Affymetrix (NYSE: AFFX) is a biotechnology company that develops and markets research tools in the molecular biology field. Its main product line is the GeneChip microarray platform, an analysis tool in genomics research. Affymetrix pioneered the genomics research industry as the first company to develop the GeneChip microarray platform, which is now used widely in many research institutions as an essential part of genetic analysis.
The GeneChip microarray platform has three components: the analysis instrument, reagents, and the disposable one-time-use probe array. Affymetrix sells the reusable portions of this platform, including the reagents and the analysis instrument, at low margins but sells the one-time-use consumable probe arrays at a high margin. Almost all of Affymetrix's sales revenue originates from the sales of disposable probe arrays, since they must be replaced after every research experiment procedure. AFFX sells its products to some of the world’s largest pharmaceutical, diagnostic and biotechnology companies, as well as leading academic, government and not-for profit research institutions. The company has approximately 1,000 employees worldwide and maintain sales and distribution operations across the United States, Europe and Asia.
Affymetrix is heavily reliant on orders from research institutions to generate sales revenue. As a result, fluctuations in the research funding for these institutions, a large percentage of which come from NIH grants, would affect Affymetrix's sales revenue greatly. In addition, Affymetrix produces its GeneChip probe arrays using publicly available genetic sequencing information, which is updated daily and changed frequently due to new discoveries in the field. This exposes all of Affymetrix's products to the risk of becoming obsolete and unusable if the firm fails to update its products.
Affymetrix experienced a recent manufacturing problem due to supply restrictions on an important component of the GeneChip system, which caused product delivery delays and quality problems. The effects of this setback are evident in AFFX recent poor performance. However, Affymetrix's recent patent infringement lawsuit against major competitor Illumina (ILMN) has resulted in a $90 million settlement decision in favor of Affymetrix, which should offset these recent losses.
Affymetrix is a market-leading firm that specializes in developing and selling genomics research analysis equipment. To preserve its market-leading position and guard against strong competitors delivering similar products, Affymetrix maintains various collaborative relationships with key suppliers and research organizations.
In 2009, AFFX had total revenues of $327 million in 2009. This was a substantial decline from its 2008 total revenues of $410 million in 2008. However, its net income was not adversely affected. Between 2008 and 2009, AFFX's net loss decreased from a loss of $304 million in 2008 to a loss of $28 million in 2009.
Affymetrix's staple product is its GeneChip microarray platform, which is used to analyze genes in many research labs. The platform works using a disposable probe array, which contains pre-arranged genetic components, to interact with the DNA in a laboratory experiment. The probe array is then placed in necessary reaction reagents, and the end product is analyzed by the scanning instrument and software. The end data produced from the analysis instrument tells researchers the DNA content that they are testing for use in sequencing and identification of genes.
This platform has three main components:
Affymetrix markets its GeneChip products throughout the world, selling directly to pharmaceutical, biotechnology, diagnostics, and consumer products companies as well as academic, governmental, and private research institutions.
A large portion of Affymetrix's client base consists of researchers funded by the National Institute of Health (NIH). As a result, a decrease in federal funding of research will cause a decrease in sales of research equipment and negatively impact AFFX's performance. Although the NIH grant budget doubled from 1998-2003, its growth since then has remained at 2-3%, which could significantly limit in AFFX's revenue growth..
Genetic sequence information is stored and updated in various public databases throughout the world. Because of the large number of researchers working on identifying new genetic information, these databases are updated continually to incorporate the results of new discoveries. The efficacy of GeneChip products, which are designed according to information from these genetic databases, depends on the accuracy of information from these databases. Furthermore, Affymetrix faces a significant challenge to incorporate every new change in the continually updating database. Changes in known genetic sequencing information affect Affymetrix's sales revenue, as its GeneChip products rely completely on this information.
Although Affymetrix manufactures GeneChip products in its own facilities, certain raw materials and components used in the synthesis of probe arrays are available only from single vendors. Delayed delivery or a decrease in quality of these materials would impair Affymetrix's ability to produce probe arrays or other components of the GeneChip system to meet the needs of its clients. Notably, essential imaging materials essential to the production of each GeneChip product is supplied by only one manufacturing facility.
Affymetrix's products are currently marketed heavily in Europe and Asia, and international revenues make up 52% of the company's total revenues. Therefore, fluctuations in foreign currency exchange, trade regulations, and less adequate intellectual property rights protection mechanisms in foreign countries are all factors that could affect the company's overall profitability.
The GeneChip products that Affymetrix specialize in are directed towards three areas of research use: genetic expression monitoring, DNA analysis, and molecular diagnostics. In each category, Affymetrix faces increasing competition from various other biotech firms that produce similar products and target the same market. After Affymetrix pioneered the GeneChip system, many biotech firms expanded their product lines to include similar systems with the same functionality. Affymetrix's products compete directly with these products. Like Affymetrix, the competitor firms also generate most of their revenue from the sales of consumable probe arrays. Some of AFFX's major competitors include Agilent Technologies (A), Applied Biosystems (ABI), Illumina (ILMN), and Beckman Coulter (BEC).