Diagnostic products maker Gen-Probe’s (GPRO) third-quarter fiscal 2011 adjusted (excluding one-time charges) earnings of 57 cents trounced the Zacks Consensus Estimate by 3 cents while matching the year-ago adjusted earnings of 57 cents.
However, the California-based company swung to a loss in the third quarter, hammered by a $39.5 million impairment loss on its equity investment in privately held DNA sequencing firm Pacific Biosciences (PacBio). Gen-Probe, in June 2010, made a $50 million investment in PacBio to collaborate on developing products that are based on their proprietary technologies.
Gen-Probe posted a loss of $15.4 million (or 33 cents a share) in the quarter versus a profit of $27.4 million (or 56 cents a share) a year ago. The company narrowed its sales and earnings targets for the full year.
Revenue Analysis
Revenues rose 5% year over year to $139.1 million, but missed the Zacks Consensus Estimate of $141 million. Product sales climbed 6% to $136.4 million as healthy growth in clinical diagnostic business more than neutralized the decline in blood screening sales.
Clinical diagnostic revenues soared 16% year over year to $86.6 million, powered by higher sales of APTIMA Combo 2 assay across domestic and international markets and GTI Diagnostics acquisition. Moreover, foreign exchange swings contributed roughly $0.7 million to clinical diagnostic sales.
The APTIMA women’s health business remains the key driving force for the clinical diagnostic franchise. Gen-Probe, on October 31, 2011, won the U.S. approval of the APTIMA human papillomavirus (“HPV”) assay which is viewed as a major new opportunity for the clinical business.
Blood screening product sales dipped 6% year over year to $47.4 million, hit by lower shipment of instruments (including the TIGRIS systems) to Gen-Probe’s partner Novartis (NVS) which the company expects to continue into the fourth quarter. Foreign exchange movements, however, had a favorable impact of $1.7 million on sales.
Revenues from research products and services plummeted 23% year over year to $2.4 million, impacted by sustained weakness in pharmaceutical outsourcing.
Collaborative research sales tumbled 68% year over year to $1.1 million, hit by lower funding from Novartis for the development of the fully automated PANTHER instrument for blood screening. Royalty and license revenues doubled year over year to $1.6 million, boosted by higher royalties from Novartis associated with the plasma testing market.
Margins & Expenses
Gross margin on product sales rose to 70.3% from 67.2% a year-ago, benefiting from a favorable sales mix (higher APTIMA sales). Total operating expenses rose 9.9% year over year to $106.8 million. Research and development expenses rose 2% year over year to $27.9 million.
Marketing and sales expenses climbed 24% to $17.3 million due to the investment in European commercial infrastructure and addition of GTI Diagnostics. General and administrative expenses spurted 59% to $18.3 million as a result of the GTI Diagnostics acquisition and higher share-based compensation expenses.
Financial Health
Gen-Probe ended the quarter with cash and cash equivalents and marketable securities of $426.3 million, down 8.8% year over year, and short-term debt of $248 million (up 3.2% year over year). The company generated $42.3 million in cash flows from operations during the quarter and invested $11.2 million in capital expenditure, resulting in a free cash flow of $31.1 million. Separately, Gen-Probe’s Board has authorized the buyback of an additional $100 million of its shares.
Outlook and Recommendation
Gen-Probe has tightened its revenues and earnings forecasts for fiscal 2011. The company now expects revenues in the range of $575 million to $580 million versus its earlier forecast of $575 million to $590 million.
Adjusted earnings per share target for the year have been narrowed to a band of $2.28 to $2.32 from the prior guidance of $2.28 to $2.37. The current Zacks Consensus Estimates for 2011 revenue and earnings are $578 million and $2.32, respectively.
Gen-Probe now expects adjusted operating margin of roughly 27% compared with its earlier projection of between 27% and 29%. Product gross margin forecast, however, remains in the band of 69% and 70%.
Gen-Probe is a dominant player in the rapidly expanding nucleic acid test (“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 strong cadence of new products that are expected to support growth in the years ahead. Moreover, Gen-Probe’s PANTHER molecular testing platform will significantly contribute to its revenues as it broadens the testing menu for the instrument.
However, Gen-Probe competes with more established firms such as Roche (RHHBY), Becton Dickinson (BDX), and Abbott Labs (ABT) in the maturing molecular diagnostic industry. Moreover, the company’s blood screening business is expected to remain under pressure due to lower instrument sales. Currently, we have a Neutral recommendation on Gen-Probe, which is in line with a short-term Zacks #3 Rank (Hold).
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