AFFX

Affymetrix, Inc. (AFFX)

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Affymetrix Corporation (AFFX)

Q3 2010 Earnings Call Transcript

October 27, 2010 5:00 pm ET

Executives

Doug Farrell – VP, IR & Treasury

Kevin King – President and CEO

Tim Barabe – CFO and EVP

Analysts

Ross Muken – Deutsche Bank

Dave Clair – Piper Jaffray

Marshall Urist – Morgan Stanley

Isaac Ro – Goldman Sachs

Derik De Bruin – UBS

Julie Collins [ph] – Robert W. Baird

Brigham Hyde – Cowen and Company

Dwayne [ph] – Macquarie

Presentation

Operator

Greetings and welcome to the third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Doug Farrell, Vice President of Investor Relations for Affymetrix. Thank you. Mr. Farrell, you may begin.

Doug Farrell

Thank you, operator. Good afternoon, everyone and welcome to the conference call. At the close of the markets today, we released our results for the third quarter of 2010.

Joining me on the call today is our CEO, Kevin King, who will provide a commercial and operational update. Following that, our CFO, Tim Barabe, will provide a detailed review of our financial results for the third quarter. As a reminder, today's call is being recorded and the audio from the call is being webcast over the Internet on our homepage at affymetrix.com.

During this call, we may make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially for Affymetrix from those projected.

These risk factors are discussed in Affymetrix's Form 10-K for the year ended December 31, 2009 and on other SEC reports, including our quarterly reports on Form 10-Q. We encourage you to review these documents carefully as forward-looking statements are made as of today's date and we make no obligation to update this information.

So with that introduction, let me turn the call over to Kevin.

Kevin King

Good afternoon, everyone. We continue to make steady progress in the transforming of our company through commercial, product development, and operational efforts that have resulted in significant operating gains over the prior year.

As you know, we have been executing on a strategy that diversifies our product revenues from largely academic research markets to markets that are less dependent upon government funding than the clinical validation and routine testing segments. To achieve this, we've redirected our R&D investments to address opportunities, including the development of new copy number and genotyping assays and new instruments, coupled with high throughput array formats.

On the operating side of the business, we have achieved 6 points of improvement in product gross margin and a 12% reduction in total operating expenses that have resulted in $25 million improvement in operating income for the first nine months of the year. We have also strengthened our balance sheet by repurchasing about $100 million in convertible debt.

Before turning the call over to Tim for a review of our third quarter operating results, I'd like to discuss how our year-to-date product revenues are being influenced by new product adoption, pricing, and volume trends.

We have been able to generate good end-user demand for our array products, as measured by sustained double-digit volume increases for the last three quarters. Much of this growth is the result of new products targeted at high-volume applications. During this period, the pricing of our legacy DNA and RNA products have remained relatively stable.

I'll take a few minutes to give you an update on our consumables and instrument trends. Within DNA, over the past several quarters we have significantly expanded our DNA product offerings by providing a new platform that addresses the need for validated SNP content for whole-genome and targeted genotyping applications. We have also created new clinical research assays that address the perinatal and cancer copy number analysis markets.

Within our DNA portfolio, our cytogenetic products, whole-genome custom and targeted genotyping products are the fastest growing product lines. Compared to the first nine months of last year, total DNA product volumes have increased over 20% and total revenues were up 16%.

Axiom adoption has steadily increased throughout the year and now represents 40% of our total DNA volume. In addition, roughly half of that volume is Axiom custom array designs. We believe this initial success has been driven by the unique ability of our customers to design high content arrays and attractive price per sample.

As you know, Axiom leverage is a growing database of validated content and includes the latest discoveries from the 1000 Genomes Project. As reported previously, we have expanded our Axiom custom offerings to include genotyping arrays with as few as 50,000 markers per sample to an upper range of 2.6 million markers per sample. We believe the Whole-Genome Association market has slowed in the latter part of the year, as customers are now only beginning to access newly available rare SNP contents. Looking forward, we believe the availability of this content will be a catalyst for new association studies.

In cytogenetics, we are experiencing broader adoption of our products that include our 250K, SNP 6.0, and our Cyto 2.7M. We are encouraged by the guidance that the American College of Medical Genetics issued on September 28th that recommends arrays as the first-line test over traditional karyotyping.

Read the rest of this transcript for free on seekingalpha.com