This is an excellent company that was clearly overvalued during all the hype of the biotech boom. In my view, the company is now undervalued. Potential investors should keep an eye on this one. Clearly, there are risks as the companies health, in general, will be a function of the health of the US economy. I don't see US recovery on the horizon any time soon however, bottom pickers and others would do well to watch this company for a suitable entry point.
I have used this companies products for many years when I was a research scientist. Their quality and product support was better than any.
AnnaP
AXN : Letter to Shareholders re Update ASX Report 10:20:026 16/12/2002 Issuer: AXN AXON INSTRUMENTS INC 2002-12-13 ASX-SIGNAL-G
HOMEX - Melbourne
+++++++++++++++++++++++++ This update expands on the announcement detailing the restructuring and expense reduction plan made to the Australian Stock Exchange on November 12, 2002.
BACKDROP
In May 2002, we advised of a decline in the genomics market and the resultant impact on the company's business. We also advised of the high level of research and development expenditure associated with several important new products that either have been released or will be released early in 2003. In response to these factors we advised of a number of initiatives undertaken to reduce costs, together with our continued commitment to build the company's revenues through the release of new products.
In an additional response to these challenges, and to our financial performance in the first half of the year, Axon's management and board undertook a complete strategic review of the company's research and development activities, with the goal of achieving an enhanced focus on projects with the greatest near-term market potential. As a result of this review, in November 2002 we:
1. took action to further decrease expenses, most notably in research and development, and
2. adopted a strategy to substantially reduce the time to market for our products.
2002 FINANCIAL PERFORMANCE
We expect a loss for the year ended December 31, 2002, of up to US$10 million, compared to a profit of US$750,000 for the previous year. The expected loss in 2002 includes anticipated R&D expenditure of approximately US$13.5 million, versus US$12.3 million for 2001, and one-off expenses totaling US$1.8 million. These are: acquisition of a technology license, the November restructuring (see below), the estimated loss over the lifetime of a sublease resulting from our relocation to new premises, realised stock readjustments on the sale of a product line, and inventory to cost of goods sold adjustments.
We believe that the combination of increased revenues from new products and expense reductions will return Axon to profitability in 2003, consistent with its eighteen years of profitable operations up to 2002. In addition, we are in a strong cash position, holding US$27 million in cash and marketable securities as of November 30, 2002.
RESTRUCTURING & EXPENSE REDUCTION PLAN
On November 12 we implemented the first of the action items arising from the strategic review and reduced our workforce by approximately 15%. Combined with attrition, this brings the total workforce reduction this year to approximately 20%. We are confident that by concentrating our efforts on key near-term product opportunities we will be able to launch new products at a faster rate.
In total, the current reorganisation is estimated to deliver savings of more than US$4 million in 2003, and the initiatives will positively impact profitability on an ongoing basis in future years.
RATIONALE FOR THE PLAN
The restructuring and expense reduction plan, together with the new strategic direction, were prompted by a combination of less-than-anticipated revenue from a depressed world genomics market, and significant increases to research and development expenses as we undertook to develop a larger than usual number of new products at one time. In addition to significantly increasing expenses, the increase in the number of R&D projects contributed to a slowing of the rate of new product releases. The key change to our strategy is to now conduct research and development on a smaller number of projects, with the aim of bringing products to market at a faster pace. This will result in our being in a stronger competitive position in rapidly changing technology markets, positioning us to begin to achieve more profitable performance as in the previous eighteen years of operations.
The basis from which we will implement our new strategies remains strong. There are two major reasons for this:
* in spite of the genomics market downturn, microarray scanning and analysis is a powerful technology with a long term future. Our range of new scanners and software (recently released, or to be released in the next few months) places Axon in a strong position to compete effectively, to take advantage of upturns in the market, and to increase our share of the market;
* other new products we have developed, especially our integrated high-throughput drug discovery systems, have launched the company into new, growing markets with strong demand for high quality instrumentation of the type Axon is widely recognised for developing. With certain of the first-generation systems now released, and others due to be released in early 2003, we are in a strong position to take advantage of new opportunities and bring products to market at a faster pace.
The new strategic approach will allow us to respond to market opportunities faster, demand less outlay, and build on the investments made over the past few years.
NEW PRODUCTS
Under our new operating plan we have prioritised our development projects and will concentrate on developing the key products that have maximum potential to build near-term and medium-term profitability. Top priority will go to the ion-channel recording and fluorescence imaging screening products.
ION-CHANNEL SCREENING: PATCHXPRESS & OPUSXPRESS
We will devote the largest portion of our immediate research and development effort to the PatchXpress(TM) pharmaceutical screening system. The PatchXpress is intended to satisfy the widely recognised pent-up demand for the screening of compounds for ion-channel therapeutic targets.
We believe this product represents a major market opportunity for Axon. It builds on our long history as the world's leading manufacturer of instrumentation for studying ion-channel mechanisms. The PatchXpress product development is well advanced, with final testing underway and first commercial shipments expected early in 2003. Through collaborations and early marketing efforts we have secured advance orders for the initial shipments.
The PatchXpress will be the first Axon product requiring high-value consumables, thus adding a new and profitable dimension to our business. The monthly revenue from these will build with time, as the number of installed PatchXpress systems increases.
The OpusXpress(TM) 6000A parallel oocyte voltage clamp workstation was released to market in February 2002 and has begun selling. Focus for this product has now shifted to marketing.
FLUORESCENCE IMAGING SCREENING: IMAGEXPRESS
A second major market opportunity in pharmaceutical screening will be met with the ImageXpress(TM) fluorescence screening system. Like the PatchXpress and OpusXpress, the ImageXpress enables large numbers of compounds to be tested for their mode of action against the proteins implicated in disease. However, in ImageXpress this is achieved by imaging cells that have been labeled with molecular fluorescent markers, rather than by tracking the activity of ion channels. The use of fluorescent labeling is an established drug screening technique, and we have built on our expertise in imaging software and hardware to create a high quality, affordable system to enter this market. We expect to begin shipments in the next two months, as we already have a number of advance orders for ImageXpress systems.
FIELD SERVICE
Our new screening products are large, complex, integrated units that will experience heavy use. They will require regular maintenance in order to consistently generate the high quality data that Axon actively promotes as one of the major selling points for the systems. All the products will be offered with field-service maintenance contracts. As the number of units in the field grows it is anticipated that the provision of this service will become a significant new revenue source for the company.
GENOMICS
The GenePix(R) Personal 4100A microarray scanner was released to market in August 2002. Revenues for the new scanner (which won an instrument design award - see our web site for details) have been lower than anticipated due to the general downturn in genomics markets already noted, but are steadily increasing as the scanner gains market exposure. The four-colour high-end microarray scanner, GenePix Professional 4200A, continues in development and is expected to be released in early 2003.
A new version of GenePix Pro software (4.1) was released concurrently with the GenePix Personal scanner. This microarray acquisition and analysis application continues to mature, with the addition of new features and streamlined usability, to the point that its file format is becoming a de facto standard amongst genomics researchers.
Following its introduction to the market in February 2002, the gene expression informatics software, Acuity(R), has undergone rapid development, leading to a midyear version 2.0 release with significantly improved functionality. Work proceeds on Acuity 3.0, which is due for release in the first quarter of 2003. In addition, we are continuing our productive collaboration on Acuity with CSIRO for advanced microarray analysis methods.
NEUROSCIENCES
In general, our sales of neuroscience products continue to be strong. Axon dominates this market sector world-wide and will continue to support it, developing new and upgraded products to further increase market share and exploit new market opportunities.
The latest version of Axon's market-standard electrophysiology acquisition and analysis software, pCLAMP 9, was released in September and is selling steadily.
INCREASED MARKETING EFFORT
An important aspect of the strategic review is the increased emphasis on effective, comprehensive marketing, with an accent on promoting total company image as well as individual products. In the coming year, we will complement the release of new and upgraded products with expanded marketing exposure directed at increasing market share. Our marketing campaigns will centre attention on Axon's excellent corporate image and reputation for reliable, high quality instrumentation and software in a range of fields, providing the capacity to supply complete solutions for customers.
COLLABORATIONS
We entered into an important and fruitful collaboration with Aviva Biosciences Corporation in June. Aviva has developed the disposable Patch-on-a-Chip(TM) planar electrodes exclusively licensed for use in the PatchXpress. In September, Axon signed agreements with Johnson & Johnson Pharmaceutical Research & Development, LLC and NeuroMed Technologies Inc for final stage in-the-field testing and development of the PatchXpress. These companies join a third, large pharmaceutical company (who, in cognizance of that company's policy, cannot be named) as collaborators on this project. These collaborations have helped keep the PatchXpress well on target for its projected release early next year.
The collaboration with Zyomyx Inc to jointly develop laser scanners for protein biochips is complete, with scanners now in production at Axon, and Zyomyx in the final stages of beta-testing the integrated platform. Zyomyx's product launch is anticipated for the first quarter of 2003. The engineering collaboration will continue in 2003 as we apply the GenePix 4200 design to the Zyomyx scanner, and customise GenePix Pro software for the instrument.
FUTURE FOCUS
The key goal of the strategic review and reorganisation mentioned above is to return Axon to profitability in 2003. To achieve this goal we will:
1. focus on a smaller number of high-potential near-term product developments,
2. reduce the time taken to bring products to market,
3. implement new research and development procedures that will enable us to do more with less,
4. significantly reduce operating expenses, primarily in research and development, and
5. increase our marketing efforts across all product lines.
In summary, we are confident that increased sales resulting from the introduction of innovative new products and an expanded marketing effort, combined with decreased expenses resulting from our reorganisation, will lead to a profitable and exciting future for the company.
A Finkel G Powell CHIEF EXECUTIVE OFFICER PRESIDENT
