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Affymetrix, Inc. (NASDAQ:AFFX)

2012 Lazard Life Sciences Conference

November 14, 2012 8:00 AM ET

Executives

Frank Witney - Chief Executive Officer

Analysts

Steve Unger - Lazard

Steve Unger

Good morning. Thanks. Thanks for coming this morning. This is our 9th Annual Healthcare Conference. And this is day two obviously. My name is Steve Unger. And I’m a life science tools and diagnostics analyst.

With us today, we have Frank Witney from Affymetrix. He is the CEO. We also have Doug Farrell, Vice President of Investor Relations. So this is the first presentation of the day in life science tools. Affymetrix, as you know, has been around for quite some time and recently completed a [transforming] [ph] the acquisition of the company called eBioScience. And Frank is going to have a - give a detailed presentation and then we will open for some questions. Thanks.

Frank Witney

Okay. Thanks Steve. Hopefully, everyone can find a seat. So good morning and thanks for taking the time to join us today. I’d like to thank Steve Unger and the team at Lazard for the opportunity to be here today. We appreciate the opportunity to give you a progress report. At Affymetrix, we have a lot of what we think are positive things going on as we continue on our journey to retain - to recur - to recover sustained growth and profitability. And I’ll walk you through the elements of what we’re doing and then we can obviously go deeper in one-on-one in breakout sessions.

Showing on the slide is, presentation may contain forward-looking statements and I encourage you to review our SEC filings to get the specific details on the risk factors.

The agenda for this morning is shown on the slide. We’ll talk about the company fundamentals and the essence of the new vision for the company as was pointed out, we have a long-history of outstanding contributions to basic research. And we’re evolving our strategy to evolve with our customers that are doing more and more work on understanding fundamental disease mechanisms and using that information to create molecular diagnostics.

So in effect, what we’re doing here is we’re taking advantage of the effort that customers are using to create - to use information from the laboratory and translate that into medical practice these so called translational research and clinical diagnostics.

So we’ll cover the fundamentals and that vision. We’ll talk about in detail some of the strategies that support our vision, in particular, the growth drivers which are emerging quite clearly, and then at the end we’ll talk about the company priorities.

As I mentioned our customers are moving very rapidly into efforts to understand truly, with the tools that are available, to understand disease mechanisms. And through those disease mechanisms, molecular diagnostics will emerge, new approaches to therapies will emerge.

And again it’s this bench side to best side effort that are the customers that we are trying to tap into and there are really as you’ll see during our presentation there are really significant opportunities that are available to us, little bit different from the customers that the company served in its early period, in the period of ‘98 to 2005, which was very fundamental research. This research is much more applied and we think has the most potential.

Just a little bit of background, where this - the work we doing here is extending a long history of innovation of the company. The brand name is really one of the iconic brand names.

You can’t go into a biology lab, basic research translation with clinical without people knowing the name. This is a leveragable asset for the company. We have - our technologies are well established and not in debate that they are functional and state of the art; there is over 26,000 scientific publications based on Affymetrix Technology, primarily the GeneChip technology which were the most known for over 26,000 publications and in fact, much of what’s known about developmental biology was learnt on Affymetrix arrays.

ABI was sequenced in the human genome. Those sequences were then applied to GeneChips and then people would measure expression in liver or kidney or tumor cells and look for differences in expression patterns and those patterns were revealing as expression was different in different tissues and that led to an understanding of disease mechanisms.

So the contributions to the company are not in debate. We built up over the time early people like Sue Siegel and others built up a very powerful global commercial organization. I’ll say a few more words about that in a few minutes.

We’re a consumer based company. 90% of our sales are either microarrays or reagents. About 60% of our sales are now GeneChips which we are the most known for. But through the acquisition of eBioScience, USB and Panomics, we now have 40% of our revenues are now off chip, have nothing to do with chips. So we’re trying to balance our portfolio out more and we’ll make additional comments on that point.

Our products measure gene function that is the expression of DNA and RNA. We look at genetic variance that may have impact or cause or predict disease and we do a lot of work on the regulation side. How are these networks of 30,000 genes in the cell controlled and what goes wrong, what - this regulated a disease.

And the most important point on the slide is the last one. We are shifting our portfolio much more to translational and diagnostic applications from our fundamental efforts in discovery and we’ll talk about how we’re doing that. The two most - the two clearest examples of that are the work we’re doing in our cytogenetics program, which is going extremely well and we’ll talk about that as well as the acquisition of eBio which closed in late June, which gives us a much broader set of assays for cell-based assays protein detection which are extremely important in translational research relating cancer and immunology.

So we have a much broader base of - much broader portfolio to go into medical schools or the translational personalized medicine laboratories in pharmaceutical companies. So very important for us to bring eBio in to give us that diversification.

Couple of fundamentals on the business, shown on the left pie were primarily consumables that’s recurring revenues. These are GeneChips, the Panomics multiplex assays, eBioscience flow immunoassays, as well as our Life Science - USB or Life Science reagents which are basic biochemicals molecular biologicals, membrane (inaudible) proteins are used in routine (inaudible) customers (inaudible).

We have diversified customer base. As you can see the split there between academia, pharma and then some B2B play and this gives us a nice set of customers to market into.

And we’ll see a little bit more about this but geographically we are about half of our sales are in North America, another roughly 30% are in Europe and an area that we’re investing in is our Asia and our broader global distribution organization.

In Q3, we grew 16% even though we were down slightly in North America and Europe. In Q3, we were up 16% in Asia, driven primarily by China where we made significant investments. We have a new country manager there. We did also in Q3 we executed on a conversion of the eBio business from distributors to direct. So we’ll get end-user sales and profits and that effort it was a three month task to be going live but the team did an incredible job and on October 1st we are direct - selling directly the eBioscience business in Japan through our office there.

So we’re really focusing on Asia where we think we have some very nice upsides, particularly in the biosciences as well as our genotyping business. So nice geographic split with an emphasis on growth in Asia-Pacific.

A good graphic here to show our global footprint the - over the years, we’ve developed a 90% of our sales are direct through Affymetrix sales, service and support team with extremely deep knowledge about the applications. We are a little bit specialized. We have people to sell GeneChips. We have some people that sell the eBio products. We have people to sell our genotyping products. These are very different sales.

We are working very hard to integrate that so we can get leverage. We are not there yet. We’re not doing a (inaudible) job getting leverage across these essentially we call them PT boats and the PT boats don’t necessarily communicate as well as they could.

So that’s a big internal effort for us. But we do have coverage. We’re well-known. We can get into labs anywhere in the world. And again 90% of that is through direct sales, a smaller extent through distributors in some outlying regions but we did - we are going more, more direct to China where our biggest investment is as well as Latin America where we see some real upside particularly in our - at genotyping programs. So some nice geographic effort and that’s not - and we are spending a fair amount of time focusing on that particular aspect.

Our portfolio we think it’s in better shape than it’s been in a long time for two reasons; one is the quality of the products in these areas as well as the diversity brought by eBioscience. So we’re most known for our gene expression products, I’ll go into a little bit more detail about the percentage split of each of those, these end of the business units.

But gene expression is what we are most known for. It built the company up in the period of ‘98 to 2005. We have the number one position in the array-based gene expression. A lot of the work we are doing here is clinically-oriented as people developed relatively complex RNA signatures, 50 to 100 RNA’s that maybe predictive of a particular disease or segment disease primarily cancer, we’ll talk about that a little bit more but these are - they are the best products in the industry without a doubt. On the other hand as you are probably all aware that business has been challenged and declining a little bit more than 10% a year and that does produce some concern.

It is worth mentioning that these are highly profitable products with gross margins of around 70% and very modest R&D investment. So from a direct contribution basis, it’s really adding to - it’s adding to the bottom line.

The upper right is our highest growth opportunity by far, our genetic analysis business, it has two components, our Genotyping business and then our one of our real blue - one of our Blue Chip assets which is our cytogenetics business and more to come on that.

The newest addition to the team is eBioscience. They are number two player in flow cytometry reagents. These are assays that allow you to measure expression of protein and ultimately the work we are doing internally will allow us to measure in a unique assay RNA levels in single cells.

This is particularly important to leukemia and lymphoma where there is a lot of interesting RNAs - fusion RNA molecule that are highly involved in tumor genesis and these could likely lead to diagnostic assays because we have the depth of technology to develop fusion to measure fusion RNAs in single cell by flow, eBio (inaudible), we’ll talk about just a little bit more, has an extensive and growing portfolio of immunoassays that used to measure protein levels.

So great addition to our platform. These are very high profit products, gross margins north of 70%, operating margins north of 30%. So portfolio we think is moving in the right direction.

Just a quick snapshot if you look at the pie chart in the left. Green – the green segment there is our expression business which is around 36% of our business that’s down from nearly half before the eBio acquisition as we said, that business is declining and based on new technologies like [RNAc] [ph], lower costs products, there is not much we can do to grow that business, one of our goal is to stabilize the business and we’ve done okay job.

In this quarter we were outside of our band, I’ll show - as you can see on the table on the right our goal is to - how that business declined in 5% to 10% range. We were a little bit outside of that, in the expression business is also our Panomics products which are not arrays, they are solution assays or tissue assays. But taken in aggregate we were down more than this 5% to 10%.

The two important points here are these two pieces, which represent nearly half the business which is our genetic analysis business and our eBioscience business, both of those we think have good growth profiles.

As you heard on the conference call, if you listened into that we had a difficult quarter in eBioscience in our first quarter, we were only up 1%. We are some - we can talk about more details of that later, but from having this first quarter under our belt, I don’t see anything fundamentally that changes my view that eBio will grow in this 5% to 8% to 10% range.

We are putting new assets into the company that were underdeveloped in the Panomics business, which we think –are a much bigger commercial channel, as well as new technologies, we think eBio business is going to be in very good shape.

The other point - so the real growth is going to come and we will go into much more detail, how we are going to grow the genetic analysis and the genotyping business, which are our growth drivers, as well as eBio business.

You can see the other point I want to make on this chart, if you look on the right, if you look on the right column, our R&D investments are clearly following our - are following our growth potential for each of these business. We are investing very heavily in our genetic analysis business, this includes finishing up our clinical trials for our CytoScan product, which we should finish within a couple of months and then we’ll file for FDA approval of that product.

We are investing in our genotype business where as we talked about on the call, we are starting to see sequential quarter growth and year-over-year growth of our Axiom platform which is our new genotyping platform and we are starting to have conversations. We were at ASHG last week - Human Genetics, and we really are into conversations with the consortium that are really pushing this field together.

So we feel better about, we feel very good about our [side] [ph] business and better of our genotyping business. And again, we are investing very lightly in our expression business. This is what, again this is very profitable business for us but we certainly have to manage the decline.

And finally, without going into detail, we have clear priorities in each of our business units, relative to revenue projections, (inaudible) expression is our harvest business, we want to read, we want to wring every single dollar out of that business, as it goes through its inevitable decline, strong growth in both segments for our genetic analysis side or genotyping and we want to grow our eBioscience business, taking advantage of both the diversity as well as the profitability.

So, turning to just a little bit deeper discussion of our growth opportunities, I’ll start with the genetic analysis side, we really have three strategies here. Let me go backwards, strategy number one is again the clinical diagnostics side, these are primarily expression arrays. While expression arrays are considered yesterday’s news, we were partnering with over 65, there are 65 different tests being developed on expression arrays were - relatively complex signatures, 100 to 200 RNA molecules are indicative of specific disease. So this is our so called (inaudible) partner, I have a slide on that in a minute.

We are clearly developing new products for translational medicine and pursuing IVD-clearance. This would include our cytogenetics product CytoScan, which is moving low down the path. We have a technology called OncoScan which is a copy number product that allows you to do copy number, out of incredibly small amounts of FFPE samples well below what can be done in sequencing, 50 nanograms, and get very high quality copy number data, as well as libraries of somatic mutations we are moving very hard on that, intend to launch that mid next year.

And finally, our genotyping platform which I’m not going to say too much more about, we have a heavy focus on translational. Genotyping is moving into a little bit different phase from GWAS to people who are at specific disease states, big - very large cohorts whether it’s immunology, cancer, psychiatric disease and then go out and create essentially custom arrays with content that we think that could be potentially predictive as well as Ag which is more routine applications.

Just a snapshot, these are the various partners that we are working with. Think about this as s bunch of PT boats out in the water, some of them are ahead of others and some of them are doing very well, (inaudible) which up here somewhere, maybe Pathwork Diagnostics has a test for tumor of unknown origin, which allows you to determine the source of or origin of a particularly metastatic tumor. Roche is a long-standing partner. Almac has a very powerful array for biomarker discovery, which we licensed in. Most of these are in cancer, some of them are in cardiovascular and we continue to work with these partners.

An area that we are particularly excited about is molecular cytogenetics. As we talked about in the past many times, there is a clear movement from karyotyping to microarrays. Karyotyping is from high-school biology where you display all the chromosomes and look at them under a microscope. These are metaphase chromosomes that are chemically stained. What it shows here is this is the same chromosome, I’m not sure which one, maybe it is two or three, that you get five spreads and you can see they don’t look at all alike.

The resolution is incredibly low five megabases and so the thought leaders have said, let’s do this on microarrays where we can get very high resolution and that effect is the diagnostic yield, goes up by a factor of eight diagnostic yield, but you can - child presents with some sort of a developmental defect or delayed development, and the diagnostic yield goes up from 3% to 8% and that’s why all the opinion leaders are moving people in this direction.

The market is very large. It’s an $800 million market. We think it’s growing very rapidly. It’s coming from two places. People doing traditional microscope side of genetics that wouldn’t prefer to do arrays and secondly, we are winning market share due to the quality of our product.

Many, many different applications in cytogenetics, we are focusing here in postnatal. It’s got the clear – the market is around $100 million for arrays and another $100 million for microscopes but there are many other applications that we’ll be driving that to with our platforms. We consider our CytoScan product a platform and we can drive it into many different applications.

Why are we winning? The CytoScan HD, it seems all the performance standards put out by the regulatory groups and the thought leaders we have the highest level of gene coverage. We have SNPs, which are very important in many diagnostic settings. Our gene coverage was developed with thought leaders, very simple workflow. The diagnostic yield goes to more than 20% and we have a full IVD clear strategy, so very positive about this whole program.

CytoScan now represents 10% of our revenues. We will do something like $30 million in that product this year, which is essentially a doubling of what we did with our existing products. So we feel - and that was right on our plan, exactly. So we feel very good about this.

Turning to eBioscience for just a second, as our customers have moved from functional, structural biology, this was ABI, this was Affymetrix, to this new world of understanding the biology of disease and then creating molecular diagnostics there is a clear need for more cell-based assays, which we don’t have in our portfolio as essentially a genomics company. So this is a great addition to our portfolio.

The strategic rationale for eBioscience is pretty clear. We want to expand our addressable markets, if we do very – we do but to a large extent, which will be shown on the next slide, we have a very broad spectrum of reagents now from genetic variant to gene expression, to the RNA level, to protein expression either in immunoassays or in cell-based assays by flow cytometry.

A great fit, their target markets are translational medicine, cancer, stem cell, very much of a biology focus, which is what we want to move our GeneChip business into a more biology focus and great financial synergies, high gross margins, high EBITDA; margins well above 30%, which contributes to our overall story.

eBioscience is clearly a blue-chip company in our industry with great financial profile. It had a long history of growth. Q3 was disappointing as those of you who listened into the call, we were only up 1%, one large OEM knocked us down about 3% to 4%.

But if you look at the right side, there is really – they’ve built up over many years, over a decade, a number of very important core capabilities and what’s not showing here is their new product introduction process, which generates more than 10% of revenues a year come from products.

They generate more than 600 new products a year based on a 100 different antibodies, which are then formatted in different ways. So very refined new product introduction, which is really underlying their sustainable, their sustained growth.

Just a quick snapshot of their products, 90% of their products are in flow cytometry where they have a number two position behind BD, with a strong portfolio, placing about a $1 billion market for RUO. They have a small emerging diagnostic play in leukemia and lymphoma, which is still very small but will grow. The traditional growth rates in flow reagents have been attractive. eBio has over 7,000 products in this area.

Immunoassay is business that is also now a very strong in emerging business for them, with 9% growth and then some smaller products. So we think overall the portfolio is in great shape and the strategic and financial contributions will be quite good to our efforts.

Finally, just a couple of summary slides. I think this is really a very important slide and it’s kind of maybe the take home lesson what you think about our portfolio. We divide our assets into two classes: Expansion opportunities as well as harvest opportunities. I think this is relatively clear, but in the assets that we think can grow, are eBioscience, flow and immuno. Our clinical arrays, primarily cytogenetics, with OncoScan and our partners following on, that represents 15%, eBio is 22%, genotyping for translational, medical applications as well as Ag represents 13% and our Panomics, primarily molecular pathology is 5%.

So a little bit over half of our portfolio, we think has attractive growth opportunities; in the harvest category, which is about 45% and we put our array expression business again, I want to remind you of the profitability of that particular product line and one thing we didn’t talk about here today is our life science reagents, which are basic biochemicals, molecular biologicals, it’s around 10% of the business. It again is profitable.

So both of these business while not growth opportunities, are generating significant profits for us and that’s the 45%. So, I think this essentially puts in context the kinds of things that we are doing.

Then, in conclusion, our priorities for the company, return our core business to low single digit growth is a focus that we’ve had for the last – I’ve been back at the company about a year and a quarter- this has been our focus from day one and we are starting to stabilize our revenues as we talked about on the conference call.

We were down 2% organically. If you compare the same quarter to - if you compare the quarter of ‘11 to quarter ‘10, we were down 14%. So we are definitely stabilizing our revenues. We want to generate positive operating and free cash flow. A major program for us is the FDA filing for our CytoScan product. We continue to integrate eBioscience in our global applications and execute on collaborative opportunities that exists and pay down our debt to reduce leverage.

So with that I will stop, but thanks for your attention. I think we have a lot of things that are directionally headed in the right way and we look forward to take any questions in the breakout session. Thanks again for your attention.

Question-and-Answer Session

[No Q&A session for this event]

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Source: Affymetrix's CEO Presents at 2012 Lazard Life Sciences Conference (Transcript)

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