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Tuesday, August 01, 2006

Affymetrix's Losing Hand

Stocks: (AFFX)(ILMN)

Affymetrix, the largest producer of biotech chip technology, has managed to do the near-impossible by losing its technology lead to a much smaller rival. And, it is killing the company's bottom line and revenue.

Affymetrix virtually invented the current technology used for molecular biology research, but its financial hardly reflect that. Revenue in the most recent quarter fell from $84.1 million in the year ago to $80.1 million. The company's operating loss was $9.1 million compared to a profit of $.8.5 million in the quarter last year. Affymetrix's cash balance has dropped $24 million since December 31, 2005 and receiveables are down by about a third.

Shares of the company fell 10% after hours to $19.43, well below the company's 52-week and more that a 50% drop from the 12-month high of $52.44.

The other actor in this play is upstart Illimina. Affymetix has had to cut prices due to more attractive products at its rival. The Illumina products are more efficient than Affymetix chip arrays and the larger company will not have new products online until 2007.

Affymetrix fall has been swift and brutal. Perhaps the best measure of its fortune is that its stock trades at a price-to-revenue ration of less than 4 x. Illumina's ration is 14.7 x. The companies have nearly identical market caps of about $1.5 billion,

Two years ago, Illumina had revenue of $50 million to $355 million at Affymetrix. Illimina's revenue is now over a third of Affymetrix's and based on forecasts could be 50% by year-end.

With no product available to directly counter the offering of Illumina, Affymetrix will be faced with using lower prices to try to keep share over the next few quarter. It's a strategy that is unlike to satisfy investors.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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