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Equity Research

January 13, 2010 United States of America


Healthcare
Affymetrix Inc. (AFFX - US$ 6.44) 3-Underweight Life Science Enabling Tools
Recommendation Change C. Anthony Butler, Ph.D.
1.212.526.4410
Major Structural Challenges; Underweight charles.butler@barcap.com
BCI, New York
Investment Conclusion
‰ We are downgrading Affymetrix (AFFX) from 2-
EPS (US$) (FY Dec)
Equal Weight to 3-Underweight based on
increasing visibility on new technologies that we 2008 2009 2010 % Change
believe are rapidly rendering the company's Actual Old New St. Est. Old New St. Est. 2009 2010
products obsolete. New sequencing technologies 1Q -0.02A -0.22A -0.22A -0.22A N/A N/A -0.06E -1000% N/A
are now becoming price competitive with 2Q -0.04A -0.04A -0.04A -0.05A N/A N/A -0.02E 0% N/A
Affymetrix's array (chip-based) products, 3Q -0.26A -0.11A -0.11A -0.13A N/A N/A -0.03E 58% N/A
especially for gene expression analysis, which has 4Q -0.35A -0.09E -0.09E -0.10E N/A N/A 0.01E 74% N/A
traditionally been Affymetrix's strongest end Year -0.67A -0.47E -0.47E -0.48E -0.21E -0.21E -0.14E 30% 55%
market; competitors are releasing new products in P/E N/M N/M
the coming months. There will likely remain some
level of ongoing demand for arrays on the Market Data Financial Summary
company's existing installed base, though this
should diminish over time, and the company has Market Cap (Mil.) 471 Revenue TTM (Mil.) 316.9
struggled with profitability at current revenue Dividend Yield 0.00
levels. In our view, the company's core 52 Week Range 10.06 - 1.78
technology faces serious challenges to long-term
viability.

Summary
‰ We are lowering our price target on AFFX to $3, or
an EV/EBITDA multiple of ~8x our FY2011 Stock Overview
estimate of $16M, a multiple in line with peers. Reuters
AFFYMETRIX INC. - 1 / 1 2/ 20 10 AFFX
Our old $6 price target was ~8x our old 2011 10 Bloomberg AFFX
EBITDA estimate of $38M. ADR

Stock Rating Target Price


2
New: 3-Underweight New: US$ 3.00
Volum e
Old: 2-Equal Weight Old: US$ 6.00 8M
6M
4M
Sector View: 1-Positive 2M
0
Feb Mar Ap r May Jun Jul Aug Sep Oct Nov Dec Jan
Source: Lehm anLive

Please Continue to the Next Page

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PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 3 AND IMPORTANT DISCLOSURES BEGINNING


ON PAGE 4
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Equity Research

We are downgrading Affymetrix (AFFX) from 2-Equal Weight to 3-Underweight 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 we believe 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, we 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.

We 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 our opinion, also has superior brand equity given the last decade of what we 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
our coverage. With a probable increase in pricing pressure from new technologies and declining revenues, we do not believe that this
company can be profitable in the long-term without a substantial course correction that may well be too late.

We are substantially lowering our revenue estimates and widening our loss estimates for AFFX, especially in the outer years. In our view
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. In our view, the company's core
technology faces serious challenges to long-term viability. 3-Underweight.

Affymetrix, Inc. (AFFX) Summary Financials


FY2007A FY2008A 09Q1 09Q2 09Q3E 09Q4E FY2009E FY2010E FY2011E
($ in millions, except per share numbers) Mar Jun Sep Dec
Revenue $ 371 $ 320 $ 79 $ 82 $ 78 $ 83 $ 321 $ 331 $ 315
EBIT $ 21 $ (44) $ (11) $ (1) $ (6) $ (4) $ (21) $ (6) $ (18)
EBITDA $ 54 $ 7 $ (8) $ 13 $ 4 $ 5 $ 25 $ 30 $ 16
Pretax Income $ 34 $ (43) $ (15) $ (3) $ (7) $ (6) $ (31) $ (14) $ (26)
Net Income $ 24 $ (44) $ (15) $ (3) $ (8) $ (7) $ (32) $ (14) $ (26)
Shares 72.1 68.6 68.6 68.9 68.8 68.6 68.7 68.6 68.6
EPS $ 0.34 $ (0.67) $ (0.22) $ (0.04) $ (0.11) $ (0.09) $ (0.47) $ (0.21) $ (0.39)

Gross Margin 62.6% 52.5% 53.5% 60.4% 54.9% 56.0% 56.2% 58.4% 56.4%
SG&A 37.3% 39.7% 39.9% 36.7% 38.0% 37.0% 37.9% 36.6% 38.6%
R&D 19.6% 26.4% 27.1% 25.0% 24.0% 24.0% 25.0% 23.5% 23.5%
Op. Margin 5.8% -13.6% -13.5% -1.3% -7.1% -5.0% -6.7% -1.7% -5.7%
Tax Rate 29.6% -7.4% -3.4% -15.5% -5.6% -6.0% -5.5% 0.0% 0.0%
Profit Margin 6.4% -13.7% -19.2% -3.7% -9.8% -7.8% -10.1% -4.3% -8.4%

Revenue Growth 4.5% -13.8% -1.2% -6.1% 4.0% 5.6% 0.4% 3.1% -5.1%
Sources: Company Disclosures, Barclays Capital Estimates

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Equity Research
Analyst Certification:
We, C. Anthony Butler, Ph.D. and Evan Lodes, hereby certify (1) that the views expressed in this research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Other Team Members:


Koshal, Nandita (BCI, New York) 1.212.526.5232 nandita.koshal@barcap.com
Lodes, Evan (BCI, New York) 1.212.526.9719 evan.lodes@barcap.com

Company Description:
As a pioneer of enabling tools in genomic revolution, Affymetrix, Inc. is principally engaged in the development, manufacture, sale and
service of its proprietary GeneChip microarray platform system and consumables.

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Equity Research

On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment
management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.

Important Disclosures:
Affymetrix Inc. (AFFX) US$ 6.44 (11-Jan-2010) 3-Underweight / 1-Positive
Rating and Price Target Chart:
AFFYMETRIX INC.
As of 04-Jan-2010
Currency = USD
34.00
32.00
30.00
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2-07 5-07 8-07 11-07 2-08 5-08 8-08 11-08 2-09 5-09 8-09 11-09
Closing Price Price Target
Recommendation Change Drop Coverage
Source: FactSet
Currency=US$
Date Closing Price Rating Price Target Date Closing Price Rating Price Target
04-Jun-09 5.62 6.00 25-Jul-08 7.61 11.00
12-Dec-08 2.45 5.00 15-Apr-08 10.95 19.00
24-Oct-08 4.09 7.00 26-Jul-07 26.06 27.00
13-Oct-08 4.50 10.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by Affymetrix Inc. or one of its affiliates.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Affymetrix Inc..
Valuation Methodology: Our $3 price target is derived with a 8x EV/EBITDA multiple and our 2011 EBITDA estimate of $16M.
Risks Which May Impede the Achievement of the Price Target: The risks include stronger-than-expected operational performance,
stimulus order wins, and/or cost controls.

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Equity Research
Important Disclosures Continued:
ILLUMINA Inc. (ILMN) US$ 39.17 (11-Jan-2010) 1-Overweight / 1-Positive
Rating and Price Target Chart:
ILLUMINA INC.
As of 04-Jan-2010
Currency = USD
52.00
50.00
48.00
46.00
44.00
42.00
40.00
38.00
36.00
34.00
32.00
30.00
28.00
26.00
24.00
22.00
20.00
18.00
16.00
14.00
12.00
2-07 5-07 8-07 11-07 2-08 5-08 8-08 11-08 2-09 5-09 8-09 11-09
Closing Price Price Target
Recommendation Change Drop Coverage
Source: FactSet
Currency=US$
Date Closing Price Rating Price Target Date Closing Price Rating Price Target
28-Oct-09 33.37 41.00 10-Jan-08 35.01 75.00
21-Sep-09 41.23 45.00 10-Jan-08 35.01 1 -Overweight
02-Jul-09 33.46 42.00 24-Oct-07 28.91 65.00
22-Oct-08 25.14 46.00 17-Oct-07 29.40 60.00
29-Sep-08 40.38 50.00 13-Sep-07 26.07 55.00
23-Jul-08 45.98 100.00 25-Jul-07 22.96 47.00
18-Jul-08 43.12 93.00 18-Jul-07 20.82 44.00
23-Apr-08 39.92 85.00 14-Mar-07 14.77 36.00
15-Apr-08 35.67 80.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by ILLUMINA Inc. or one of its
affiliates.
Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from ILLUMINA Inc. in the past 12
months.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of ILLUMINA Inc..
ILLUMINA Inc. is or during the past 12 months has been an investment banking client of Barclays Bank PLC and/or an affiliate.
Risks Which May Impede the Achievement of the Price Target: Risks include: unexpected slowdown in genotyping, gene expression,
sequencing, or molecular diagnostics. New competitive products including, but not limited to Affymetrix, LIFE, and 454. Emergence of
competitive third generation sequencing platforms

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Equity Research
Important Disclosures Continued:
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities.

Company Name Ticker Price Price Date Stock / Sector Rating


Affymetrix Inc. AFFX US$ 6.44 11-Jan-2010 3-Underweight / 1-Positive

Mentioned Company Ticker Price Price Date Stock / Sector Rating


ILLUMINA Inc. ILMN US$ 39.17 11 Jan 2010 1-Overweight / 1-Positive

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