We reaffirm our Neutral recommendation on diagnostic products maker Gen-Probe (GPRO) following its mixed second-quarter fiscal 2011 results. Earnings of 51 cents a share for the quarter beat the Zacks Consensus Estimate of 49 cents.
Profit tumbled 21% year over year as healthy growth in the California-based company’s clinical diagnostic franchise was eclipsed by double-digit declines across blood screening and research products/services businesses.
Sales fell 2% year over year to $135.9 million, missing the Zacks Consensus Estimate. Revenues from clinical diagnostic products soared 18% driven by the company’s APTIMA women’s health business and acquisition of GTI Diagnostics.
Lumpiness in the blood screening business continued with sales clipping 22% in the quarter, hurt by lower sales of TIGRIS systems to partner Novartis (NVS). Gen-Probe narrowed its sales and earnings guidance for fiscal 2011.
Gen-Probe is a dominant player in the rapidly expanding nucleic acid testing (“NAT”) market, the fastest growing segment of the clinical diagnostic market. It is a market leader in domestic gonorrhea and chlamydia testing with its PACE and APTIMA assay product lines.
We believe Gen-Probe is well placed with a slew of new products that are expected to be the harbinger of growth in the years ahead. Moreover, the ongoing market shift away from traditional diagnostic methods towards molecular testing represents a tailwind for the company.
The acquisition of specialty diagnostics firm GTI Diagnostics is a strategic fit for Gen-Probe, providing a boost to its top line.The healthy growth trend in the clinical diagnostic business is expected to sustain over the remainder of fiscal 2011.
Gen-Probe’s new APTIMA trichomonas assay (cleared in the U.S. in April 2011) is already gaining favorable traction. Moreover, the company’s fully-automated molecular testing platform PANTHER is expected to significantly contribute to revenue growth in the years ahead as it broadens the testing menu for the instrument.
Moreover, the company boasts a reasonably sound balance sheet and is making prudent use of healthy free cash flows by means of acquisitions, overseas expansion as well as rewarding shareholders through share repurchases.
However, Gen-Probe is operating in an intensely competitive industry and its clinical diagnostics products face reimbursement risks. The company competes with more established firms such as Roche (RHHBY), Becton, Dickinson (BDX) and Abbott Labs (ABT) in the maturing molecular diagnostics industry.
Moreover, the company’s struggling blood screening business is expected to remain under pressure due to lower instrument sales to Novartis. Costs associated with product development may also weigh on the company’s bottom line. Our recommendation is in line with a short-term Zacks #3 Rank (Hold).
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