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Analysts, Investors 'Troubled' as Affymetrix's Preliminary Q3 Revenues Miss Estimates

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A constrained funding environment and weaker Euro negatively impacted Affymetrix's gene expression array and eBioscience business units in the third quarter, causing the firm to report lower-than-expected preliminary revenues and eliciting concern from analysts and investors alike.

The Santa Clara, Calif.-based life sciences company this week said that it expects total revenue of approximately $80 million for the three months ended Sept. 30, missing an average consensus analyst expectation of $84.6 million.

CEO Frank Witney in a statement attributed the firm's weak Q3 performance to "ongoing concerns about global academic funding as well as a weaker Euro." Both factors caused a decrease in revenues in Affy's gene expression array business unit as well as eBio, the San Diego flow cytometry and immunoassay reagents provider that Affy acquired in the second quarter (BAN 8/7/2012). Specifically, Affy said that eBio's revenues were $18 million in the three months ended Sept. 30, about six percent down from analysts' expectation of $19 million.

Though Affy saw "double-digit growth" year over year for its genotyping array products, including its arrays for cytogenetics research, Witney said that the company now expects that total revenue, excluding eBioscience, will be "flat to slightly down" for 2012 relative to 2011. Witney had previously pledged to return Affy to profitability this year, and had forecast low, single-digit growth for the firm (BAN 8/7/2012, BAN 2/14/2012).

Investors reacted negatively to the news. Affy shares closed at $3.71 on Monday, the day of the announcement, down 14 percent from a previous closing price of $4.31.

In research notes released after the announcement, several analysts suggested that other factors may be contributing to the weakness in Affy's gene expression array business.

For example, Piper Jaffray's Bill Quirk wrote that the recent findings from the Encyclopedia of DNA Elements consortium, which uncovered "multiple unexplored regions with regulatory functions," will "lead to a shift away from gene expression arrays to more robust methods (e.g. transcriptome sequencing or RNA-seq)."

Members of the ENCODE consortium last month published 30 papers in Nature, Science, Genome Research, and other journals, demonstrating that they were able to assign biochemical functions to around 80 percent of genome sequences — filling in large gaps left by previous studies that focused only on protein-coding sequences, which account for about 2 percent of the genome.

Illumina CEO Jay Flatley said last month at an investor conference that the ENCODE findings pointed to a need for more whole-genome sequencing, as opposed to other methods, both array and sequencing based. "You need to sequence the entire genome to get access to the entire spectrum of variation and regulation across the entire genome," Flatley said (BAN 9/18/2012).

Despite the potential impact of the ENCODE findings on Affy's expression array business, Quirk called the firm's genotyping growth "encouraging" and said that Piper Jaffray remains "optimistic on the top-line diversification eBioscience provides Affy, although it is troubling that eBio missed expectations during its initial quarter post acquisition."

Goldman Sachs' Isaac Ro suggested in a note this week that the factors affecting Affy's Q3 performance could potentially impact the share prices of other life science tools companies. At the same time, he said that more specific issues were impacting Affy's expression array business.

"Recall that in [the second quarter of 2011, Affy] was one of the first tools companies to see funding pressures, which sparked a sector-wide sell-off," Ro wrote. "At that time, the company pointed to 'decreased sales to academic customers across all regions, particularly in North America' as the reason behind the revenue shortfall," he wrote. "Having said that, we would also point out that [Affy] faces the added pressure of secular shifts away from microarray technology and market share losses to [Illumina]."

Because of these other factors — a shift away from arrays as well as array market share losses to Illumina — Goldman Sachs remains neutral on the group of tools companies it covers.

"Our recent checks have not suggested a sharp pullback in 3Q spending patterns across academic end markets," wrote Ro. "Additionally, global macro indicators imply a relatively stable operating environment sequentially."

While Witney acknowledged that the performance of Affy's gene expression array and eBioscience business units was "weaker than expected" in Q3, he said that management "continues to believe that the Affymetrix business is stabilizing," that the integration of eBio into Affy is "on track," and that the company has "important new product development and commercial programs that are underway."

In its statement this week, the company said it expects to report cash on hand of approximately $39.6 million as of Sept. 30, after a $3.5 million interest and principal payment on its senior debt. Affy noted that it is observing a "pre-earnings quiet period" until it reports its third-quarter results on Oct. 31.

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