AFFX Affymetrix, Inc.

We retain our Neutral rating on genetic products maker Affymetrix (AFFX) following its tepid fourth-quarter fiscal 2011 results which missed the Zacks Consensus Estimates. Its loss per share of 21 cents for the quarter was higher than the Zacks Consensus Estimate of a loss of 7 cents.

Sales declined at a double-digit clip, hurt by lower product revenues, and also missed the Zacks Consensus Estimate. The California-based company witnessed declines across its consumable and instrument businesses in the quarter, resulting in a 18% decline in product revenues.

Both DNA and RNA sales declined in the quarter. Gross margin dipped year over year, impacted by volume absorption and unfavorable mix.

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. Affymetrix holds a leading position in the gene expression products and services market.

Affymetrix is expanding its customer base through new product launches and strategic alliances. Moreover, the company is pursuing a number of strategies (including expansion into new markets) aimed at expanding its top line.

Affymetrix is shifting its R&D focus from discovery and exploration markets to the faster-growing validation and routine testing markets. The company reckons cytogenetics and cancer research as promising areas for expansion, representing market opportunities of roughly $200 million and $500 million, respectively.

The company has realigned its operation into a number of business units including gene expression, genetic analysis, life science reagents and clinical diagnostics. The structural changes are expected to streamline its decision-making process while improving customer focus and accountability.

Affymetrix has also taken up various steps to stabilize its expression business. Moreover, the company expects its genetic analysis and clinical diagnostic business to grow at least 20% in 2012, driven by its cytogenetics program and increased traction of its Axiom genotyping platform.

We are also encouraged by the company’s move to buy privately-held eBioscience, a global leader in immunology and oncology flow cytometry reagents. The acquisition will significantly boost its foothold in the fast-growing immunology, oncology and translational medicine markets, representing an annual opportunity nearing $3 billion.

However, Affymetrix is operating in an intensely competitive industry and faces risks associated with lower R&D spending by its customers due to a soft economy and government actions including budget cuts.

Affymetrix is exposed to a volatile funding environment. The company has been beset by uncertainties surrounding National Institutes of Health (“NIH”) funding. Decline in government research grants may substantially affect the company’s revenues. Affymetrix currently retains a Zacks #5 Rank, which translates into a short-term “Strong Sell” recommendation.

 
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