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Global genetic devices maker, Affymetrix Inc.’s (AFFX - Analyst Report) first-quarter 2013 adjusted loss per share of 1 cent was wider than the Zacks Consensus Estimate of break-even earnings. The adjusted loss excludes one-time items such as acquisition, restructuring and amortization-related expenses. However, it was narrower than the year-ago adjusted loss per share of 3 cents.

Reported net loss (including one-time items) in the quarter was $15.4 million (or a loss of 24 cents per share) versus a loss of $4.2 million (or a loss of 6 cents per share) in the previous year quarter.

Revenues

Revenues increased 19.5% (including the eBioscience acquisition) year over year to $77.9 million. eBioscience, which the company acquired in June 2012 contributed $19 million to total sales in the first quarter. However, results were lower than the Zacks Consensus Estimate of $82 million by 4.9%.

The company is facing severe headwinds in its Gene Expression business, offset by strong growth in the Genetic Analysis business and modest contribution from eBioscience. Additionally, the tight U.S. academic funding environment is also a problem.

Revenues from products were up 22.4% year over year to $71.6 million in the quarter. Product revenues included consumable sales of $49.1 million, down 8.7%, and instrument sales of $3.5 million, down 25.5%. It also included $19 million from the eBioscience acquisition. Services and other revenues also dropped 5.9% to $6.4 million, down 20% sequentially.

Margins

Gross margin for the first quarter declined to 51% from 58% in the year-ago period. However, adjusted gross margin remained flat year over year at 59%.

Operating expenses increased to $52.2 million in the quarter compared with $41.3 million, a year ago. Adjusted operating expenses were $43.6 million versus $39.3 million in 2011. Operating expenses were higher due to charges related to the eBioscience acquisition, offset by net savings in Affymetrix Core operating expense, amounting to $4.4 million, on the back of restructuring and headcount reduction.

Selling, General and Administrative (SG&A) expenses were higher at 45.1% of sales versus 42.8% in the year-ago quarter, mainly due to expenses associated with eBioscience. Excluding eBioscience, SG&A decreased 7% year over year.

Research and Development (R&D) expenses, as a percentage of sales, fell to 15.7% from 20.4% in the year-ago period, due to reduced headcount and variable compensation expenses along with lower IT and facilities costs and lower spending on supplies and consulting.

Balance Sheet

Affymetrix ended the first quarter of 2013 with cash and cash equivalents of $37.5 million, down 65% year over year. In the quarter, the company redeemed all of the remaining $3.9 million of its 3.5% convertible notes (due in 2038). Affymetrix also prepaid an additional $3.2 million of its senior-secured debt, reducing the total balance outstanding to $70.1 million.

Recent Developments

In the quarter, Affymetrix entered into a major contract with UK Biobank, a long-term epidemiological research, investigating 500,000 DNA samples, to study complex human diseases affecting public health. The Axiom Genotyping Solution from Affymetrix will be used to generate superior-quality genotypes, which in turn will provide researchers with valuable data to study genetic factors in human diseases.

Affymetrix has also entered into a partnership with Aqua Gen and the Center for Integrative Genomics (CIGENE) at the Norwegian University of Life Sciences (UMB) in the first quarter. As per the agreement, Affymetrix will genotype more than 900,000 markers per sample from the Atlantic salmon to implement genomic selection and enhance the salmon breeding program at Aqua Gen.

Further, the company has submitted a 510(k) to the U.S. Food and Drug Administration (FDA) for its CytoScan Dx whole genome cytogenetics test. The test is intended to identify chromosomal copy number variants (CNVs) and loss of heterozygosity associated with intellectual disability, developmental delay, dysmorphic features and congenital anomalies.

Our Take

We remain disappointed with Affymetrix’s dismal first quarter results. Research and development spending by Affymetrix’s customers have fallen considerably due to a weak macroeconomic environment coupled with stringent government actions including budget cuts. Additionally, unexpected softness in the gene expression business worries us.

Although Affymetrix’s plan to focus on expanding in the translational science, molecular diagnostics and applied markets is beneficial in the long-term, we remain on the sidelines given the near-term headwinds.

Further, modest contribution from eBioscience has failed to impress us. Increasing pricing pressure in the U.S. along with operational hazards in Japan dampened the growth rate. However, management is confident that it is capable of increasing eBioscience’s market share going forward, on the back of new products.

We currently have a Zacks Rank #4 (Sell) on the stock. While we prefer to avoid Affymetrix until we see signs of improvement in the company’s performance, other companies like Osiris Therapeutics (OSIR - Analyst Report), Cleveland BioLabs and Athersys (ATHX - Snapshot Report), all carrying a Zacks Rank #1 (Strong Buy), are expected to do well in the Medical-Biomed/Gene industry.
 

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