2006 was a difficult year for Motley Fool Rule Breakers selection Affymetrix (NASDAQ:AFFX). It started with the company struggling with manufacturing capacity issues, eventually moving on to pricing pressures and vanishing earnings. This maker of high-throughput genetic sequence and expression level analysis tools reported its quarterly earnings late yesterday, and it looks like the troubles of last year may well be behind it.
Affymetrix reported earnings of $0.13 per share for the past quarter. The result was substantially lower than the $0.43 the company posted in the prior year, but it did represent a return to profitability after the $0.21 loss reported in the previous quarter, and it handily beat analysts' estimates of $0.04 per share.
2007 should be brighter for Affymetrix. The company will continue to face pricing pressures in its discovery research products, but it expressed confidence that gross margins should return to the 60% level. The company expects to complete the manufacturing capacity buildout and introduce a 1 million single nucleotide polymorphism (SNP) array in mid-year.
What intrigues me most about Affymetrix is its pending entry into the clinical diagnostics market. The company reported that it has about 20 diagnostic programs in development, many in collaboration with partners. I expect these products will be similar to the Amplichip cytochrome P450 Cyp array (available from Roche Diagnostics in collaboration with Affymetrix). The company also plans to open a clinical services laboratory later in the year, which should help drive adoption of these pending diagnostic products. A medical diagnostic product line would free the company from dependence on the largely academic market of discovery research, a market that is moving ever closer to low-margin commodity-type pricing.
The FDA only recently provided draft guidance for in-vitro diagnostic multivariate index arrays (say that five times fast). The guidance provides an outline for seeking approval for the type of multi-component array-based tests that Affymetrix is currently developing. Earlier this week, the FDA approved the first of these expression array-based tests, MammaPrint, from Agendia. This product measures the expression levels of 70 genes associated with the likelihood of the recurrence of breast cancer and provides a grade as to the risk level of the cancer spreading. Such a tool should assist doctors in designing individualized treatment programs.
I'm encouraged by Affymetrix's performance this quarter, but still inclined to sit on the sidelines until some of the diagnostic products come to market. The research/discovery market is too prone to academic funding cycles and pricing pressures. However, few companies are better situated to take advantage of the wealth of information that has been gleaned from the sequencing of the human genome than Affymetrix. Aggressive investors with a core belief in the future of medical diagnostics and personalized medicine may well want to make Affymetrix a part of their portfolio.
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Fool contributor Ralph Casale, known on the Motley Fool discussion boards as HelicalZz, is a biochemist by trade. He has been known to be variable in the expression level of his opinions. He holds no financial position in any of the firms mentioned. The Motley Fool has a disclosure policy.
