We initiate our coverage on genetic products maker Affymetrix (AFFX) with a Neutral recommendation. The company posted respectable results in fourth-quarter fiscal 2010 with earnings beating the Zacks Consensus Estimate while profit surged 42% year over year as lower costs more than offset a decline in sales.
California-based Affymetrix is a leading provider of microarray-based products and services to the global research community. Along with Illumina Inc. (ILMN), it is one of the two major providers of microarray technologies primarily used in the field of genetic research.
Affymetrix has expertise in gene expression monitoring arrays, which are used to identify correlations between genes, determine their biological functions, and identify patterns that enable more accurate disease classification. It has a dominant position in the gene expression market and enjoys a recurring revenue stream.
Affymetrix continues to enjoy steady end-user demand for its arrays. The company’s Axiom array platform (launched in October 2009) has been a key driver for its DNA business. Moreover, Affymetrix is expanding its customer base through new product launches.
Affymetrix is pursuing a number of strategies (including expansion into new markets and strategic alliances) aimed at expanding its top line, representing a top priority in 2011. In this regard, we believe the company’s distribution agreement with Fischer Scientific, a unit of Thermo Fisher Scientific (TMO), and shift of focus to high-growth markets (such as validation and routine testing) represent positive steps for future revenue growth.
However, Affymetrix is operating in an intensely competitive industry, which is characterized by rapid technological changes and evolving market needs. The company, in its core gene expression and genotyping markets, competes with Illumina Inc., Life Technologies Corporation (LIFE), CombiMatrix Corporation (CBMX), Sequenom Inc (SQNM), among others.
Moreover, Affymetrix faces risks associated with lower R&D spending by its customers, notably in Europe, due to a weak economy and government actions (including budget cuts). Although the company is diversifying through acquisitions, such a strategy has inherent execution and integration risks. All these factors lead us to take a cautious stance on the stock.
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