy was in the process of upgrading its Sacramento plant and that its Singapore plant was likely to go live this year.

"We have found a facility in Singapore which was a preexisting facility that had only been built out several years ago by a semiconductor manufacturer," Schiffman said of the new plant. "Singapore will absolutely be live in 2006."


"If anything we are going to accelerate the development of products and increase coverage and accessibility to the customer base for this technology."

Fodor last week said the new manufacturing resources "should help alleviate any capacity and manufacturing yield constraints for 2006 and beyond," although it was not immediately clear how capacity problems had affected the company's fourth-quarter performance. Capacity problems had directly affected Q3 revenues and were responsible for the company's revised Q4 and FY'05 outlook at the time.

Calls to Affy seeking further comment on that issue were not returned by press time.

During the conference call, Schiffman said that manufacturing problems fourth-quarter consumables sales were up 7 percent year over year.

"As a result of capacity constraints that we experienced during the fourth quarter, consumables sales growth were limited to about 7 percent over Q4 2004," Schiffman said. "Even with these capacity limitations, consumable sales were up roughly 20 percent for the full year 2005," he added.

Fodor predicted that the company's top line would grow by 15 percent in 2006, but declined to give any other estimates prior to the release of the Q4 and FY'05 results in two weeks.

— Justin Petrone ([email protected])

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