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As Gene Expression Market Tapers Off, SNP Genotyping Becomes Affy’s Sales Driver

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Pulling itself out of the red, Affymetrix last week announced second-quarter financial results that showed the firm earning a comfortable profit of $1.2 million for the three months ended June 30, compared to a $10 million loss in the same period last year. Revenues grew 10 percent to $88.3 million from $80.1 million year over year.
 
The quarterly performance was received well by investors who sent the price of Affy’s shares up 10 percent to $26.98 the afternoon the results were released. The company also made Thursday’s list of winners on TheStreet.com, while online market analysis publication The Motley Fool noted that “after an abysmal 2006” Affy has “continued to turn things around.”
 
While the results and positive market reaction indicate that recent strategic restructuring in the firm’s management have begun to pay off for Affymetrix, they also underscore the important role that the DNA analysis business has begun to play in the future of the company.
 
Traditionally, sales from Affy’s RNA analysis business, which generally includes gene expression products, have made up the majority of its revenues. In the first quarter of 2007, for example, RNA analysis contributed about 65 percent of total product-related revenue, compared to 35 percent of sales from genotyping-related products in its DNA analysis business (see BAN 2/13/2007).
 
However, the second quarter saw that dynamic change. Expression products now comprise 55 percent of sales, compared to 45 percent of sales from genotyping
 
During a conference call with investors last week, John Batty, Affy’s new chief financial officer, said that revenues for the DNA business were up 65 percent year over year, and up 42 percent sequentially. The RNA business, however, was “down slightly from last year by about 3.5 percent and 4 percent sequentially,” he said.
 
During the call, Affymetrix officials pinned the shift in the balance between expression sales and genotyping sales to the favorable reception of its 1.8-million-feature SNP 6.0 Array, launched last month, coupled with the still sluggish, single-digit growth of the gene expression market.
 
According to Kevin King, president of life sciences, Affy’s “improved top line growth was driven by the successful launch of the 6.0 Array, which has been an important catalyst for our DNA analysis business.” 
 
King noted during the call that the “6.0 was only available for the last four weeks of the quarter and represented 35 percent of the sample volumes for our whole-genome association products. As 6.0 ramps as a percentage of our DNA volumes, we expect to see further improvement in our overall DNA margins,” he said.
 
On the gene expression side, King said that Affy is still performing well, but that the market is maturing. Gene expression sales in Q2 were up 50 percent year over year with the bulk of the increase driven by academic researchers using Affy’s exon arrays to classify tumors and study mechanisms of disease, he said.
 
When asked by an analyst about what impact expression sales had on Affy’s total revenues, King replied, “If you look at the products we have introduced [including the exon-level and gene-level arrays] they are up this year 10 percent as a mix. I think overall the market is growing in the low single digits. Our sales are up and I would say that we are holding our own on that side there.”
 
Affy’s customers continue to be primarily academics using chips for research purposes. In April, King said that academic customers were about 65 percent of Affy’s total client base in the first quarter, while pharmas and biotechs represented 35 percent of the company’s customers. Last week King said that margin has widened slightly, with academics comprising 67 percent of Affy customers compared to 33 percent from industry.
 
“From a customer perspective, we saw solid growth in our academic business, along with sequential improvement in our pharma revenue,” King said.
 
A New Flagship
 
Historically, the bulk of Affy’s sales have come from gene expression products, like its popular GeneChip Human Genome U133 Plus 2.0 Array, which has been used in experiments resulting in at least 150 publications. But last week’s call revealed that Affy is beginning to see whole-genome genotyping chips like its SNP 6.0 Array as the new flagship products of the company.
 
The rationale behind this shift in strategic thinking is a change in the market, according to Affy co-founder and CEO Steve Fodor.
 
The market dynamics are changing rapidly and I think there are a couple of things going on,” he said. “In expression, we continue to see a big emphasis in moving many of the results not only at the research level but into more clinical work and into the development world. We have a pretty mature product line there. The path that we will follow will be to move those to higher and higher throughput and towards the clinical practice,” he said.
 
“In genotyping, in the most recent past there has been an emphasis on doing a whole-genome study and then you do some fine mapping and then some targeted genotyping and then move forward on your discovery work there,” Fodor continued. “What has clearly been shown is that we haven’t competed very strongly in the targeted genotyping area but there is clearly an opportunity to do not only the initial genome association but also the replication study at the whole-genome level,” he added. 
 
Fodor also said that the launch of the 6.0, priced at $375 per sample, has “helped to build momentum in [Affy’s] DNA sales, [creating a] record quarter for both DNA revenues and volumes.” He added that the market for the whole-genome genotyping SNP chips is increasingly being defined by large contracts with organizations doing population studies on thousands of samples. For instance, Affy has inked deals with the Children’s Hospital of Philadelphia and the Genetic Association Information Network since it launched the 6.0 in June, Fodor said.
 

“While I do not know Affymetrix's plans, the natural evolution of the genotyping platforms will be to even denser SNP coverage.”

One question that remains unanswered is how Affy will continue to build on the genotyping success of the 6.0. Affymetrix has so far not disclosed what the next product out of its DNA analysis pipeline will be, but customers are anticipating it will be a higher-density product.
 
“While I do not know Affymetrix's plans, the natural evolution of the genotyping platforms will be to even denser SNP coverage so that more ancient ancestral human populations can be adequately studied,” Dietrich Stephan, director and senior investigator neurogenomics division of the Translational Genomics Research Institute, told BioArray News in an e-mail this week.
 
Stephan wrote that the launch of such additional products is “predicated on the assumption that whole-genome resequencing will not supplant this need on a price-competitive technology,” but he added that it will take at least another five years for the cost and error rates associated with sequencing platforms come down far enough to supplant SNP arrays.
 
Doug Farrell, Affy’s head of investor relations, hinted during the call that Affy believes the success it has had with the 6.0 could buoy further product introductions. “Typically we see customers shift rapidly over to new products in this whole-genome space,” he said. “The 6.0 was about a third of the volumes for the quarter even though it was only available during the last month,” he said. “Over a couple of quarters you see the vast majority of the demand shift to the flagship product,” he added.
 
A Rosy Relationship with Roche
 
During the earnings call Affymetrix also answered analysts’ questions about how Roche’s proposed $272.5 million acquisition of NimbleGen Systems could impact its own relationship with Roche — its partner in developing the AmpliChip CYP450 for drug metabolism testing.
 
According to Fodor, Affy’s relationship with Roche in diagnostics “has not changed.” He added that Affymetrix has been “vocally very supportive of the expansion of the microarray marketplace and we have done licensing deals with other microarray companies including NimbleGen.”
 
Fodor added that Affy sees the pending acquisition as “very positive for the expansion of the microarray marketplace, especially because these guys are all licensed up.” Affymetrix concluded a licensing agreement with NimbleGen last October (see BAN 10/10/2006).
 
He added that Affy’s partnership with Roche is “business as usual” and that Affy will “continue to work with them on diagnostics opportunities and we will continue to be supportive of the expansion of the research market.”
 
Fodor’s comments echoed a similar line taken by Roche. Lonnie Shoff, senior vice president of applied science and molecular diagnostics at Roche Diagnostics, told BioArray News last month that she would be “very surprised” if the NimbleGen acquisition has any effect on Roche’s relationship with Affy and that “future test development will not be changed” (see BAN 6/26/2007).

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