AFFX Affymetrix, Inc.

Affymetrix Inc. (AFFX), a global genetic products company, reported second quarter 2012 adjusted (excluding one-time items other than stock-based compensation expense) loss of 13 cents per share, worse than the Zacks Consensus Estimate of a loss of 8 cents a share.

Reported profit in the quarter was $30.9 million (or 43 cents per share) versus a loss of $3.7 million (or a loss of 5 cents per share) in the year-ago quarter, primarily due to a one-time income tax benefit of $44 million related to the eBioscience acquisition.

Revenues

Revenues increased 2.7% year over year to $66.4 million marginally ahead of the Zacks Consensus Estimate of $66 million. Revenues included roughly $1.4 million from the eBiocience acquisition, negated by a currency impact of 2%. Sales were mainly led by higher revenues from scientific services, partially offset by lower chips revenue.

Revenues from products were approximately flat year over year at $58.5 million in the second quarter, which included consumable sales of $53.3 million, down 1.2%. However, instrument sales remained flat year over year at $3.8 million. Services and other revenues rose 19.7% to $7.9 million.

Margins

Unfavorable product mix led to a decline in gross margin to 58.3% from 60.1% in the year-ago period. This was partially offset by decline in excess and obsolescence costs in inventory. Product gross margin declined to 58% from 62% in the prior-year quarter.

Operating loss was $15.4 million in the quarter compared with a loss of $3.1 million, a year-ago. Selling, general and administrative (SG&A) expenses were higher at 61% of sales versus 41.3% in the year-ago quarter, largely due to expenses related to the eBiosciense acquisition. Research and Development (R&D) expenses, as a percentage of sales, fell to 20.5% from 23.7% in the year-ago period.

Balance Sheet

Affymetrix ended the second quarter 2012 with cash and cash equivalents of $26.7 million, down 2.4% year over year.

Recent Developments

On June 25, Affymetrix completed its acquisition of San Diego, California-based eBioscience Holding Company, Inc. for $315 million in cash. The acquisition is expected to significantly boost Affymetrix’s foothold in the fast-growing immunology, oncology and translational medicine markets, representing an annual opportunity of more than $2.5 billion. It will diversify the company’s revenue base, expand its product range (to include a vast array of reagents) and reinforce its growing molecular diagnostics business.

During the quarter, Affymetrix entered into a global distribution agreement with ScreenCell, a medical devices company which specializes in isolating rare circulatory cells. Under the agreement, Affymetrix will be the sole distributor of ScreenCell’s Circulatory Tumour Cells (“CTC”) Technology, to be used only for research purposes. The company believes that this latest addition to the Expression business will revolutionize cancer treatment in a big way as it will enable quick and cost-effective translational research.

Affymetrix also signed a research collaboration and licensing deal with Massachusetts General Hospital. Per the agreement, utilizing Affymetrix’s QuantiGene ViewRNA Assay platform, both the organizations will co-develop innovative cancer biomarker tests.

The company also announced a global partnership with Leica Microsystems in the second quarter. Affymetrix will combine its QuantiGene ViewRNA ISH Tissue Assay with Leica’s BOND RX staining platform for research purposes.

Our Take

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.

The company is shifting its research and development (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.

Affymetrix is also 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. Currently, the company retains a short-term Zacks #2 Rank (Buy).

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

 
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