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Affy Says Genotyping Arrays a Bright Spot amid Q1 Revenue Drop; Plans to Close eBioscience Buy in Q2

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Despite posting a double-digit drop in first-quarter revenues, Affymetrix executives said last week that they are "optimistic" about the firm's future, pointing to growth in demand for genotyping arrays.

Affy reported last week that revenues for the three months ended March 31 dropped 12 percent to $65.2 million from $73.7 million a year ago. Much of the falloff was attributable to a "precipitous" decline in expression array sales, which plummeted 20 percent year over year as researchers continue to transition to next-generation sequencing.

The Santa Clara, Calif.-based firm also announced after reporting its earnings that it has signed an amended deal to acquire San Diego-based flow cytometry and reagent firm eBioscience for $315 million in cash. Even during the company's Q1 earnings call, Affy gave no hint that a deal might be close. In fact, CEO Frank Witney said he was "disappointed" that Affy had not reached an agreement, in spite of ongoing discussions.

Affy plans to complete the eBioscience acquisition by the end of the second quarter. The company originally announced its intent to buy eBioscience for $330 million in November, but because of a lawsuit and other issues, it had to restructure the purchase (BAN 12/6/2011).

Affy has characterized the deal as "transformational," diversifying its revenue streams to include eBioscience's menu of reagents, and thereby decreasing its reliance on its expression array business, which still accounts for half of the microarray maker's revenues. eBioscience posted $71 million in revenues last year.

'Stabilizing' Business

Despite the Q1 revenue slide, both Witney and Chief Financial Officer Tim Barabe portrayed the firm's business as having stabilized.

"This $65 million result represents our fourth consecutive quarter of generating revenue in the mid-$60 [million] range and indicates our business is stabilizing," Barabe said during the call. Witney added that Affy is now "on track toward [its] goal of returning the overall business to growth in 2012."

Last year, Affymetrix reorganized into three units: genetic analysis and clinical applications, largely comprising genotyping array sales; expression, which consists of Affy's expression array portfolio as well as Panomics' RNA and protein expression kits; and life science reagents, mostly derived from its USB product lines.

According to Witney, Affy has managed to stabilize its business due to increased sales in its genetic analysis and clinical applications unit. More specifically, it saw demand rise for its CytoScan HD genotyping array for cytogenetic research, as well as targeted genotyping products in human genetic and agricultural biotechnology research.

Witney said this unit currently makes up about 30 percent of the company's revenue. While the unit grew about 5 percent during the quarter, Affy expects it to grow by 20 percent this year, he said. Much of that growth should come from uptake of CytoScan, which the firm launched last summer. Witney expects CytoScan sales will contribute 10 percent of Affy's revenues by year end.

Still, the company has delayed its plan to submit CytoScan to the US Food and Drug Administration for clearance. Affy said earlier this year that it expected to submit CytoScan to the FDA by the middle of the year. This week, it pushed back its planned submission date to "late 2012." Company executives pinned the delay on an FDA request to adjust its clinical protocols, but declined to elaborate after being asked by analysts several times during the call's question and answer session.

Witney listed a number of other genotyping deals on the call, including an agreement to provide custom Axiom genotyping arrays to a group studying salmon and trout; a partnership with the Ovarian Cancer Consortium, which plans to use Axiom genotyping arrays to genotype a "large number" of patients; and an agreement for a "major study" of colorectal cancer across Hispanic and Latino populations.

Affy has launched a menu of ethnic-focused genotyping panels, and Witney said that customers believe that "having ability to study a more targeted set of markers over a much larger number of samples is a very attractive value proposition" and that Affy is "winning competitive bids because of this advantage."

The company's greatest weak spot continues to be in expression. While sales of its Panomics QuantiGene and Procarta RNA and protein expression products increased more than 15 percent year over year, due in part to a sales reorganization, expression revenue was down 20 percent year over year and the firm's goal is to lessen the
decline to between 5 and 10 percent year over year. Barabe noted that expression was down 4 percent sequentially, within the company's stated targets.

During the quarter, Affy began selling Almac Diagnostics' Xcel array. Almac began offering the chip as a service in 2010. The array contains 97,000 transcripts and was designed for use in cancer studies where cross-disease compatibility is important (BAN 4/3/2012). Witney described Xcel as a "great product" that is being used to validate discoveries made using next-generation sequencing.

The company attributed an 8 percent decrease in its life science reagents unit to a "temporary slowdown" in its membrane extraction detergent product, and moving from a distribution model to direct sales for its ExoSAP-IT PCR Clean-Up reagent. Witney said that the life science reagents unit contributes 13 percent of Affy's revenues. He anticipates it will take "a few quarters" to regain momentum in that business.

Though Witney said the firm would be profitable again by the end of the year, several analysts remained cautious about Affy's future.

"Considering [Affy]'s decreasing expression end market and an uncertain academic funding environment, we remain concerned about the company's long-term outlook," wrote Oppenheimer's David Ferreiro in a note.

Goldman Sachs' Isaac Ro was similarly wary, noting that Affy's array business "continues to face headwinds from customer switches to DNA sequencing, a tough funding environment for legacy products, and continued pricing pressure."

A Global Perspective

During the call, Witney provided an overview of Affy's sales in different geographies, saying that sales reorganizations in Europe and Asia had paid off, while North American sales lagged in Q1, particularly to academic customers.

Last year, Affy changed the head of its global sales organization, as well as the sales leadership in Europe and Japan. "This is reinvigorating our commercial efforts in those markets, and we're seeing that in the numbers," he said without elaborating. The company also recently recruited an "industry veteran" to head up sales and marketing for North America. Witney said he expects similar improvements in North America under the new hire's leadership.

Affy is also trying to reach more customers in emerging markets. Witney named China, Brazil, and Mexico as countries where the firm has made investments. Specifically, Affy opened a new sales office in Brazil. Illumina similarly opened an office in Brazil last year in an effort to tap into Latin American markets (BAN 1/25/2011).

According to Witney, there is a "pretty heavy emphasis" at the company on "trying to build our global commercial organization with a strong leadership, as well as … the right people in the right places."

Affy saw a slight increase in instrument placements during the quarter — revenues were $4.7 million, up from $4.6 million in the year ago period. Witney said that instrument sales to European and Asian customers were "particularly strong" and "that is where the majority of instruments were placed."

In the US, the company did not fare as well. Witney said that Affy is "not seeing too much encouragement" from a distribution pact with Thermo Fisher Scientific. Thermo became the exclusive North American distributor for Affy's automated GeneAtlas system last year, and the firm originally hoped it would lead to more placements in the US (BAN 5/17/2011).

Elsewhere in Q1

According to Barabe, product revenues dropped 13 percent to $58.5 million from $67.5 million, and services and other revenues increased 8 percent to $6.8 million from $6.3 million. The product revenues consisted of $53.7 million in consumables revenues and $4.7 million in instrument revenues, the company said.

Affy reduced its R&D spend in the first quarter to $13.3 million, an 18 percent drop-off from $16.3 million from a year ago. Its SG&A costs rose 3 percent to $27.9 million from $27.2 million.

The firm posted a net loss of $4.2 million, compared to a profit of $39,000 a year ago.

Affy had $107 million in cash and cash equivalents and $700,000 in restricted cash at the end of the quarter.