AFFX Affymetrix, Inc.

We retain our Neutral rating on genetic products maker Affymetrix (AFFX). Its second-quarter fiscal 2011 loss per share of 5 cents was a penny higher than the Zacks Consensus Estimate.

However, losses narrowed 33% year over year as lower costs more than offset a decline in revenues. Sales dipped roughly 10% year over year to $64.7 million, hurt by decline in sales to the California-based company’s academic customers across all markets, especially in North America. Sales met the Zacks Consensus Estimate.

Product revenues (down roughly 11%) were hit by lower consumables and instrument sales. Both DNA and RNA sales declined in the double-digit bracket in the second quarter. Despite lower revenues, gross margin improved year over year on the back of favorable 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.

Affymetrix is enjoying steady end-user demand for its arrays and is expanding its customer base through new product launches and strategic alliances. The company broadened its popular Axiom genotyping platform in the second quarter with the launch of the Axiom myDesign array for studying mutations in disease and characterizing genetic interactions.

Moreover, the company unveiled the innovative Cytoscan HD platform for cytogenetic analysis and is currently working closely with the U.S. FDA to bring this innovative product into the market.

Moreover, Affymetrix is pursuing a number of strategies (including expansion into new markets and strategic alliances) aimed at expanding its top line. The company’s shift of focus to high-growth markets (such as validation and routine testing markets) represents positive steps for future revenue growth. Affymetrix targets generating at least 25% of its sales from new markets in 2011.

However, Affymetrix is faced with intense competition across its core markets and is exposed to risks associated with lower R&D spending by its customers. Our recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).

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