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Affy 'Reassessing' Strategy, Focus after 'Challenging' Q2, New CEO Says

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This story was originally posted on July 28.

By Justin Petrone

Affy's 10-percent revenue decline in the second quarter, due to a loss of market share to competitors and rival technologies, has caused its new CEO to "reassess" the company's strategy and focus.

During his first earnings call as CEO, Frank Witney acknowledged the challenges the firm faces and admitted that Affy has been "slow to respond to technology changes" in the market.

Witney said it is a "fact" that the company missed a technology cycle, referring to next-generation sequencing, and said it is clear that sequencing is having an impact on the firm's business.

Still, he said he sees an upshot for Affy in the end. Sequencing is "drawing a lot of attention and money, but it's also creating lots of opportunities for us to do certain things in and around the types of information that's being generated through sequencing experiments," he said.

And, despite its lackluster Q2 performance, Witney said that he is "convinced" the firm has opportunities to restore growth if it positions its products correctly.

As the firm reported last week, Affy's total sales for the three months ended June 30 fell to $64.7 million from $71.7 million a year ago. Affy earlier this month warned that preliminary revenues would come in at between $64 million and $65 million (BAN 7/12/2011).

Product sales fell 11 percent to $58.1 million from $65.1 million year over year, while services receipts rose 13 percent to $5.3 million from $4.7 million a year ago. Royalties and other revenues dropped 28 percent to $1.3 million from $1.8 million.

"These results, combined with other recent misses, require us to take a long, hard look at how we are operating our business to identify how we can improve our visibility and predictability and quickly implement the appropriate changes," Witney said during Affy's second-quarter earnings call.

He also said that the company has been "slow to respond to technological changes," as well as the way it presents its products to customers. He said that competition from firms that sell next-generation sequencing platforms is "clearly having an impact" on Affy's business, but acknowledged that the company's array products, particularly its expression business, could be better fitted into researchers' workflows, even if they are using the newer technology.

As a result, he said the company has begun an internal review to find ways to improve its performance, and is "reassessing [its] strategy and operating focus" with a "sense of urgency."

At the same time, Witney, who replaced Kevin King earlier this month as Affy's chief executive, stressed that despite its Q2 performance Affy retains the "technical, financial and human resources to succeed in our core markets" (BAN 6/7/2011).

Looking for a Boost

Affy breaks its consumables business into two main categories: RNA and DNA. RNA revenues have been derived mostly from sales of its GeneChip gene expression microarrays. However, the category now also includes receipts from its QuantiGene platform, which it gained through its 2008 acquisition of Panomics.

Affy's DNA revenue is largely derived from sales of genotyping arrays, as well as branched-DNA-based QuantiGene kits. In both the RNA and DNA categories, business fell in Q2.

Chief Financial Officer Timothy Barabe said during the call that RNA revenue fell 13 percent to $29.6 million from $33.9 million in Q2 2010, while DNA and other revenues dropped 12 percent to $19.4 million from $22.1 million in the same period last year.

Affy also sells Panomics' protein-screening assays and reagents gained from its 2008 buy of USB. Sales of all Panomics- and USB-related products grew during the quarter, but not enough to offset the decline in its core array business. These products only make up about 15 percent of Affy's revenues.

"We did see modest growth in Panomics and we also saw decent growth in USB, so I would say the weakness was primarily microarray based," Barabe said.

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Witney said that Affy's genotyping business was the "most hit" in Q2, and that the firm was "hit the most hard" in the market for whole-genome chips used in genome-wide association studies. By comparison, Illumina this week said sales of its whole-genome chips used in such studies were increasing.

Affy's decline occurred in spite of the completion of a Kaiser Permanente and University of California San Francisco project that genotyped 100,000 people on Affy's Axiom platform.

Witney called the project "one of the largest genetic studies that has ever been conducted" and claimed that the population of San Francisco Bay Area, from where volunteers were recruited, is among the "most diverse" in the US.

Affy has sought to capitalize on that study by releasing population-optimized, whole-genome genotyping chips for European, East Asian, Latino, and African-American populations. The company has already launched its European population-optimized Axiom chip, and Witney said the others will be available later this year (BAN 4/26/2011).

"We believe these new arrays expand the potential market for the Axiom platform because they provide more informative solutions for researchers who are investigating complex diseases in diverse ethnic groups," he said.

Affy is also looking for a boost in genotyping sales from its recently launched CytoScan HD Array for cytogenetic analysis. The chip includes more than 2.6 million copy-number markers, of which 750,000 are genotypeable SNPs and 1.9 million are non-polymorphic probes.

Witney called it a "state-of-the-art product for cytogenetic analysis" and reaffirmed the company's desire to have the platform cleared by the US Food and Drug Administration for clinical use.

"We continue to work closely with FDA to find the appropriate regulatory path for CytoScan, and we intend to file this product for marketing clearance," he said.

He added that it would be "premature" to provide any more detail, such as timing, about that path. Affy earlier this year announced its plan to submit CytoScan to FDA (BAN 5/10/2011).

Witney said that CytoScan HD is also "appropriate" for cancer cytogenetics studies, and said that the firm will be "aggressively moving into that space with essentially the same product."

Affy's OncoScan FFPE service is still "early days" in terms of market adoption, Witney said, but stressed the assay has potential. Affy earlier this year launched the second version of the service, which enables users to analyze DNA from formalin-fixed, paraffin-embedded tissues to extract retrospective clinical data from archived samples.

"We're in build mode with that product," said Witney. "We're talking to a lot of heavy hitters in the space that see the potential of that technology, and we've got some very good work going on here to understand its current and future potential. We think it's in a very, very competitive position to other technologies that are used for retrospective genotyping of cancer patients, but it's still early days."

'Trouble Ahead'

Some analysts participating in the earnings call seemed skeptical of Affy's immediate growth opportunities.

"I think [that] to many it seems like these opportunities are far outweighed by the company's participation in declining businesses in mature areas," said Doug Shenkel, an analyst at Cowen and Company, during the call.

Dane Leone of Macquarie Research echoed this theme, noting during the call that the company's total revenues are at the same level they were in 2001. "Is there any area or any end market that we can point to that actually grew this quarter or was weakness completely broad based across every segment?" he asked.

In response, Witney pointed to growth in the Panomics and USB product lines and in the firm's microRNA arrays. Moreover, he said, Affy's future growth potential lies more in how it presents its products to the market rather than any particular product.

"It's very much an execution play. I think that there are many aspects in the company that are underperforming and that are in markets that are growing," said Witney. "The market for gene-expression and genetic-analysis products is growing in nearly every category. There's absolutely no reason that we can't grow given our suite of technologies, products, and customers."

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Still, some analysts were not convinced. In a research note this week, Oppenheimer and Co.'s David Ferreiro predicted "trouble ahead" for the firm. Affy "remains heavily levered to the microarray market" and "once again underperformed the competition in an ever-contracting market," he said.

"As sequencing evolves and grabs a greater percentage of research dollars and academic funding becomes more challenging, we expect this fundamental headwind to continue to impact top-line results," he added.

According to Ferreiro, growth from Affy's Panomics and USB businesses is "key" for the firm's future. "Uptake of cytogenetic, cancer, and pharmacogenomics arrays will also be key for future growth," he said.

In another note published this week, Goldman Sachs' Isaac Ro said that Affy faces a "long and arduous process ahead." He said that a follow-up call with management "confirmed that the next six months will feature a handful of new products likely built around the core technology franchise as Whitney simultaneously takes stock of the existing franchise."

By early January, the company expects to articulate a new growth strategy and provide financial guidance, Ro said. Until then, Goldman Sachs sees Affy's base business "facing additional competitive pressures in a tighter funding environment."

Secular Decline

Where analysts see headwinds from next-gen sequencing, Affy sees greater opportunity.
Witney said that the company is "well positioned" with its array products to leverage discoveries from sequencing. "Array-based approaches are a perfect complement to the discovery of transcriptome elements," he said.

However, Macquarie's Leone suggested that Affy's problems in the market are due to its inability to respond to the pressure that next-gen sequencing has on its array business.

"The problem originally stemmed from not developing technology or missing a technology cycle years ago," Leone said [during the call, referring to next-gen sequencing. "And obviously, we see the consequences of that. It seems … that there's just a fundamental technology issue that's going to cause the company to continue to be in secular decline for years to come."

While Witney conceded that the company missed a technology cycle, calling Leone's assessment "a fact," he noted that the "way to turn the tide" when it comes to sequencing is to "make sure that people understand when one would run a microarray and how it fits into the workflow."

He said that Affy is "not insecure about our ability to fit into workflows as people try to understand genetic information in different ways." In coming quarters the company will "put a lot more meat around the bones" of its offering, he said.

In a research note released this week, RW Baird analyst Quintin Lai made some suggestions for Affy's path to returned growth. According to Lai, "low-hanging fruit would be to expand non-microarray business lines like USB and Panomics." Lai said that Affy should next focus on expanding its molecular diagnostics portfolio, noting that the company's diagnostic partners "continue to make progress" using its chips.

Finally, Lai said that Affy needs to "shore up" its array business, by looking at positioning, pricing, and new products to stimulate growth.

Despite its Q2 sales performance, Affy ended the quarter cash flow positive. According to Barabe, the firm has total cash and available-for-sale securities of approximately $256 million and its current net cash position is $160 million.

According to Witney, though, the firm will not use those resources in merger or acquisition activities for some time.

"This is a heads down period for us until we get our current product portfolio in shape and [are] commercially successful," Barabe said. "Obviously, we have the financial flexibility to do it through some very hard work by the team here, but it's not something we're going to be focusing in the near term."


Have topics you'd like to see covered in BioArray News? Contact the editor at jpetrone [at] genomeweb [.] com.

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