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AFFX > SEC Filings for AFFX > Form 10-Q on 4-Nov-2013All Recent SEC Filings

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Quarterly Report


This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 should be read in conjunction with our financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q and with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

All statements in this quarterly report that are not historical are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act as amended, including statements regarding our strategic initiatives, anticipated cost savings, return to profitability and integration of and synergies related to eBioscience, as well as all other statements regarding our "goals," "expectations," "beliefs," "intentions," "strategies" or the like. Such statements are based on our current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Actual results or business conditions may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, our capacity to identify and capitalize upon emerging market opportunities; risks relating to our ability to acquire new businesses and technologies and successfully integrate and realize the anticipated strategic benefits and cost savings or other synergies thereof, including our acquisition of eBioscience, in a cost-effective manner while minimizing the disruption to our business; risks that eBioscience's future performance may not be consistent with its historical performance; risks relating to our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness; risks relating to our ability to develop and successfully commercialize new products and services; uncertainties related to cost and pricing of Affymetrix products; fluctuations in overall capital spending in the academic and biotechnology sectors; changes in

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government funding policies; our dependence on collaborative partners; the size and structure of our current sales, technology and technical support organizations; uncertainties relating to our suppliers and manufacturing processes; risks relating to our ability to achieve and sustain higher levels of revenue, higher gross margins and reduced operating expenses; uncertainties relating to technological approaches; global credit and financial market conditions; personnel retention; uncertainties relating to the FDA and other regulatory approvals; competition; risks relating to intellectual property of others and the uncertainties of patent protection and litigation; volatility of the market price of our common stock; unpredictable fluctuations in quarterly revenues; and the risk factors disclosed under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, except as required by law.


We are a leading provider of life science research and molecular diagnostic products that enable multiplex and parallel analysis of biological systems at the gene, protein and cellular level. We sell our products to genomic research centers, academic institutions, government and private laboratories, as well as pharmaceutical, diagnostic and biotechnology companies. Over 48,000 peer-reviewed papers have been published based on work using our products. We have approximately 1,100 employees worldwide and maintain sales and distribution operations across the United States, Europe, Latin America and Asia.

Reportable Operating Segments

Our operations consist of two reportable operating segments, Affymetrix Core and eBioscience. During both the three and nine months ended September 30, 2013, Affymetrix Core accounted for approximately 75% of total revenue and eBioscience accounted for approximately 25% of total revenue.

Affymetrix Core is divided into business units, with each unit having its own marketing groups to better serve customers and respond quickly to the market needs. In addition, the business units share some research and development resources and common corporate services that provide capital, infrastructure, resources and functional support, allowing them to focus on core technological strengths to compete and innovate in their markets. Affymetrix Core manufacturing operations are based on platforms that are used to produce various Affymetrix Core products that serve multiple applications and markets. The following describes the four business units that form Affymetrix Core:

•         Expression: This business unit markets the Company's GeneChip gene
          expression products and services, and the QuantiGene® line of
          low-to-mid-plex RNA measurement products.

•         Genetic Analysis and Clinical Applications: This business unit markets
          the Company's genotyping products and services, such as the Axiom®
          product line, and products with clinical research applications, such as
          the CytoScan® cytogenetics arrays and the OncoScanTM FFPE assay kit.

• Life Science Reagents: This business unit sells reagents, enzymes, purification kits and biochemicals used by life science researchers.

•         Corporate: This business unit is comprised primarily of incidental
          revenue from royalty arrangements and field revenue from services
          provided to customers of the Company.

Acquired in 2012, eBioscience is operated as a separate business unit with its own research, marketing and manufacturing groups:

•         eBioscience: This reportable segment specializes in the development,
          manufacturing, marketing and distribution of research products in the
          areas of flow cytometry reagents, immunoassays, microscopic imaging and
          other protein-based analyses.

All of our business units sell their products through our Global Commercial Organization comprised of sales, field application and engineering support, and marketing personnel. We market and distribute our products directly to customers in North America, Japan and major European markets. In these markets, we have our own sales, service and application support personnel responsible for expanding and managing their respective customer bases. In other markets, such as Mexico, India,

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Brazil, the Middle East and Asia Pacific, including the People's Republic of China, we sell our products principally, but not exclusively, through third party distributors that specialize in life science supply. For certain molecular diagnostic and industrial applications market opportunities, we supply our partners with arrays, reagents and instruments, which they incorporate into diagnostic products or other routine applications and assume the primary commercialization responsibilities.

See Note 13. "Segment and Geographic Information" for more information on our reportable operating segments.

Overview of the Third Quarter of 2013

We have faced declining financial performance over the past several years. Traditionally, a significant portion of our business was in the well-established gene expression business where our GeneChip® Expression product line comprised more than half of our revenue as we concentrated on selling these products in the basic research market focused on discovery research. Declining sales in our Expression business resulting from intense competition from low cost or alternative technologies such as next generation sequencing has been a primary reason for annual decreases in revenue since 2007. Our strategy is focused on finding new growth opportunities in the expression market, building market share with our Genetic Analysis products and diversification into the large protein and cell market with our eBiosciences products.

Affymetrix Core reported revenue of $60.5 million for the three months ended September 30, 2013, as compared to $62.0 million during the same period in 2012. Revenue reported from eBiosciences was $19.9 million and $17.6 million for the three months ended September 30, 2013 and 2012, respectively. The decrease in revenue from Affymetrix Core was primarily due to a $3.3 million decline in our Expression business unit revenue and $0.3 million lower royalties and other revenue compared to the same period in 2012 . These decreases were partially offset by a $2.7 million increase in our Genetic Analysis and Clinical Applications business unit as a result of increased sales in our Cytogenetics line of products which has been steadily growing since its launch in 2012 and our Axiom® products. The increase in revenue from eBioscience reflects strong growth in Asia Pacific and Europe.

Since Dr. Frank Witney became our President and Chief Executive Officer in July 2011, we have focused on reducing our dependency on our Expression business unit by building a more diversified portfolio with broader revenue streams, including products that reach into the growing markets for translational medicine and molecular diagnostics. Excluding eBioscience, revenue from the Expression business unit was approximately 40% of Affymetrix Core business in the third quarter of 2013 as compared to 44% in the same period of 2012 while revenue from our Genetic Analysis and Clinical Applications business unit was 39% in the second quarter of 2013 as compared to 34% in the same period of 2012.

As we progress through 2013, we continue to execute on the strategy developed by Dr. Witney and our management team where we will realign our product portfolio, stabilize our core business and position our company for growth and increasing profitability. We expect this transformation to take several years, and have categorized this plan into three phases.

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