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'Soft' Q1 Pushes Affymetrix to Bet on Applied Markets, Acquisitions to Restore Growth


This story was originally posted on April 29.

By Justin Petrone

Affymetrix is keen to diversify its business, grow its applied-markets plan, and make acquisitions to offset "soft" demand for its whole-genome genotyping arrays, according to its CEO.

However, analysts were cautious about Affy's future prospects, and one well-regarded analyst suggested the firm may become an acquisition target itself.

Affy CEO Kevin King said this week that the firm is sizing up potential buys even as it continues to sell more of its cytogenetics and cancer-focused products.

"We have a fairly active business-development dashboard, and we're always looking at acquisitions that could help both top line and bottom line," King said during the firm's first-quarter conference call Wednesday.

"That said, I think within our portfolio we're quite confident in the applied-market growth … for cytogenetics and cancer," he said, adding that Affy feels "very strongly" about the appeal of its branched DNA-based QuantiGene View kits for a number of pathology applications.

First-quarter sales growth for newer products in cytogenetics and oncology research partially offset declines in other areas such as the genome-wide association studies market, but it wasn't enough to stem a year-over-year decline in revenues.

For the three months ended March 31, revenue fell 8 percent to $73.7 million from $80.2 million a year ago.

Product revenues dropped 8 percent to $67.5 million from $73.4 million year over year, while service revenue was flat at $4.5 million and royalties and other revenue fell 22 percent to $1.8 million from $2.3 million.

Affy breaks its consumables sales into two categories: DNA, largely dominated by genotyping array products; and RNA, led by the firm's gene-expression array products. Both segments were down during the quarter.

Chief Financial Officer Tim Barabe said during the call that consumables sales fell 5 percent to $62.9 million from $66.2 million a year ago. DNA revenue sank 9 percent during the period to $21.7 million from $23.9 million a year ago, while RNA revenue fell 4 percent year over year to $36.5 million from $38 million.

The product mix remained about two-thirds RNA, and one-third DNA and other revenues, Barabe noted.

Receipts from other consumables, including kits for protein analysis, as well as reagents and biochemical products, rose 7 percent to $4.6 million from $4.3 million during the quarter.

Instrument sales plumetted 36 percent to $4.6 million from $7.2 million.

However, Affy posted a $39,000 profit during the quarter compared to a $9.6 million loss a year ago, partially the result of decreased operating costs.
R&D expenses shrank 12 percent in the quarter to $16.3 million from $18.5 million, while SG&A spending decreased 13 percent to $27.2 million from $31.4 million.

As of March 31, Affy had $29.6 million in cash and cash equivalents, and $52.1 million in available-for-sale securities — resources that King said the company could spend on acquisitions or business combinations.

Affy an Acquisition Target?

Investors weren't happy with the results, causing shares in Affy to fall 3 percent the day after the company released them.

Some investment-bank analysts were equally wary about Affy's future. Writing in a research note this week, Goldman Sachs' Isaac Ro said the company continues to face "secular headwinds in the legacy research franchise that will weigh on [its] ability to drive material revenue growth in spite of new product launches."

He also pointed out that the firm's newer, automated GeneTitan instrument platform has seen "limited commercial success" since its launch in 2009, "implying market share in the core array business will continue to suffer."

Looking ahead, Ro cautioned that risks to Goldman Sachs' view and price targets for Affy include "GeneTitan traction, adoption of genotyping arrays with [1000 Genomes] content, stabilization in gene-expression pricing, and acquisition of the company."

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Meantime, Oppenheimer analyst David Ferreiro called Affy's revenue "uninspiring" and said its profitability was "overshadowed by another quarter of negative revenue growth."

In particular, he said the firm's microarray business "continues to disappoint," saying its weakness in the GWAS market "seems to be impacting [Affy's] DNA array sales more than [Illumina's]," suggesting unfavorable competitive dynamics.

"As pressure from [next-generation sequencing] looms, especially for RNA arrays, [Affy] will continue to face an uphill battle in the microarray market," he said.

Given these "multiple headwinds to the company's core microarray franchise, successful execution of the ongoing business diversification strategy is necessary," Ferreiro concluded.

Potential drivers include the "uptake of cytogenetic, cancer, and pharmacogenomics arrays," which have already been "promising, suggesting potential DNA stabilizers," he said.

Ferreiro added that the company's instrument distribution pact with Thermo Fisher Scientific, inked last year, "remains a potential wild-card for growth" (BAN 1/18/2011).

Applied Markets

Company officials painted a different picture, saying declining RNA revenues were the result of a shift to lower-priced products rather than slower demand.

In fact, King said that RNA array volumes in the first quarter grew over the first quarter of 2010, and said the 4-percent drop in revenue was offset by a 50 percent increase in ArrayPlate volumes over last year.

Affy's array plates, which run on its high-throughput GeneTitan platform, typically cost less per sample than the firm's older, cartridge-based format.

"We generated year-over-year RNA volume increases in several key product lines, including [in vitro transcription], gene-level, and microRNA [arrays] and reagent products," said King. Affy introduced the second version of its GeneChip miRNA Array in March, which King said contributed to a 60 percent boost in miRNA array sales in Q1 (BAN 3/1/2011).

"We believe the market for RNA arrays continues to be [increasing] despite the financial community's concerns over potential displacement by new sequencing technologies," King said.

In the GWAS market, though, King acknowledged "continued softness" and said the firm was eager to move beyond its dependence on that sector to more lucrative opportunities, even as it prepares to introduce a suite of population-optimized arrays for association studies (BAN 4/26/2011).

"It's really the large GWAS market that is very soft that's dragging down the total DNA number for us," he said.

King said he anticipates a coming "steady stream" of smaller, follow-on association studies, but conceded the expected second wave of GWAS, powered by rare-variant content made available by the 1000 Genomes Project and other sources, "really hasn't materialized yet."

With GWAS sidelined for now, Affy is seeing a "steady increase" in revenue from other DNA products for cytogenetic, cancer, and pharmacogenomics studies, according to King.

He said first-quarter sales of cytogenetics- and cancer-related products grew 20 percent year over year, despite the 9-percent drop in DNA sales. "The growth from these products is decreasing our dependence on the GWAS market, and it's important to note that we believe demand within these markets is growing and that the total opportunity exceeds that of the GWAS market by a factor of [three]," he said.

To take advantage of the opportunity in cytogenetics research, Affy will in the third quarter of this year launch a next-generation array called Cytoscan. The new chip will provide "unprecedented resolution for studying copy number variations as well as … SNP content," he said.

Customers who have evaluated Cytoscan have indicated the firm has a "real game changer with great prospects for taking share and accelerating the conversion of the [cytogenetics research] market to arrays," said King. "We believe this will be one of our most important growth drivers for the company in the second half of the year."

Affy already has a number of cytogenetics-themed products on the market. Since its initial launch in 2008, the firm's Cytogenetics Research Solution has been offered with its SNP 6.0 and Whole-Genome 2.7M Arrays (BAN 7/6/2010).

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In terms of oncology-focused products, Affy is looking to offer its OncoScan FFPE Express service as a catalog product. The firm introduced the second generation of the assay, which enables users access to copy number, allelic ratio, and somatic-mutation data from formalin-fixed, paraffin-embedded tissues, last month (BAN 4/5/2011).

King did not discuss a potential launch date for the kit, but said that it would be made available in the firm's older, cartridge format, given that it has "over 200" of its GeneScan3000 Dx systems installed worldwide that could run the assay.

King said that customers have been using the OncoScan service for both biomarker discovery and to make drug determinations for patients, though not as a "first-line" test.

"These broad genetic signatures …are really good for identifying …therapeutic action," he said. "That's kind of a sweet spot, and customers tell us they want that stuff in-house."

Affy is also looking to expand its menu of agriculturally themed arrays. Earlier this year, the firm introduced its high-density Axiom BOS 1 Array for bovine studies and its GeneChip Rice 44K Array for rice breeders and researchers (BAN 1/18/2011).

King said that Affy had a "very good quarter" for the BOS 1 Array and is "getting good traction" with its 44K Rice Array; he did not elaborate. King added that the company has "other planned products on the horizon" and is "very optimistic" about the agricultural biotechnology market in general.

Though Q1 instrument sales were down, King predicted that instrument growth this year will be positive. In January, Affy inked a deal with Fisher Scientific in which Fisher will distribute Affy's automated, benchtop GeneAtlas system to its customers (BAN 1/18/2011).

King said that Affy completed training Fisher representatives in February, and the company placed an initial order for demo inventory. "We expect to begin seeing the benefits of the relationship [with Fisher] over the balance of 2011," he said.

Regional Perspective

Like most life science-tools firms, Affy's fortunes continue to improve in the Asia Pacific region, which he called firm's "fastest growing," in spite of the recent earthquake and tsunami in Japan. King said Affy "did fairly well" in that country during the first quarter.

Still, he cautioned that Affy is "not really sure how the Japan research market is going to continue to move forward" following the recent events. "I think a lot of that has to do with [whether] there's any other unfolding effect here as a result of the tragedy there."

Sales by region for the quarter were not immediately available. Receipts from Japan last year were about $22 million, or about 7 percent of the firm's total 2010 revenues of $311 million. Sales in "other" markets, which include other Asian nations, were $29 million, or 9 percent of total sales in 2010.

While Asian sales continue to rise, Affy still does more business in Europe, though King said the continent is the "most challenging" region for the company at the moment for a "variety of funding and economic reasons."

Affy's rival Illumina also reported "weaker" sales in Europe during the quarter (see related story, this issue). Affy's sales in Europe last year were $80 million, or 26 percent of total revenues.

The bulk of Affy's business comes from sales in North America. Receipts from American customers were $178 million, or 57 percent of total revenues last year. So far this year, King said that sales to US pharmaceutical and other industrial customers have been "fairly solid," despite pharma consolidations.

At the same time he warned that the academic funding environment is "challenging" and "competitive," a situation that has left the company "vying for dollars" against other firms.

Have topics you'd like to see covered in BioArray News? Contact the editor at jpetrone [at] genomeweb [.] com.