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Affymetrix Provides Updates on Genotyping Growth, Biobank Deals, Expression Outlook in Q3 Call

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This story was originally posted on Nov. 1.

Affymetrix executives offered more details about the firm's ongoing turnaround during the company's third quarter earnings call last week.

While CEO Frank Witney acknowledged on the call that the Santa Clara, Calif.-based company reported "modest" year-over-year growth of 1 percent in Q3, he said the firm believes that its "growth momentum" will continue, driven by new product offerings.

Affymetrix's total revenues for the three months ended Sept. 30 were $80.4 million, compared to $79.6 million in the same period last year. Though the firm reported slight overall growth, the performances of Affymetrix's four business units in the quarter were mixed.

Genetic Analysis – which consists mainly of Affymetrix's genotyping array products – remained the company's "fastest-growing segment." Affymetrix did not break out a single metric for this business unit. Instead, it said that sales of its CytoScan offering for clinical cytogenetics and research grew 36 percent year over year, and now contribute 12 percent of Affymetrix's revenues.

Witney attributed the jump in CytoScan sales to "increased business in existing accounts," expansion into new geographies as European and Asian customers move to arrays from conventional karyotyping, and the expanded use of CytoScan in the translational medicine and molecular diagnostics markets. More specifically, Witney said that Affymetrix is seeing increased use of CytoScan in oncology research. He noted that the potential for CytoScan in the oncology market is larger than it has been in the constitutional genetics market, where it has mainly been adopted.

Affymetrix in February submitted a CytoScan package to the US Food and Drug Administrationto be cleared for the clinical diagnosis of genetic diseases and conditions in pediatric cases (BAN 2/19/2013). Witney said that the filing is "proceeding well" and reiterated that Affymetrix expects the review process to take about a year from the time of filing.

Illumina has also submitted a chromosomal microarray package to the FDA, while Agilent Technologies plans to submit its platform to the agency next year (BAN 1/29/2013).

Affymetrix's CytoScan growth was dwarfed by the performance of its Axiom genotyping array business, which grew by 80 percent during the third quarter. Witney attributed the revenue spike to an expanded menu of products, the "continuing success" of its custom array programs, and new opportunities from biorepositories and agricultural research customers.

Affymetrix earlier this year signed an agreement with UK Biobank to genotype the British biorepository's 500,000-sample collection over the next few years, and UKBB and Affymetrix recently finalized the array design and commenced genotyping for the project (). The company has said it expects to recognize most of the revenue from the deal in 2014.

Future deals with other biobanks are also a possibility. Witney said that biorepositories "want standardization" and are "in discussions with each other," hinting that they might prefer to use the same platform to genotype their collections. He said that Affymetrix is in "active discussions" with a number of biobanks at the moment. "Our early success with UK Biobank … is helpful as we talk to other similarly situated customers," he added.

Witney also hinted at a potential future deal in the consumer genomics market, where Illumina, as chip supplier to 23andMe, Ancestry.com, Family Tree DNA, and National Geographic, maintains a near monopoly.

"We are in active discussions with potential collaborations in consumer genetics and expect this market will provide another leg of growth in our genotyping business," Witney said, adding that the company will share more details once they're finalized over the next couple of quarters.

Another opportunity for Affymetrix's Genetic Analysis business is its recently launched OncoScan FFPE Assay Kit, which enables whole-genome profiling and copy number analysis from formalin-fixed, paraffin-embedded solid tumor samples in 48 hours (BAN 8/6/2013).

The company launched the assay as a service two years ago. Such service customers, though, are "low-hanging fruit," Witney said, and the company believes its revised, kitted version of OncoScan is "more powerful" and "should be well adopted." He added that Affymetrix considers OncoScan a "significant revenue opportunity" and thinks it will "make a material contribution to our revenues next year."

'Our goal of modest declines'

Staunching the decline of what it now considers its legacy Expression business is one of Affymetrix's strategic goals. Witney said that the firm's declines would optimally be between 5 and 10 percent year over year.

In Q3, the firm saw its Expression business decline 12 percent compared to the third quarter of 2012, less than the 29 percent year-over-year decline it saw at the beginning of this year. Indeed, unanticipated declines in its Expression revenues forced Affymetrix to suspend guidance in May (BAN 5/7/2013).

Witney called Q3's 12 percent drop "an improvement" and said that the company will "continue to make appropriate investments in its Expression business to achieve our goal of modest declines."

The company's main growth vehicle in the Expression market is its Human Transcriptome Array, a 6.9-million-feature chip for global gene expression profiling. Witney said that Affymetrix is "encouraged" by the market's response to the HTA, and is winning researchers over to the array because it costs less than RNA-seq and can provide data in a week's time.

"We are gaining adoption of this product from customers in the translational sciences, who may be considering RNA-seq, but appreciate the performance, simplicity, and economics of HTA," said Witney.

He said that Affymetrix has created HTA reagents for "clinically relevant sample types" such as blood and FFPE tumor samples, and that "these attributes enable large-scale genome-wide transcription profiling studies over very large sample sets."

Witney added that Affymetrix is in the process of expanding its HTA product line as it "represents our new generation expression arrays, kits, and software."

Another product that is keeping Affymetrix's Expression business alive is its microRNA array. Witney said that Affymetrix has seen a "nice response" to the product, and will introduce a new version of its miRNA array shortly.

In recent quarters, Affymetrix's Expression business has been hit particularly hard in Japan, where the majority of its revenues were generated by sales of its legacy IVT gene expression profiling arrays in the past (BAN 8/6/2013). Witney said that Affymetrix has been rebuilding its Japanese presence by shifting its focus to selling its Genetic Analysis and newer Expression products.

"So many of us have made trips over to Japan to get the team up to speed on the genotyping business as well as the cytogenetic business," said Witney. "On the Expression side, we're trying to team up and the Japanese customers on our HTA product," he said. It's really a strong company-wide effort to get our stronger-growing businesses established in the Japan market."

eBio and LSR

Affymetrix's Q3 revenues included a $19.9 million contribution from eBioscience, the San Diego-based flow cytometry and immunoassay reagents maker that Affymetrix acquired in June 2012. Affymetrix reported eBiosciences revenues of $17.6 million for Q3 2012, its first quarter as part of the company.

According to Witney, half of eBio's 13 percent growth in the quarter came from the company's decision to make its Procarta multiplex assay kits, gained through its 2008 acquisition of Panomics, part of its eBio business. Affymetrix's Procarta kits are run on Luminex platforms.

Organically, eBio revenues grew 6 percent year over year. Witney said that Affymetrix was "encouraged by this result given the significant exposure eBioscience has to academic spending in North America." He said that the company continues to see "strong growth" in Europe and Asia, and "modest improvement" in North American sales.

One product that Affymetrix hopes will drive future eBio revenues is QuantiGene FlowRNA, a flow cytometry-based assay that allows simultaneous measurement of gene and protein expression in single cells, Witney said.

Life Science Reagents, Affymetrix's fourth business unit, generated revenues of about $7.8 million in Q3, down roughly 4 percent year over year. That revenue number included a contribution from Anatrace, a provider of detergents and synthetic lipids for use in membrane protein studies. Affymetrix last month sold its Anatrace business to Los Angeles investment firm StoneCalibre (BAN 10/15/2013).

While Anatrace was profitable, the impact of its sale is "not expected to be significant" to Affymetrix's Life Science Reagents business. Witney said that the firm's Life Science Reagents business' "biggest challenge" is in its molecular biology products line, and that the company expects the business to be "flat to slightly down" over the next few quarters as Affymetrix aims to improve its performance.

Financials

Affymetrix's product revenue for the quarter was $74.8 million, up nearly 3 percent from $72.7 million in the prior year period, while services revenues dropped by more than a fifth to $5.6 million from $6.9 million in Q3 2012.

CFO Gavin Wood said on the call that the company's scientific service revenue is "project-driven" and that Affymetrix expects to see this revenue increase materially as it begins to run samples for the UK Biobank in the next few months.

Core consumable revenues rose 3 percent to $52.1 million in Q3 compared to $50.5 million a year ago while the firm's instrument revenues dropped 40 percent to $2.8 million from $4.6 million in Q3 2012.

Affymetrix reduced its GAAP net loss by 77 percent to $4.2 million, or $.06 per share, in the quarter from $17.9 million, or $.25 per share, in the third quarter of 2012.

Non-GAAP net income was $3.3 million, or $.05 per share, compared to a non-GAAP net loss of $2.4 million, or $.03 per share, for the third quarter of 2012. Affy beat analysts' consensus estimate of $.02 per share.

The company cut its SG&A spending to $33.6 million in the quarter from $36.3 million in the year-ago period, while Q3 R&D costs fell to $11.5 million from $16.5 million.

Wood attributed the declines in SG&A and R&D costs to "reduced headcount and variable compensation" as well as lower IT costs, and reduced spending on supplies and consulting.

Affymetrix ended the quarter with cash and cash equivalents of $50.6 million.

Wood said in a statement that "stronger revenue and prudent working capital management" combined with "careful control of our operating expenses" allowed the firm to generate about $10.5 million in cash flow from operations. He noted that Affymetrix has reduced its senior secured debt by 45 percent since June 2012.

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