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Though Slow Capital Spending is Hindering Instrument Sales, Affymetrix Sees Chip Growth

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When Affymetrix made its first quarter financial report last week, the company ended a run of two consecutive profitable quarters. But the revenue news was not as bad as it had indicated just three weeks before, when it issued a bleak guidance statement that sent its stock price plummeting and touched off a round of shareholder lawsuits.

The company reported first-quarter revenue of $67 million, less than the $70 million to $72 million in revenues it had projected when it reported its fourth-quarter financials, but more than the $60 million to $62 million that it projected in early April. The company’s quarterly loss was $12 million, including a one-time charge of $10.1 million for expansion of its licensing agreement with its Perlegen spinoff.

“It is a challenging start for 2003,” Greg Schiffman, the company’s chief financial officer, said in a conference call with analysts.

As the leader and standard-setter in the microarray industry, Affymetrix is regarded as the bellwether of the commercial microarray business sector. Any measure of the microarray industry begins with the company’s revenues. And, because it is a microarray pure play, unlike its two major competitors, Agilent (see above story) and Amersham (see Lab Report), its financial underpinnings and performance are quantitatively more observable than those companies, which do not provide granular detail such as the number of arrays sold on a quarterly basis.

Affymetrix does make a revenue reporting distinction between all of its products sold, and revenue it takes in from GeneChip sales.

And, it is in the sale of its GeneChips where the battle for profitability and control of the commercial microarray area will play out. The company sees an opportunity to increase chip sales.

“We expect to see continued growth in our core array business, independent of growth in the installed base of instruments,” Schiffman said.

Putting its Chips on the Table

The company’s sales of its $250,000 GeneChip systems plummeted in the first quarter to 22, down from an average of 50 per quarter in 2002. The company reports an installed base of some 820 systems globally. While exact sales figures are not provided for each instrument sold, back-of-the-envelope figuring shows a $7.5 million drop-off, from an estimated quarterly revenue of $12.5 million (on 50 systems) to $5.5 million (on the sale of 22 instruments in Q1).

Despite this system sales dropoff, sales of probe arrays continue to grow.

In five years, Affymetrix has gone from probe array revenues of $13.7 million on product revenues of $37 million in 1998; to probe array revenues of $155 million on product revenues of $249 million for 2002 —for total array growth from 36 percent of sales to 63 percent now (see chart).

For the second quarter, the company is projecting product and product-related revenues of $280-$285 million for the year, and $62-65 million for the second quarter.

More Burgers on the Grill

Affymetrix now finds itself facing a similar business challenge to that of McDonald’s. Just as seemingly every street corner has its set of golden arches, and nearly every major research facility has its core Affymetrix lab, the question becomes: How to grow revenue without new real estate, and without building more kitchens and restaurants, or selling more scanners and, hyb ovens, and fluidics? The answer: Keep the grill full.

“We plan to focus activities on increasing chip usage throughout the installed base, “ said Schiffman. “Chips drive our core business, and the growth there is solid and strong.”

The installed base of the Affymetrix GeneChip systems has room, he said: “There is a capacity there that is not being used.”

Pardon Me, May I Borrow Your Hyb Oven?

To increase chip usage on its existing installed base, Affymetrix is stepping up its node and service-provider program, allowing researchers to conduct array experiments without having to make a capital investment in a scanner or the other necessary instruments that are necessary.

The company is also looking to promote expand usage of commercial Affymetrix services providers. Those would include companies like Genome Explorations of Memphis, Tenn., and Expression Analysis of Durham, NC. And there is are “nodes,” scannerless labs, which the company sees as an opportunity for potential growth.

“We want to provide an outlet for people to do array experiments, using a scanner down the hall or one down the street,” Sue Siegel, Affymetrix’s president, said in the conference call.

The company considers Nodes as facilities with everything to run chips — with the exception of scanners. This includes fluidics stations, hybridization ovens, and workstations. Customers using nodes may take advantage of scanners existing within their institution. In many cases, customers might purchase additional nodes, enabling them to process more arrays in a short period of time. As an example, if capital spending is tight, a scientist might walk his chip over to another lab instead of purchasing a scanner, an Affymetrix spokeswoman said.

Pressure on Pricing?

Affymetrix recorded gross margins of 68.9 percent on its first quarter revenues and growth of 40 percent on chip revenue.

The company plans to maintain its margins and its pricing, said Trevor Nichols, the company’s chief commercial officer.

“We are improving our margins strongly, and you can’t do that if you are discounting your products,” he said.

However, a Hong Kong-based news service, FinanceAsia, last week reported that Affymetrix has lowered prices in Japan by as much as 70 percent.

“Now that Affymetrix has gone direct in Japan, we’ve taken the opportunity to make changes to our pricing structure that will delight our Japanese customers and bring Japanese prices in line with U.S. and Europe,” said Anne Bowdidge, Affymetrix’s spokeswoman in a written response.

“We’ve reduced prices by 20-25 percent in Japan, and in addition, for certain large volume commitments, customers in Japan can get discounts up to 70 percent off list price, bringing them in line with programs already available to US and European customers.

“We believe this new pricing strategy will make our technology more accessible to the Japanese market.”

— MOK

 

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