Affymetrix Inc. (AFFX)
Q1 2010 Earnings Call Transcript
April 21, 2010 5:00 pm ET
Executives
Doug Farrell – VP, IR
Kevin King – President and CEO
Tim Barabe – EVP and CFO
Analysts
Bill Quirk – Piper Jaffray
Marshall Urist – Morgan Stanley
Brigham Hyde – Cowen & Company
Ross Muken – Deutsche Bank
Peter Lawson – Thomas Weisel
Sanjay Chawla – JP Morgan
Jon Groberg – Macquarie Capital
Isaac Ro – Leerink Swann
Derik De Bruin – UBS
Quintin Lai – Robert W. Baird
Unidentified Company Speaker
(Starts Abruptly) Net loss for the quarter was $9.6 million or $0.14 per diluted share, which included an impairment charge of about $4.9 million or $0.07 per diluted share related to a non-marketable investment.
This compares to a net loss of $25.2 million, or $0.37 per diluted share in the first quarter of 2009, which included pre-tax restructuring charges of $2 million, or $0.03 per diluted share. Fully diluted shares for the first quarter of 2010 were 67.9 million shares, compared to 68.6 million in the first quarter of 2009.
Turning to gross margin, in the first quarter total gross margin expanded to 58.8%, representing an increase of 12 percentage points over the prior year quarter. Product gross margin for the quarter was 61.3%, as compared to 46.9% in the first quarter of 2009. This improvement was driven large by the completion of our manufacturing consolidation, stable pricing and the introduction of new products.
Total operating expenses for the first quarter were $49.9 million, which compares to $55.3 million for the same period last year, excluding restructuring expenses of $2.0 million. Our continued discipline on reducing operating expenses helped to sharply reduce our net loss relative to the prior year.
First quarter 2010 R&D expenses were $18.5 million, compared to $21.3 million for last year, down 13%. SG&A expenses in the first quarter were $31.4 million, compared to $34.0 million for last year, down more than 7%.
The company recorded net interest and other expense of approximately $6 million in the first quarter, 2010, compared to a net expense of $4 million in the prior year quarter, primarily due to the previously mentioned $4.9 million impairment charge on the non-marketable security, as well as lower interest rates on our marketable securities offset by effective hedging on foreign currency and some gains in our marketable securities portfolio.
In terms of income taxes in the first quarter, we recognized income tax expense of approximately 900,000, our expense for 2010 -- first quarter 2010 is principally driven by foreign income taxes and foreign withholding taxes.
To facilitate the analysis of the company's core operating results, I would like to summarize non-core adjustments to our net loss for the quarter and their impact on pre-tax earnings per share.
In aggregate, these adjustments amounted to $7.1 million, or $0.10 per share and include within gross margin $600,000 or $0.01 per share, in the amortization of acquisition-related intangibles.
In operating expenses $1.6 million or $0.02 per share including $1.0 million related to acquisition of -- amortization of acquisition-related intangibles, $350,000 for asset impairments and about $200,000 for a true materials contingent consideration. Again, in non-operating income loss there was $4.9 million or $0.07 per share related to the impairment.
Let me take a moment to summarize our balance sheet. We ended the first quarter of 2010 with total cash and available for sale securities of approximately $347.6 million, compared to $346.6 million at the end of the fourth quarter of 2009. In the first quarter the company generated $5.7 million in positive cash flow from operations.
First quarter DSOs were flat at 65 versus the prior quarter. Capital expenditures were about $3.2 million and depreciation and amortization was approximately $8.7 million, including the amortization of acquired intangible assets.
Operating expenses for the first quarter included $2.3 million of stock compensation expense, compared to $1.7 million in the first quarter of 2009.
Net inventory for the first quarter of 2010 was $56.2 million, compared to $54.5 million in the fourth quarter of 2009, primarily driven by increased instrument inventories to support recent launches.
Turning to guidance, we believe the 2010 is shaping up to be a good year for Affymetrix. We entered the year with a number of recently introduced products that are helping us to grow the business and return to profitability. We expect total revenue for the second quarter to be in the range of $80 to $82 million.
This revenue target includes continued strong product growth similar to the first quarter, offset by an expected continued decline in scientific services revenue of around $7 to $8 million.
Gross margins for the second quarter are expected to be about 58% in line with the first quarter. For the full year, we expect to achieve an average gross margin of approximately 60%. Of course actual gross margin will vary as a function of total revenue and mix, but longer term we believe that an overall gross margin in the low to mid 60% range is a good and achievable target.
On our last call we told you that we expect to see operating expenses decline in both -- in terms of absolute spending and as a percentage of revenue. We made great progress in the first quarter and we expect to realize continued leverage as the year advances. For the second quarter we expect operating expenses to be in the $50 to $51 million range.
As for taxes, we expect our tax provision to be about $500,000 for the second quarter, again consisting primarily of foreign taxes with some state and other taxes. We also expect to be cash flow positive from operations in the second quarter as well as for fiscal 2010.
In closing, we continue to executing our strategic plan that is focused on growing the business, controlling costs and returning the company to sustained profitability. I look forward to updating you on our continued progress next quarter.
At this point, we'd like to open the call for questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question is from the line of Bill Quirk with Piper Jaffray.
Bill Quirk – Piper Jaffray
Yeah. Thank you. Good afternoon.
Tim Barabe
Hi, Bill. How are you?
Bill Quirk – Piper Jaffray
Good. Thank you. First question is you highlighted several of the array product is having a decent growth here in the first quarter. Any of them in particular to call out, you mentioned both the whole-genome arrays as well as some of the custom products. Was one strong and the other, or are we really seeing a decent amount of growth from both?
Kevin King
Bill, this is Kevin King. I think we are seeing good growth in both, referring to your question on the DNA side, seeing good growth both in the whole-genome products, the Axiom products, the Axiom targeted genotyping products as well as in cytogenetics. I think was good growth across the board for those three.
Bill Quirk – Piper Jaffray
Very good. And then, Kevin, is it safe to assume that some of the positive trends we saw in the first quarter are continuing here in April as well?
Kevin King
Continuing in April. I don't know if I…
Bill Quirk – Piper Jaffray
In other words, is the momentum that we saw beginning in the fourth quarter and certainly spilling into the first, is that having the same effect on the second quarter as well?
Kevin King
Yeah. I think that's very consistent with the guidance that Tim gave you. I think going forward into Q2, we’ll continue to see, expect to see double-digit growth on the product revenue side, offset by pressure that we have in services, the scientific services will likely decline somewhere between $7 to $8 million. But I think the key point here is that the product revenue growth is really what's driving the engine of the business here and we feel good about that.
Bill Quirk – Piper Jaffray
And then is it safe to assume based on Tim's comments, Kevin, that or Tim for that matter that we’re going to continue to see pretty tight working cash management here? Working capital management, excuse me over the balance of the year?
Tim Barabe
Yeah. I think that's a fair comment. We’ve got into a situation where we are positive cash flow on a quarter-by-quarter basis and we see that going forward. So we will continue to tightly monitor our working capital.
Bill Quirk – Piper Jaffray
Very good. Thanks, guys.
Kevin King
You bet.
Tim Barabe
Thank you, Bill.
Operator
Your next question is from the line of Marshall Urist with Morgan Stanley.
Marshall Urist – Morgan Stanley
Hey, guys. Good afternoon. And first question is on the RNA array business. And you could give us a sense the different moving parts, I know you highlighted some of the, gene level and whole transcript products that are doing well.
Could you give us a sense of the puts and takes in terms of how are those doing and then, the sort of core, sort of historical U133 business. Is there still kind of pricing and volume pressure there that some of these new products are offsetting?
Kevin King
Sure. Marshall, we divide the gene expression market into biomarker discovery and biomarker validation. And our legacy product line which largely consists of the U133 product is largely a biomarker discovery product. Within that segment we do see price pressure but we also have augmented that with new product lines, so these new product lines include the gene level array, gene level with splice junctions and the Axiom arrays. And these are unique products in the marketplace that have a premium, if you will, relative to 133.
That portion of our business is not growing as fast as the second segment of the business, which is biomarker validation. And there in some cases the same products are used but used by different customers, as well as lower plex products from acquisitions such as USB and Panomics and there we see increasing volume trends and we see stable pricing.
Marshall Urist – Morgan Stanley
And could you give us the sort of magnitude of the growth trends in the two and kind of how much each is of the business, of the RNA business?
Kevin King
On the market side, I would say the biomarker validation segment of the market is growing double digits, maybe 15%, 12% to 15% overall. And I would say that the legacy biomarker discovery portion of the business might be growing 2% to 3% on average.
Marshall Urist – Morgan Stanley
Okay. So then if you had 3% RNA growth, does that mean then the discovery piece is actually is -- was actually down year-on-year?
Kevin King
Yeah, I think that that's a fair comment and we talked a little bit about that at the Q4 call as well, the mix of our business is shifting. I forget the exact percentages but I think in 2008 to 2009 that mix shift between discovery and validation went from 50/50 to 60/40, something like that. I'd have to go back and look for you.
But clearly the validation and new products are what's driving our growth and on the biomarker discovery side, the U133 product has been around now for more than a decade.
Marshall Urist – Morgan Stanley
Right.
Kevin King
And has enjoyed very strong market share. We still continue to believe that we’re the market leader there by a wide margin. But, people are doing less and less studies there and moving more into validation.
Marshall Urist – Morgan Stanley
Okay. Great. Thanks. That's really helpful. And then, on the, when you guys think about, sort of a longer range plan for the business, if we think about 12 to 24 months from now.
How much of the -- of your array volume on the RNA side would you like to see, go away from cartridge into the peg platform? Is it, should it be, it going to be a third or half of the business a year from now? What's the right way to think about that?
Kevin King
24 month period to be in a range of 25% to 35% is a good range overall for total consumables.
Marshall Urist – Morgan Stanley
Okay. Great. And then a couple of questions on DNA. Could you give us a sense of how you're kind of thinking about new product roll-out over the rest of the year on the fixed content side for DNA? Are there new product plans with new content there for -- to sort of refresh the 6.0 or GWAS side of the business or are you really putting resources behind driving the custom business?
Kevin King
That's a great thought. A lot of the marketplace's influx right now, we do have catalog products. We have launched an Asian panel and we are looking at other ethnic panels as well, but the real value here is in customers being able to customize their own contents. Good example of that is the customized product that was done for UCSF and Kaiser, very, very powerful product that has terrific genomic coverage and really is providing a lot of good information. I think a lot of customers are looking to Kaiser and other customers and now starting to say it's not so much about fixed panels, it's about the ability to customize and I would suspect that a lot more of that is going to continue to happen and that certainly is where a lot of our infrastructure investment has been going into on the R&D side as well.
Marshall Urist – Morgan Stanley
Okay. Great. And then just one last one for me. Can you give us a sense of what the Kaiser study revenue contribution was in the quarter?
Kevin King
Yeah. I don't think we are breaking that out customer revenue and so forth. We haven't planned on doing that. Sorry.
Marshall Urist – Morgan Stanley
But then just you said last quarter there wasn't anything material but are you starting to see an impact of that study this quarter?
Kevin King
Yes. I would say definitely there is -- there are multiple GeneTitan systems there, they have run through their pilot stage, they have placed orders and taken delivery and started doing studies on the actual custom chip that we gave to them. So, yes, they are ramping up quite nicely.
Marshall Urist – Morgan Stanley
Okay. Great. Thanks a lot.
Kevin King
You bet.
Tim Barabe
Thank you, Marshall.
Operator
Your next question is from the line of Brigham Hyde with Cowen.
Brigham Hyde – Cowen & Company
Hey, guys. Brigham in for Doug this afternoon.
Tim Barabe
How are you?
Brigham Hyde – Cowen & Company
You've previously guided growth in that (inaudible) business between 8% and 10% -- I'm sorry the product business. You beat that by about three points just -- I guess total color on what surprised you there and what was better than expected?
Kevin King
Look, I think it was pretty much across the board. Our DNA growth as we said was up 25%, 26%. That was very strong. Not so much surprise, but strong. Instruments continue to be strong. Year-over-year instruments are up several million dollars and I was thinking that coming off a fairly strong Q4 that instrument revenue may slow down and it was pretty strong here. It was at $7.7 million, I think $8 million so that was a little bit there. Services came in just as we had called on the last earnings call, we knew that that pipeline was drawing up and we thought it would be about $4 million to $5 million and it turned out to be $5 million for the quarter, $4.5 million overall and our license and research came in right around where we thought, about $2.2 million, $2.3 million.
Brigham Hyde – Cowen & Company
Thanks. That's helpful. Let me follow on the instrument vein. You talked about 40 instrument placements, maybe just kind of generally between GeneTitan and GeneAtlas and your other instruments, how does that split out?
Kevin King
We are not breaking out our instrumentation mix and I actually think that going forward we will probably be evaluating whether or not we will be giving an instrument number in total. And that's largely because we have a range of products now that range from roughly $60,000, $65,000 up to $300,000 and it's a little bit of a mixed bag here in terms of giving a number and since we are not giving the mix, it might be -- it might be of little value. We will certainly work with you to see if that's the case, but…
Brigham Hyde – Cowen & Company
Yeah. No, just trying to get at it if instruments maybe a little better than expected, if there was either the Atlas placed quicker than you thought, or (inaudible) or maybe Titan had a good quarter, but I understand you can't dig in there. The services declined, you said pretty much in line. You seem to have pretty good clarity on where that's going so I guess as you guided for Q2, I think we should feel pretty confident in that, you have good optics there?
Kevin King
I would say for Q2 the optics are good. Looking out into Q3, Q4 and Q1 of next year is where we are really beginning to look very carefully at where customers are going to want to place their bets. Right now, the introduction of the GeneTitan provides a lot of the benefits that assay scientific services would provide in the past, which had to do with data quality, consistency, lower cost for sample, et cetera and many of those things are now capable within GeneTitan. And we have also been trying to enable our service providers. We have got dozens of service providers around the globe that we think is just as capable of running these studies as we are and quite honestly from a margin standpoint, scientific services is not up to the level of profit that you see with, say, consumables or product.
Brigham Hyde – Cowen & Company
Yes.
Kevin King
So we are really evaluating this. Now, that said, we do have customers that really do want Affymetrix to run or manage stare studies for them. So we have got to be aware and sensitive to that. And we also just launched the new copy number, cancer copy number capability for fixed in paraffin embedded samples using our MIP technology and this is something that right now is only in the service for Affymetrix. I'm sure you're aware there are millions, if not tens of millions, of samples, cancer-related samples that researchers would love to evaluate and this technology has really been proven to be quite robust in evaluating paraffin embedded samples. And so we are trying to get a handle on what that pipeline looks like in the future, clearly not giving guidance in Q2, Q3 and Q4, but certainly evaluating that for the future.
Brigham Hyde – Cowen & Company
That's great. And then one final one just to kind of -- high and low of the market. You mentioned in your comments about validation studies and sequencing and maybe just some of the dynamics you're seeing both there and I guess how that relates to the overall GWAS market. So we think about arrays being used for a strict array-based GWAS versus some kind of modified validation platform, how are those two things evolving as the year has gone on?
Kevin King
In my discussions with users, both at the sequence level or sequence type users and array users, I think people are seeing this to be more and more complimentary than they are displacing one another. Arrays are sort of faster, better, cheaper, if you will, from a validation standpoint than where sequencing can be and from a discovery standpoint, sequencing is a great tool for discovery. So I think they are probably more of a compliment to one another.
Brigham Hyde – Cowen & Company
Thanks a lot.
Kevin King
You bet.
Operator
Your next question is from the line of Ross Muken with Deutsche Bank.
Ross Muken – Deutsche Bank
So I just want one clarification on the guidance. So as I recall and I know this was under the previous CFO, but we had talked about an annual numbers somewhere in the $340 million range and you just talked about not wanting to give guidance for Q3, Q4 and Q1 of next year, so I'm trying to put that into context. Is that something where we are kind of now no longer thinking about it in an annual context, or are we looking for maybe a future date where we will get updated on that?
Tim Barabe
I think we still feel that the analyst expectations out there on the street are achievable.
Ross Muken - Deutsche Bank
Okay.
Tim Barabe
And we are not backing away from that. What we are seeing is the second quarter will continue the strong product growth, but we will have the back -- a huge services number to compare to from the second quarter of 2009 and really focusing your attention on where the growth is coming from for us, it's really the product -- the product growth that's growing. So it's really a very good story on the product side and a tough hurdle to overcome on the services side for the second quarter but, no, we still feel the number is an achievable one.
Ross Muken – Deutsche Bank
Okay. Great. And in terms of on the DNA business, I mean it was a very strong quarter. You've had a couple of other competitors that have put out some new products in the last three or so months, how would you characterize your hit rate when you're going head to head, maybe not some of the areas where you've got more of a niche product, but in some of the larger based competitive areas.
Kevin King
You used the word competitors, I think in reality there are two of us in this space and all deals get contested. We are involved in all of them and I would say we are winning our share of the fights. There have not been that many large deals in the last, say three to six months. We have spoken about that in the fourth quarter call. I think people are still mulling through the new content that's been generated. I will tell you that customers are markedly impressed by the ability to customize contents at the levels that Affymetrix can customize. This is not really been possible in the past. Customization has really been limited to 100,000, maybe 200,000 markers and with Affymetrix you now have the ability to customize just about anything up to nearly 700,000 markers. The assay is quite robust, very sensitive, very specific, has shown to be very, very good, producing very good results in terms of call rates and reproducibility and so forth. And the benefits of the GeneTitan are also weighing in there as well. So I think the marketplace is reaffirming the investments we have made here and voting positively.
Ross Muken – Deutsche Bank
Okay. Great. Thank you very much.
Kevin King
You bet.
Tim Barabe
Thanks, Ross.
Operator
Your next question is from the line of Peter Lawson with Thomas Weisel.
Peter Lawson – Thomas Weisel
Hi, Tim. I'm just wondering if you can talk through your new plans for the company in 2010, what changes you want to bring about.
Tim Barabe
Well, I think it's a bit early for me to be talking about changes that I want to bring about. But as I said in my opening remarks, I think the company has committed itself to cost control, to new products, to gross margin expansion and right now, those are exactly the things I'm concentrating on. I'm getting to know the business better and also hoping to contribute in exactly those areas.
Peter Lawson – Thomas Weisel
Okay. Look forward to an update next quarter. Just on the weakness in the margins of that service business, kind of an uptick in the costs, what was going on there?
Kevin King
Yes. So the weak service margins are the result of having a scientific services infrastructure that was running at fairly low capacity or utilization. If you compared it to services margins say in last year, maybe the first or second quarter where we were running, say $8 million or $9 million of services revenue, we were generating about 40% margin on that and we were able to liquidate the expense, the fixed expense and scientific services. This quarter scientific services was very low and we still had a lot of expense there and that relates to the point I was making a moment ago, or with the last question, about we are evaluating our scientific services pipeline. We are also evaluating our scientific services infrastructure. Do we need this size infrastructure if we don't forecast in the quarters ahead a lot of return to growth in scientific services?
Peter Lawson – Thomas Weisel
That sequential up-tick you saw in the cost of that service revenue, what was that from?
Kevin King
Sequential up-tick in the cost.
Tim Barabe
So, Peter I think what Kevin was saying is that the costs are actually similar to where they were last year where the revenue was significantly down. So that was the drag on margins was having a similar cost structure of having the same kind of revenues moving through that business.
Kevin King
Yeah. In fact the costs are down year-over-year. The cogs last year were $7.5 to $8 million.
Peter Lawson – Thomas Weisel
Yeah. I'm thinking sequentials, 4Q to 1Q. How good it is? 3.7ish 4Q and 4.66 this --
Tim Barabe
3.7 for 4Q, as opposed to --
Kevin King
I'm sorry. We will have to dig into it and take a look at it.
Peter Lawson – Thomas Weisel
Yeah. We will talk about it off-line.
Kevin King
Yeah. Okay.
Peter Lawson – Thomas Weisel
And then I just wonder if you can talk through the components of growth that you saw from that DNA business of GWAS versus Axiom, versus cytogenetics.
Kevin King
Yeah. I sort of commented on that on the first question that we had from Bill. It was pretty uniform across those three areas in terms of growth, certainly the whole Genome targeted were at a higher level in absolute dollars than we did on the cytogenetics research more because of the number of customers there. But all three of them were up pretty strongly and this is sort of the second quarter, third quarter row where we are starting to see this type of trend for us.
Peter Lawson – Thomas Weisel
And then I wonder if you could finally kind of walk through the commentary or benefits you're seeing from NIH stimulus spending?
Kevin King
Yeah. NIH stimulus spending, I'm not so sure there is much more commentary to add here. We have got a lot of instrument placements as a result of stimulus spending, awards have been coming out. I would say that overall, the level of spending is still not there in terms of -- in my view, in terms of big, big impact in the marketplace. I wouldn't say that the Americas is over the top right now with spending.
Peter Lawson – Thomas Weisel
Okay. Thank you so much.
Kevin King
You bet.
Operator
Your next question is from the line of Tycho Peterson with JP Morgan.
Sanjay Chawla – JP Morgan
This is Sanjay sitting in for Tycho Peterson. Thanks for taking the questions. For GeneAtlas, from what type of customers are you seeing the greatest demand and is that pretty much in line with your expectations and if you could kind of talk about what the install base potential might be for the next several, next few years?
Kevin King
Sure. There are about 50,000 molecular biology labs around the world. These largely represent the target base of customers for us. Most of the target audience is centered around new users to microarrays. Good examples would be university settings that don't have capabilities that maybe have small budgets that can't afford a $200,000 or $300,000 piece of capital equipment, or would be running fewer volume or lower volume arrays and not really being capable of having a staff that could use a sophisticated piece of equipment. And so this is a much simplified unit in terms of, in terms of work flow and capability and at a greatly reduced price for on the capital side. These customers are also in industrial type settings as well and in some of our core labs or traditional core lab customers also our target here. I think primarily the target is around new users in those 50,000 labs.
Sanjay Chawla – JP Morgan
Great. Thank you. And in terms of your operating expenses, you guys continued to do a great job managing that. Just kind of if you could give us some color around what, additional levers there might be?
Tim Barabe
Well, I think you have seen with the $49.9 million in this quarter and 51 million in the fourth quarter of 2009. $49 million in the third quarter 2009 that we have -- we have come through the major savings in terms of operating expense leverage versus the time when we had a couple of factories. So we have gotten to what we feel is a good level and we hope to hold this level in terms of absolute expense while hopefully growing the top line as well. And continuing to bring the operating expenses as a percentage of sales down, so there's continued thought about how can we tweak it a bit more, but I think most of the major savings are behind us. Kevin, do you have anything to add to that?
Kevin King
No. I think that's right. I think we have been working hard to get our expense structure down and now we have got to grow into that expense structure that we have.
Sanjay Chawla – JP Morgan
Great. Thank you very much.
Kevin King
You bet.
Operator
Your next question is from the line of Jonathan Groberg with Macquarie Capital.
Jon Groberg – Macquarie Capital
Hi, Kevin. Can you just talk about your spending around $18.5 million in R&D, thought maybe keeping that the right level to keep it at? Maybe just talk about, where you're investing that now? You've just launched two new products. You're trying to get those out in the market, but what should we be looking for you from in terms of kind of new products. This is a constantly evolving market. Maybe just talk about what we should be expecting going forward?
Kevin King
Yeah. Jon, I don't think I want to disclose products that we haven't publicly announced before, but I would say a couple of things are going on within R&D right now. One, with a lot of the next generation products released, they are moving into more of a sustained mode and follow-on releases to them. In addition of that, we have reinvigorated the Affy Labs investment in the business for longer-term research to help us to grow our business in the long run. And I feel with that, the timing of that is right. Now that we are sort of turning the business around and with more stable and predictable revenues and we have got a lot of our cost issues under control. So we are spending more money in the research side of the business for long-term growth. We also have other components of our business such as USB reagents, the Panomics products lines continue to do extremely well and we are investing in those parts of the business.
We have our liquid array technology platform that we invested in, as an acquisition a few years ago. And as I mentioned on the fourth quarter call, a lot of that research work is done and those programs have moved into development. So we are really bullish about our ability to compete in the low to mid flex space, not only with the products of USB and Panomics, but also by marrying those with true materials into the future.
Jon Groberg – Macquarie Capital
So – and obviously I don't want to disclose any product, but just as a category it's clear that on the array side, for example your competitor is investing a lot and trying to continue to get more and more content onto arrays, shrinking down future sizes everything. Is that a direction that -- is it arrays that you're investing in, is it outside of arrays, is it more on the customization, customers are now saying yes you have customization, but the turnaround time isn't there. So is it trying to improve the turnaround time, is it in? And I guess I'm trying to get a feel for where you see the incremental investment dollars in R&D being most valuable in terms of the slices of your business. Is it in the Panomics and that side that you talked about?
Kevin King
Yeah. So the major categories of investments say for this year, are the building out of the infrastructure for our greater customization capabilities, for Axiom, also for gene expression products. Clearly, this is a new part of our business and we want to get those products to be more streamlined in terms of turnaround and so forth. That's a big part of our investment. Continuing to build out applications on GeneTitan as well as GeneAtlas is an area of investment for us. It was shown to us when we moved from gene expression only to gene expression and genotyping on GeneTitan. The uptake was greater. And we believe that further menu expansion is going to continue to drive the business there. We are also spending a lot in the area of cytogenetics research, both for pre and post natal applications, as well as for cancer applications with a road towards some point in the future regulated products. So there's a lot of work going on in the business there. We think those will represent big recurring revenue streams for us in the future. I think those are probably the major categories, Jon.
Jon Groberg – Macquarie Capital
Okay. Thanks for that clarification and then can you just -- people asked around this but just trying to get a sense you've been pretty good in the past at being able to depict what was actually happening in the market. So if you think about your DNA growth, how much of that do you think was just market growth, how much of that was easy comps, how much of that -- maybe just your service revenues, you said are going to be down sequentially. So these big GWAS projects don't seem like they are coming back yet. I'm trying to get a sense as to that overall market in terms of where the different levers are again.
Kevin King
Well, I think we are building up, if you sort of work it from the most recent products to the past. I think we are building up a good recurring revenue base in the cytogenetics research area for DNA products. So I think that's first and foremost an area that we think is important and will continue to grow. We know that more and more customers are looking to adopt microarrays relative to fishing care typing from a research point of view.
I think on the GWAS side there continues to be a lot of strong interest in follow-on studies to 6.0. This has been a premiere product for us now since 2007 with capabilities for both SNP and copy number. It's a robust product and customers continue to buy that. I would say that the studies are necessarily on the order of welcome trust, but you do see sample studies out there in the five to 10,000 sample range and we win a fair amount of those with 6.0. With Axiom, we are just getting started. A lot of our GeneTitan systems are being installed or have just been installed.
It takes a good four to five weeks to get those systems shipped, up, running, trained. You need a Beckman, a liquid handler in front of that that has to be trained installed. And so we are hopeful that these GeneTitans will start producing lots of gene Axiom samples in the future, but on that side we are just getting started. I will say the interest is very high and it's very high as it relates to the ability to customize data and that's a capability that we have and we think will actually help expand the market and grow the market going forward.
Jon Groberg – Macquarie Capital
Okay. Last question, just a clarification here again, kind of GWAS, not putting words in your mouth but sounds nothing large there really going on, cytogenetics growing rapidly. You keep hearing there's going to be crackdown that these labs are going to have to have FDA approved cytogenetics products from you on the array side. What's the impact of that? When do you have to have, in your view, that FDA approval in order to keep growing in cytogenetics?
Kevin King
Right now our products are only intended for research use only, so I don't think we are hitting that broader portion of the market and I don't think that there's that level of exposure for us for that reason. Should we get out there and try to market our products more akin to a regulated product, we would certainly need approval and that day would have to come sooner rather than later, but right now we are not marketing our products in that area.
Jon Groberg – Macquarie Capital
Okay. Thanks.
Kevin King
You bet.
Operator
Your next question is from the line of Isaac Ro with Leerink Swann.
Isaac Ro – Leerink Swann
Hi, good afternoon. Thanks for taking the question. Hi, I just wanted to ask first one you mentioned on pricing that the environment remain generally stable. So I'm wondering just two things on pricing, one would be can you maybe comment on your visibility around pricing trends as it progresses and maybe against that context. How your product gross margins might vary should pricing on a per sample basis maybe trend towards that $100 level at some point. At those levels would you still be able to generate north of 60% gross margin?
Kevin King
So let's maybe take these in pieces. So pricing trends in the past have been stable for DNA have been stable for a good portion of our RNA products with the exception of the U133 product, where I had mentioned earlier in the biomarker discovery segment, those prices have trended downward and that stuff is fairly predictable for us.
Going forward well, they continue to be stable? In a good market environment where the market is growing and expanding, I think there is an opportunity for prices to remain stable. If the market growth slows down manufacturers tend to be more competitive, you could see price pressure. I mean that's just simple straightforward business logic there.
In terms of the -- if prices were to fall to $100 could we maintain on a chip basis, high margins the answer is yes, we could. Not only from a manufacturing consolidation but also our new peg format is significantly less expensive than the cartridge format. And so we think that we could maintain lower margins, lower prices, average selling prices and still maintain good margins. We often think about from a business perspective how much elasticity might there be in the marketplace much like if a cell phone went from $500 to $100 to more people buy cell phones.
In some markets that we participate in we do think there's elasticity, particularly in the DNA side of the business for GWASs studies. It's been shown that the power of a study increases with sample size and for customers to buy more samples per dollar, if you will is a good thing. And therefore we think that market is quite price sensitive.
We are not convinced that the gene expression market is as price sensitive. If you will largely because a lot of studies are done with few samples and the actual costs of the chip is a small percentage of the total cost of running a study including acquiring the sample. And so we think those customers tend to be less price sensitive and that's why we think prices have not declined tremendously on that side of the business but rather more slowly.
Isaac Ro – Leerink Swann
Great. Thanks so much for that. And then just a second question around, GeneAtlas and then in the context of next-gene sequencing technologies. There is obviously a lot of them out there both commercial and soon to be commercial. And I'm wondering do you see anything out there that might be complimentary to your platform and thus potentially attractive as an acquisition target and it is, so kind of what are some other technological performance related parameters that you think to be most relevant interesting to your platform?
Kevin King
From a next-gene sequencing point of view, I think most and this is my opinion. But I think most of the manufacturers that are out there are about to be on the marketplace are largely focused on discovery applications. We haven't seen anything that really differentiates one another. I think these people -- these companies are looking more and more the same.
In fact, I think a lot of the data that's being generated is now turning into a commodity. So discovery information is more of a commodity than it is unique. I think looking forward into the out years, what would be attractive would be the ability to turn these products into validation applications, where you could do fairly low cost but a measurable and different -- with a measurable and differentiable advantage. So that would be moving out of discovery into the validation or testing area. And I won't comment on whether or not we think there's a market for that or not but that's where we think it would be, where it could be attractive.
Isaac Ro – Leerink Swann
Great. Okay. And then just lastly getting back to the GeneAtlas, as I look at some of the customers that you talked about as sort of being target audiences. I also see sort of a lot of these other sequencing companies reducing the cost of their own technologies to sort of the similar price points that I'm thinking of here and do you see as a result sort of a competitive die thank where you might force some of these customers to choose to sort of get an lower answer into lower end array technology versus a lower end sequencer. And therefore, how do you make that value proposition towards your platform?
Kevin King
Well, I think it depends on the application and I think the GeneAtlas is a significantly lower cost, easier to use and lower cost per sample than what any sequencer is today or could be. We are talking about our an instrument that has a less price of around $70,000 and an average sample price under $300, $250 to $300 with the turnaround time of about a day to two days.
And it's not a discovery instrument, right. It's an expiration and validation instrument. So I think they are really quite different products if you will to the extent that there are more sequencers that are discovering new content. We think that's good for the array business. We think that's good for the array market because those products are going to -- those discoveries are going to need to be validated. And arrays remain to be the platform of choice for follow-on studies.
Isaac Ro – Leerink Swann
Got it. Great. Thanks so much for taking the question.
Doug Farrell
Yeah, Isaac. I was going to say, this is Doug. I think in addition costs aside, the through put and Affymetrix needs behind sequencing studies are dramatically different right with arrays you can run hundreds of samples a day very efficiently and the Affymetrix is seamless, trying to scale up volumes in sequencing even with the costs coming down is a very complex undertaking. And certainly, there are super users who can do it, but the average customer is not in a position to do 10 or 20 fold more samples on their sequencer even if they had the money do it.
Isaac Ro – Leerink Swann
Got it. Yeah. Okay. Thank you very much.
Doug Farrell
Thanks.
Operator
Your next question is from the line of Derik De Bruin with UBS.
Derik De Bruin – UBS
Hi.
Kevin King
Hey, Derik.
Derik De Bruin – UBS
So one of my questions were answered. But I'm going to pick around the edges and stuff. So how much of your installed base do you think you can actually -- you can swap out with the new technology platforms?
Kevin King
So I think upwards of a third to half of our installed based or medium to high throughput users. And therefore, good campaigns for the genotyping system. A lot of our installed based also the age of our installed base is getting up there in some cases the GCS 3000 going around for five to six years. And so a lot of customers are looking to replace their technologies are those products in agent.
So I think 1/3 to 1/2. On the GeneAtlas side, I think that less of a replacement product and more of an expansion product to new users and to new markets. These 50,000 microbiology labs that I referenced or the vast majority of them are not users of microarrays, they are probably users more of real-time PCR.
And where you have the need or the ability to look at multiple genes, multiple signatures that are fairly low price point is an attractive marketplace according to the market research that we have done and the positioning of the product.
Derik De Bruin – UBS
Do you plan at some point to stop supporting your older legacy GeneChip products?
Kevin King
No. No. I don't foresee any reason for us to stop supporting or manufacturing cartridges or the GCS 3000. There are certainly could come a day when those systems are retired and there's not a need to do it but where they’re customer centric and want to be loyal for our customer base, so there is no reason for us to obsolete those.
Derik De Bruin – UBS
Could you talk a little bit about what you -- when we talked about some of the academic markets? Could you talk a little bit about the pharma and biotech markets? Have you seen any dramatic pickups now for guess? What's the reception when you go into the pharma and biotech accounts on the new platforms? Are they -- there any interest at all in them picking things up?
Kevin King
Yeah, absolutely. Look, the pharma business is strong for -- I wouldn't say strong, it's steady for us from a mix standpoints. We have moved a lot of our products to the drug development side away from drug discovery. That's consistent with what where pharma stand. There is good interest in GeneTitan. We have a lot of our customers that have purchased multiple GeneTitans for use in gene expression.
We have customers interested in using Axiom on the pharma side. And I would say the growth of the Panomics line both pro carda and QuantiGene is very centered in drug developments for biomarker validation, RNAi screening and other types of high throughput applications and pharma really, really likes these products for a variety of reasons, easy work flow very, very quantitative inner capability, ability to plex to levels that PCR and other types of lower end technologies are not able to do. And the pharma and biotech industries will pick these products up quite nicely and we think it's going to continue.
Derik De Bruin – UBS
I guess, are you seeing but just Kevin, would you characterize the overall spending environment in pharma and biotech labs just in general? But I guess is there still hesitancy to spend overall from those customers with spending a little bit more relaxed in Q1 relative to Q4 or relative to last if you could just a little bit of comparison year-over-year?
Kevin King
I don't think there's any relaxed spending either in fourth quarter or first quarter. I mean this is -- these are tough times for pharma. There's been a lot of consolidation, a lot of shakeout as you know. And I think people are conservative as the pharmaceutical industry tries to work their way through patent explorations and slow pipeline so for. So it’s just tough owing. I do think that there is room for people to acquire products that provide value to their workflow and our products seem to be doing that. At the same time, I wouldn't say that the industry is booming, if you will.
Derik De Bruin – UBS
Right.
Kevin King
Do you find that as well or -- yeah.
Derik De Bruin – UBS
Yeah. Could you -- I just one other question. Could you just talk a little bit about the geographic mix and just what you're seeing outside the U.S. in particular?
Kevin King
Yeah. I would say that our Asia region is the fastest growing part of our business. It has been for a while but increasingly growing nicely. That's led by growth in China. We see good growth potential in Japan, new government in Japan resurgence of interest in life sciences and so forth that had not been there for a while. And then the whole Asia-Pacific rim has been growing nicely.
The mix of our products in our revenue are about the same. I think it's roughly 50, 50 somewhere 48, 52, somewhere around that. Currency is an issue, right, in Europe both the British pound and the euro have hurt, hurt revenues if you will because currency is going in the wrong direction. That problem doesn't necessarily exist so much in Asia except for the yen. And to some extent our in large industrial customers global pharma even if they are based in Europe sometimes they pay in dollars, so we are a little bit sheltered from that.
Derik De Bruin – UBS
Okay. Great. Thank you very much.
Kevin King
You bet. Thanks.
Operator
Your final question is from the line of Quintin Lai with Robert W. Baird.
Quintin Lai – Robert W. Baird
Thanks. All my questions have been answered.
Kevin King
Great.
Doug Farrell
Thank you all for joining us today on the call. If you did miss any portion of the call, a phone replay will be available for the next seven days or so beginning at 5 O’clock Pacific time. To access the replay domestic callers should dial 800-642-1687. International callers please use 706-645-9291. The pass code for both is the same, 69103813. Alternately there is not a replay that will be available under the Investor Relation section of our website at affymetrix.com. So thanks again for joining us and have a great day.
Operator
Thank you for joining today's conference call. You may now disconnect.
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