Firm notes the downgrade is based on increasing visibility on new technologies that are rapidly rendering the company's products obsolete. New sequencing technologies are now becoming price competitive with Affymetrix's array (chip-based) products, especially for gene expression analysis, which has traditionally been Affymetrix's strongest end market; competitors are releasing new products in the coming months.
The genetic analysis space is evolving rapidly, with the cost of obtaining genetic data declining at a rate faster than Moore’s Law. This is a powerful fact and one that Barclays believes offers the promise to fundamentally change the practice of medicine just as the computer has changed society, though also means that companies involved in the space are under unrelenting pressure to innovate. Given the extraordinary advances in sequencing technologies in recent years, it is now possible to generate genetic information at a cost that is orders of magnitude cheaper than just a few years ago. Rather than slowing, the pace of innovation has actually increased recently, with numerous next-generation technologies close to market. By mid-decade, they expect these technologies are likely to enable the complete sequencing of a human genome for less than $1,000.
In the meantime, significant work is still being done on arrays, which generate less information but are cheaper. In some applications, however, work previously done on array platforms is now done on sequencing instruments given decreasing cost; new technologies available in the coming months are likely to be totally cost competitive (or even superior) on instruments that also allow more-advanced sequencing work. In particular, Affymetrix archrival Illumina recently announced the HiSeq 2000 platform, which has comparable cost and throughput to microarrays in a highly automated platform with minimal labor required. In a two-day run, researchers can perform epigenetic profiling on 200 samples for less than $200/sample. This is comparable or even superior to Affymetrix’s array technology.
Firm notes they do not believe that researchers are likely to commit to an entirely new generation of (not backwards-compatible) instrument from Affymetrix given the competition (which, in their opinion, also has superior brand equity given the last decade of what they believe to be AFFX’s strategic missteps, as well as missing an entire product cycle). There will likely remain some level of ongoing demand for arrays on the company's existing installed base, though this should diminish over time. To further complicate matters, the company has struggled with profitability even with more than $300M in run-rate revenues, making even post-restructuring AFFX among the least efficient companies in Barclays coverage. With a probable increase in pricing pressure from new technologies and declining revenues, they do not believe that this company can be profitable in the long-term without a substantial course correction that may well be too late.
Firm is substantially lowering their revenue estimates and widening their loss estimates for AFFX, especially in the outer years. In their view their 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. In Barclays view, the company's core technology faces serious challenges to long-term viability.
Barclays is lowering their price target on AFFX to $3, or an EV/EBITDA multiple of ~8x their FY2011 estimate of $16M, a multiple in line with peers. Their old $6 price target was ~8x their old 2011 EBITDA estimate of $38M.
Notablecalls: I think this call has the ability to inflict some serious damage to Affymetrix's (AFFX) stock price today. Back in 2009 it seemed the co still had a fighting chance to overcome competition (See archives for Piper upgrade July 23) but now I think it's increasingly evident they won't.
Note how Barclays says their estimates (and the $3 price tgt) represent a conservative & by no means the worst-case scenario for AFFX. They are basically saying it could get a lot worse from here.
I would not be surprised to see AFFX trade down 10%+ today on that downgrade - putting $5.70 level in play.
Needless to say, Barclay's $3 target is the new Street low for the name. I suspect that many of the market participants that were betting on AFFX's revival will be throwing in the towel after this call.