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Affymetrix Restructures as Q3 Revenues Drop 14 Percent on Weak Product Sales

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This story was originally posted on Nov. 3

By Justin Petrone

Facing what some analysts deem "fundamental headwinds" in most of its core businesses, Affymetrix executives this week announced a restructuring of the company and pledged to return the beleaguered array vendor to growth in 2012.

The announcement of the reorganization came as Affy reported a 14 percent drop in third-quarter revenue on diminished sales. The company reported total revenues of $64 million for the three-month period ended Sept. 30, compared to $74 million for the third quarter of 2010.

Affy's total product sales fell 15 percent to $57 million from $67.3 million in the year-ago period. Array sales, designated as consumables, were $52.9 million, down 14.4 percent from $61.9 million in the third quarter of 2010

In particular, its RNA business, which consists mainly of its gene expression microarrays, plummeted 22 percent in Q3 — to $20.9 million from $36.9 million in the prior-year period — largely due to pressure from next-generation sequencing as well as a constrained funding environment.

The firm's DNA business, mostly composed of genotyping arrays, fell 4 percent to $24 million from $25 million in Q3 2010.

Instrument sales for the quarter fell 24 percent to $4.1 million from $5.4 million in the prior year. Services revenue, on the other hand, increased to $5.3 million from $4.9 million, while royalty and other revenues declined slightly to $1.7 million from $1.8 million.

The firm posted a net loss of $9.8 million, compared to a profit of $968,000 for Q3 2010.

Affy's R&D spending dropped around 6 percent to $15.3 million from $16.2 million, while SG&A expenses increased 2 percent to $26.9 million from $26.3 million.

A 'Sense of Urgency'

CEO Frank Witney said during an earnings call this week that the firm's management has a "sense of urgency" about returning Affy to growth next year.

In line with this, Witney announced that Affy had reorganized into three business units: a gene expression business unit; a genetic analysis and clinical diagnostics business unit; and a life science reagents unit, primarily composed of the products the firm gained through its 2007 acquisition of USB.

"This structure will streamline our decision-making process while increasing customer focus and accountability," said Witney, who took over as CEO in July. "In order to achieve our goal of generating revenue growth for the full year in 2012, it was critical to have these structural changes in place well ahead of year end."

As part of the restructuring, Affy also made cuts in its workforce, reducing its R&D team by 20 percent.

Witney said the firm would reallocate some of the resources gained from the cuts toward its sales and marketing activities, while Chief Financial Officer Tim Barabe said that Affy expects to save $5 million annually due to the cuts.

"We streamlined our R&D programs to focus on key deliverables that target our growth opportunities — particularly in cytogenetics, genotyping, and cancer mutation detection — while providing sufficient resources to achieve our goal of stabilizing our … expression business," said Witney.

Despite the company's Q3 performance, Witney said that after meeting with the company's customers in the months since becoming CEO, he is "enthusiastic" about the prospects for growing the business.

"Many of these customers are heavily involved in translational research, where running a large number of samples in order to validate clinical significance and utility is absolutely critical," said Witney.

The "largest opportunities" include genetic biomarker validation, especially in cancer research, he said. "These are applications in which microarrays are a primary tool for conducting such large-scale studies."

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CytoScan HD

During the call, Witney said that the company plans to submit its CytoScan HD platform to the US Food and Drug Administration for review by the middle of next year.

Affy launched its offering for cytogenetic analysis earlier this year. Its array includes more than 2.6 million copy number markers, and the firm claims that the CytoScan HD "enables accurate breakpoint estimation, high-resolution loss of heterozygosity determination, detection of uniparental isodisomy and regions identical-by-descent, as well as low-level mosaicism visualization and heterogeneity measurements" (BAN 7/26/2011).

Laboratory Corporation of America and ARUP Laboratories have both adopted the array in recent months (BAN 8/23/2011).

With CytoScan HD, Affy sees an opportunity to restore its overall business to growth. Witney said the array currently targets an opportunity in constitutional cytogenetics of about $200 million per year, and that the company intends to "further penetrate this market by converting customers from traditional microscope-based approaches, as well as taking share from other commercial array platforms" manufactured by rivals like Agilent Technologies, Illumina, and Roche NimbleGen.

"We believe this product line will be an important growth driver for us over the next several years," Witney said. "When we receive regulatory clearance, this would put us at a significant advantage over other array-based competitors in the cytogenetic space, which is currently served by research-use-only products," he added.

All of the company's competitors in the market have similarly pledged to take their platforms through FDA clearance. Most recently, Illumina said it hopes to submit its cytogenetics platform to the agency in the first quarter of 2012 (BAN 10/25/2011).

In addition to constitutional cytogenetics, Affy also sees opportunities for its product in cancer cytogenetics, a market that has also received attention from other firms such as PerkinElmer's Signature Genomic Laboratories, BlueGnome, and Ambry Genetics, which have rolled out a number of cancer-themed offerings over the past year (BAN 9/13/2011).

Witney said he has met with several oncology experts who "are extremely excited about using CytoScan to conduct cytogenetic profiling in both blood cancers and solid tumors."

The company estimates that the oncology market represents "an additional $500 million per year opportunity, and can help us grow cytogenetics into major part of our business in the coming years," Witney said.

During the call, Witney dismissed the idea that next-generation sequencing platforms would impact the adoption of arrays for cytogenetic analysis.

"I think that it's a long run before NGS would impact cytogenetics," said Witney, noting that half the constitutional cytogenetics market still relies on microscopes to identify genetic abnormalities.

'Stabilizing' Expression

According to Witney, Affy hopes that growth in applied markets, like cytogenetics or agricultural biotechnology, will offset losses in other markets where Affy is struggling, among them gene expression.

Witney acknowledged during the call that there is "a lot of uncertainty" around National Institutes of Health funding. Sales to NIH-funded researchers make up around 25 percent of the firm's revenues.

But the firm is also suffering from competition with next-generation sequencing. Rather than construct the newer technology as an opponent, however, Witney said that Affy is hoping to position its products as a complement to the popular technology.

"I don't think we've done a particularly good job of explaining why arrays are very, very useful as a companion to NGS," said Witney. "The vast majority of publicly available sequence resides on our arrays in ways that you can look at transcripts and isoforms of those transcripts," he said. But "for us, that's an area that we have a lot of work to do in explaining the utility."

In Witney's words, Affy is focused on "stabilizing" its gene expression revenues. The firm is betting on "opportunities in translational medicine and clinical applications," including efforts by its 14 diagnostic partners to "offset the declines we've seen in our expression business."

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After years of development, Affy's diagnostic partners continue to bring tests to the market at a steady pace. Earlier this year, Skyline Diagnostics, a Dutch company, gained a CE-IVD mark for its AMLprofiler test for acute myeloid leukemia (BAN 3/15/2011). And last week Paris-based Exonhit Therapeutics announced that it would soon commence US clinical trials for AclarusDx, its Alzheimer's test. The diagnostic is already available for clinical use in Europe (BAN 11/1/2011).

Witney noted that Affy has launched a number of products in recent quarters to maintain its presence in the expression market. He said that Affy has also seen "strong growth" in sales of its microRNA expression profiling product, the GeneChip miRNA.

Witney also reminded analysts that the company recently launched 16 model organism arrays for use on its automated benchtop GeneAtlas system. Earlier this year the company inked a sales and marketing pact with Thermo Fisher Scientific, enabling the latter firm to sell the GeneAtlas to North American customers (BAN 5/11/2011).

This week, Witney said that the relationship is still "relatively early days," but argued that the expansion of the menu would translate into instrument placements. "That's a menu-driven sale," he said. "We have to have a menu before people are going to buy into that platform."

Another new product that Affy hopes will revive expression array sales is its GeneChip Human Transcriptome and Splice Junction Array, a 6.9-million-feature chip designed with researchers from Stanford University. Launched in August, the chip is a "potentially better profiling tool … compared to NGS approaches," Witney said (BAN 8/16/2011). The chip is priced at $400 per sample, which Witney said would make it useful for clinical validation studies.

Witney also discussed changes in Affy's Panomics, where he was CEO prior to the company's acquisition by Affy in 2008.

He said that Panomics had been growing by 30 percent year-over-year at the time of acquisition, but that sales for the group's mid-plex assay products have recently "gone backwards due to some operational missteps on our part."

He added that the tapering in Panomics' revenues was a "structural issue," but the company has "rebuilt" the business's team and believes the product line has "tremendous growth opportunities."

Witney admitted that gene expression is not Affy's "highest growth opportunity" when compared with other products, such as the CytoScan HD, but argued that the company has a "very realistic opportunity to stabilize our expression business based on new products, new focus, and commercial orientation."

Genotyping Trends

Compared to the one-fifth drop off in expression sales, Affy's genotyping business fared relatively well, declining just four percent. Witney said that the company continues to see opportunities in the market for whole-genome genotyping chips that are used to power genome-wide association studies.

Affy has embarked on a strategy of releasing population-focused arrays and in recent weeks introduced genotyping chips for studying African populations and for evolutionary biology studies (BAN 11/1/2011).

"People certainly see the power of having ethnically focused arrays in terms of finding variants and … potentially linking those to disease states," said Witney. "So I think that having these types of arrays available is a very positive step for us in our genotyping platform."

Affy is also looking to seize a larger piece of the targeted genotyping market where it faces traditional competitors like Illumina, as well as other firms like Sequenom.

The company earlier this year introduced its Axiom myDesign Targeted Genotyping Arrays, which it claims enable researchers to study mutations in disease pathways and characterize gene-gene interactions. The firm's customers can now design arrays to genotype between 1,500 and 2.6 million markers per sample.

This week, Witney said that the product would become available in the first quarter of 2012 and that Affy is taking orders for it.

"We expect there will be a growing market, in which novel sequence variants will be identified in GWAS or NGS studies and require validation on targeted genotyping arrays, which we are well positioned to provide," said Witney.

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Analysts and Investors React

Though Witney said he was enthusiastic about Affy's growth opportunities, he noted that it would take a few quarters for the company's reorganization and new products to make the company profitable again.

"I think we're probably within another quarter or so of starting to see real traction from our cytogenetics products and some of the other things that we're doing on stabilization of the expression line," he said.

Analysts' reactions to Witney's statements were mixed. RW Baird's Quintin Lai wrote in a research note that the investment firm is "encouraged that he is setting an organizational bar of achieving top-line growth and operating profitability in 2012."

At the same time, Goldman Sachs' Isaac Ro believes the firm's expression business is facing "a losing battle for funding dollars in the context of NGS-based expression studies." In genotyping, Goldman Sachs continues to see Illumina as a "formidable competitor both in research and applied end markets," Ro wrote in a research note.

Lastly, Ro said that Goldman Sachs sees opportunities for Affy in cytogenetics, but believes they are "unlikely to contribute meaningfully until 4Q2012 at the soonest."

Oppenheimer's David Ferreiro was similarly cautious, noting that Affy is "heavily levered to both the contracting microarray market and to academic budgets," and therefore "faces a fundamental headwind it is trying to combat by shifting to the clinical and applied markets."

Investors, meantime, were unfazed by Affy's Q3 results. Shares of the firm's stock were trading at $4.95 on Thursday afternoon, down one percent from a close of $5 on Wednesday, the day Affy reported its earnings.


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

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