This article was originally posted on Feb. 10.
After a 'challenging' year of revenue decline, Affymetrix executives last week promised to return their company to growth, hoping that new products, such as the CytoScan HD array for cytogenetics research, will offset an anticipated drop in expression array sales.
"Our investors are impatient to see stabilization of our business and a return to growth," said CEO Frank Witney. "We believe we are positioned to do that in the year 2012 and beyond, and have a high sense of urgency to make this a turnaround year for Affymetrix."
Witney commented on the firm's business during an earnings call last week. The embattled Santa Clara, Calif.-based array company reported a 23 percent drop in revenue for the fourth quarter of 2011 and a 14 percent revenue decline for the full year. The company attributed its losses to lower consumable and instrument sales.
In particular, the firm's gene expression array business, which still comprises 45 percent of its overall revenues, remains under pressure from next-generation sequencing. Affy's expression business declined by nearly a fifth in 2011, Witney said, and management expects it to shrink by between 5 percent and 10 percent this year, despite new product introductions and a reorganized sales team.
Since Witney took the helm of Affy last year, the company has reorganized into three business units: Expression, a combined Genetic Analysis and Clinical Diagnostics unit, and Life Science Reagents.
Witney said the firm now believes that growth in the latter two units will offset the projected decline in expression this year and will allow it to return to year-over-year growth beginning in the second half of 2012.
"We're making a steady progress in redirecting the business and laying the groundwork for a return to growth," Witney said.
Witney also outlined four goals for Affy's business. These include stabilizing [its] expression business, increasing [its] market share in genotyping, building critical mass in cytogenetics, and driving continued growth in its life science reagents business.
During the call Witney provided investors with an update on Affy's planned acquisition of eBioscience. Affy announced in November its intention to buy the San Diego flow cytometry and immunoassay reagents provider for $350 million in cash and debt, but was forced to delay the deal due to financing arrangements and an investor lawsuit, which was settled last month (BAN 1/31/2012).
Though the company said in January that the deal would close by the end of the first quarter, Affy seemed last week to back away from any concrete date for completing the acquisition.
"Successful completion of the transaction will require that we restructure the deal, and we are in active discussions on this front with eBioscience and our lenders," said Witney. He declined to further comment on those negotiations, saying he did not want to "speculate as to the possible elements of the restructuring or the likelihood that we'd be able to reach an agreement."
Affy will enjoy an exclusivity period through March 31 during which it won't face outside bidders for eBioscience. Witney said that Affy is not thinking about making other acquisitions at this time. "We're totally focused on our core business, as well as seeing what transpires in our discussions with eBio and with our lenders."
Even if Affy is unsuccessful in its bid to acquire eBioscience, Witney said the firm would still begin to grow again in the second half of 2012, due to growth in its core business units.
According to Witney, Affy will staunch the decline in its expression array business with a combination of new product launches and targeted overtures to sequencing users. Expression has been Affy's core business since it was founded two decades ago, but Witney acknowledged that the market dynamics have changed.
"It used to be relatively easy to sell expression arrays," said Witney. "We didn't have a lot of competition, either from price or other technologies," he said. "And now, the situation is more complex and we're trying to respond to that."
The company does not see a way to "change the trajectory" of its "historic" expression array business, Witney noted. "The expression … business has shrunk in the 15 percent to 20 percent range, and we don't see any way to attenuate that," he said. "We can only augment it and offset it with new products that we've launched."
Witney said the firm "took some important steps" towards stabilizing the business in the fourth quarter. He cited a recent deal with Genisphere that will allow Affy to offer Genisphere's reagents to Affy array customers, particularly those profiling microRNA expression.
"Customers tell us these reagents enable faster insight into the role of microRNAs in biological processes, such as mRNA degradation, transcriptional gene silencing, translational repression and, ultimately, in biomarker discovery in our core markets of translational medicine and cancer research," said Witney.
Witney said that Affy hopes to launch its first of such kits by midyear.
In terms of reaching out to sequencing users, Witney said that Affy has hired expression specialists to sell into the "pretty complex world of NGS, in which the arguments are complex and the roles of arrays need to be explained pretty carefully." In this case, the company is positioning its products as validation tools, he said.
Still, he cautioned that despite these efforts the firm's expression array business "will continue to decline."
Another potential growth driver for Affy's expression business unit is its Panomics line of branched DNA-based assays. Witney was formerly the CEO of Fremont, Calif.-based Panomics before Affy acquired it in 2008 (BAN 11/18/2008). The business was growing prior to its incorporation into Affy, but apparently did not perform as well as it should have post acquisition, given Witney's comments last week.
Witney said that Affy has now put together Panomics' old sales team, but that it would take time for them to revive growth in that product line. "It's not like the water faucet — you just don't turn the water back on," he said, "but we expect it to grow pretty aggressively."
According to Witney, sales of Panomics products account for about 8 percent of Affy's revenues, or about $21.4 million, based on its 2011 results. That is roughly double what Panomics brought in during the first nine months of 2008, prior to its acquisition (BAN 2/24/2009).
Witney said that Affy plans to grow its Panomics business by 35 percent this year and is "off to a good start."
Affy anticipates that its main growth driver this year will come from its Genetic Analysis and Clinical Diagnostics unit, especially from its CytoScan HD array, which is targeted to researchers in the constitutional and cancer cytogenetics communities. The company also expects increased demand for its Axiom genotyping arrays, and will launch a new kit by year end for cancer mutation detection.
According to Chief Financial Officer Tim Barabe, sales in the Genetic Analysis and Clinical Diagnostics unit account for 35 percent of the firm's revenues, or about $99 million in 2011. Witney said that Affy hopes that sales in the unit will increase by 20 percent this year, and, more specifically, believes that by the end of 2012 sales of CytoScan will constitute about 10 percent of its overall revenues.
The company plans to do this by converting cytogenetics customers from traditional, microscope-based approaches, and "taking share from other commercial array platforms," Witney said, naming Agilent Technologies as the dominant player in the market.
Indeed, Agilent not only serves individual labs, but manufactures cytogenetic arrays offered by other companies in the space, such as Oxford Gene Technology and BlueGnome, as well diagnostic services firms, like CombiMatrix Molecular Diagnostics.
Still, Affy has managed to gain some traction in the market with CytoScan, naming Laboratory Corporation of America and Arup Laboratories as first adopters (BAN 8/23/2011.
Affy launched CytoScan HD last July. The offering consists of its CytoScan HD array, reagent kit, Chromosome Analysis Suite software, and GeneChip instrument system. The array includes more than 2.6 million copy number markers, of which 750,000 are genotypeable SNPs and 1.9 million are non-polymorphic probes (BAN 7/26/2011).
The company in January said it plans to submit CytoScan HD to the US Food and Drug Administration for clearance later this year (BAN 1/17/2012).
Witney said that Affy believes that receiving regulatory clearance will put the firm at a "significant advantage" over other firms that sell chips for research use. Still, rivals Agilent, Roche NimbleGen, and Illumina have all pledged to submit their cytogenetics offerings to the FDA too (BAN 7/26/2011).
The company plans additional launches related to cytogenetics. Witney discussed potential applications in prenatal testing, pre-implantation genetics, and hematological cancers, but provided no timeline for when such chips could become available.
Affy also expects to see growth in its Axiom genotyping array business this year, although Witney characterized it as not being as reliable a source of revenue as other company offerings.
"Axiom is a lumpy business," said Witney. "It's not a daily number," he said, "these are larger deals." Affy expects to see growth from researchers using its population-focused arrays, as well as researchers in the agricultural biotechnology arena, for whom Affy has launched a number of chips in the past year and expects to launch more.
In recent months, Affy has launched chips for studying African-American populations and human origins studies (BAN 11/1/2011, BAN 11/29/2011).
At the Plant and Animal Genetics conference in San Diego last month, Affy also discussed the pending launch of a high-density genotyping array for studying poultry (BAN 1/24/2012).
"I think we have modest and realistic expectations around our genotyping platform," Witney said.
He added that Affy plans to launch a kitted version of its OncoScan assay by the first quarter of 2013. The cancer-related mutation detection platform is currently offered only as a service.
Affy believes that its OncoScan product will complement its CytoScan HD offering.
"Our OncoScan product is really a cytogenetics product because it's a copy number product that also does cancer mutations," said Witney. "So when you put our CytoScan product together with our OncoScan product … we think we'll have very broad-based platform for doing cytogenetics, either in constitutional, in hematological or in solid tumors."
Life Science Reagents
Of Affy's three business units, Witney characterized its Life Science Reagents business as the most stable and predictable. The unit consists of products developed by USB, a Cleveland, Ohio-based reagents maker that Affy acquired in 2007.
Since the acquisition, Affy has consistently seen mid-single-digit growth in the business, Witney said. The company believes that its product lines for molecular biology and biochemistry and its Anatrace membrane extraction reagents will "continue to deliver profitable growth for the foreseeable future," said Witney.
According to Witney, sales of life science reagents make up 13 percent of the company's revenue, or around $35 million. He said that the business unit is growing at an annual rate of between 5 percent and 7 percent.
Around the World
Affy continues to invest in building its international presence. Witney said that the firm is focused on opportunities in two emerging markets, Brazil and China, where Affy has had "very small efforts" relative to its competitors.
Affy maintains a representative office in Shanghai, and relies on a distributor, Prodimol Biotecnologia, to reach Brazilian customers. Going forward, Witney said that Affy will rely on a mix of direct sales and distributors to reach customers in these markets. "We believe we can … with just some additional efforts in those two markets … get additional growth," said Witney.
In other markets, Affy has appointed new commercial leadership for Japan and Europe. "Japan has been a difficult area for Affymetrix for several years and we felt it was time for a new leadership there," said Witney. He also said that he has a "high level of confidence" in the firm's European performance, noting that its Q1 quota for Axiom genotyping arrays has already been booked on the continent.
The most troublesome region for Affy is its home market, North America. Here too Affy recently changed its sales leadership.
"We changed leadership in North America because we believe that … we've underperformed in North America," said Witney. "I'm not sure that that's a macro trend or it's a company-specific trend, but we certainly had stronger performance in our international business, which is Asia and Japan and our distributors, as well as Europe," than in North America, he said.
According to its 10-K for 2010, the last year for which region-specific sales information is available, Affy's US sales fell 6 percent to $178 million from $190 million, declined 7 percent to $81 million from $87 million in Europe, were flat at $22 million in Japan, and grew 8 percent to nearly $30 million from $27 million in other markets.
'A Difficult Year'
Though it has not yet provided a regional sales breakdown for its 2011 performance, altogether 2011 was a "difficult year" for Affy, Witney said.
Total fourth-quarter revenue fell 23 percent to $65.1 million from $84.9 million for the same period in 2010. For the year ended Dec. 31, 2011, the company reported that total revenues declined 14 percent to $267.5 million compared to $310.7 million in 2010.
Fourth-quarter product revenue was $58.7 million compared to $71.9 million for the fourth quarter of 2010, a decrease of 18 percent. Consumable sales were $54.8 million, down 13 percent from $63.4 million in 2010.
Affy has historically broken its revenue into two categories, DNA, largely derived from genotyping sales, and RNA, largely derived from expression-related sales.
For Q4, DNA and other revenue fell 13 percent to $23.3 million from $26.9 million in Q4 2010. RNA revenue fell 14 percent to $31.5 million from $36.5 million in the fourth quarter of 2010. Additionally, instrument sales for the quarter fell by more than half to $3.8 million from $8.5 million in the fourth quarter of 2010.
For the full year, product revenue was $241.3 million in 2011, down from $277.7 million in 2010, or a decrease of 13 percent. Consumable sales were $225 million in fiscal 2011, down about 11 percent from $252.1 million in 2010. DNA and other revenue was $98.7 million, or down 8 percent from 2010. RNA revenue of approximately $126 million, $126.3 million, was down about 12 percent from the $144.3 million for the same period in 2010.
Instrument sales for 2011 were $16.3 million, down from $25.6 million in 2010. Service revenue was $5.1 million, compared to $6.4 million in the fourth quarter of 2010. For the full year, service revenue was $20.2 million in 2011, compared with $20.6 million in 2010.
Royalties and other revenue was $1.3 million versus $6.6 million in the fourth quarter of 2010. For the full year, royalties and other revenue was $6 million in 2011, compared to $12.4 million in 2010.
Affy's Q4 R&D expenses rose 8 percent to $16.7 million from $15.5 million for the same period last year, "driven by increased spending on our cytogenetics program," as well as costs associated with a 20 percent reduction in R&D headcount, according to Barabe.
For full-year 2011, R&D expenses were $63.6 million, down from $67.9 million in 2010.
Affy reported SG&A expenses of $28.8 million for Q4, flat compared to the fourth quarter of 2010, which was $28.7 million. For FY 2011, SG&A expenses were $109.6 million compared to $114.8 million in 2010.
For the full year, Affy's net loss was $28.2 million compared to a net loss of $10.2 million in 2010.
Affy ended Q4 with total cash and available-for-sale securities of $265.1 million. The firm is forecasting flat to low single-digit growth this year.
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