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Mizuho Initiates Coverage of Affymetrix with Outperform Rating

NEW YORK (GenomeWeb News) – Calling Affymetrix a "turnaround story," investment firm Mizuho Securities initiated coverage of the microarray firm with an Outperform rating and a price target of $6 per share.

In a research report published Thursday, analyst Peter Lawson estimated Affy's 2011 loss per share at $.06 on revenues of $275.7 million.

Lawson said that the recent change of hands in management, greater focus internally and on new markets, and a stronger pipeline of products point to a better future for Affy. He noted, however, that it will be a quarter or two before the firm's "full coherent strategy emerges and we see the initial evidence of the turnaround."

The key catalyst for the potential recovery of Affy, Lawson said, is the change in management. On July 1 Frank Witney replaced Kevin King as CEO. Noting Witney's previous stints at Panomics, where he was CEO from 2002 until 2008 when Affy acquired it, and at Dionex, where he was CEO from April 2009 until December 2010 when Thermo Fisher Scientfic acquired that company, Lawson said Witney "has a strong record of operational leadership in the life science industry."

Lawson also said that Witney's earlier stay at Affy from December 2008 until April 2009 when he was chief commercial officer "will clearly help in his return to Affymetrix and the transition to CEO."

Lawson also called Affy's move away from large scale, complex genetic discovery to validation and testing, principally clinical diagnostics, a positive development. By 2014 the company anticipates revenues from validation and test markets will comprise between 40 and 45 percent of total revenues, up from about 25 percent estimated in 2012.

As that shift occurs, Affy's exposure to the academic market as a percentage of revenues is expected to retreat from 70 percent in 2009 to 60 percent by 2012.

"We view this as a positive given the high level of innovation required to remain competitive in cutting edge technologies for academia, and the weakness surrounding government funding in the US and Europe," Lawson said.

The validation and testing market is about $1.5 billion, he said, and the most promising opportunity for Affy in the testing market is cytogenomics. Lawson cited Affy's CytoScan HD product for the analysis of copy number changes and single nucleotide polymorphisms. Affy is in discussions with the US Food and Drug Administration on the appropriate regulatory pathway for CytoScan, and Lawson said that he expects the firm to submit an application to FDA for approval of CytoScan next year.

In addition to concerns about past management, much of the dim view over Affy among investors surrounded its core microarray business, which in light of next-generation sequencing has been dismissed as a dying technology. Lawson said, though, that demand for microarrays will still be "significant," particularly for large-scale genomic research "where sequencing in the near-term remains cost prohibitive, and in diagnostics, where simplified read-outs are preferred."

Moreover, microarrays, he added, can be complementary to sequencing, as they can be used to validate sequencing data.

During Affy's second-quarter earnings conference call last month, Witney addressed questions from analysts on the challenges microarrays have from next-gen sequencing, saying that the answer would be to "make sure that people would understand when one would run a microarray and how it fits into the workflow. People do lots of experiments and have different needs at different times."

He added that the company will begin educating researchers about how microarrays fit into translational medicine and large clinical studies "that are in and around NGS."

However, as the cost of sequencing keeps plummeting and whole-genome sequencing threatens to disrupt the microarray market, Lawson said that "sequencing poses a significant threat to microarray demand, and Affymetrix is especially vulnerable given its reliance on array revenue — which would necessitate an accelerated transition to validation and testing."

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