This story was first published on April 23.
Increased demand for next-generation genotyping products as well as gene-expression kits used in biomarker validation drove Affymetrix's revenues up 2 percent during the first quarter, despite a decline in sales of services and expression arrays for biomarker discovery projects.
The Santa Clara, Calif.-based array vendor last week reported that total revenues for the three-month period ended March 31 increased to $80.2 million from $78.6 million during the same period one year ago.
Product sales spiked 13 percent to $73.4 million from $64.9 million, while services revenue declined to $4.5 million from $11.6 million. Royalties and other revenue inched up to $2.3 million from $2.1 million year over year.
President and CEO Kevin King said during the firm's earnings call that Affymetrix was off to a "good start" for the year. In addition to posting double-digit growth in product revenue, the company "achieved significant year-over-year improvements to our operating model and generated a positive operating cash flow for the quarter," he said.
In separate research notes, analysts from Thomas Weisel Partners and Leerink Swan noted that Affy beat estimates for its Q1 performance, but said they remained "cautious" going forward.
"We remain cautious on the competitive landscape as other low-cost genomics platforms begin to crowd the market," wrote Leerink Swan analyst Isaac Ro.
DNA and RNA
Sales of consumables for the quarter accounted for 83 percent of Affymetrix's total revenues, King said. Affy breaks its consumables business into two main components, DNA and RNA.
The bulk of DNA revenues, which grew 23 percent during the period, are derived from sales of its arrays for genotyping, which includes chips designed for use in applied markets such as cytogenetics. RNA revenues, meantime, which rose 3 percent during the quarter, are earned from the gene-expression arrays that have historically been the most reliable slice of the firm's business.
Also contributing to the increase are newer additions to the product portfolio, like Affy's branched DNA-based Panomics QuantiGene panels, which are used in biomarker exploration and validation.
According to King, DNA sales were driven by the adoption of the firm's next-generation Axiom genotyping offering that debuted last year. Also contributing to the growth has been the "continued success" of the company's SNP 6.0 array, which has now been on the market for three years, said King. Affy also noted "strong revenue growth" from cytogenetic research products.
Affy launched its first-generation cytogenetics package in March 2008, and last year began shipping its updated cytogenetics offering, which is based on its Whole-Genome 2.7M Array. King said there was "good growth across the board" for those three product lines.
He added that "certainly the [whole-genome and targeted genotyping sales] were at a higher level in absolute dollars than we did on the cytogenetics research, more because of the number of customers there," King said. "All three of them were up pretty strongly, and this is sort of the second quarter, third quarter in a row where we are starting to see this type of trend for us."
Affymetrix launched its Axiom Genotyping Solution in October 2009. The automated system, which runs on the firm's GeneTitan instrument, already hosts a number of catalog array plates, including the Genome-Wide Human Array Plate optimized to study Caucasian populations, as well as the Genome-Wide ASI Array Plate, which contains content for studying Asian populations. Other themed array plates are in development (BAN 10/20/2009).
But what Affymetrix sees as its advantage in the genotyping market is its ability to produce customized whole-genome arrays for genome-wide association studies. King said that researchers at Kaiser Permanente and the University of California, San Francisco, for instance, have opted for a custom Axiom package to conduct genome-wide analysis.
[ pagebreak ]
King said the Kaiser-UCSF study, which will study DNA samples from 100,000 Kaiser volunteers in Northern California, could serve as a model for other researchers embarking on new association studies.
"I think a lot of customers are looking to Kaiser and other customers and [are] now starting to say it's not so much about fixed panels, it's about the ability to customize," said King. "And I would suspect that a lot more of that is going to continue to happen and that certainly is where a lot of our infrastructure investment has been going into on the R&D side as well."
Affy hopes this aspect of its genotyping business will give it an edge over Illumina, its main competitor.
"I think in reality there are two of us in this space and all deals get contested," said King. "We are involved in all of them and I would say we are winning our share of the fights."
Geographically, King said Affymetrix is doing well in Asia in both DNA and RNA segments. The firm now manufactures all of its GeneChips at its hub in Singapore and is investing more resources in the region (BAN 3/30/2010).
In particular, Affy is seeing growth in China and Japan. "We see good growth potential in Japan, [and] with a new government in Japan [there has been] a resurgence of interest in life sciences and so forth that had not been there for a while," said King. "The whole Asia-Pacific rim has been growing nicely."
Out of Sequence
Discussing next-generation DNA sequencing, King reiterated Affy's long-held position that it is not interested in acquiring a sequencing platform and said "most of the manufacturers that are out there or about to be on the marketplace are largely focused on discovery applications." Also, Affy hasn't seen anything that really differentiates one firm from another.
"I think these companies are looking more and more the same," he said.
"A lot of the data that's being generated is now turning into a commodity. So discovery information is more of a commodity than it is unique," King added. "What would be attractive would be the ability to turn these [sequencing] products into validation applications. That's where we think [sequencing] could be attractive."
Doug Farrell, Affy's head of investor relations, said during the call that the increased ability of sequencing vendors to enable multiplexing on their instruments is not a threat to the company's array business.
"You can run hundreds of samples a day very efficiently and the Affymetrix [platform] is seamless," said Farrell. "Trying to scale up volumes in sequencing, even with the costs coming down, is a very complex undertaking. Certainly, there are super users who can do it, but the average customer is not in a position to do 10- or 20-fold more samples on their sequencer even if they had the money do it."
Claiming that sequencing is "good for the array business," King said discoveries made using sequencers will require validation, and "arrays remain to be the platform of choice for follow-on studies."
In cytogenetics, Affy is building a "good recurring revenue base," King said. The firm says the cytogenetics research market is "important" and expects to continue growing in the space, even as it competes against array firms like Agilent Technologies, BlueGnome, Illumina, Oxford Gene Technology, Roche NimbleGen, and others.
All array firms that sell chips for cytogenetic research are keeping an eye on the US Food and Drug Administration's Office of In Vitro Diagnostics, which is currently reviewing how it regulates tests that are run on vendors' arrays.
In June, the American College of Medical Genetics will host a meeting to discuss the review that will include participation from the FDA, vendors, and customers (BAN 4/13/2010).
Like Agilent, Illumina, and Roche, Affy has pledged to eventually seek clearance for a cytogenetics package. Still, King said during the call that the firm's business is not vulnerable to a change in regulatory policy in cytogenetics.
"Should we get out there and try to market our products more akin to a regulated product, we would certainly need approval and that day would have to come sooner rather than later, but right now we are not marketing our products in that area," King said.
King added that the company is "spending a lot in the area of cytogenetics research, both for pre- and postnatal applications, as well as for cancer applications with a road towards some point in the future regulated products."
[ pagebreak ]
During the call, King said Affy now divides its expression business into biomarker discovery and biomarker validation.
Its traditional whole-genome gene-expression array business is seen as discovery, which declined during the quarter as customers moved projects into exploration and validation phases.
"The mix of our business is shifting," King said of Affy's RNA sales. "In 2008 to 2009 that mix shift between discovery and validation went from 50/50 to 60/40. Clearly the validation and new products are what's driving our growth" in RNA today, he added.
"I would say the biomarker validation segment of the market is growing double digits, maybe 15 percent … but that the legacy biomarker discovery portion of the business might be growing 2 percent to 3 percent on average," King said.
"People are doing less and less studies there and moving more into validation," King said.
One group of customers that has been driving the growth of Affy's biomarker validation segment is pharmaceutical companies — a turnaround from recent years, during which pharmas cut spending on biomarker discovery.
One of the reasons Affy bought Fremont, Calif.-based Panomics in 2008 was to restore its sales to pharma, hoping that Panomics' low- to midplex QuantiGene kits would be attractive assays for validation studies (BAN 11/18/2008). King said that the acquisition has helped the company in this segment.
"We have moved a lot of our products to the drug-development side away from drug discovery," said King. "Pharma really, really likes these [Panomics] products for a variety of reasons, [including] easy workflow, the ability to plex to levels that PCR and other types of lower-end technologies are not able to do. The pharma and biotech industries will pick these products up quite nicely and we think it's going to continue."
Instruments and Services
Affy said that it shipped 40 instruments in the first quarter, with instrumentation revenue up 38 percent over the prior year, driven by adoption of its GeneTitan platform and initial shipments of its GeneAtlas system. The firm did not break out how many GeneTitans, GeneAtlases, or legacy GCS300 systems it placed.
During the call, King said Affy later this year will launch whole-transcript strips for human, mouse, rat, and other model organisms for GeneAtlas users. He said the firm has so far placed GeneAtlases with customers in North America, Japan, and India.
"There are about 50,000 molecular biology labs around the world, and these largely represent the target base of [GeneAtlas] customers for us," King said. "Most of the target audience is centered [on] new users to microarrays."
He said "good examples [of such customers] would be university settings that … maybe have small budgets that can't afford a $200,000 or $300,000 piece of capital equipment, or would be running fewer volume or lower volume arrays and not really being capable of having a staff that could use a sophisticated piece of equipment." Other potential customers can be found in industry, such as biotechs or pharmas, and in core labs, according to King.
Affy is also trying to get older customers to upgrade to the GeneTitan and GeneAtlas platforms. In particular, the company sees the GeneTitan as a replacement for the older GCS3000, while Affy is catering to newer users with the GeneAtlas.
King hopes that a third to a half of the firm's installed base will soon switch over to the GeneTitan. "The age of our installed base is getting up there. In some cases the GCS 3000 [has been] going for around five to six years," King said. "A lot of customers are looking to replace their technologies."
The company sees the GeneAtlas as "less of a replacement product and more of an expansion product to new users and to new markets," King said. "These 50,000 microbiology labs that I referenced or the vast majority of them are not users of microarrays, they are probably users more of real-time PCR."
King also said the company will continue to support its older GCS 3000 and to produce legacy cartridge arrays.
"I don't foresee any reason for us to stop supporting or manufacturing cartridges or the GCS 3000," said King. "There certainly could come a day when those systems are retired, … but we’re customer-centric and want to be loyal for our customer base, so there is no reason for us to obsolete those."
[ pagebreak ]
While Affy's instrument placements jumped, its service revenues dropped to $4.5 million from $11.6 million in Q1 2009. The company attributed the decrease to a number of large genotyping projects it undertook in the first half of last year that did not rematerialize in the current period.
Service revenues were also affected by the sale a little over a year ago of its CLIA lab to Navigenics for an undisclosed sum (BAN 3/17/2009).
Affy recently launched two offerings to spur sales in services as it awaits new large genotyping projects as researchers gear up for an anticipated second round of genome-wide association studies.
Last month, the firm, together with collaborators at the Jackson Laboratory, launched a Mouse Diversity Genotyping Array for the study of mouse genome complexity and diversity among mouse strains (BAN 3/23/2010).
Last week, Affy launched its MIP Copy Number Service through its research services laboratory. The service is run on the company's MIP 330K Cancer Panel and enables researchers to obtain high-quality, allele-specific copy number data from formalin-fixed, paraffin-embedded samples.
"I'm sure you're aware there are millions, if not tens of millions, of … cancer-related samples that researchers would love to evaluate and this technology has really been proven to be quite robust in evaluating paraffin-embedded samples," King said of the new service.
Elsewhere in Q1
Affy said first-quarter net loss dropped to $9.6 million from $25.2 million as it trimmed its spending and did not repeat a $2 million restructuring charge from Q1 2009. However, Affy took an impairment charge of $4.9 million on a nonmarketable investment in Q1 2010.
Affy's R&D spending declined to $18.5 million from $21.3 million, and its SG&A spending dropped to $31.4 million from $34 million.
As of March 31, Affy had cash and cash equivalents of $75.8 million.
Chief Financial Officer Timothy Barabe said during the firm's earnings call that Affy expects revenues in the second quarter to be in the range of $80 million to $82 million, roughly in line with its Q2 2009 earnings.