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Affymetrix Inc. Q1 2008 Earnings Call Transcript

April 30, 2008 | about stocks: AFFX

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Affymetrix Inc. (AFFX)

Q1 2008 Earnings Call

April, 24 2008 5:00 am ET

Executives

Doug Farrell - VP of IR

Kevin King - President

John Batty - CFO

Steve Fodor - CEO

Analysts

Derik De Bruin - UBS

Quintin Lai - Robert W. Baird & Company

Tycho Peterson - JPMorgan Chase & Company

Zarak Khurshid - Caris & Company

Doug Schenkel - Cowen & Company

Ross Muken - Deutsche Bank

John Sullivan - Leerink Swann & Company

Un Kwon-Casado - Pacific Growth Equities

Presentation

Operator

Good afternoon. My name is Abigail [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Affymetrix first quarter Earnings Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

At this time, I will now turn the call over to Mr. Doug Farrell, Vice President of Investor Relations, so that we may begin.

Doug Farrell - Vice President of Investor Relations

Thank you, Abigail. Good afternoon, everybody, and welcome to the conference call. At the close of the market today, we release our operating results for the first quarter of 2008. Joining me on the call today is our President, Kevin King, who's going to give you a review of the operational and commercial highlights for Q1. After that, John Batty, our CFO, is going to go through detailed review of our operating results, and we will close out with our CEO, Steve Fodor, giving you an update on some of the new technology initiatives, Steve will talk about.

As a reminder, this 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 that 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, 2007, and in other SEC reports including our Form 10-Q for subsequent periods. We encourage you to review these documents carefully and any forward-looking statements are made as of today's date.

Let me turn the call over to Kevin King now.

Kevin King - President

Thanks, and good afternoon, everyone. During the first quarter we generated about $169 million in revenue and $46 million in profit, including restructuring and acquisition related charges and the benefit of a $90 million intellectual property payment. As our revenue results for the quarter were below our internal expectations, I'd like to start off by reviewing the details of the shortfall, and it's important to me and to the rest of the team that we're very transparent in communicating our results, our strategy, and our outlook to all of you.

For the first quarter, our revenue came up short of our internal expectations in three areas. Gene expression counted for about $4 million, instrumentation about $4 million, and services by $3 million. The $3 million in services was a timing issue and we will expect it to be recognized in Q2.

From a customer perspective, roughly two-thirds of the $8 million difference came from our pharma business. In genotyping, we grew the business by 24% year-over-year and I'll come back to this later.

In gene expression, we've been the industry leader for more than a decade. Our annual expression sales exceed $150 million, which includes roughly half of the sales to pharmaceutical companies.

Our pharma partners have primarily used our expression products for biomarker discovery and target identification, and this market has matured and we're now selling less over a standard IVT expression products into pharma. In Q1, expression sales were down roughly $4 million from our internal expectations.

Our install base in pharma is quite large and we have very close relationships with our customers and our analysis over the year-over-year variance indicates that this change was not driven by competitive inroads or the emergence of emerging technologies but rather pharmaceutical companies are simply doing less target identification. However, I would like to emphasize that new gene level expression products, all Exon, Tiling, and gene level products now make up over 20% of our expression revenue. This growth is offsetting the decline in the use of IVT.

Let's shift to the high-growth areas of our business. Our genotyping business continues to grow and was up 24% over the prior year, including the impact of a $6 million reduction in revenue from Perlegen. In fact, adjusting for Perlegen, the growth of our core genotyping business to other customers was up over 35%. Additionally, we had strong growth in reagents over the prior year aided by our recent acquisition of USB.

I'd now like to spend a few minutes talking about we're investing to grow our business. In gene expression, we have successfully protected our market share in order to fund the development of our next-generation products. Although we are not projecting overall growth in expression business in 2008, we believe that the growth in the newer Exon, Tiling, and gene level products will allow us to keep the business constant or consistent with respect to the prior year. The market for genotyping is growing rapidly. To date our high double-digit growth in genotyping has been driven by a few products, mainly our SNP 5.0 and 6.0 products.

Our ongoing investments include a major expansion of our genotyping product line. This will include the introduction of new products using new assay chemistries, random access to the genome offered in a wide range of flexible product formats for human and applied markets. Steve will tell you more about this later.

For several years now we've been investing in diagnostics and that business is starting to come on line. These programs include cytogenetics, drug metabolism, as well as our PbA partners program, and a second-generation diagnostic platform. These markets all represent high volume, recurring revenue streams that are independent of research funding.

We achieved important diagnostic milestones in Q1. The first is our partnership with LabCorp and the use of our new high-resolution cytogenetic application based on 6.0. LabCorp has completed its full validation of the product and it is now in routine use. LabCorp is one of the leading providers of cytogenetic testing and we're very excited to partner with them in this high-growth diagnostic application.

In addition to LabCorp, the molecular lab at UCLA will also be offering cytogenetic testing using our 6.0 array. We've projected academic customers as well as major clinical laboratories will begin migrating from multiple tests that require high levels of labor toward a single high-plex automated Affymetrix platform.

This week, Pathwork Diagnostics, one of our dozen powered by Affymetrix partners, began offering a CLIA -based diagnostic test that is focused on cancer. The tissue of origin test aids oncologists and pathologists in the diagnosis of hard to identify tumors and is based on the FDA approved Affymetrix platform. It's estimated that there are more than 200,000 patients with uncertain primary tumors that are treated in the U.S. each year.

In the second half of the year, we will launch new instrumentation, the 96F. The 96F is a companion offering to our high throughput scanner that is capable of scanning single, 24 or 96 samples. The capabilities of the 96F go beyond our market-leading scan times to improve the entire array processing work flow.

We are projecting, it will take less than 30 minutes of hands-on time per day to run our system at capacity from hybridization to data file generation. This new integrated system will run both expression and genotyping assays and will be compatible with our next-generation technologies that are in development.

To summarize, we are disappointed with our Q1 results, however, we understand the key drivers of our business and believe the remainder of the year is achievable. The commercial outlook that we've described for 2007 is driven by the strength in our genotyping business, new clinical applications like cytogenetics, drug metabolism, and our reagent business.

Aside from our high throughput instrumentation platform, our forecast does not include the impact of new product programs that have not yet launched. Importantly, our outlook for 2009 is even more solid given the planned launch of our next-generation product offerings into the marketplace.

Last year we made significant operational improvements, steadily reducing our operating expenses and improving profitability, and in 2008 we're continuing to make further progress in improving our operational effectiveness and are committed to making the operational changes necessary to meet our revenue and profit goals. At the same time, we believe the opportunities for the Company are enormous and perfectly aligned with our highly scalable technologies. We have a long history of innovating in the marketplace and have technologies with unlimited potential. We're focusing on investments and innovations on products that meet the growing demand of the new genetic research in clinical markets.

I'd like to now turn the call over to John for a discussion of our financials.

John Batty - Chief Financial Officer

Thanks, Kevin, and good afternoon, everyone. Before I get into the detail for the quarter, I'd like to point out that we've adopted a new presentation of our revenue for our financial statement to provide better clarity. Based on feedback from investors, we've regrouped our revenue into three primary categories, each of which share common characteristics. Product sales, services, and royalty and other revenue.

The first category, product sales, includes arrays and reagents and instruments. In addition, this category includes the contribution from Perlegen Sciences. The second category, services, includes scientific services and associated consumables, field service and professional service. And lastly, the third category, royalties and other, includes software, subscription fees, licensing and royalties, and research revenue. To assist investors and analysts in understanding year-over-year trends, we've provided a full reconciliation of prior periods for comparative purposes.

Now I'd like it turn to the results for the quarter. In summary, we were disappointed with our performance in the first quarter and our results fell short of our own expectations. We understand where our challenges came from and have already begun to take the necessary steps.

For the first quarter of 2008 the Company reported total revenue of $169.6 million including a $90 million IP payment. Excluding the IP payment, total revenue was $79.6 million in line with the prior year. This compares to $107.6 million for the fourth quarter. Net income was $46.3 million or $0.58 per diluted share versus a net loss of $4 million, or $0.06 per diluted share in the first quarter of 2007. Q1 2008, net income includes a pretax restructuring charge of $13.9 million, or $0.17 per diluted share as compared to $5.4 million, or $0.08 per diluted share in the prior-year quarter. It also includes $800,000 for acquired in-process technology from the USB acquisition.

Turning to the detail, first quarter product revenue, which includes again, arrays, reagents and instruments was $62.8 million as compared $64.5 million for the first quarter of 2007. Array and reagent sales were $58.8 million, including Perlegen and two months' contribution from the USB acquisition. This represented an increase of approximately 5% from the first quarter of 2007.

As Kevin noted, DNA revenue was up approximately 24% year- over-year to $21.3 million, and was offset by RNA which was down approximately 5% as compared to last year's revenue of $38.5 million. Revenue from Perlegen Sciences included in DNA decreased $5.9 million as compared to first quarter of 2007.

And finally, instrument sales were $4 million as compared $8.5 million in the prior year quarter. We shipped 17 GeneChip systems and scanners in the quarter bringing cumulative system shift to about 1,740. Service revenue was $8.4 million as compared $8.8 million in the first quarter of 2007. And finally, royalties and other revenue was $98.3 million versus $7.2 million in the first quarter of 2007, and was driven principally by the recognition of $90 million of revenue in connection with the IP payment.

Turning to gross margin, gross margin percent for the quarter was 81% and was favorably impacted by the $90 million IP payment. Excluding the impact of this payment, total gross margin would have been 60.2% as compared to 64.4% in the first quarter of 2007.

So, over the course of last the year and continuing into 2008, Affymetrix has been executing to a plan to improve its gross margin percent through factory consolidation, changes in chip formats, improvements in yields, and by driving material cost reductions. These initiatives included the consolidation of the Bedford instrument manufacturing plant last year and the transition from the two-chip 500k product to a single chip SNP 6.0 solution for the DNA market.

In many respects the same advances in technology that we use to drive competitive advantage together with the improvements in manufacturing performance have allowed us to produce more unit output with a smaller manufacturing footprint. This is lending us to take more aggressive action to reduce costs and excess capacity. In particular, we announced this quarter that we would shift a higher percentage of our array manufacturing from our California plant to our Singapore plant and reduce operating costs. This plan is on track.

The comparison of product gross margin in the first quarter of 2008 to the first quarter of last year is particularly difficult and that the first quarter of 2007 enjoyed favorable factory absorption. As we discussed in detail in the last year, we've pre-built instruments to prepare for the Bedford factory shutdown and ramped SNP 6.0 in anticipation of its launch in May. This resulted in a large inventory build in the first quarter and a reduction in margins in subsequent quarters, as we burn this inventory off and we had to gear down the factory.

In the first quarter of 2008, product gross margins declined to 58.6% on seasonally lower manufacturing activity and a lower mix of RNA products. DNA increased as a percentage of array and reagent revenue from approximately 31% in Q1 '07 to approximately 36% in the first quarter of '08.

Finally, service revenue margins of 32.6% improved 5.8 points over the first quarter of 2007 on more favorable mix of programs. Total operating expenses for the quarter were approximately $68.2 million, which included $14.7 million, or $0.18 per share in acquisition and restructuring expenses. This compares to $60.5 million for the same period last year, which included restructuring charges of approximately $5.4 million, or $0.08 per share.

Q1 '08, operating expenses including $2.6 million of stock compensation expense as compared to $2.8 million in the fourth quarter of '07. First quarter 2008 R&D expenses were $18.8 million as compared to $19.2 million for the same period last year, and SG&A expenses in the first quarter were $34.8 million, down approximately $1 million compared to the prior quarter.

In connection with the acquisition of the USB, we incurred a charge of approximately $800,000 for acquired in-process technology. In addition, we recognized a restructuring expense of $13.9 million, which included asset impairment charges and employee separation costs associated with our announced acceleration of the majority of our array production to Singapore.

The Company recorded net interest and other interest expense of $3.3 million in the first quarter as compared to $2.3 million in the prior-year quarter. This included interest income of approximately $4.9 million, interest expense of $3.6 million and a net gain on securities of $1.8 million. While interest income increased due to higher average cash balances, the yield on investments has decreased dramatically due to the lower interest rate environment.

In the first quarter, we recognized income tax expense of $26.7 million, which represents an effective tax rate of 36.7%. Our tax provision and rate benefited from increased income from our Singapore entity, where we enjoy a tax holiday.

Net income was $46.3 million or $0.58 per diluted share versus a net loss of $4 million, or $0.06 per diluted share in the first quarter of '07. Fully diluted shares used for the first quarter of '08 were 83 million shares as compared to 67.9 million in the first quarter of 2007, and reflect the fact that at higher income levels, our convertible securities are dilutive.

Let me now turn to the balance sheet. We ended the first quarter of 2008 with total cash and available securities of approximately $602 million. First quarter DSOs was 87 days as compared to 69 days in the prior quarter. And, you know, DSO is typically increase in the first quarter as a result of seasonally strong Q4 sales, and so these receivables are still current. In the first quarter of '08, capital expenditure were about $4.7 million, and depreciation and amortization was approximately $9.6 million.

Net inventory for the first quarter was $51.8 million, up about 20% from $42.9 million at the end of the year, driven principally by our revenue shortfall. As compared to the prior year net inventory was, however, down from $59.1 million.

I'd like to review our current guidance for fiscal 2008. The Company expects total revenue for the year to be in the range of $490 million to $510 million. Assuming the mid-point of our revenue guidance, this translates to top line growth of around 11% excluding the one-time IP payment.

While we are not providing quarterly revenue guidance, we do expect to generate around 57% of our revenues in the second half of the year, which is consistent with prior-year's seasonality patterns. Excluding the impact of the IP payment, we are targeting total gross margin of around 62%. And some of the key margin levers include ramping up production in Singapore, continuing to focus on reducing supply chain costs, and leveraging our new ERP system so that we can grow the Company in a cost-efficient way.

The Company expects total operating expenses between $235 and $240 million, which include restructuring expenses of approximately $17 million. Our quarterly tax rate for 2008 will depend both on the level and the geographic mix of earnings and for the full-year we expect our tax rate to be approximately 37%.

This rate is weighted disproportionately in 2008 to the U.S. tax rate due to the recognition of the one-time IP payment in the first quarter. And due to the availability of NOLs, cash taxes in 2008 should be less than $8 million.

In summary, while we had some challenges in the first quarter, we remain focused on improving growth with the introduction of new products and capabilities. Our resolve has only increased, as we recall how the successful introduction in market adoption of SNP 6.0 in the second half of 2007 propelled growth in the second half of the year. As Kevin highlighted in his introductory comments, we look to continued growth in the genotyping segment and the contributions from new products and markets including cytogenetics and drug metabolism solutions.

And, now I'd like to turn the call over to Steve Fodor to tell you more about these and other future product initiatives. Steve?

Steve Fodor - Chief Executive Officer

Thanks, John, and good afternoon, everyone. I'd like to close the call with some comments on our overall strategy and an update on the new product initiatives that we announced in January. As Kevin and John told you, the trends in our business and our priorities are clear. We will continue to manage our expression product line with emphasis on the newer products such as gene level, Tiling, and all Exon products as well as the launch of new instrumentation and high throughput formats.

We are not forecasting much growth in this business in the near-term, but in the long run we believe that the market will continue to need advanced tools to understand the function of the genome. Therefore, we expect that expression and functional analysis is an important long-term market. Accordingly, we plan to maintain our expression market franchise and to leverage the revenues for the development of new product lines.

In contrast, the high growth in the genetics market mandates significant investment in the expansion of our portfolio genotyping products. Our SNP 5.0 and 6.0 are successful and rapidly growing products, but we are only participating in part of the genetics market. As we communicated in January, we have been developing new products that employ a novel enzymatic sequencing reaction. This new assay is very cost effective, scalable and well suited for both whole genome products and for random access targeted genome products.

We are currently scheduled to finish screening the human diversity panel against the database of all known human polymorphisms with this technology by mid-year. From this screen, we will have characterized millions of new SNPs for future products.

Our plans include introducing product formats that span the range from assays with millions of markers to very cost-effective formats with hundreds of markers. We believe that this product line will open significant new market opportunities for the Company, expanding whole genome association products, introducing a targeted genotyping offering, and will have application in markets such as agricultural and diagnostics.

Some of the product milestones you should watch for in 2008, include the completion of the human diversity screen by mid-year followed by the initial design of next-generation genotyping products. The expanded customer adoption of our drug metabolism assay and pharmaceutical clinical trials.

You should expect an expansion of our cytogenetic product line as well as the addition of new partnerships. Expect the early access launch of our new 30-million marker high-resolution copy number chip set, and finally, the launch of advanced automation and high throughput systems with new formats for both expression and genotyping products. We will continue to see the diagnostic and clinical markets with our partnerships and a growing portfolio of products. We expect that these new products will open up important new growth opportunities for Affymetrix.

In closing, we are deep into a new technology cycle that will dramatically expand our product lines and total adjustable markets. I look forward to updating you on our progress as the year advances. Now we'd like to open the call for questions.

Questions-and-Answers

Operator

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Derik De Bruin.

Doug Farrell

Hello, Derik, how are you?

Derik De Bruin - UBS

Hi. How are you?

Doug Farrell

Good, thanks.

Derik De Bruin - UBS

So, first off, while I do appreciate the greater color that you've given us, I'm a little disappointed that you didn't fully break out the USB revenues. You know, I can understand if you're discontinuing some products you don't want to give us the full-year, but I think a quarterly contribution would be helpful. You know, it certainly means something I think to give us a little bit greater comfort on the trajectory given the problems that you had in the first quarter.

John Batty

Derik, this is John. When you look at the growth guidance that we've provided for the year, we expect that approximately half of the growth will come from the USB product line. As you know, we are building on approximately a $60 million reagent business.

We've been pretty sensitive about talking about what the previous year revenue is, because we may actually choose to not invest and continue some of those products. Going forward is going to be increasingly difficult for us to distinguish between the contribution of products that are manufactured at USB and those that are simply being remanufactured on Affymetrix' behalf.

Derik De Bruin - UBS

Okay.

And, you know, I'm just about going over some of the lack of visibility in the first quarter. You know, Steve, correct me if I'm wrong, but I think you sit on the Board of Perlegen, so I'm curious as to if, there was going to be a $6 million shortfall from Perlegen, why that didn't show up in the, why didn't you pick that up earlier?

Steve Fodor

Yeah, so, I think maybe I'll have Kevin take the revenue piece of this. But, I think, with respect to Perlegen, I think the point that we were making was that actually the genotyping business actually grew quite well like around 24%, and actually if you take out the component of the $6 million that we had to make up for that shortfall in Perlegen, it actually grew substantially more than that. So, you know, we did have visibility into what the Perlegen revenues were, but I think I'll let Kevin put that into a little more context.

Kevin King

Sure. So, I think the way that you worded the question here, let me make sure that we're clear. So the shortfall in the quarter --

Derik De Bruin - UBS

I guess the question is it's like you were expecting some revenues from Perlegen to come through in the first quarter that didn't change, that obviously didn't come through due to the fact that there's been some changes over there and how they're moving the business. I guess, I'm just wondering why you didn't pick that up sooner than you did.

Doug Farrell

Right, Derik. This is Doug. Maybe I'll just add one piece to that. The Perlegen discussion really was on the full-year change of numbers that was not related to Q1. Q1, as we said, was really a piece expression, a piece instruments and then some services. Based on the outlook and the modification of the outlook of which a part of that was Perlegen for the full-year, we reduced the outlook.

Steve Fodor

So, that's the part that I was trying to refer to here. So, in the first quarter there were three pieces to the miss as I had described here. So, roughly $8 million of this, which is $5 million from pharma and $3 million from separate from instruments is the miss and then $3 million of services. There is no Perlegen component per say in that.

Derik De Bruin - UBS

Okay.

Steve Fodor

$1 million of services a year, we have a pretty strict guideline with respect to sample availability or sample arrival at Affy and the samples that we're counting on in the quarter didn't arrive in time and we couldn't complete the study. So, this is a push into Q2 for us and I'm really not concerned about that.

On the -- when we had their pre-announcement, we talked about pharma revenues being soft. This is really the $5 million that we have here. Of the $5 million in pharma, 4 of it was RNA, which we described and $1 million was instruments.

On the remaining portion of the $8 million is $3 million of instruments overall and that's largely in our academic organization, and I can tell you this was just poor execution. We have visibility to these instruments. A lot of these instruments got caught up in European tenders. For example, there's about $1 million worth of orders in Europe that got tied up here. It's an unacceptable level of poor execution on my part. But, I'm really not that concerned about, well, I'm concerned that we didn't execute well, but as far as remainder of the year I feel pretty confident about it. So, you know, when we talk about the decrease for the rest of the year, it's largely around pharma.

Now as we -- with respect to Perlegen, Perlegen had done about $12 million of business last year and that business was declining. And for this year, we had put them in at around $7 million hoping that as they transitioned their product more, their strategy a little bit more, that would continue to see that growth toward $7 million. And, I just don't see at this point that that level of business is going to materialize so we've lowered that estimate on the Perlegen side and that's in the outward quarters not in Q1.

Derik De Bruin - UBS

Okay. That's helpful. And then the last question and I'll get back in queue. So in the revenue shortfall to pharma, how much of that was simply because things were over ordered in the fourth quarter, or your sales force was a little too aggressive in selling product, or how much of this was just orders that got delayed or products that were stopped or just the result of some of the fact that there was weak spending in pharma?

Steve Fodor

I really think it's the latter and I'll give you a little more commentary on this one. So, you know, I travel quite a bit with our customers. I literally go around the globe each quarter and I've met not only with academic, but in this quarter with pharma customers, and there is a fair amount of uncertainty with respect to a handful of our large pharma customers.

And, it's disturbing to me, because we had figured out, if you will, at the end of the year that a lot of the uncertainty in pharma had pretty much washed down and we could count on revenue from these key accounts. But, as I visited many of our customers, they are still faced with uncertainty in a couple of ways. One is a lot of their budgets are unknown. Two, a second one is a lot of them are going through organizational structure changes and this is really why at the end of the quarter we were a little bit surprised that some of this stuff didn't materialize. And I think, it really relates to the uncertainty that's going on in pharma. And by and large, a lot of them are just doing fewer and fewer studies as a lot of dollars are moving from the discovery of biomarkers really into development. And, this is why we're talking now about new products in the development life cycle as it relates to product development, drug safety and clinical trials with things like [EMAT] and so forth and the whole genome association products.

Derik De Bruin - UBS

Okay, great. I'll get back in the queue. Thank you.

Steve Fodor

You bet.

Operator

Due to time constraints, I would like to remind everyone to please limit themselves to one question to allow optimal time for everyone to ask their question. Your next question comes from Quintin Lai with Robert W. Baird, your line is open.

Quintin Lai - Robert W. Baird & Company

Taking a look at the operating expense, looks like that you -- could you talk a little bit about possible other restructuring, because I think on the prerelease press release, you said you are going to take a hard look at the expense structure with the lower revenue growth.

And then, you know, kind of diving into one of the particular lines, the R&D line, sounds like that you're committed to getting these new products out, but then once these new products are out, should we anticipate R&D dropping off as a percent of sales beginning next year? And so any color that would be helpful.

Kevin King

Quintin, its Kevin. I can take the R&D spend, John can talk about the overall OpEx here. Look, we're committed to holding our R&D spends for this year to the levels that we need to get these new products out. As Steve said, we're very deep into a new technology cycle and it's essential for our growth of our business to get into new markets. So these new platforms, chemistries, assays, et cetera, are essential for us to do, and the right thing for us to do for the business here is to continue and invest there.

Certainly in the long-term, we're going to continue to take the rate of operational spending down to lower levels, including R&D as a function of sales growth, if you will. John, why don't you talk about some of the things that we've got on the plate here and the rest of OpEx for the year and what we've done.

John Batty

Well, certainly over the last year, we've made substantial progress and we've spent a lot of time over the last two years in putting in place a new ERP system, which went live and was quite successful this quarter.

In the last earnings conference call we talked about some expenses that we are going to incur in the first quarter. We were successful in keeping those expenses down below $2 million. Most of those expenses actually disappear as those consultants and contractors move away from the Company.

Beyond that, we're continually focused on identifying areas that we can improve the operational effectiveness of the Company. And certainly one of the key areas is to actually leverage this investment we've made in our ERP system. We've actually taken our spending down for the next fiscal year and the goal is to try to take them down sufficiently to make up the loss and profits in the first quarter.

Operator

Your next question comes from Tycho Peterson with JPMorgan. Your line is open.

Tycho Peterson - JPMorgan Chase & Company

Hi, good afternoon.

Kevin King

Hey, Tycho.

Tycho Peterson - JPMorgan Chase & Company

Wondering if you'd be willing to comment a little bit on pricing trends. Just, you know, how you're looking at pricing the market in general, and, you know, whether you guys had, in fact, you know, implemented a price increase. And particular for the 133, I guess is the area I'm focused on. But if you could talk just more generally as well about how you're viewing pricing in the market?

Kevin King

Sure. Probably the most relevant comp on this one is, you know, Q4 to Q1 pricing. Pricing for DNA and RNA are stable. I wouldn't say that they're neither up nor down.

As I had mentioned in prior calls, we've been looking at opportunities to increase price where appropriate. We have not raised prices on U133 as a product. Some of the newer products that have come out have higher prices than what we had anticipated overall.

And, you know, one of the guidelines that I've set for our marketing teams in the business here is that they really ought to be thinking about very high gross margin levels on new products. We throw around the number of 70% gross margin, if you will, as a hurdle on new products.

Don't know if that's totally achievable, but that's my stretch target that I give to the teams and that really means that folks have to be thinking up front about the value that we're going to be providing to our customers. It means up front that they have to be thinking very carefully about the cost of those products, and they have to be thinking about the overall overhead that's required to support those products.

And, that is really putting in a whole new discipline, if you will, in terms of price management, price expectations, value setting in the business. And, that's what I'm counting on to help us here to drive continued performance overall from a gross margin point of view.

Tycho Peterson - JPMorgan Chase & Company

Okay. And then just, maybe following up quickly on the gross margin comment, with a kind of suite of new products here and then obviously the manufacturing move to Singapore, should we think about margins, really expanding in the back half of the year? I know you've given full year guidance, but should we think about -- how should we think about things, I guess, trending throughout the course of the year?

John Batty

Well, we've given guidance for the full-year, so we're targeting [62%] for the year. To the extent that we enjoy better manufacturing leverage as we load our factories more completely, and I would expect that we would exit at a higher gross margin percent.

Kevin King

And Tycho, I think from a sort of new product line, one of our main objectives in introducing some of the new formats that we'll be doing, particularly in the genotyping world, is that we will be able to have much more flexible, or much more flexibility on different amounts of content on these arrays and what the margins will be.

Tycho Peterson - JPMorgan Chase & Company

Okay. Thank you very much.

Operator

Your next question comes from Zarak Khurshid with Caris & Company. Your line is open.

Zarak Khurshid - Caris & Company

Thank you for taking my question. Just curious about the genotyping business. Would you characterize it as growing sort of in line with the market as a whole or maybe above trend or below? And additionally, you know, with one of your competitors expanding their platform with a higher throughput instrument, how do you sort of -- how does that factor into some of the contract wins and so forth, the overall throughput aspects of the product?

Kevin King

Sure. This is Kevin. I can try to answer, add some commentary on this one. I would say that in total, a couple of things year-over-year, so we're going to have a full year of 6.0 where last year we had half a year. I would say that from a share point of view in a qualitative way, we are at least inline with competitors. There really isn't a very good metric out there. I think I'd probably say that from that point of view.

The -- as far as automation, the comment that I made here in our press release is, we've had a high throughput scanner now for some time. I think, others are responding to that and really what customers tell us is they want to automate, if you will, or optimize the entire work flow and that's real what our 96F is all about with a reduction in hands-on time for operators. So, that reduces their overall labor time and the amount -- the number of touches that have to go on here.

So I think we're clear that we've got great performance there and the ability to help customers reduce their FTEs from work flow point of view. I think looking forward in the whole genome association markets, we're continuing to see the number of studies increase. We're seeing the number of big studies increase and probably the depth of content is going to be a factor here both from copy number and minor allele frequency information on the arrays, I think are going to be important as well, and I think those are going to end up being new drivers for growth as we go forward. And I think, based on what Steve has told you here about our ability to put more and more content on our products, we think we're going to be in pretty good shape there overall.

Zarak Khurshid - Caris & Company

Great. And then lastly, with respect to the challenging environment that you're in, has this changed the way that you think about acquisitions and going forward are you looking perhaps at sort of different areas outside of your core competencies for potential acquisitions? Thank you.

Kevin King

I wouldn't say our strategy has changed from what we've been communicating over the last year. It's clear that there are lots of opportunities to grow beyond the business that Affymetrix is in today. And, I would also say that one quarter doesn't define Affymetrix either.

So, you know, we really have to look to the long-term potential of the business. The markets that appear to be of strong interest to us certainly are in genomics and the clinical markets, and we're going to continue to look at spaces like that.

Operator

Your next question comes from Doug Schenkel with Cowen and Company. Your line is open.

Doug Schenkel - Cowen & Company

Great. Thanks for taking my questions. So, you effectively had no growth year-over-year this quarter, and I would think your comps presumably would get tougher in the second half of the year given that, one, the 6.0 rolled out in earnest in mid '07 and that, two, you don't have the Roche payment in Q3. If I back into your guidance just by summing up Q2, Q3 and Q4 results and compare that period of '08 versus what you did in 2007, it looks like you're guiding the street effectively to 14% growth year-over-year over that period, and then if I back out the Roche payment, it actually goes up to 18%.

So, I guess what I'm getting at is, despite your comments about poor execution maybe being isolated to Q1, this is a seemingly pretty steep curve to climb over the balance of the year. Could you maybe give us a little more to better understand where this growth is coming from? Is it primarily a further acceleration of genotyping revenue or are there pipeline or collaborative initiatives that you're banking on over the course of the year?

Steve Fodor

Sure. So a couple of points here. If you look at our business overall, first quarter to rest of year, we typically do somewhere between 78 and 80% of our business for the remaining three quarters, Q2, 3, and 4 and that's about where we have to be this year. I think last year Q2, 3, and 4 were 78% of the total. This year we've got to do 80% to get to that number, so it's not grossly out of line.

So, what do we have different this year is the question that you're asking. Clearly, we have more growth in 6.0 than we did last year overall. We have the addition of USB. We have products in markets that we weren't in last year. So cytogenetics was not a product force last year. Our drug metabolism assay that we have was not in our product portfolio last year. We have new instrumentation in our product portfolio that's coming out in the back half of the year. And, we have -- excuse me, sorry, I had mentioned 6.0 as the full-year for the area. So, I think overall that those are the primary drivers that we're looking toward that add up to the growth.

Now, clearly we've got, you know, good visibility to our funnel overall. And, I think the plan that we have here is an achievable plan as we've defined it between the sort of 400 to 420 excluding the intellectual property payment.

Doug Farrell

So, Doug, maybe I'll just add to, I think John did touch on it earlier. But, I mean, if you look at the growth for the full-year it really splits pretty evenly between genotyping growth and reagent growth. Certainly not a lot of it focused on expression this year.

Doug Schenkel - Cowen & Company

Okay. And then maybe if I could just ask one follow-up. You guys put up some pretty impressive, I guess, in certain quarters last quarter gross margin numbers, and I think we were cautiously optimistic about the progress you were making given your improvements in yields and clearing out some of the old inventories. And John, I think you talked about this in the prepared remarks, but given the shortfall this year and I apologize if I missed your discussion to this point, but are there any issues in terms of excess inventory or other dynamics that would potentially weigh on gross margins over the course of the year? I guess specifically in Q2, assuming you bounce back from what happened in Q1?

John Batty

Let me address the quality of the inventory first. We take a very close look at the quality of our inventory and our turns, as you pointed out, have actually improved quite substantially over the last several quarters. We did miss, you know, in the first quarter, but the quality of that inventory is very good and we expect to ship that, you know, for the remainder of the year.

I would say that our core business is actually growing quite strong. You know, our genotyping business was up 24% year-over-year. Adjusting for Perlegen and for going forward, I think that we certainly have an opportunity to exit the year at much higher gross margins.

The Singapore transition is well under way. In the fourth quarter, we ran about 25% of our production there. This quarter it was upwards of 35% and I wouldn't be surprised to see that much higher in the second and third quarter.

Doug Schenkel - Cowen & Company

Okay. Thank you.

Kevin King

I think both questions are really good ones for us here. One is the growth in the rest of the year and the other one is on the gross margin side. I don't think we want to overstate that. We've got a plan here that both we believe in but also a plan that requires a lot of work on our part.

Operator

Your next question comes from Ross Muken with Deutsche Bank. Your line is open.

Ross Muken - Deutsche Bank

Good afternoon.

Kevin King

Hey, Ross.

Ross Muken - Deutsche Bank

So, I think maybe this is probably best for Steve. You rattled off a ton of new products that are coming out in the last half of the year and have talked about sort of obviously an upcoming product cycle. Can you kind of characterize this relative to product cycles we've seen historically or at least talk about sort of this cycle relative to what we've seen in introductions the last few years? And also more specifically, if you can give some commentary around the high content CNV chip, and sort of what that exactly is addressing, because I think that's certainly a pretty exciting market that you guys are going to be entering.

Steve Fodor

Yes. So I think, you know, when we -- I'll try to cover that a piece at a time and not be too long-winded. But in expression, I think, you know, what we've been doing over the last few years is we've had this, you know, our gold standard IVT product, U133 out over the years and we've introduced some of these new advanced products, the all Exon, the Tiling, and the gene level, which give really give better looks at the biology of what's going on in gene expression and we're seeing more and more movement there. But, you know, for the most part, we've seen that market sort of flatten out and these are replacements of more advanced products.

When we -- many of these new products that we're talking about in genetics really it's not just new products, it's actually a new platform approach to this. And as I mentioned earlier, the first piece of this is that we're screening the database of known human variations, and that will be the fuel to populate a whole series of products, and so the way we're looking at this is that we'll be using chips of different sizes that can be both on the cartridge formats and/or on the high volume peg formats, but that we can really do highly random access choosing of the human variation that we want to put on these different products. And, so we're looking at really a whole family of products that will come out from the launch of a sort of revitalized platform if you will.

And then, you brought up the third point which was in cytogenetics and you're absolutely right. This is where the investment in what we've done at cultivating the diagnostics in the clinical world has really paid off. We've established that the platform is dependable, we've, you know, gone through the MAQC where, there is obviously a lot of expression products out there, but, the world has really tested these, and Affy has come out as the gold standard. We've put out products that do high-resolution copy number.

The first part of cytogenetics will be, the launching of 6.0 in cytogenetics, and we've seen a nice partnership here with both LabCorp and UCLA and they're offering it now. But as you put it, we are going to introduce a new, even higher resolution set of products that will begin with this 3 chip set that looks at 30 million micros simultaneously. Now from that, of course, we can create a different family of products if we want or a smaller format products that can actually be much more focused.

So, we're trying to take a much more platform and family approach to this marketplace, so that we have a much broader spectrum of products to fill the needs of the marketplace.

Ross Muken - Deutsche Bank

And quickly John, is there any way to tease out sort of what the tax rate would have been ex the $90 million payment?

John Batty

I think it's a little hard to do that. I think the best proxy is the number that we have, we do have a cost sharing arrangement with our Singapore legal entity and the more income that we earn in that legal entity allows us to take advantage of the tax holiday we have there. We didn't get full advantage of that in 2007, because we weren't able to utilize those tax benefits. At this scale of operations, we have an opportunity to leverage that further in 2008.

Ross Muken - Deutsche Bank

All right. Thanks.

Operator

Your next question comes from John Sullivan from Leerink Swann. Your line is open.

John Sullivan - Leerink Swann & Company

Hey, guys. Good afternoon.

John Batty

Hey John.

John Sullivan - Leerink Swann & Company

A couple of quick ones. What do you think of the possibility that a expression researchers are at the margin moving from large survey products like the U133 to more pointed or a complexity reduced products like your human gene 1.0 ST array and what happens to ASP if they're still doing the same number of samples but they're moving to a less complex product? First of all, do you think that it's possible that the work is moving in that direction?

Steve Fodor

Well, I think, you know, again, you have to think about the application in this area. I mean, for example, this is the sort of thing that has been looked at many times over the last 10 or 12 years in expression. For research purposes, the direction -- there's no question that the direction of the customers is to have a much more detailed look at the genome. And, we've had a very thorough product out there for years in the U133. And, consistently this has gone up against sort of, simple looks at the genome, U133 performance just comes out way on top.

What we've been experienced from the research customers is that they want more biology. They want to come closer to the biology. And, so that means, let's not just look at the three prime end, let's look at the Exons, which spikes variant of the genome we're looking at. And that's gone so far as Exon, and it's part of the design of the gene level actually is to look more closely at the biology and not just look at the three prime end. And of course, Tiling, which, just does a really thorough job of looking broadly across the genome.

On the other hand, are there other opportunities for focused products? Well, over the years we've made different ones that are for the research market. For example, looking at custom cancer panels and custom immunology panels, and so on. None of those have really taken off because most customers in research want to look at the whole genome or look closer to the biology. That's not to say, though, in the clinical world or in diagnostics that some of those customers want to distill things down to a particular set of genes and to use them for diagnostic or clinical applications. So, I think you have to think carefully about which marketplace you're looking at.

John Sullivan - Leerink Swann & Company

Okay. But, it sounds like you're saying that in the research setting at the margin, your average customer is not moving toward more disease-focused arrays for gene expression, your average customer is staying with more complex products and actually may be through slight variance or all Exon arrays is actually going to higher ASP more complex products. Is that what you're saying?

Steve Fodor

Well, okay, I'm not sure I'll say that. But, what I will say is that I think it is the characteristic of most researchers that they want the most complete information available. There's no question about that. At a particular, I mean obviously it has to be affordable. But I think that in the clinical setting, where you have get to high volume repetitive tests, where you boil things down to 100 genes or something and you want to do those over many, many times, that there will be markets there where, volume and costs will play a much more important piece.

John Sullivan - Leerink Swann & Company

Okay, great and thanks for taking the time with me on that. Can I just ask one more quick question hopefully. And just, shifting gears into cytogenetic testing, an area that you guys sound like you're making some good headway in. Can you just talk about for a second the value proposition for the customer in this cytogenetic testing arena? A LabCorp or a UCLA, when they look at, especially in reimbursable work, when they look at using your platform to determine these chromosomal trends locations, what's the fully loaded cost benefit that's available to them that's driving them toward Affymetrix' platform?

Kevin King

This is Kevin. I think there are a number of value propositions here, one having to do with labor. One having to do with total cost, and one having to do with the clinical results. So, what we're really getting is a complete picture, if you will, of the chromosome abnormalities in a single study versus looking at carrier typing, fish another types of techniques that involve many people and lots of cost. And in the, I don't want to speak on the reimbursement side for our customers, but the ability to use the reimbursement codes, et cetera, are sort of a negotiation, if you will, with the payers, and what we've seen right now is that the payers are really actually able to -- are helping these people by allowing them to use the reimbursement code, since the end result is the same.

You also have, faster turnaround time, if you will, for a lot of these studies and that's really important in some of these applications for the end person, which is the patient in this case to really get a result in a faster period. I think those are probably the four value propositions.

John Sullivan - Leerink Swann & Company

Okay. And then I guess relatedly, are you guys, are you of the opinion that even for projects in cytogenetics where you're looking very specifically, you're not looking at an entire genome looking at -- you're not looking at broad chromosomal translocations, but instead you're looking at diagnose a single disease. Are you confident that the Affy platform is still a platform that can deliver economic benefits for the LabCorps of the world?

Kevin King

Yes. I think some of these, in fact, I think that's the question with some of these tests is they're trying to find out, which specific chromosomal abnormality is there. And, so of course there might only be one for or localized in a region of the genome, but it's very important to be able to broadly look across the genome to be able to give a good answer.

Operator

Your next question comes from Un Kwon-Casado with Pacific Growth Equities. Your line is open.

Doug Farrell

Hey Un, are you there?

Un Kwon-Casado - Pacific Growth Equities

Hello?

Doug Farrell

Hi, how are you?