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Affymetrix Says Adoption of Lower-Priced Products Contributed to 4 Percent Fall in Q4 Revenue


This story was first posted on Feb. 4.

By Justin Petrone

A growing number of researchers switching to lower-priced arrays led Affymetrix to post a 4 percent decline in fourth-quarter revenue.

Product revenues for the three months ended Dec. 31, 2010, declined 12 percent from a year ago. The results mirrored a 5 percent decline in full-year 2010 product revenues.

For the three months ended Dec. 31, 2010, the Santa Clara, Calif.-based microarray firm said revenues totaled $84.9 million, compared to $88.8 million for the fourth quarter of 2009. Product revenues for the quarter were $71.9 million, down from almost $81 million a year ago.

For full-year 2010, Affy's revenues slid 5 percent to $310.7 million from $327.1 million in 2009. Its product revenues decreased to $277.7 million in 2010, compared to $279.2 million in 2009.

Company officials attributed the Q4 revenue drop to a "major slowdown in scientific services" and "lower-than-expected sales within the discovery segment of our business."

Offering more detail on the latter, officials cited the lower prices it charges for its new array format, sales of which now make up 40 percent of total consumables revenues.

"Total revenues within the discovery markets were down approximately 5 percent over the prior year, as the adoption of lower-priced products increased as a percent of total mix," said CEO Kevin King during an earnings call last week.

King said that the change in mix has occurred in both the RNA and DNA segments of the firm's business. Affy divides its consumables business into RNA and DNA sales, largely equivalent to gene expression and genotyping, respectively. RNA revenues make up about two-thirds of the firm's consumables business, while DNA comprises the remaining third.

Affy introduced a new array plate format for gene expression applications in 2008 and added genotyping in the new format at the end of 2009 with the launch of its Axiom Genotyping Solution.

While most customers have continued to use the firm's traditional cartridge format, more are adopting the plate format, which runs on Affy's automated GeneTitan and GeneAtlas systems. King estimated that the firm now has 200 GeneTitans installed worldwide, a 75-percent increase over the 2009 installed base.

Though Affy's array plates cost less per sample than its legacy cartridges, they also cost "significantly less to make," King noted during the call. While this has cost the firm revenues in the short term, King said that the "trend for pricing should begin to stabilize" this year, and that "if volumes continue to increase, we should be seeing acceleration on the margin side as these prices stay stable."

Overall, despite the slide in Q4 sales, King said the firm has made "substantial progress in improving the fundamentals of our business" over the past year. He cited as an example of this progress Affy's return to profitability, due in part to lowering operating costs in recent quarters.

For instance, the firm's R&D costs for the fourth quarter fell 9 percent to $15.5 million from $17 million a year ago, while SG&A spending declined 17 percent to $28.7 million from $34.6 million for Q4 2009.

For full-year 2010, Affy spent $67.9 million on R&D, down 12 percent from $77.4 million in 2009. SG&A costs shrank to $114.8 million for 2010, down 12 percent from $130.8 million in 2009.

However, the improvements in operating expenses and profitable back half of 2010 — net income for the quarter rose 42 percent to almost $4 million from $2.8 million a year ago — weren't enough to stem the losses the firm incurred in the first half of the year, resulting in a full-year net loss of $10.3 million. While this was a 57 percent over $23.9 million in 2009, it fell short of Wall Street estimates.

During the call, King noted that Affy had annual free cash generation of more than $40 million, a fact that could make it more acquisitive going forward, and said the company experienced "double-digit growth" within its "strategic target markets of routine testing and validation."

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Tim Barabe, Affy's chief financial officer, said during the call that consumables sales fell 12 percent during the quarter to $63.4 million from $71.9 million. The decline was apparent both in RNA, where sales in Q4 fell 19 percent to $36.4 million versus $44.9 million in 2009, and in DNA, where the firm posted $21.5 million in revenues, down 14 percent from $25 million in the year-ago quarter.

For the full year, consumables sales fell 1 percent to $252.2 million in 2010 from $255.7 million in 2009. In 2010, Affy posted RNA revenue of approximately $147 million, down about 8 percent from $161 million in 2009. Annual DNA revenue was $91.3 million, up 3 percent year over year.

As King indicated, the lower sales both during the quarter and in the whole of 2010 were not the result of weak demand, since volumes actually grew during those periods. Instead, Barabe said that the decline was "driven primarily by a mix shift to lower-price formats, as overall unit volumes increased."

King added that the firm continues to be competitive in the expression and genotyping markets. He estimated that the firm has a "50- to 54-percent" share in the expression-array business, while genotyping is "closer to 40 percent."

King acknowledged that Affy is "number two" in the genotyping segment, where Affy's main rival, San Diego-based Illumina, is considered to be the leader.

According to King, the adoption of next-generation sequencing-based applications for expression studies has not yet impacted the firm's business, but he ceded that it could in the future.

"Is Affy facing competition from RNA-seq? I would say, 'no,'" he said in response to an analyst's question during the call. "Could it occur in the future?" he added. "Absolutely."

King said that he doesn’t think that the use of sequencing as a substitute for arrays affected 2010 receipts. At the same time, he predicted that the firm's expression business will likely be down 5 percent throughout 2011 — due to the lower price of its expression products but also because of pressure from other technologies.

"Clearly, sequencing is competing for a limited pool of funds overall, and there is a big [interest] around [sequencing] right now," he said.

As its discovery-oriented RNA sales declined during the fourth quarter and full-year 2010, Affy's DNA business continues to grow. King said the firm enjoyed a "successful first year" of Axiom genotyping sales, which made up about 40 percent of its total DNA volumes in both the fourth quarter and throughout the year.

Customer demand was driven by Axiom's performance as an assay and the company's ability to create customized chips, he said. About half of Axiom arrays sold in 2010 were custom designs, King noted.

Affy has recently expanded Axiom from the genome-wide association market to applied markets like agricultural biotechnology, which King estimated to be worth $500 million per year. To capture some of that opportunity, the firm last month introduced its high-density Axiom BOS 1 Array for bovine studies and its GeneChip Rice 44K Array for rice breeders and researchers (BAN 1/18/2011).

Affy has played in the ag-bio space before, providing whole-genome expression products, a "large fraction" of which were custom chips made for a "variety of companies, particularly large seed companies and plant companies," King said.

He added that the BOS 1 Array is the first of several animal-related products the company plans to introduce. He did not elaborate.

Routine Testing and Validation

According to King, the results for the year reflect Affy's strategy to grow its presence in the routine-validation and -testing markets. These markets straddle the firm's RNA and DNA businesses, so it did not break out a revenue number for those markets versus discovery.

King did estimate, though, that sales for use in routine testing and validation made up 20 percent, or about $62 million, of the firm's overall revenues last year. In comparison, the firm generated 12 percent of its 2009 sales, or around $39 million, in the routine testing and validation arena, he noted.

King said Affy's sales in this market have been led by arrays used in cytogenetic research. "In the perinatal markets, we’ve seen a major shift by the medical community toward the adoption of Affymetrix microarrays over conventional approaches," King said.

He said that "helping to accelerate that transition" was the American College of Medical Genetics' recommendation in September 2010 that arrays should be considered as a first-line tool for genetic studies (BAN 9/28/2010).

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King estimated that around 17 percent of the cyto research market has converted to arrays so far, and that the firm's business is "likely to be the fastest-growing [in the market among other] array manufacturers within cytogenetics."

These include principal Affy rivals such as Agilent Technologies, Roche NimbleGen, and Illumina.

Like most manufacturers, Affy is involved in discussions with the US Food and Drug Administration about submitting a cytogenetics-related package to the agency for clearance. He said the firm plans to file for clearance of at least one such product and will provide updates in coming quarters.

Most of Affy's rivals also plan to file cyto submissions with the FDA (BAN 7/6/2010).

After cytogenetics, sales generators include Affy's offerings in the cancer-research arena. He noted "growing interest among top cancer centers and pharmaceutical companies around the world" for the firm's OncoScan FFPE Express service offering.

Introduced last year, OncoScan allows molecular pathologists and oncologists to profile cancer samples for patient risk stratification, therapy selection, and the discovery of new cancer signatures (BAN 9/28/2010).

King said the firm's ability to work with formalin-fixed, paraffin-embedded samples has been a differentiator in the market. He said the company plans to debut an OncoScan kit in the future, but did not elaborate.

Other products making their way into the routine-testing and -validation space are Affy's Panomics line of QuantiGene kits. Last year, Affy launched QuantiGene ViewRNA Assay formats to support in situ multiplex gene expression analysis.

The branched DNA-based assays are designed to quantitate gene expression while localizing RNA trafficking within the cell at the single-copy level, according to the firm. The five-hour assay can multiplex gene expression in 96- or 384-well formats for high-throughput phenotypic and reporter gene-compound screening.

Affy claims its QuantiGene kits can be used to profile expression, quantify target mRNA following RNAi gene silencing; test biomarker validations, characterize stem cell differentiation and QC; decipher viral-host cell interactions; and validate microarray gene-expression results.

Affy previously said it plans to expand its QuantiGene menu this year (BAN 11/16/2010).

One upside of the increase in adoption of Affy's products for routine testing and validation is that that they cost more per sample than its discovery-oriented offerings, King noted.

"Our clinical research and clinical-based products command higher premiums," he said. "I think as these products begin to emerge into or evolve into real tests, then you might be looking for maybe an order of magnitude more in terms of price opportunities on a per-patient per-sample basis," King said.

He also said that he expects routine testing and validation sales to make up 25 percent of the company's total revenue in 2011, and that over the next three years revenues from clinical and validation markets will be 45 percent of the firm's total revenue compared with 20 percent today.

Instruments and Services

In addition to its cytogenetics and cancer offerings, sales of Affy's instruments are also contributing to growth. Though instrument-related revenues fell 7 percent to $8.5 million from $9.1 million in Q4 '09, Barabe said that full-year instrument revenues rose 9 percent He did not provide further details.

King attributed 2010 growth in instrument sales to Affy's introduction in February 2010 of its benchtop GeneAtlas system, as well as increased adoption of the high-throughput GeneTitan system. Another revenue driver during the year was demand for Affy's FDA-cleared Dx2 instrument

Also, Affy last month inked a distribution pact with Thermo Fisher Scientific, whose Fisher Scientific arm will distribute the GeneAtlas in the US and Canada (BAN 1/18/2011).

King called the deal an "important step" in putting the firm's products "within the reach of the large and fragmented global community of researchers." He said that training has started with the Fisher Scientific sales and marketing team, and that Affy "expects to see the benefits of this partnership" beginning in the second quarter.

"We expect instruments to grow as we expand the distribution of our GeneAtlas platform with Fisher Scientific, increase our GeneTitan installed base, and further penetrate clinical markets with new instrument placements," King said.

Service revenues during the fourth quarter, meantime, grew to $6.4 million from $5.9 million, while for the year service revenue dropped by nearly 50 percent to $20.6 million from $39.6 million in 2009, an ongoing trend.

Company officials did not discuss the decline during the call, but they did acknowledge it during the firm's third-quarter 2010 call. At that time, they attributed the drop to the fact that most services that rely on its chips are now outsourced to third-party providers (BAN 11/2/2010).

Net Cash

As of Dec. 31 Affy had $35.5 million in cash and cash equivalents and $67.2 million in available-for-sale securities.

Barabe said that in the fourth quarter, the company generated about $23 million in cash flow from operations. For the full year, it generated more than $48 million in cash flow from operations, up from $9.5 million in 2009, he said.

All this cash on hand leaves the firm open for "other opportunities," Barabe said, which could include acquisitions. King said during the call that Affy is now "at the point where reasonable-sized acquisitions that can strengthen [our] portfolio are a good thing for us to be looking at." He did not elaborate.

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

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