AFFX Affymetrix, Inc.

We maintain our Neutral rating on genetic products maker Affymetrix (AFFX). The California-based company posted a modest profit of $39,000 (or break-even earnings) in first-quarter fiscal 2011 as a decline in sales was offset by lower costs. The results matched the Zacks Consensus Estimate.

Revenues dipped 8% year over year, hit by lower product sales, trailing the Zacks Consensus Estimate. Product revenues were hurt by lower consumables and instrument sales. Both DNA and RNA sales fell in the quarter. Despite lower sales, gross margin improved in the quarter owing to better mix and reduced costs.    

Affymetrix is a leading provider of microarray-based products and services to the global research community. Along with Illumina Inc. (ILMN), it is one of the two major providers of microarray technologies primarily used in the field of genetic research. The company holds a leading position in the gene expression products and services market with roughly 50%-54% share.

Affymetrix is enjoying steady end-user demand for its arrays and is expanding its customer base through new product launches. The company broadened its popular Axiom genotyping platform in the first quarter with the launch of the Axiom Genome-Wide CHB 1 Array for studying diseases in Han Chinese populations.

Moreover, Affymetrix is pursuing a number of strategies (including expansion into new markets and strategic alliances) aimed at expanding its top line, representing a top priority in 2011. Affymetrix targets to generate at least 25% of its sales from new markets in 2011.

Moreover, the company’s distribution agreement with Fischer Scientific, a unit of Thermo Fisher Scientific (TMO) and shift of focus to high-growth markets (such as validation and routine testing markets) represent positive steps for future revenue growth. 

However, Affymetrix is operating in an intensely competitive industry, which is characterized by rapid technological changes and evolving market needs. Moreover, it faces risks associated with lower R&D spending by its customers, notably in Europe, due to a weak economy and government actions (such as budget cuts). Our recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).

 
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