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Affymetrix Reiterated at Neutral

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We reiterate our Neutral recommendation on Affymetrix Inc. following its second quarter results. In the reported quarter, adjusted (excluding one-time items other than stock-based compensation expense) loss of 13 cents per share was worse than the Zacks Consensus Estimate of a loss of 7 cents a share.

However, 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 recently acquired eBiocience holding. Currency fluctuations negated revenues by 2%. Scientific services contributed to higher revenues, partially offset by lower chips sales.

Affymetrix is a leading provider of microarray-based products and services to the global research community. Along with Illumina Inc. (ILMN - Free Report) , it is one of the two major providers of microarray technologies primarily used in the field of genetic research. It also 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. Affymetrix reckons cytogenetics and cancer research to be promising areas for expansion, representing market opportunities of roughly $200 million and $500 million, respectively.

In addition, the recent acquisition of eBioscience Holding is expected to boost Affymetrix’s foothold in the fast-growing immunology, oncology and translational medicine markets, representing an annual opportunity nearing $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.

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) to expand its top line.

However, Affymetrix operates 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.

Moreover, the company’s core business, the Expressions unit (which constitutes about one-third of the business) has not been performing up to the mark. Despite higher volumes and improving North American array sales, a mix of higher throughput but lower cost products act as a drag on revenues.

The Life Science Reagents business too is down, due to the termination of a distribution agreement in North America for one of its key products. The company expects to face near-term headwinds as the business shifts to direct sales.

Despite these headwinds, the company has been successful in expanding its top line and stabilizing its business through strategic acquisitions and operational synergies. We believe that the company will effectively integrate its latest eBioscience acquisition so that it does not end up being a drag on the bottom line. We currently have a Neutral recommendation on Affymetrix, which carries a short-term Zacks #2 Rank (Buy rating).

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