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Affy Sets Sights on Downstream Market to Offset GWA Studies 'Trough'

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This story has been updated from a previous version published on April 24 to include additional information on Affy's stock price and comment from an analyst.

Affymetrix last week reported a 7 percent uptick in first-quarter revenues — a "good start" for the year, according to CEO Kevin King, who forecast that demand for the company's genotyping arrays will slow in coming quarters as customers await the launch of the firm's next-generation genotyping products.

To make up for the "lumpiness" of the market for genome-wide association studies, where its genotyping arrays are used, Affy will continue to debut applications that are downstream from GWAS, particularly in validation and routine testing, King said last week during an call to discuss the company's first-quarter earnings.

These "high-growth markets" are "less constrained by research funding" and are "more likely to generate recurring revenue streams," King said.

During the call, King also shed some light on Affy's decision to sell its Clinical Services Laboratory to Navigenics, noting that the lab was unable to provide a sustainable revenue stream.

Affy's total revenue for the quarter fell to $78.6 million from $169.6 million in the prior-year period, which included an intellectual property payment of $90 million related to the settlement of a dispute with Illumina (see BAN 1/15/2008).

The company’s first-quarter product revenue increased to $64.9 million from $62.8 million in the comparable period of 2008. Product revenues included array and reagent revenue of $59.7 million and instrument revenue of $5.2 million. Service revenue increased to $11.6 million from $8.4 million in the prior-year period, and Affy said that it shipped 26 GeneChip systems during the quarter, bringing its total systems shipped to 1,839.

Affy posted a net loss of $25.2 million, or $.37 per share, for the quarter, compared to a profit of $46.3 million, or $.68 per share, for the first quarter of 2009. R&D costs rose 13 percent year over year to $21.3 million from $18.8 million, while its SG&A expenses dipped around two percent to $34 million from $34.7 million.

Affy said it held $66 million in cash and cash equivalents at the end of the quarter.

Shares of Affy fell 17 percent to $3.52 on April 23, the day after Affy reported its Q1 results. By press time, however, the company's shares had climbed back up to $4.28 in mid-afternoon trade — 2 cents higher than their closing price on April 22.

Isaac Ro, an analyst for Leerink Swan, noted in a research note published last week that the Q1 results "beat expectations," but warned that long-term questions remain. "Commentary regarding a slowdown in GWAS-related genotyping array volumes, coupled with the ongoing decline in gene expression arrays, leaves us cautious on [Affy's] growth prospects in the near term."

As evidence of the decline in GWAS demand, Affy's first-quarter genotyping business revenue, broken out as "DNA revenue" by the firm, was down approximately 4 percent year-over-year to $20.3 million, Chief Financial Officer John Batty said during the call. This was offset by Affy's expression, or RNA business, which was up approximately 3 percent to $37.9 million. Year-over-year, the mix of RNA and DNA revenue remained about two-thirds and one-third, respectively, Batty said.

According to Batty, Affy's GWAS business tends to be "lumpy" and "characterized typically by a number of large projects and those projects often times can extend across quarters."

Affy's flagship genotyping chip remains its SNP Array 6.0. Launched two years ago, the array features 1.8 million genetic markers, including more than 906,600 SNPs and more than 946,000 copy number variants.

King said that Affy is now on schedule to introduce a "major new family of genotyping products" in the second half of '09 that will provide Affy customers with "more comprehensive tools for genome-wide association studies and focus customizable content for targeted genotyping applications."

This new family of arrays will be deployed on the company's next-generation array platform and make use of new assay chemistries, King said. One component of the new platform is Affy's GeneTitan instrument, launched last fall. The system, priced at roughly $300,000, includes Affy’s ArrayStation, launched in 2005, which fulfills automated sample-preparation and liquid-handling duties, while the GeneTitan provides all other array-processing steps.

GeneTitan is also designed to handle Affy's new "peg array" format — strips of arrays produced to work with existing 96-well microtiter plates, allowing higher-throughput processing of the arrays. King claimed in the call that GeneTitan decreases the time required to process nearly 100 samples from "seven hours down to only 30 minutes."

Affy launched legacy gene-expression assays in the new format when it debuted GeneTitan in September. According to King, the company will introduce alternative splicing arrays and whole-transcriptome profiling arrays in a peg format this quarter.

The Santa Clara, Calif.-based company plans to launch new genotyping assays in the second half of the year that will capitalize on a new "whole-genome amplification assay, and new array chemistries for higher sensitivity and specificity for SNP and copy number detection," King said.

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Customers will also be able to select the content for their genotyping arrays from an Affy database culled from its internal screening program, which has generated more than 10 billion genotypes to date, King said. To generate the database, Affy created a set of chips with about 12.5 million human variations that were used to interrogate around 1,100 samples (see BAN 1/15/2008). King said that Affy also intends to add content from the 1000 Genomes Project to its database as it becomes publicly available.

King added that the new genotyping assays are already being used by some early-access customers. He did not elaborate.

'New Wave of Growth'

Once available, the combination of the new genotyping assays in the peg-array format will lift the company's DNA business revenues above thier current level, King said. However, he admitted that the whole-genome association study market itself is "in a trough right now" as customers wait for those products to come on line. His words echo those of Illumina CEO Jay Flatley, who last week also discussed the status of the market for GWAS tools.

According to Flatley, Illumina — Affy's sole rival in the market — is similarly expecting a "slowdown" in the growth rate of genome-wide association studies over the next few quarters as researchers await new content from sequencing projects such as the 1000 Genomes Project to be incorporated onto its microarrays.

Flatley said the slowdown will be "temporary," however, as the new content will "drive a whole new round of rich genome-wide association studies" based on rare variant content (see BAN 4/22/2009).

King said this week that the GWAS market itself is changing. "In the past, genome association studies were first done with the premise that there was a linkage between common diseases and a common variant," King said. "The first path of studies that have been done over the last maybe three years or so have shown that we’ve been identifying linkages between genetic variation and disease, but we don’t account for all of the disease associated risk," he said. "What people are doing is taking a step back and looking at two things: one is structural variance or copy number and the second one is the possibility that lower frequency variants may play a major role here. People are gearing up for that."

As Affy prepares for this second-round of genome-wide association studies to buoy its business, it is also making efforts to build the downstream side of its franchise. King said that the products it acquired with its $73 million purchase of Panomics last year have been "received well" by its customers for "biomarker analysis, drug compound screening, in situ gene expression, RNAi monitoring, and DNA copy number applications."

In Q1, Affy introduced two new assays based on Panomics' line of QuantiGene branched DNA assays. The first, the QuantiGene 2.0 DNA analysis assay, quantifies DNA copies and copy number variation. Affy views it as a "downstream complement" to its GeneChip copy number products, such as its SNP Array 6.0 and its Cytogenetics Solution. Targeted end-user markets for the assay include direct discovery, disease research, and agricultural and biotech breeding programs, King said.

The second new Panomics product is QuantiGene ViewRNA HTS. This assay "detects single RNA and DNA molecules in single intact cells" and will be used to screen "millions of compounds against genes that are predictive of disease type and response to therapy." King said that "many" of Affy's pharma partners have expressed interest in the "high-throughput screening capabilities" of the assay.

Affy's RNA or expression business has suffered from a decline in spending from pharmaceutical companies that have slashed their upstream discovery endeavors in recent years. According to King, the availability of new QuantiGene assays is part of an effort to restore business among what have been reliable pharma accounts for the company in the past.

According to Batty, sales of Panomics products should contribute on average $3.5 million to $4 million on a quarterly basis going forward. He also provided a short update on the status of USB and True Materials, the two other companies Affy acquired over the past 18 months.

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USB, now called Affymetrix Ohio, is becoming "interweaved with the rest of Affy's business" and is beginning to manufacture or in-source reagents for its GeneChips, Batty said. He estimated that USB was a $25 million business in 2008. Affy closed its acquisition of USB for $75 million in December 2007.

Batty was also asked by analysts about True Materials, the Bay Area startup developing digitally encoded microparticle-based assays that Affy bought for $25 million in August 2008 (see BAN 8/12/2008). Affy has since described the technology as "liquid arrays" for scalable genotyping of 100 to 10,000 markers. Batty said that Affy will be discussing True Materials, its initial applications, and timing for their launch, at the company's investor day in June.

Batty added that, with access to $66 million in cash and equivalents as of March 31, Affy will "continue to be opportunistic in terms of evaluating business development opportunities." He said that Affy is currently focused on getting its business "back on track to growth and profitability, but we’ll certainly look at options on how we might use that cash to maximize shareholder value."

Goodbye CLIA Lab

During the call, King also discussed Affy's decision to transfer ownership of its Clinical Laboratory Improvement Acts-compliant lab to direct-to-consumer genetics testing company Navigenics earlier this year (see BAN 3/17/2009).

Navigenics offers its service using the Affymetrix platform. Navigenics Chief Medical Officer Vance Vanier said in a statement last month that acquiring its own clinical laboratory gave Navigenics the "flexibility and capacity to better respond to the growing demand for our genome testing services,” and was "driven in large part by a growing interest in Navigenics’ genome testing services." Employees of the lab have subsequently become employees of Navigenics, and the firm continues to process projects for Affy customers, Vanier said.

King said that Affy decided to sell the lab to Navigenics because the associated revenues "weren't really that significant" for the company. Affy first opened the lab, called Affymetrix Clinical Service Laboratory, in West Sacramento in 2006. King said the initial goal of Affy was to enable its partners to prepare their tests for eventual US Food and Drug Administration clearance.

"We thought that this could actually be a big recurring revenue stream for us, so we had lots of partners — 15, 20, 30 partners with whom we would be working on projects," King said. "Often times the projects were fairly small, and when the projects were over ... the first thing they said to us was they wanted to open their own CLIA lab," he said. "So, it really wasn’t much of a recurring revenue stream for us."

According to King, this situation made Affy's CLIA lab "more of a job shop" than the "big multi-million dollar business model that ... we thought it might be." It was the "combination of this non-recurring revenue stream and the idea that all of our partners or most nearly all of our partners wanted their own CLIA lab, that we just said, 'Look, this isn’t a good business model for us,' and we turned it over," he said.

King added that it is "pretty easy" for Affy to obtain access to a CLIA lab, and he is "not concerned" about the company not having its own CLIA lab in the future.

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