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Strong 2004 for Affymetrix; Expanded Applications Key to 05 Revenue Gains

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Affymetrix last week reported strong gains in revenue and earnings for the fourth quarter and fiscal year 2004, as sales of its chips, instruments, and reagents all reached record highs.

Stephen Fodor, chairman and CEO of Affymetrix, said it was “a breakthrough year,” citing a tripling of net earnings from fiscal 2003.

The Santa Clara, Calif.-based firm posted fourth-quarter-revenue of $107.7 million compared to revenue of $89.2 million in the fourth quarter of 2003, and surpassed analysts’ estimates for Q4 revenue of $103.8 million. Its fiscal 2004 revenue was $346 million compared to $300.8 million in 2003 — a 15-percent increase.

Affymetrix said its fourth-quarter revenue included GeneChip array sales of $57.4 million, instrument revenue of $25.2 million, and reagent revenue of $9.6 million — all record highs for the company. Total product and product-related revenue for the quarter was $104.9 million compared to $85.3 million for the comparable period a year ago. For the year, total product and product-related revenue rose to $330.9 million from $280.8 million in 2003.

The microarray market leader also sharply increased its net earnings for the quarter and fiscal year. For the fourth quarter, the firm posted net income of $27.1 million, or $.44 per basic share, compared to income of $16 million, or $.27 per basic share, in the fourth quarter last year. For the year, Affymetrix had net income of $47.6 million, or $.79 per share, compared to income of $14.3 million, or $.24 per basic share, in 2003.

The firm’s research and development costs climbed to $73.4 million in 2004 from $65.9 million the previous year.

2004 Events Set Up Expanded Applications in ‘05

Perhaps the most significant event for Affymetrix — and a precedent for the microarray industry as a whole — this past year was the clearance of the company’s GeneChip System 3000Dx for diagnostic applications in both the US and EU. The regulatory authorities in the US and EU also cleared the first test to run on the system, Roche’s CYP450 AmpliChip.

Affymetrix was the first microarray manufacturer to receive such approvals, creating an opening into a molecular diagnostics market potentially worth $20 billion, according to some estimates. The diagnostics market has long been a target for microarray manufacturers, and Affymetrix can expect several other manufacturers to seek FDA and EU clearance for their instruments and biomarkers over the next few years. San Diego-based Nanogen is a likely near-term competitor with its line of analyte-specific reagents and the pending launch of its NanoChip 400, a microarray-based molecular diagnostics platform (see BAN 11/3/2004).

Following the US approval, which the Food and Drug Administration announced on Dec. 23, Affymetrix wasted no time in signing up another diagnostics partner, with Johnson & Johnson unit Veridex gaining “long-term and comprehensive,” yet non-exclusive, access to the GeneChip technology to create and market in vitro diagnostics for certain undisclosed cancers.

During a conference call following the release of the firm’s results, Affymetrix Chief Financial Officer Gregory Schiffman told investors and analysts to expect a lot more partnerships on the diagnostics front during 2005.

In the third quarter of 2004 the firm launched several new gene-expression microarrays, including new tiling arrays based on the ENCODE (Encyclopedia of Complete DNA Elements) project (see BAN 10/27/2004). Affy expects the tiling arrays to significantly expand the applications for its gene-expression arrays to include analysis of transcription-factor-binding sites, sites of chromatin modification, sites of DNA methylation, and chromosomal origins of replication.

The tiling arrays are part of Affy’s “new probe array offerings in 2005 [that] will redefine the field of gene expression,” according to Fodor.

Fodor also noted that the firm had expanded an early-access program for its 96-well GeneChip high-throughput platform, and is introducing a GeneChip automation system that enables automated target preparation.

“These automated systems will help drive consumables sales and enable our customers to address their application needs in drug discovery, toxicology, and clinical trials,” Fodor said. “We are particularly focused on the downstream development market, where our pharmaceutical customers spend 75 cents of every R&D dollar.”

According to Fodor, “There’s somewhere between 40 and 60 ongoing clinical trials that we are aware of [that are using the GeneChip technology]. What we’ve seen over the last few years, of course, is the migration of this technology, in a pretty big way, from basic research into clinical work.”

Affymetrix also has plans to accelerate its push into the genotyping field over the next year through the introduction of a 500K GeneChip Mapping Set, with an early-access program scheduled to launch in the first half of 2005, followed by a commercial launch later in the year. This past year, it launched a 100K genotyping chip and signed several alliances, including a major pact with the Broad Institute, aimed at expanding its presence in the genotyping market. Affy also has an ongoing distribution pact with ParAllele, under which the firms are selling ParAllele’s MegAllele genotyping reagents for use with Affymetrix’s arrays.

One Legal Battle Ends, Another Begins

In June, Affymetrix announced that it would make $62.5 million in payments to buy out the remainder of its obligations to OGT under an earlier settlement of litigation (see BAN 6/16/2004). The buyout included a one-time $42 million payment as well as $20.5 million in royalty payments. At the time, Affymetrix said it expected the payment to boost its gross margins above 70 percent for the rest of the year — and it did, with the firm posting gross margins of 72.4 percent for 2004 compared to 68 percent in 2003.

But as that legal saga came to an end, another one was launched with Affy filing suit in the summer against Illumina for alleged infringement of six patents held by Affymetrix. The suit claims that Illumina’s BeadArray and Sentrix instruments incorporate inventions covered by Affymetrix’s patents, which were issued between 1996 and 2003. Illumina President and CEO Jay Flatley told BioArray News that the suit was an attempt to “slow down” the company’s efforts in the gene expression and genotyping spaces (see BAN 10/6/2004).

Schiffman said during the conference call that the litigation expenses were relatively small and are already reflected in the firm’s guidance for 2005.

Affymetrix is predicting a 17-percent boost in fiscal 2005 revenue to $405 million and earnings per diluted share of $1.12. For the first quarter of 2005, the firm expects $90 million in total revenue and earnings per diluted share of $.20.

The company finished the year with $42.6 million in cash and cash equivalents, a steep drop from the $275.9 million in the bank at the end of 2003. However, an Affymetrix spokesperson noted that the firm would not have to raise any money during the year, since it listed $163.1 million in available-for-sale securities on its balance sheet.

Investors reacted enthusiastic-ally to Affymetrix’s financial results, sending the firm’s shares up 14.3 percent to $41.53 in the first full day of trading following the release of the figures.

In a somewhat unusual move, investment bank UBS early this week downgraded Affy’s shares from a “buy” to “neutral,” but raised its price target on the firm’s shares from $43 to $47. According to a note issued by UBS, it downgraded the stock because Affymetrix trades at a “significant, and in our opinion, well deserved premium” to others in its sector, and it is now fairly priced.

UBS said that FDA approval of the GeneChip System 3000Dx and the AmpliChip, as well as the development of targeted therapies, would drive demand for microarray technologies, which would benefit Affymetrix as the market’s dominant player.

— EW

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