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Laying Out Vision for 06, Affy Pledges to Focus Energy on Clinical Labs, Manufacturing, and Dx

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In 2005, Affymetrix launched three high-density array product lines as well as its first automated system, and ultimately saw sales of the former constrained by manufacturing glitches, and sales of the latter minimized by weak interest.

Last week, while discussing the firm's fourth-quarter and 2005 results with investors during a conference call, Affy CEO Stephen Fodor projected that over the next 12 months, customers are likely to see the company focus on three main projects -- building its clinical labs business, improving manufacturing capacity, and enhancing the use of its technology in the diagnostics market.

"For 2006, we will focus our efforts on growing the markets for the product portfolios launched in 2005," Fodor said during the call. "These include new ... products such as ParAllele-based products, the 500K Mapping Array Set, our Exon Arrays, and our Whole-Genome Tiling Arrays," he said.

Fodor added that the "manufacturing constraints and product delays" the firm experienced last year, which caused the firm to revise revenue projections on two occasions, had "highlighted areas of the organization that need strengthening, particularly in manufacturing and new product introductions" (See BAN 1/10/2006).


"Our overall growth will be driven by consumables, as a result of expanding our product lines, applications, and adding new customers."

Affymetrix last September answered a major manufacturing problem that slowed production of its Mapping 500K set by overhauling its manufacturing infrastructure and pledging to increase capacity at the its Sacramento facility by 60 percent as of this quarter.

Also, the company has invested $5.5 million to buy a 100,000-square-foot facility from an undisclosed semiconductor company in Singapore to build its first international plant in a region that is attracting more of its attention (see related story, this issue).

Greg Schiffman, Affy's chief financial officer, said during the call that in the second half of 2006, the firm plans to bring the Singapore plant online, "accelerating production from the plant almost a year [ahead of Affy's] original expectations."

Schiffman said that the company exited 2005 meeting approximately 75 percent of its desired yield for the 500K chips. He said that the firm is now "well into a [manufacturing] expansion that will double [its] array-manufacturing capacity by year-end 2006."

Consumables

Though last year's shortfall in 500K production may have accelerated the need for Affy to increase manufacturing capacity, the way company officials characterized the evolution of their business last week made it appear as if such changes were inevitable, because revenues from sales of consumables, including its GeneChips, continue to rise as instrument sales diminish.

As Schiffman noted during the call, instrument sales declined 20 percent in 2005, "largely due to reduced levels of instrument upgrades," while for 2005 "consumable revenue was approximately $240 million, an increase of more than 20 percent over the prior year."

"Our overall growth will be driven by consumables, as a result of expanding our product lines, applications, and adding new customers," Schiffman pointed out. He said 70 percent of consumables sales were of RNA analysis, or gene expression, products, and 30 percent were of newer DNA-analysis, or SNP genotyping, products. Schiffman said he expected growth in the DNA-analysis product segment to "continue to grow well above [Affy's] overall growth rate."

Fodor said Affymetrix will not abandon newer instruments, like the automated ArrayStation released in October, as it focuses on its core consumable-driven businesses.

"We will continue to support automation that will allow our customers to expand the scope of their research, particularly in downstream pharmaceutical applications, including toxicology and pharmaceutical trials," Fodor said.

Affymetrix's Q4 Revenues
Inch Up 3.5 Percent; Profits Tumble

Affymetrix last week reported a 3.5-percent increase in revenues for the fourth quarter of 2005.

Total revenue for the three months ended Dec. 30, 2005, inched up to $111.5 million from $107.7 million during the year-ago period.

Affymetrix's Q4 revenues were approximately $6 million dollars above its last projection of $105 million. The company had cut its fourth-quarter revenue projection twice since the fall of 2005, citing "growing pains" as it brought new products into potential markets (see BAN 1/10/2006, BAN 10/26/2005).

Affy's fourth-quarter profit fell 8.2 percent to $24.8 million, or $0.35 per share, from $27.1 million, or $0.41 per share, during the fourth quarter of 2004.

R&D spending during the period decreased to $19.7 million from $20.5 million year-over-year.

As of Dec. 31, 2005, Affymetrix had $100 million in cash and cash equivalents.

For fiscal 2006, Affymetrix predicted product and product-related revenue of about $400 million, and total revenue of about $420 million.

For the first quarter of 2006, Affy projected product and product-related revenue of $87 million, and total revenue of about $91 million.

Clinical Labs and DX

Last week Fodor also offered more detail on the company's efforts to build its own clinical laboratories business as well as an update on its diagnostics partnerships.

Specifically, Fodor said that Affymetrix Clinical Labs, which is being constructed near the firm's Sacramento facility, could ultimately help the company sell more consumables. "While we don't expect significant revenues from ACL in 2006, we do expect to stimulate additional growth in consumables as researchers work to validate biomarker signatures for broad diagnostic applications," he said.

Affymetrix has not provided a date for commencing clinical lab operations, but Doug Farrell, the company's head of investor relations, wrote BioArray News in an e-mail this week that ACL "will be a CLIA-regulated lab and [Affy expects] to begin processing chips for partners in [its] West Sacramento ACL facility in the second half of 2006."

Farrell said that ACL will offer a range of CLIA-regulated clinical assays, and that "available services will include current Affymetrix commercial catalogue and custom assays such as gene expression monitoring assays, DNA analysis assays, and chromosomal copy number." Farrell declined to disclose the cost of the investment Affy is making in ACL.

Additionally, during last week's conference call, Fodor said that Affy will continue to target the end-user diagnostic market outside of the new labs. Fodor said that the company had sold a "number of diagnostic units," or GeneChip Scanner 3000 Dx systems, last quarter.

The GCS 3000 Dx is the central instrumentation used in diagnostic assays on the GeneChip platform. Last year, Affy partner Roche Diagnostics released the AmpliChip, the first microarray-based diagnostic panel to be cleared by the US Food and Drug Administration as an in vitro diagnostic (see BAN 1/5/2005).

According to Affy, a number of companies are still working with the system through its Powered by Affymetrix program, including J&J's Veridex, BioMerieux, Almac Diagnostics, and PathWork Informatics.

PathWork CEO Glenda Anderson told BioArray News in early January that the firm may receive clearance to sell its PathChip, which is OEM manufactured by Affy and runs on the GCS 3000 Dx system, this year (see BAN 1/3/2006).

— Justin Petrone ([email protected])

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