This article was originally published on July 23.
Despite a slight slide in second-quarter sales, Affymetrix's CEO said last week that the company has made progress on its goals to enter routine testing markets, debut a new array platform, and streamline its operations.
The company said Q2 revenues slid 6 percent to $81.6 million, compared to $86.9 million in the comparable period of 2008, partially due to a negative currency impact of $3 million. Affy reported net income of $7.3 million compared to a net loss of $3.6 million in the year-ago period.
The current quarter included a pretax restructuring charge of $200,000 and a $17.4 million gain on its repurchase of $69.1 million worth of convertible notes, the firm said. The prior-year quarter included a pretax restructuring charge of $900,000.
Kevin King said during the firm's earnings call that the company currently acts according to three strategic priorities: expansion into "large and growing validation and routine testing markets"; the reengineering of its technology platform with a "lower cost basis, higher flexibility, and expanded range of applications"; and creating greater operating leverage to improve profitability.
According to King, management's "efforts to prepare the company for renewed revenue growth and profitability" by focusing on these priorities "have started to pay off." He cited the fact that its $81.6 million in revenue for the quarter was higher than the $75 million to $78 million it forecast during its first-quarter earnings call and a 4 percent sequential increase over Q1 sales.
King added that approximately 15 percent of Affy's sales in Q2 were to the validation and routine test markets, up from "low single-digits" a year ago.
Still, product revenue fell 10 percent to $67.2 million from $75 million in the second quarter of 2008, while arrays and reagents brought in $62.2 million and instruments $5 million in the current quarter.
Service revenue increased more than 8 percent to $12.2 million from $9 million in the prior-year period, due to large projects involving the Wellcome Trust Case Control Consortium, the National Institutes of Health-hosted Women's Health Initiative, and others. Royalties and other revenue fell to $2.2 million from $2.9 million. In terms of instrumentation, the company said it shipped 27 systems in the quarter, bringing its cumulative systems shipped to 1,866. Instrument sales were $5 million, compared to $6.2 million in the prior-year quarter.
R&D spending rose to $20.4 million from $19.6 million while sales, general, and administrative costs increased to $31.7 million from $29.6 million in the second quarter of 2008.
As of June 30, Affy held $73.3 million in cash and cash equivalents.
Investors were pleased by Affy's performance. Shares of the firm's stock were trading at $8 on the of afternoon of July 23, the day after the company announced its Q2 earnings, up 36 percent from a close of $5.88 on July 22.
Leerink Swan analyst Isaac Ro said in a research note this week that Affy's "execution is improving" but that the investment company remains "cautious on the long-term viability" of Affy's expression business and awaits the "timely" and "successful" launch of the firm's new genotyping products before becoming "more constructive."
In another note published this week, Peter Lawson, an analyst with Thomas Weisel Partners, similarly praised the "apparent stabilization" of Affy's business, but said the investment group "remains cautious on the company's turnaround" for similar reasons.
RNA and DNA
Affy breaks its sales into RNA and DNA segments. Historically, sales in the RNA segment have been dominated by the Santa Clara, Calif.-based firm's whole-genome, gene-expression products, such as its Human U133 Plus 2.0 Array. DNA revenues are largely derived from its whole-genome genotyping chips, such as its Human SNP Array 6.0.
John Batty, Affy's chief financial officer, said during the call that RNA revenue during the quarter fell to $38.6 million from $40.6 million for the same period in 2009. DNA revenue dropped to $22.1 million from Q2 '08 sales of $27.9 million. RNA products contributed to 60 percent of sales during the quarter, while DNA sales made up the remaining 40 percent.
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Batty added that new products made up 35 percent of total RNA revenue during the quarter, compared to 20 percent last year, and 10 percent during the same period in 2007.
Affy's RNA business has expanded in recent quarters to include whole-transcriptome and alternative splicing arrays, microRNA chips, and branch DNA-based QuantiGene assays for lower-throughput screening applications. The QuantiGene assays were acquired with Affy's $72.7 million buy of Fremont, Calif.-based Panomics last year (see BAN 11/18/2008).
Though it declined year over year, King said Affy's RNA business increased 2 percent over the first quarter of 2009 and noted that the introduction of products for miRNA profiling as well as the QuantiGene assays are "contributing to a product mix shift" within the firm's "stable gene expression business," and complementing its leading expression products, like the U133.
"The RNA business for us has been stable now for some time," King said. While sales of its whole-transcriptome, miRNA, and QuantiGene products are increasing, legacy products like U133 are declining in price and volume, he said.
"I think the market is looking for more functionality and quantification in gene expression, and that the new products that we have meet those needs," he said. "I am fairly confident that the gene expression business overall can at least be stable, if not show some signs of growth in the long run."
King said that Affy's DNA business grew 8 percent sequentially, driven by growth from new products such as its Drug Metabolism and Transport panel for pharmacogenomic studies and its Cytogenetic Research Solution for customers studying chromosomal changes.
At the core of Affy's efforts to grow its RNA and DNA businesses is its new technology platform, the GeneTitan system. Launched last September, GeneTitan is a fully automated instrument that offers array processing from hybridization to data analysis. The first application to debut on the instrument was whole-genome expression profiling made available in the firm’s 24- and 96-peg array plate format (see BAN 9/30/2008).
King said that roughly 70 percent of Affy's GeneTitan placements in Q2 occurred through the company's reagent rental program and "did not have a large effect on our overall instrumentation revenue." Batty later declined to say how many GeneTitan systems were shipped in the quarter.
Batty said that the reagent rental program is modeled on similar programs run by diagnostic companies. Typically, Affy inks a contract with a customer and places a system with the client. It then charges a premium on its consumables to cover monthly rent for the system. Depending on the volume of consumables the customer uses, the price of the system is paid off over one or two years. According to Batty, GeneTitan's list price is $300,000.
King said that Affy's industrial and academic customers were buying the system and that, overall, new GeneTitan customers tend to be medium- to high-throughput users doing validation studies to compare the performance of the peg array platform to the legacy GeneChip products. While they have gotten "very excellent results," King said it will "take a while for them to work through that data" and publish on the system.
While gene expression profiling is already available in the peg-array format, Affy is now preparing to launch whole-genome genotyping applications on the GeneTitan later this quarter. The company is pooling genomic variation data from both an internal screen that has produced "10 billion genotypes to date" with genetic content from data released by the 1000 Genomes Project and other efforts, King said. He added that there was "a lot of overlap" between Affy's internal database and the data released so far by 1000 Genomes.
Like Illumina, its main competitor in the market to provide the technology for genome-wide association studies, Affy has also experienced a decrease in demand for its whole-genome genotyping products (see related story, this issue).
"There are not too many very large-scale projects similar to what we saw, say, in 2007 and early parts of 2008," King said."I think people are waiting for this new content to arrive."
In addition to GeneTitan, Affy plans to launch a lower-throughput benchtop system called GeneAtlas next year. King said GeneAtlas will go to early-access customers for beta testing towards the end of this quarter (see BAN 6/9/2009).
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PGx and Cyto
Beyond selling research products for gene expression and genotyping, Affy is targeting the submarkets of pharmacogenomic screening and molecular cytogenetics.
Affy's main offering for the PGx space is its DMET panel, which enables users to look at 1,936 drug metabolism markers in 225 genes. King described PGx as a "new market" where customers would have to adopt a new technology platform to use Affy's panel. While nascent, Affy sees room for growth in PGx.
"This market could enter into every clinical trial [that the] pharmaceutical industry gets involved with," King said. "It could also play a key role in personalized medicine on the academic medical side, where people would want to know genetic variation in conjunction with drug prescribing patterns and so forth," he said. "That could possibly be a very large market."
In terms of cytogenetics, Affy considers itself to be entering an established market worth over $1 billion per year that is currently undergoing a technology shift from older technologies like karyotyping to arrays. So, in addition to wooing molecular cytogeneticists with a new technology platform, Affy has to compete against rivals who also offer cyto chips and services, such as Illumina, Agilent Technologies, Oxford Gene Technologies, BlueGnome, and others.
King said that molecular cytogeneticists have been moving "very, very rapidly" from using older approaches to microarrays and that Affy is spending a lot of time in refining its assays. Earlier this year, the firm launched the second version of its cytogenetics offering, which includes its new Cytogenetics Whole-Genome 2.7M Array, a new reagents kit, and upgraded analysis software, the Chromosome Analysis Suite (see BAN 5/19/2009).
During the call, King was asked if Affy had any diagnostic ambitions for its cyto products. He said that Affy's focus is currently "centered" on the cytogenetics research marketplace.