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After 'Pivotal' 2012, Affy Looks to CytoScan, Axiom Genotyping Products to Drive Future Growth

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This article was originally posted on Feb. 1

When Affymetrix executives look to the years ahead, they envision a reinvigorated company that is sustained by demand for its products and by a leaner, focused organization that is able to transform the company into what CEO Frank Witney termed a "leader in translational medicine, molecular diagnostics, and applied sciences."

Witney provided an overview of the firm's efforts to reach that goal during its fourth-quarter earnings call last week, describing phases of the company's progress since he joined as CEO 18 months ago. The first phase was the stabilization of its core business and realignment of its portfolio. The second phase is to drive the sustainable and profitable growth of the company. And the third phase is to assume the status of market leadership.

Affy is not there yet. According to Witney, the firm is still in the second phase of this three-stage transition, which will play out throughout the coming year and into 2014 and will focus heavily on its CytoScan cytogenetics and Axiom genotyping products.

Affy has also embarked on a restructuring plan, announcing last month a plan to lay off 100 employees, or 8 percent of its staff, in order to reduce costs and return the firm to profitability (BAN 1/15/2013).

Despite the layoffs, the Santa Clara, Calif.-based company has some reason to be optimistic. For the three months ended Dec. 31, 2012, Affy reported $84.3 million in revenues, up from $65.1 million a year ago. The 29 percent jump was mostly attributable to the inclusion of revenues from eBioscience, the flow cytometry and immunoassay reagents provider that Affy acquired in June 2012. Excluding that business, revenues grew 2 percent year over year, the company said.

Witney discussed multiple dynamics within the firm's four business segments — gene expression, genetic analysis, and life science reagents, and eBio.

Overall, demand for microarrays continues to be high. Witney said that the firm saw double-digit growth in array shipments in the quarter, driven primarily by the firm's CytoScan and Axiom product lines. At the same time, a shift to less-expensive arrays put pressure on Affy's ailing expression business unit, which declined by 10 percent year over year in the fourth quarter. Most of that decline was attributable to a 14 percent drop in revenues for its legacy GeneChip expression arrays. The dive in GeneChip revenues was offset in part by 11 percent growth in the company's Panomics business, a subsegment of the expression business unit.

Specifically, Witney said that growth in the expression business was driven by the Panomics QuantiGene ViewRNA molecular pathology offering and its Procarta multiplex immunoassay offering.

Despite that growth, Affy expects the decline in its gene expression business to continue. Witney said that the firm anticipates a 10 percent decline in 2013. Among the "obvious headwinds" facing the business are customers converting to sequencing or to the firm's own lower-cost products. Thanks to the eBio acquisition and continued growth in genotyping sales, Affy won't be as vulnerable to dwindling expression revenues as it has been in the past. Witney projected that expression revenues will represent about 30 percent of the firm's total revenues in 2013, compared to 50 percent two years ago.

'Healthy Growth Prospects'

Affy's main growth driver continues to be its genetics analysis business unit, which had a "solid" fourth quarter, according to Witney, growing by 17 percent year over year. In particular, Q4 CytoScan cytogenetics and Axiom genotyping revenues doubled from the year-ago period. The company's cytogenetics portfolio now accounts for about 10 percent of its revenues, accounting for $30 million in revenues last year, compared to $10 million in 2011.

Affy has been preparing to submit CytoScan for US Food and Drug Administration clearance, and Witney said the firm's filing is "now imminent." Affy expects to have an FDA-cleared cytogenetics product on the market by the middle of the year. Its main competitors, Agilent and Illumina, have also recently provided updates on similar filing plans (BAN 1/29/2013).

CFO Timothy Barabe said that the firm's cyto array business is growing by "taking market share from other players," such as Agilent, which is the "clear leader," in his words, but also by converting users to arrays from conventional karyotyping, as well as increased adoption in the blood cancer space. Witney claimed the firm now has 180 accounts using that product.

Altogether, cytogenetics represents an annual opportunity of $800 million for Affy, Witney said. About $200 million of that is postnatal constitutional cytogenetics, half of which is still done using classical karyotyping. But the much larger market is in cancer cytogenetics, which he estimated to be a $500 million market. He said that the cyto market has "healthy growth prospects" and is "minimally impacted" by sequencing, and that the firm expects that CytoScan will continue to be a "star product."

Affy's Axiom genotyping business continues to grow, the result of an "expanding catalog offering" and targeted products designed for both human and agricultural biotechnology research. At the most recent Plant and Animal Genome Conference in San Diego, investigators described several new chips developed in cooperation with Affy, including arrays for buffalo, wheat, and ornamental plant studies (BAN 1/22/2013). The company also recently introduced its 384-sample Axiom product, dubbed the Axiom 384 HT (BAN 1/22/2013 ).

Witney called the Axiom 384 HT an "extremely important development" that will "significantly strengthen our competitive position" and help continue the firm's penetration in the ag-bio market, "where routine genotyping and marker-directed breeding is increasingly widespread." He estimated that the ag-bio market currently exceeds $100 million in sales annually and thus is an "important growth driver."

Beyond Expression and Genetic Analysis, Affy's Life Science reagents business generated $7.8 million in Q4, roughly flat with Q4 2011, and Witney said that Affy believes that life science reagents will grow in the low single digits this year.

The firm's eBioscience unit grew by 6 percent in the quarter. Affy said that it believes that eBio's flow cytometry and immunoassay reagents products will continue to grow at about the same rate this year, driven by new product adoptions and by offering eBio products through the firm's global sales channel. Witney estimated that eBio-generated revenues will represent about 22 percent of its total revenue this year.

Altogether, Witney called 2012 a "pivotal year for Affymetrix." For 2013, the company expects its revenues to grow 12 percent to "$330 million or greater," a goal that is "built on the assumption" that it can generate "solid, double-digit growth" in its Genetic Analysis unit, mid-single-digit growth in its eBioscience business unit, and low single-digit growth in its Life Science Reagents business, while experiencing a 10 percent decline in its Gene Expression business unit.

A 'Hawkish View'

In several research notes last week, analysts who cover Affy praised the firm's Q4 performance, but were more cautious than management about its future prospects, citing a potentially greater decrease in expression sales, as well as the looming threat of a reduction in the National Institutes of Health budget, referred to as sequestration. During the call, Witney said that about a quarter of Affy's business was vulnerable to possible NIH funding decreases.

"We continue to have a more hawkish view on the expression business, where we've projected a 15 percent decline," wrote Leerink Swann's Dan Leonard. "Additionally, AFFX's outlook factors in a status-quo NIH funding environment," he wrote, "whereas sequestration would negatively impact NIH funds and AFFX's 2013 revenue."

Goldman Sachs' Isaac Ro called cyto a "bright spot" for the firm, but said that Affy faces "another transition year" ahead, where the "need for innovation remains acute" in the face of "end market headwinds and keen competition." In particular, he noted competition from Illumina, as well as competition in the cyto market, given Illumina's recent acquisition of BlueGnome, a British firm that specializes in arrays and software for cyto research and preimplantation genetic diagnosis. Like Leonard, Ro noted that Affy's projections did not anticipate the impact of sequestration.

In response to questions about sequestration during the call, Witney said that Affy continues to monitor its customers in the US. At the same time, he noted that the firm's business is shifting to applied markets like cytogenetics and agbio that are "less impacted by government funding." He also said that it is "not easy" for Affy to model its future revenue projections to include potential cuts, as it is not "privy to any specific information about exactly how or when the cuts will be implemented."

Elsewhere in Q4

According to Barabe, Affy's product sales for the fourth quarter increased 30 percent to $76.4 million from $58.7 million in Q4 2011. Core consumable revenues totaled $53.1 million, down from $54.9 million a year ago, and instrument revenues reached $5.2 million, up from $3.8 million a year ago. Services and other revenues reached $8 million, up 25 percent from $6.4 million in the prior-year-period.

The firm's net loss for the fourth quarter was reduced to $12.3 million from a net loss of $14.7 million a year ago. The company took a $1.8 million charge in Q4 related to its restructuring, and expects another $5.2 million charge for Q1 2013 related to the layoffs, he said.

R&D expenses in the quarter fell 13 percent to $14.5 million from $16.7 million a year ago, while SG&A costs rose 32 percent to $38.1 million from $28.8 million.

For the full year, revenues increased 11 percent to $295.6 million from $267.5 million, although revenues were down 3 percent from 2011 excluding the $37 million revenue contribution from eBioscience.

The company recorded $266.1 million in product sales in 2012, up 10 percent from $241.3 million last year. Core consumable revenues of $210.7 million were down from $225 million a year ago, but instrument revenues were up in 2012 to $18.4 million from $16.3 million in 2011.

Affy reduced its annual net loss to $10.7 million from a net loss of $28.2 million in 2011. It also cut its R&D spending 9 percent to $57.9 million from $63.6 million a year ago, while its SG&A costs increased 30 percent to $142.9 million from $109.6 million in 2011.

Affy finished 2012 with $25.7 million in cash and cash equivalents and $699,000 in restricted cash.

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