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Affymetrix (NASDAQ:AFFX)

Q3 2011 Earnings Call

November 02, 2011 5:00 pm ET

Executives

Frank Witney - Chief Executive Officer, President and Director

Doug Farrell - Vice President of Investor Relations

Timothy C. Barabe - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Charles Anthony Butler - Barclays Capital, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Michael Cherny - Deutsche Bank AG, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Derik De Bruin - UBS Investment Bank, Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Bryan Brokmeier - Maxim Group LLC, Research Division

David C. Clair - Piper Jaffray Companies, Research Division

Ramesh C. Donthamsetty - JP Morgan Chase & Co, Research Division

Operator

Greetings, and welcome to the Affymetrix Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Farrell, Vice President of Investor Relations for Affymetrix. Thank you, Mr. Farrell, you may begin.

Doug Farrell

Thank you. Good afternoon, everyone, and welcome to the conference call. At the close of the market today, we released our operating results for the third quarter of 2011.

Joining me on the call today is our President and CEO, Frank Witney; and our CFO, Tim Barabe. As a reminder, today's call is being recorded and the audio from the call is being webcast over the Internet on our home page at affymetrix.com.

During this call, we may make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks and uncertainties and could cause actual results to differ materially for Affymetrix from those projected. These risk factors are discussed in Affymetrix's Form 10-K for the year ended December 31, 2010, and other SEC reports including our prior period quarterly report on Form 10-Q. We encourage you to review these documents carefully as forward-looking statements are made as of today's date, and we make no obligation to update this information.

So with that, let me turn the call over to Frank.

Frank Witney

Okay. Thanks, Doug, and good afternoon, everyone. I've enjoyed having the opportunity to meet with many of you over the last few months. I'm happy to have this opportunity give you an update on our commercial and operational activities during my first quarter as CEO here at Affymetrix. I want to start off by reiterating that the leadership team in Affymetrix has a sense of urgency by getting the company growing again and achieving sustainable profitability. I spent most of the first few months since returning to Affymetrix completing a detailed analysis of our market opportunities and customer needs, as well as our products and our team.

This included spending a significant amount of time in the field which was divided between our customers, our commercial team and our shareholders. I'd like to share some of what I learned with you today.

From a commercial perspective, after meeting with a number of our important customers, I came away enthusiastic about our prospects for growing the business. Many of these customers are heavily involved in translational research, where running a large number of samples in order to validate clinical significance and utility is absolutely critical. The largest opportunities involved expression of the genetic biomarker validation, especially in cancer research. These are applications in which micro arrays are a primary tool for conducting such large-scale studies.

In our cytogenetics business, we've had consistently positive customer feedback on our new research-use-only CytoScan product. We believe that the combination of the most comprehensive and highest resolution content, the simplified work flow and state-of-the-art chromosome visualization software will help to establish CytoScan as the platform of choice for advanced array-based cytogenetic analysis.

We estimate that constitutional cytogenetics represents an annual opportunity of about $200 million, and we intend to further penetrate this market by converting customers from traditional microscope-based approaches, as well as taking share from other commercial array of platforms.

We intend to file this product for regulatory approval by mid-2012, and believe this product line will be an important growth driver for us over the next several years. When we receive regulatory clearance, this would put us at a significant advantage over other array-based competitors in the cytogenetic space, which is currently served by research-use-only products.

Importantly, CytoScan revenues for the third quarter met our expectations and we are building commercial momentum for this product. This same technology is also important in cancer research, which opens up longer-term opportunities that are even larger than constitutional cytogenetics.

During the quarter, I had the opportunity to meet with a number of thought leaders in the field of oncology that are extremely excited about using CytoScan to conduct cytogenetic profiling in both blood cancers and solid tumors. We estimate that this market represents an additional $500 million per year opportunity, and can help us grow cytogenetics into major part of our business in the coming years.

We see opportunities in genotyping as well. This include ethnic-focused products such as Pan-African Array we recently launched, as well as in Targeted Genotyping market where we are starting from a relatively small base.

During the quarter, we announced the upcoming availability of a new Axiom Array that has been developed based on content derived from multiple sequencing projects, including 1000 Genomes and a series of 16 other key sequencing programs.

A key differentiate -- a key differentiator for the array is the ability for customers to add their own custom content. The product will be available in Q1 of FY '12 and we are currently taking orders.

We expect there will be a growing market, in which novel sequence variance will be identified in GWAS or NGS studies and require validation on Targeted Genotyping arrays, which we are well positioned to provide.

Gene expression, we're focusing on stabilizing our revenue. While this was another tough quarter in our expression business, we believe that the combined opportunities in translational medicine and clinical applications, including our 14 Powered by Affymetrix partners can help offset the declines we've seen in our expression business. We also had a strong growth in our miRNA product, which is one of a number of new products that are ramping up for us.

I spent a significant amount of time in the field with our -- amount of time with our field sales and support team over the last few months. And I can tell you that they are focused and they understand exactly what is expected from them in order to achieve our goals.

Turning to operations. We've recently completed reorganization into business units that include a gene expression business unit, a combined genetic analysis and clinical diagnostics business unit and a life science reagents unit, an operation that is primarily composed of the former USB products.

This structure will streamline our decision-making process while increasing customer focus and accountability. In order to achieve our goal of generating revenue growth for the full year in 2012, it was critical to have these structural changes in place well ahead of year end.

We have committed and hard working employees on our global team. I can tell you that they are employees who understand the rationale for the changes being made, and that we all share a clear vision of our strategy and tactics.

In addition to the structural changes that have been made, we have also made substantial changes in how we'll allocate our resources going forward. As you saw in our press release, we made a reduction in our R&D team. We reduced headcount in R&D by about 20% and are reallocating some of those resources to sales and marketing in order to help drive the adoption of a number of recently launched products.

We streamlined our R&D programs to focus on key deliverables that target our growth opportunities particularly in cytogenetics, genotyping and cancer mutation detection, while providing sufficient resources to achieve our goal of stabilizing our rate-based and low-plex Panomics expression business.

In summary, we are making tangible progress towards getting the business turned around and growing again, as well as achieving sustainable profitability. We believe the market opportunities are there. We have the financial and technical resource to succeed, and we've reorganized the business and realigned those resources to our key commercial opportunities.

Some key metrics that you can use to track our success include: Stabilizing our expression business including arrays, low-plex solutions and single cell QuantiGene products; increasing our market share in genotyping, particularly Targeted Genotyping applications; and building a much larger business in cytogenetics.

Now, I'd like to ask Tim to review the details of our quarterly operating results.

Timothy C. Barabe

Thank you, Frank. I'll begin my remarks by reviewing our financial results for the third quarter of 2011, and then close with an update on our balance sheet.

For the third quarter, the company reported total revenue of $64 million compared to $74 million for the same period last year. Total revenue was down 13.5% from the prior year driven by lower consumable and instrument sales.

Turning to the detail. Third quarter product revenue was $57 million compared to $67.3 million for the third quarter of 2010, representing a decrease of 15.3%.

Consumable sales were $52.9 million, down 14.4% from $61.9 million in the third quarter of 2010. DNA and other revenue was $24 million compared to $25 million for 2010 or down 4% from the same period last year.

As a reminder, last year's DNA revenue included a significant volume of genotyping arrays that were run as part of our large patient NIH stimulus-funded study.

Our RNA revenue was $20.9 million versus $36.9 million, down 21.6% from the prior year. As Frank indicated in his comments, we think that the combination of new expression applications in markets can help to offset the declines in our IVT Array product line.

Instrument sales for the quarter were $4.1 million, down from $5.4 million in the prior year. Service revenue was $5.3 million, up slightly from $4.9 million in the second -- in the third quarter of 2010. Royalties and other revenue was $1.7 million versus $1.8 million in the third quarter of 2010.

Turning to gross margin. Total gross product margin for the third quarter of 2011 was 56.8%, representing an increase of about 1 percentage point over the third quarter of 2010. This was driven by lower materials in warranty expense, as well as the favorable mix shift toward higher margin consumables.

These improvements were partially offset by lower cost absorption, the change in our accounting policy for spare parts and a provision for excess inventory. Excluding these items, our gross margin would have been roughly 60% for the quarter. For the year, we expect our total gross margins to be about 59%.

Turning to operating expenses. Total operating expenses for the third quarter were approximately $42 million in line with a $42.5 million for the same period last year. This included the previously announced $1.8 million charge associated with closing our Oakmead pilot plant and research facility. Adjusting for this non-recurring charge, our operating expenses were down about 5% year-over-year. Third quarter 2011 R&D expenses were $15.3 million, down 5.2% from the $16.2 million for the same period last year.

As Frank told you earlier, we have made a substantial reduction in our R&D headcount. Our goal is to reduce our R&D expense to about 20% of revenue in the near term, the longer-term goal of being closer to 15% of sales.

SG&A expenses of $26.9 million for the third quarter of 2011 represented a slight increase over the third quarter of 2010, which was $26.3 million. In the fourth quarter, we expect OpEx in to be in the range of $44 million to $45 million as a result of the charge for the restructuring that we completed last week.

Despite improved margins and continued operating expense control, operating loss was $5.3 million primarily due to lower revenues in the third quarter as compared to an operating loss of $2 million in the same period for 2010.

Interest expense and other net was approximately $3.1 million in the third quarter of 2011 due primarily to interest expense, the reserve against a note receivable we held from a private biotech company in the amount of $2.2 million, and other-than-temporary impairments recognized on 2 investments that totaled about $700,000. These are partially offset by higher interest income. This is compared to an interest income in other net of $3.3 million in the prior quarter, which included a gain on repurchase of convertible notes of $4.1 million, and in other-than-temporary impairment of $500,000 on a non-marketable investment.

Turning to taxes in the third quarter, we recognized income tax expense of approximately $700,000. Our income tax expense for the third quarter is principally driven by foreign income taxes.

For the third quarter, we generated a net loss of $9.8 million or $0.14 per diluted share. This compares to a net income of $1 million or $0.01 per diluted share in the third quarter of 2010.

To facilitate the analysis of the company's core operating results, I would like to summarize non-core adjustments to our net income for the quarter, and their impact on pretax earnings per share. In aggregate, these adjustments amounted to: $4.4 million or about $0.06 per share decrease in GAAP net income, and include within gross margin $533,000 or roughly $0.01 per share in the amortization of acquisition-related intangibles; an operating expenses $1 million or $0.01 per share, again, in the amortization of acquisition-related intangibles; and an interest expense and other net other-than-temporary impairments on 2 investments totaling $700,000 or $0.01 per share; and a provision for a note receivable from a non-marketable investment of $2.2 million or $0.03 per share.

Now let's turn to the balance sheet. We ended the third quarter of 2011 with total cash and available for sale securities of approximately $264 million, as compared to $255.6 million at the end of the second quarter of 2011.

Our net cash position is $168.5 million, representing an increase of approximately $47 million over the same period in the prior year. In the third quarter, the company generated $11.5 million in cash flow from operations.

Capital spending was $1.5 million, resulting in free cash flow of $10 million for the quarter. Depreciation and amortization was approximately $8.5 million. Operating expenses for the third quarter included $2.2 million of stock compensation expense, as compared to $2.5 million in the third quarter of 2010.

Accounts receivable were $41 million, down 22% from $52 million last year. Net inventory for the third quarter was $47.9 million, which is basically flat compared to the second quarter of 2011. Year-over-year, inventory is down by about 9%.

To summarize, during the third quarter, products gross margins improved by about 1 percentage point. Cash flow from operations was about $12 million; free cash flow was about $10 million; and we ended the quarter with net cash of $169 million.

Now I'd like to turn the call back to Frank for closing remarks.

Frank Witney

Thanks, Tim, and thanks to all of you for joining us today. In summary, despite what is clearly, a challenging time for us and in general a more uncertain funding environment, I have become even more confident during my first 90 days back in Affymetrix that we have high-quality assets in our technologies and people. We're addressing high-growth markets and we're executing to a focused plan to generate revenue growth and profitability in 2012.

I look forward to providing more details in our strategic plan as well as commercial, operational and financial milestone at the JPMorgan Conference and our year-end conference call.

At this point, we'd like to open up the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Bill Quirk from Piper Jaffray.

David C. Clair - Piper Jaffray Companies, Research Division

It's actually Dave Clair here for Bill. I guess the first question guys, I'm just kind of curious this is the second quarter here where product revenue is kind of in the upper $50 million range. Is this kind of the run rate we should expect for the next quarter or 2? I know you don't give guidance, but any color there would be great.

Frank Witney

Well, yes, we're not giving guidance. Although we certainly are going to talk more with more specifics in early next year. But I think we're probably within another quarter or so of starting to see real traction from our cytogenetics products and some of the other things that we're doing on stabilization of the expression line. And a lot of things we're doing in the genotyping line. So we're -- as we've said, we're intending to grow the business in 2012. We've said where that growth is going to come from, stabilization of expression, market share gain and genotyping and aggressive growth with our cytogenetics products. We believe we'll have continued growth in our USB business, which has continued to grow during this -- has continue to grow consistently. So we feel the elements are in place to grow and it's taking -- it's going to take a little while to get all the elements aligned. But I think as these weeks have passed and as we make progress in our various initiatives that those elements are lining up for us going to the new year.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And can you give us some color on Europe versus U.S. how the businesses were for each of those markets, and then how pricing is holding up?

Frank Witney

Yes. On pricing, we didn't see any dramatic issues on pricing whatsoever in the quarter. And where I would say on a regional basis there was no big differences in our performance in North America versus Europe. So I think we're holding steady on pricing and we're working very hard with both our North America and Europe team on our growth initiatives.

Operator

Our next mission comes from the line of Quintin Lai with Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

So kind of first question on the R&D side. You trimmed back a little bit but then you talked about submitting the CytoScan product next year. So should we kind of think that you trimmed it back on what was supporting -- formerly supporting gene expression and really focusing a lot on the MDx side?

Frank Witney

Yes, I wouldn't even think or relate about it that way. Our R&D, we put an enormous amount of thought into this action. So -- and as I said in my prepared comments, we'll have no -- this will not have an impact on our move forward on the filing with our cytogenetics products. And in fact, through these efforts, we believe we can add additional resources to support our expression line. Obviously, it will be -- that'll be less effort in that area and then some of our other areas that have more growth. But the restructuring, if you will, of our R&D resources was really around business unit initiatives, which are very clearly delineated and we won't see any -- we believe that, if anything, we'll be even more focused.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

And then with respect to kind of the breaking out your business units into kind of those 3 divisions, any thoughts about helping us get an idea of percent of revenues that are associated with each one of these businesses?

Frank Witney

Yes, we're working through that. Tim, I think you might want to comment on that. But we basically, reported for a long time with very pre-high level buckets, if you will. And I think we're going to move forward with a little bit more granularity to help you think about these businesses.

Timothy C. Barabe

Yes, I think that something that we will get to at the beginning of the year as well. We're right now going through the process of categorizing the products into the business units. And we'll certainly provide more transparency there. I think it's important for us to give you that transparency so that you can see into the product lines and see where our growth drivers are.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then finally, kind of going to the ethnic panels you've got for genotyping. What was some of the feedback that you got from the recent SG in terms of appetite for doing more non-Caucasian-based genotyping projects for GWAS?

Frank Witney

I think the feedback was very, very positive. People certainly see the power of having ethically focused arrays in terms of finding variants and linking those to -- potentially linking those to disease states. So I think that having these types of arrays available is a very positive step for us in our genotyping platform.

Operator

Our next question comes from the line of Ross Muken from Deutsche Bank.

Michael Cherny - Deutsche Bank AG, Research Division

It's Mike in for Ross. So I just wanted to touch on the balance sheet. You guys have obviously done a great job in terms of building cash. Strong free cash flow performance in the quarter. As you think and especially as you're doing the reorg of the business, have you made any changes or thought more deeply about how you want to allocate that cash? Obviously, a lot of different areas you're going to buildup the platform. Just kind of thinking broadly about what might be the use of that cash. Are there any product areas, or any maybe geographic expansions we should be looking to?

Frank Witney

Yes, a couple -- I'll take that in a couple different ways. I mean obviously, we have a very strong net cash position and that's really been great work done by Tim and the finance team. Our global operations team, everyone has really managed very, very well and deserves a lot of credit for that. That cash is available for strategic purposes potentially, for capital structure potentially, and we're keeping our options open and thinking through how we might use that cash. We are thinking through some potential, to the second part of your question, we would like to build up our Asia business a little bit more. Potentially, we may invest in some areas in Asia where we think we have growth opportunities in the genotyping space, the cytogenetic space where maybe we've been underrepresented and we're going through that calculus as we speak.

Michael Cherny - Deutsche Bank AG, Research Division

Great. Then Tim, just one quick question. You called that a $1.8 million charge relates to facility closure. That was not one of the numbers that you excluded in terms of the extraordinary items, correct?

Timothy C. Barabe

No, that was actually in operating expenses. So the $42 million of OpEx includes the $1.8 million.

Operator

Our next question comes from the line of Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

In the second quarter, the royalty and other revenue dipped a little bit and it picked back up in the third quarter. Is this sort of the level where it should be? Was there any onetime items in the third quarter?

Timothy C. Barabe

There were no onetime items. It's a notoriously difficult number to predict. It really depends on what our partners sell. So there were no onetime items that pushed it up.

Bryan Brokmeier - Maxim Group LLC, Research Division

Okay. And, Frank, you touched on a little bit in your prepared remarks. But just last quarter, you stated that you've visited with a few large customers. And did you meet -- continue to meet with the customers? And how is that feedback that's been provided? And has it changed over the last 4 to 5 months from when you initially started meeting with them back in July?

Frank Witney

Not really. If you take it in our -- in the big buckets of our business, the feedback from our cytogenetics customers has been incredibly positive. The people who have -- who understand the array and have seen the kinds of data off the CytoScan array are extremely bullish about it. And that -- if anything, that's ramped over the last few months [indiscernible] hands on it. In the genotyping side, I think we're starting to understand even better where our opportunities might lie. And so -- and some of the advantages that we bring to the table with the assets such as our database of validated SNPs and our high-throughput automation. So we still feel, if anything, we're seeing more and more opportunities, particularly in the targeted space and potentially in the Ag space. And finally, expression, it's difficult for us. There's obviously a lot of mindshare in NGS. It's not secret to anybody on this call. I don't think we've done a particularly good job of explaining why arrays are very, very useful as a companion to NGS. The vast majority of publicly-available sequence resides on our arrays in ways that you can look at transcripts and isoforms of those transcripts. But it's -- for us, that's an area that we have a lot of work to do in explaining the utility. And so -- I mean, I think that's the basic feedback that I've gotten from key customers. And I think when you sort of signal-to-noise all of that, that we feel that we do have the opportunities to support the growth initiatives that we've laid out for you here.

Bryan Brokmeier - Maxim Group LLC, Research Division

Okay. And then just lastly, last quarter, you talked a little bit about submitting the CytoScan for FDA clearance at mid-2012. And last quarter, you said that you're in initial discussions with the FDA on that pathway. How have those discussions progressed?

Doug Farrell

This is Doug. We have had a number of meetings with FDA. So the exact timing of the meetings relative to when we met, I can't tell you that at the top of my head. But there have been a number of meetings with them. We think we have a very good visibility on what the appropriate regulatory path is. And as Frank says, we plan to file in the middle of next year.

Operator

Our next question comes from the line of Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just 1 bigger picture question, I mean, I think we're all wrestling with the uncertainty around academic funding and clearly, hard to handicap with any precision. But if we assume that -- let's say in NIH funding, the economic markets that you serve are, let's say, down mid-single digits in the next couple of years. Can you separate what you think you need to do in the growth rates of your sort of new businesses, however you want to define them relative to that legacy array franchise such that you achieve top line growth next year consistent with your previously-stated goals?

Frank Witney

Yes. So as you say, there's a lot of uncertainty around NIH funding, and NIH represents about 25% of our revenues. A lot of the growth initiatives that we're doing, we believe, for example, in cytogenetics, will be in more applied markets and probably less -- a little bit less subject to those types of uncertainties and some of the other areas that we're doing that are in more translational spaces and preclinical to clinical spaces. If you -- even in the uncertain times, if you go out and talk to people where the funding increases are likely to be, it's going to be in cancer, translational and applied areas, which is where our strategic focus is. So you'd like to have better news, but I think everyone on this call is certainly aware of the uncertainties that exist out there. On the other hand, we feel that the direction -- the overall direction of the company, which is in applied markets, clinical, preclinical, translational and cancer are significant growth opportunities.

Timothy C. Barabe

Just like to add there as well that some of the things, for instance, we've got relatively low market share in cytogenetics, and that's a growing market. So we expect not only to gain because the market is growing but also to gain because of our market share. And that's a similar situation in genotyping.

Isaac Ro - Goldman Sachs Group Inc., Research Division

That's helpful. And then maybe pursuant to that item, if you look at the run rate that you hope to be on in revenues, how can you -- could you help us balance that against some of the sales and marketing investments you're making? And then sort of what kind of level of run rate on revenues you think you need to be at to stay cash flow positive here in this environment? And give us some color on the expense side of the equation.

Frank Witney

Well, yes. So the guidance that we've given publicly is that expenses -- that we intend to hold expenses flat to down going forward. And we've said that our intention is to grow the business and to be certainly cash flow positive but also positive at the operating income line. So this is -- we said this publicly in several forms. We'll get more specific on that going forward. But we've done a very good job here of controlling our expenses, controlling the gross margin line. And as we've said publicly, our intention is to be able to leverage profitability if we can get top line growth. And that's where the focus is. So we'll continue to be very conservative on the expense side. We'll continue to work all the initiatives on the gross margin side, which are certainly bearing fruit even under a very challenging revenue picture. But I think without going too much farther, that's how we're thinking about things at this point.

Timothy C. Barabe

I would just like to add that we're still at 60% on overall gross margin through the third quarter on disappointing sales. So I think we've done an excellent job on being able to hold on to that gross margin that we drove through in 2010. And clearly, as Frank says, the emphasis will be on controlling operating expenses going forward as well. So I think those 2 areas are well under control. And now we've got to get that top line going again.

Operator

Our next question comes from the line of Derik De Bruin from Bank of America.

Derik De Bruin - UBS Investment Bank, Research Division

So you bundled DNA and other into 1 number this time. What's with the DNA just in terms of the revenues?

Timothy C. Barabe

Hang on 1 second, Derik. I'm pulling that out. It was roughly in line, down about 5% versus the combined numbers. So pretty similar. As you'll recall, the others are fairly small piece of the overall consumables.

Derik De Bruin - UBS Investment Bank, Research Division

Yes. Yes, just trying to strip our model of that. So I'm just curious. Your RNA is down 20%, and I'm just wondering how do you stabilize that business? I mean, it's not -- it's a volume issue. It's not like you're suddenly going to be able to slash prices, and there's going to be a tremendous amount of elasticity in the market. I mean, it's like back when you were looking at the GWAS studies and you did the price cuts there, and you drove the volumes up with this. I'm just curious as to what do you need to do to basically stabilize that business?

Frank Witney

Yes. So it's a great question. And when we think about expression, by the way, we group array expression, as well as the Panomics business, which are expression products but they're multiplexed down to single-cell RNA assays. So in the expression business unit, that's all ramped in together. Just taking the Panomics side, we've rebuilt the Panomics team. We've refocused it. That's a business that sadly had gone backwards due to some operational missteps on our part, and we believe with the new -- it's basically a structural issue. The products are in great shape, while we believe we'll continue -- we'll regain growth in that part of the business. And that's an area that we feel has tremendous growth opportunities. The business was growing 30% a year before the acquisition and continued to grow for a while and then has lost step and is not growing again or will start growing again. We're very confident. On the array expression side, we are cognizant and have to be cognizant of the macro environment of next-gen sequencing and its impact on arrays and the mindshare that it's getting, which is very, very high. So what we've done is over last 2 or 3 quarters, it's launched a number of new products in the area, including, for example, our microRNA product, which has grown very, very nicely. And we'll -- although it's on a relatively small base, it will become a substantial part of our portfolio. This is an area -- microRNAs are getting a tremendous interest as regulatory elements, and new species are continuing to be identified. We're expanding -- we've expanded our menu for our GeneAtlas. We just launched 16 new model organisms that run on the GeneAtlas line. We're still on relatively early days of the relationship with Thermo Fisher and our own organization on how to sell that product. But that's a menu-driven sale. We have to have a menu before people are going to buy into that platform. So we just launched 16 new organisms. For the model organisms that will be very important in many areas of research, we've also recently launched a product that is -- it's our traditional cartridge product at a low price point because we've lost some business at the low end of the expression continuum to lower cost products. So we put out a very powerful cartridge array at a reasonable price point. It doesn't -- it's not back-compatible with our current GeneChip users. So we won't cannibalize that. But we think we can get a part of the market that was not available to us. And then finally, we launched a product called the Human Transcriptome Array that was done in collaboration with Ron Davis' lab at Stanford. It has the vast majority of coverage of human genes and coverage of human transcript isoforms that have been identified through various -- for the next-gen sequencing. And there was a paper published, press releases that we've launched that basically said that this high-density microarray is extremely good profiling tool, potentially better profiling tool for -- compared to NGS approaches for a clinical validation based on it's -- it's at a very economical price point, it's very high-performance, it's easy to run very large studies. So we have to put energy into our expression business, which we're doing. We have a business unit focused on that from single cells to genome-wide transcription profiling. We're doing things with our commercial organization to make sure that we pay attention to expression. And we're going to put a lot of energy in it. In the continuum of a growth opportunity, it's not our highest growth opportunity for sure. That's in clinical products, cytogenetics, other clinical array products that we put out. And it's probably not even as good a growth opportunity for us as genotyping. But we feel that there is definitely -- with kind of energy we're putting in it, we feel that we have a very realistic opportunity to stabilize our expression business based on new products, new focus and a commercial orientation, where we need to go out and explain to people why -- where arrays fit in the continuum and the power of arrays. It's a long answer, but that's [indiscernible] about it.

Derik De Bruin - UBS Investment Bank, Research Division

Just 1 quick one. What's the annualized cost savings you expect net from the R&D reorganization?

Frank Witney

I'll let Tim handle that one.

Timothy C. Barabe

Yes, Derik, I think we expect about $5 million. So we think we're well-positioned going into 2012.

Operator

Our next question comes from the line of Dan Arias from UBS.

Daniel Arias - UBS Investment Bank, Research Division

Frank, can you just comment on your partnership for distribution with Thermo Fisher? And I guess more broadly your view on whether additional commercial relationships are something that you think could play a role in the turnaround.

Frank Witney

Yes. So our relationship with Thermo Fisher is relatively new. I think there's a pretty good meeting of the minds about how we want to attack. They have tremendous reach into -- with their very large distribution organization. We're starting to track that with regular update calls, looking at lead lists. But we have a nice list of leads. And we continued to -- and we want to drive that partnership very, very high with a very, very high level of energy. But, again, I think it comes back to part of my long answer before, which is that we really do have to expand the menu app because people -- they're not going to -- this is going to be a menu-driven solution. So our sale. So we need to do our part, as well as the Thermo Fisher part. And we're certainly very, very -- on a very daily basis, prospecting on our own for opportunities with GeneAtlas as well. Other partnerships, we're starting to think about some things we could do on the diagnostic side to leverage some of the assets that maybe our PbA partners have to -- now that -- as we start to think about some of our own products as well. But those thoughts are still in the very early stages.

Daniel Arias - UBS Investment Bank, Research Division

Okay, I appreciate that. And just looking at areas of growth in the array markets, the Ag market is clearly an attractive one. How are you viewing or, I guess, what are you actually seeing in terms of demand for DNA versus RNA products and whole genome versus targeted analysis arrays?

Frank Witney

Well, yes, in the -- specifically in genetic analysis, we believe that the opportunities are greater and targeted. We believe the opportunities in Ag are quite interesting. And we're approaching those more aggressively. They're price-sensitive applications in the Ag market, for sure. But I think the general trend will be towards targeted studies that either come off of -- potential functional variants that come off of GWAS or NGS studies, as well as Ag opportunities. I think our Axiom array is a good example of people wanting to look at potentially functional SNPs in a targeted way. So at a very high-level, that's where we see the opportunities. And we believe our technology platform is well-positioned to take advantage of high-throughput targeted arrays when you combine all of our Axiom assets together.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And then just lastly, just thinking about your new array offerings. Is there also a refresh of software portfolio that might be necessary there? Or do you feel like the informatics capabilities are where they need to be right now?

Frank Witney

I think the answer is kind of yes and no. Certainly, in the cytogenetics area, we think our ChAS software is state-of-the-art. Our customers love it. It gives them tools to do their analyses in a very, very high way. There are some other areas that we probably -- we could put a little bit more effort on in simplifying, particularly as the sets of samples that people want to run get larger on validation studies that's going to put more emphasis on having good analysis tools to be able to sort through all the data. So I'd say the answer is a little bit mixed there. Our informatics capabilities are extremely high at the company. I think the software interface side, in some areas, we have a very strong team. In some areas, the software for the customers is better than others. I think that cytogenetics is an area that I think we have a spectacular software platform for people to use.

Operator

Our next question comes from the line of Tony Butler from Barclays Capital.

Charles Anthony Butler - Barclays Capital, Research Division

Frank, I'd love to explore a little bit more the expression market with you. And I understand and I'm respectful of your comments around energy. But I'm curious if, in fact, this could really stabilize, given I'm not sure that this market could stabilize, given I'm not sure that there's really the requirement of awareness in the marketplace. And I'm wondering, if you gave any thought in your restructuring to actually taking those resources, those fee and putting them over in the cytogenetics opportunity where you may have greater growth prospects, more of a greater margin prospects, and actually seeing that business grow perhaps at a greater rate than simply trying to stabilize an area which may not ever get stable. And I am respectful of the Panomics comments, but I'm just curious if you ever thought about that transition.

Frank Witney

Yes, a great question. And we -- believe me, we think about this every day. And if you go under -- if you go into the details of the restructuring, both at the business unit level, as well as the commercial level, we absolutely believe that our greatest growth opportunities are, as we've talked about here on the call, are in the clinical arrays and cytogenetics base. And that's where we're putting the bulk of our resources. It shouldn't take away from this call that we've level-loaded resources. We think we understand what stabilization means and what the absolute opportunity is versus even genotyping or clinical arrays. We -- on the other hand, we have a very nice expression business. It's very profitable. We have customers that have made their careers on our expression arrays and continued to use those for follow-on studies. So with reasonable amount of partitioning, we believe we can get what business is available or even a little bit more than maybe is obvious to be available in the expression area without, in any way, harming our ability to grow in the genotyping space or in our clinical -- in our translational and clinical opportunities. The other part about that is that in the translational space in cancer, cancer is very much expression. Our PbA partners are primarily expression. More and more tests are coming down the pipe that use our expression arrays for classifying, identifying. And so it's really moving from a traditional customer of discovery down to applied uses of expression. But the short answer is, in our thinking, we have -- we've been very, very careful to make sure that we're funding the growth opportunities in a way that in no way limits our -- that our growth opportunities are not resource-limited. So I'm clearly sensitive to your comment.

Operator

Our next question comes from the line of Tycho Peterson from JPMorgan.

Ramesh C. Donthamsetty - JP Morgan Chase & Co, Research Division

This is Ramesh Donthamsetty in for Tycho. I just wanted to ask about the Broad collaboration that was mentioned in a press release and I guess more broadly about how genome centers are viewing the use of arrays maybe, say, 1 to 2 years ago versus their look forward now, particularly given recent concerns about NGS over capacity.

Frank Witney

Yes. So, I mean, you saw the press release. It's a partnership to do very large studies using our SNP 6.0 product for validation and fine-mapping in cancer patients. We think that's a -- it's a testimony to our established position. SNP 6.0 is an iconic product in the industry and is still a very, very good product that has many, many uses out there. It was really the foundation of our cytogenetics business many years ago. So we think that press release is indicative of the kinds -- that product still has plenty of uses out there in the marketplace. The broader question of the use of arrays, again, I think that our position is that NGS creates opportunities for validation and clinical targets. So the requirements for validation of potential genetic variants in their utility. RNA signatures through the use of arrays is something that we believe in. And we continue to position our product line with that in mind.

Ramesh C. Donthamsetty - JP Morgan Chase & Co, Research Division

And just a follow-up on CytoScan HD, particularly with the customers like LabCorp and ARUP Labs. Are you expecting some pricing benefits from the new product introduction, particularly next year, with potential FDA approval? And if you could kind of state what that might be, that would be helpful.

Frank Witney

Yes, this is a high-value product. It's not an area that we think is particularly price-sensitive.

Timothy C. Barabe

Especially with IBD clearance.

Frank Witney

And then with IBD clearance, I think it would even be more helpful. So we feel this is very, very good business. As I said in my prepared comments, the customer feedback has been extremely positive around the product, the workflow, the software and the kinds of data that people are able to obtain off the array. So we feel very good about that, and I think that will translate into our pricing strategies.

Operator

Our next question comes from the line of Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

I've been jumping back and forth between a few calls, so I apologize if any of this has been touched upon. But, Frank, you've now had a few months under your belt with the company. Today and previously, you've acknowledged, as I think we all know, that there are parts of your business in decline. You've also talked for some interesting areas where you can generate growth, including cyto. At this point in your evaluation of the business, do you feel comfortable that the right way to think about your portfolio is that these large declining businesses are likely to continue throwing off cash and will likely to continue to throw off enough cash for the foreseeable future to support the clinical array and cyto potential?

Frank Witney

Yes, I think that's fair. I mean, we're going to put effort into obtaining whatever business and growing the business in the expression area, but with reasonable-sized investments. But these are our products that are very, very profitable. They have -- they're very sticky. And while there are technological changes that are going to cause us to think differently about expression that -- and we'll fund appropriately. But on the other hand, our heavier investments will be in downstream validation and clinical assays.

Doug Schenkel - Cowen and Company, LLC, Research Division

And given there is growth and then there is declining parts of the business, is it premature to even get close to ballparking where you might see equilibrium? I mean, I think that's clearly one of the things that a lot of investors are trying to figure out is, okay, the operations are improving. The margins, at least at the gross margin line, look pretty good. But the concern is how far can these declining businesses decline and what's the potential to offset these declines. Is it premature to get into that?

Frank Witney

Well, I think it's probably premature to get down into the details of it. But, again, I go back to what the team here is focused totally on, which is net growth in 2012 and net operating income, a positive net operating income in 2012. Exactly where those pieces are, we're working through in the mathematics but are -- we have -- every employee in the company is focused on -- with a high sense of urgency on top line growth and operating income profitability in 2012.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And maybe 1 last one. With the restructuring of R&D, do you expect to have enough of a portfolio over the -- I don't know, let's call it the next 18 months, to make sure that you're maintaining the quality of your sales and support infrastructure? Or is focusing on that somewhat maybe what's holding you back on getting a little bit more aggressive with the buyback?

Frank Witney

I think the answer is that we -- the R&D team that we have, as it's structured today, will be sufficient to support our key business unit initiatives. We will invest some portion -- redeploy some portion of that savings back into our commercial organization in ways that we're working through the details now with our commercial organization.

Operator

Our last question comes from the line of Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

I guess one of our fears is that next-gen sequencing technologies may infiltrate the cytogenetics field as well. What are the main reasons why you don't think that will happen anytime soon or ever?

Frank Witney

I think that it's a long run before NGS would impact cytogenetics. There may be some relatively small applications for NGS that -- in cytogenetics that may be a little sooner rather than later. We feel that the kinds of resolution, the kinds of -- the kind of certainty that one gets off of array-based cytogenetics will be -- from our perspective, we talked about the constitutional market is $200 million. $100 million of that is still on microscopes. And the next step would be to array-based. And as Tim, I think, mentioned, that we intend to convert people from microscopes to arrays and continue to build our market share in the array-based market based on the outstanding product that we have. I think the next-gen part of that, I think may be in some very specialized areas. But it's hard to see in the foreseeable future where -- when people are looking -- when very high levels of structural information, and certainly in a relatively conservative space that next gen will have a big impact on cyto in the foreseeable future.

Doug Farrell

Great. Thank you, everybody, for taking the time of joining us on the call today. If you did miss any portion of the call, there will be a phone replay available for the next 7 days, beginning at about 5:00 p.m. Pacific Time tonight. To access the replay, domestic callers, please dial (877) 660-6853. We have international callers to dial (201) 612-7415. The passcode for both is the same, 380800. Alternatively, an audio replay will be available on the Investor Relations section of our website at affymetrix.com. So thank you again for joining us and have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful night.

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