Evolution of Technology Leaves Affymetrix Behind
The genetics company is riding the double-helix to extinction.
Yet, the exponential jump in advancements could make some companies genetic waste.
California-based Affymetrix (AFFX) might be riding the double-helix to extinction. The company, which has traded in a range of $1.78 to $10.06 over the last 52 weeks, manufactures genetic analysis testing that uses micro-array technology. The technology that Affymetrix develops is quickly becoming obsolete, or so analysts believe.
Barclays Capital analyst C. Anthony Butler downgraded the company on Wednesday morning to Underweight from Equalweight, as well as lowering his price target to $3 from $6. The downgrade sent shares of the company down more than 10%, leaving the stock to trade around $5.75 midday Wednesday.
In December, UBS lowered its price target on the company to $5.50, from $9.50, but kept its rating at Neutral.
Butler, as well as other industry analysts, notes that the company is facing increased pricing pressures from competitors as its technology becomes quickly outdated by new genetic analysis technology such as Illumina's (ILMN) sequencing technology.
Typically new technology has a slow entrance to the market because of its high price points, but the genetic analysis business is evolving differently. The newer technologies are quickly becoming more affordable and some industry insiders believe that the entire sequencing of a human genome will cost less than $1,000 in the near future. This change in pricing could mean a major new market opening up as gene technology, used to detect disease and prevent genetic disorders, moves from the research lab to your physician's office.
Gene-sequencing technology promises to offer researchers a new look at the basic building blocks of the human body, but the technology won't necessarily bring immediate breakthroughs that will rid the human race of disease. It still has a long way to go before practical applications of the technology can do more than rule out a certain patient for a certain kind of drug therapy or help predict if someone is prone to a particular disease.
"New sequencing technologies are now becoming price competitive with Affymetrix's array products, especially for gene expression analysis, which has traditionally been Affymetrix's strongest end market," wrote Butler.
The array technology that Affymetrix makes, which offers less information, will likely still be used in the near-term due to the low cost. Yet, even that is starting to slow; as demand from the pharmaceutical sector decreases and fewer studies are currently being conducted. Affymetrix brought in less than $80 million in the third quarter due to suffering demand during the troubling economic times, missing the consensus estimate from the Street.
"There will likely remain some level of ongoing demand for arrays on the company's existing installed base, though this should diminish over time, and the company has struggled with profitability at current revenue levels," wrote Butler in the report. "In our view, the company's core technology faces serious challenges to long-term viability."
Morningstar analyst Meera Venu agrees with Butler and believes that Illumina has the superior genotyping platform. She added that Affymetrix has been forced to discount its products to compete in this space.
Technology and pricing haven't been the only things plaguing this company. Investors of this company have long been irked by past manufacturing difficulties. The company recently completed a transition of its manufacturing of some products to Singapore, but the benefits of that are yet to be seen.
"Our estimates represent a conservative view on the company's prospects though by no means a worst-case scenario, which could involve an even more rapid erosion of the installed-base demand for arrays to new competing technologies," added Butler.
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