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Despite Genotyping Growth, Affymetrix's Q3 Sales Fall 5 Percent on Service Slowdown

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By Justin Petrone

Affymetrix last week posted a 5.3 percent decline in third-quarter sales, though it said it is seeing "steady adoption" of its next-generation genotyping array products and turned a loss into a profit.

For the three months ended Sept. 30, the Santa Clara, Calif.-based array vendor reported that total revenues fell to $74 million from $78.2 million a year ago. Officials attributed the drop to a decline in service revenues, which shrank nearly 50 percent to $4.9 million from $9.9 million in the third quarter of 2009.

Chief Financial Officer Tim Barabe said the drop in scientific services occurred as projects migrated to third-party service providers, and added the company believes this "transition is largely behind us."

Affy posted a profit of $968,000 for the quarter, compared to a loss of $8.8 million for the third quarter of 2009. The firm's R&D costs in the quarter declined to $16.2 million from $18.8 million in Q3 2009. SG&A costs also shrank to $26.3 million from $30.6 million a year ago. As of Sept. 30, Affymetrix had $40.1 million in cash and cash equivalents.

While Affy officials said they were "surprised" by the decrease in services revenues, they cited "steady progress" in the company's genotyping and expression businesses.

In addition, during the third quarter, the company filed a 510(k) submission with the US Food and Drug Administration for "reagents to be used in conjunction" with the company's Human U133 Plus 2.0 expression array, according to CEO Kevin King.

King said that clearance of the reagents will "enable the acceleration of developments, commercialization of FDA-cleared, gene expression signature-based clinical tests developed on the platform, paving the way for new growth opportunities in RNA analysis."

King said during the firm's Q3 earnings call that the reagents named in the filing, referred to as the "gene-profiling reagents," will be "accessories" to Affy's 510(k)-cleared instrumentation system.
He said that from now on the Human U133 Plus 2.0 array will be manufactured under Good Manufacturing Processes and reintroduced as the" gene profiling array MDCFM," which stands for medical device for further manufacture. King did not discuss the 510(k) submission further during the call.

DNA Up, RNA Down

Affy breaks its consumables business into two segments: DNA, which is led by genotyping arrays; and RNA, which is led by sales of expression chips. Barabe said DNA-related revenues fell 1 percent year over year to $20.6 million, and RNA revenues retreated 6 percent year over year to $37.5 million. Affy's services business is broken out separately from consumables.

Product sales for the quarter rose to $67.3 million from $66.2 million a year ago, while royalties and other revenues receded to $1.8 million from $2.1 million in the year-ago period. The product mix during the quarter was about 60 percent RNA and 40 percent DNA, Barabe said. Consumables sales, at $61.9 million, were flat year over year.

For the first time, Affy was able to discuss product revenue in a third category, proteins, which came from antibody arrays and other kits gained through its 2008 acquisition of Panomics. Barabe estimated that sales of protein-related products amounted to nearly $4 million in Q3.

Noting Affy's diversified product menu during the call, King said the company in the past was a "price point company" with a "single product in RNA" with the U133 Plus 2.0 array, and "largely a single product in DNA," the Affy SNP 6.0.

"Now, we have got a very broad, diversified base, and almost all of those products, with the exception of the GWAS-related market, seem to be growing nicely for us," King said.

Within Affy's DNA portfolio, its whole-genome custom chips, targeted genotyping arrays, and cytogenetic products were the fastest-growing lines during the third quarter, King said. Sales of Affy's Axiom next-gen genotyping arrays have, in particular, performed better than the company expected when the platform debuted last year.

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The Axiom Genotyping Solution enables customers to either run catalog arrays or design and run their own arrays using Affy's internal database. Both approaches can be used on the firm's automated GeneTitan system.

King said that Axiom sales currently make up about 40 percent of the company's DNA sales, and that half of the chips sold are custom products. "I don't think that we were thinking that half of our business would be custom so quickly," he said.

Customers typically order Axiom custom arrays of between 350,000 and 700,000 markers, though the company does offer clients the ability to run samples against up to 2.6 million markers, King said. "People are generally more interested in powering a study, which means that they need more samples … and they are trading off content for it," he said.

King said that the firm already offers a 5-million-marker product as a service, but has not formalized plans on making the array available as a catalog offering. "We allow [customers] to take any combination of about 5.4 million SNPs, we put them on a series of plates, and run them for them to create subsequent targeted custom panels," King said. "We've got a couple of examples of people using that now."

Illumina, Affy's closest competitor in the whole-genome genotyping market, anticipates launching a 5-million-marker product by the middle of next year (BAN 10/27/2010). The San Diego company has recently reported a spike in demand for its genotyping arrays, but King denied Illumina's success has impacted Affy's business.

"We have products of equal or better capability in terms of content and workflow," King said. "I wouldn't say that there has been share loss or anything like that." Still, he said that the market for genome-wide association studies is slow as customers await new content from the 1000 Genomes Project and other sources. "People are starting to gear up to [develop] study designs, design custom arrays, and try to get funding," he said. "Overall, the market has fewer opportunities right now for GWAS [but] we are very optimistic that that will come back."

While Affy awaits the return of the GWAS market, it is moving forward with its offerings for array-based cytogenetics. King said the company is experiencing "broader adoption" of its SNP 6.0 and Cytogenetics Whole-Genome 2.7M arrays, and is "encouraged" by new American College of Medical Genetics guidelines that recommend arrays as the first-line test over traditional karyotyping (BAN 9/28/2010).

"Cytogenetics is tracking very nicely to our expectations and that ACMG announcement … is going to continue to promote the use of arrays in cytogenetics research," King said. He said Affy is making a "major go-to-market effort" to reach cytogenetics customers globally.

"The deployment of our sales team is the big issue here for us to make sure that we have call points with the appropriate people around the world," King said.

Affy has acknowledged numerous times over the past year that it intends to submit a cytogenetics-based assay to the FDA for clearance. Other firms that make arrays that are used in cytogenetic research, such as Illumina, Agilent Technologies, and Roche NimbleGen, have made similar promises.

This week, King said that Affy will provide more information on its regulatory strategy next year. "We've been very actively involved in this space with the FDA, but we have not yet described specifically the path that we are on and that will be coming in the beginning of the year," he said.

Affy is also promoting its OncoScan FFPE Express service for cancer research. Launched through its research services lab in September, Affy said OncoScan can obtain copy number variants, genotypes, and somatic mutations from samples as diverse as formalin-fixed, paraffin-embedded samples (BAN 9/28/2010), and degraded tissue samples.

King said the OncoScan service is in its "early days," but said interest in it is "really strong," and Affy has signed agreements with "several big, important pharma companies" and academic centers.
OncoScan assay customers include the University of Texas MD Anderson Cancer Center, the University of California in San Francisco, and the Huntsman Cancer Institute at the University of Utah, King said.

Though RNA sales were down, King said that Affy stands to benefit from product diversification. "Our portfolio of RNA products now ranges from whole-genome arrays that measure gene function, splice variants, and transcripts to assays that measure single transcripts within individual cells," he said.

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Affy has needed to diversify its offerings in part because it expects its sales to researchers to grow in the "low single-digit range" in coming quarters. King attributed the overall drop in RNA revenues to a restructuring of Affy's sales force earlier this year and a general move by customers who had traditionally bought higher-priced discovery tools to lower-priced validation products.

The sales restructuring hit sales of Panomics-related products in the second quarter, as the Panomics sales team was integrated into Affy's, causing a realignment of sales channels. King said that Panomics-related sales grew sequentially, "indicating that our efforts to get back on track are working."

Of products gained through the Panomics acquisition, King noted the firm's Procarta cytokine-profiling kits and branched DNA-based QuantiGene Plex RNA-profiling kits, and said the QuantiGene ViewRNA kits are "growing nicely."

The QuantiGene View assay in particular is being adopted by the "cancer community, academic medical centers, and regenerative medicine marketplace in a big way," he said.

King said that Affy's kits are competitive against rival technologies in the market, such as PCR, because of the ability to work with FFPE samples, and because the assays do not require amplification or purification.

He singled out high-throughput screening of drug compounds in the pharmaceutical industry is a "big application" for the company's technology. "As people are looking at single-cell detection in both regenerative medicine and in cancer where they are trying to sort out single cells from sort of a mixture of cells, we have unique advantages," King said.

The Instrument Side

Affy's instrument sales for the quarter climbed 29 percent to $5.4 million from $4.2 million the same period last year, mostly because of adoption of the GeneTitan system.

Annualized consumable pull-through for GeneTitan, launched at the end of 2008, is about $600,000 per instrument, according to Barabe. Affy did not disclose how many GeneTitans it has placed since the system was launched at the end of 2008 but by the end of this year, it expects shipments to have increased 60 percent relative to 2009.

Affy has experienced technical issues with some of the newly placed GeneTitans. King said the company incurred an expense of $1 million related to upgrading systems that "were not performing at customer sites as reliably as we had expected."
Affy is also fulfilling orders that were delayed in Q2, due in part to the European funding environment.

The company blamed a 12 percent drop in sales that quarter on weaker than expected European performance, but pledged to make up the difference in the second half of the year (BAN 7/27/2010).

King said that the company filled more than half of orders that had been delayed during Q3 and expects the rest to close by the end of the year. "I still think the European market is a fairly difficult market overall," King said. "I think we continue to see that market to be somewhat of a challenge."

Waiting for Diagnostics

As Affy continues to place more of its next-gen instruments, it expects its diagnostic partners and customers to likewise advance by developing various tests on its array platform. According to King, more than 60 tests are currently being developed by various molecular diagnostic test makers or clinical labs.

Yet of these tests, only a handful are on the market, such as Roche's AmpliChip CYP450 drug metabolism test, Pathwork Diagnostics' Tissue of Origin Test in the US, and Ipsogen's breast cancer test MapQuant DX in Europe.

Most of the assays developed by Affy's partners, now numbering more than a dozen, are scheduled to be commercialized within the next few years. King said that many of the company's partners are already in discussion with the FDA and therefore will most likely be unaffected by expected changes in the way the agency regulates laboratory-developed tests.

"Many of our partners are preparing for 510(k) submissions and are actively engaged with the FDA in order to kit and sell their products," King said. "In the long term if the FDA was to change their position on laboratory-developed tests, these folks would be well covered, because they are planning for submissions."

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