Diagnostic products maker Gen-Probe Inc (GPRO) posted better-than-expected first-quarter fiscal 2011 results with adjusted (excluding one-time charges) earnings of 54 cents beating the Zacks Consensus Estimate of 52 cents while exceeding the year-ago adjusted earnings of 48 cents. However, profit (as reported) slipped 4% year over year to $23.3 million (or 48 cents a share) as higher costs offset an increase in sales.
Revenue Analysis
Revenues for the quarter rose 6% year over year to $143 million, boosted by higher product sales, also surpassing the Zacks Consensus Estimate of $141 million. Product sales climbed 6% year over year to $138.1 million riding on record clinical diagnostic revenues, which cruised 15% year over year to $88.3 million. The growth more than offset the declines across the California-based company’s blood screening and research products and services businesses.
The healthy growth in clinical diagnostic sales was driven by higher sales of GTI Diagnostics (acquired in late 2010) products, APTIMA Combo 2 assay and the PRODESSE influenza assay. Revenues from blood screening products dipped 6% year over year to $46.7 million on account of lower sales of TIGRIS systems to the company’s partner Novartis (NVS) and unfavorable foreign exchange movements.
Revenues from research products and services toppled 24% year over year to $3.1 million, due to sustained weakness in pharmaceutical outsourcing.
Collaborative research sales jumped 9% to $3.6 million, mainly driven by increased funding from Novartis for the development of the fully automated PANTHER instrument and the PROCLEIX ULTRIO Plus assay. Royalty and license revenues slid 13% to $1.4 million.
Margins & Expenses
Gross margin on product sales increased to 69.6% from 67.3% a year-ago, helped by favorable sales mix. Total operating expenses rose 4% year over year to $108.4 million. Research and development expenses fell 2% year over year to $29 million.
Marketing and sales expenses increased 12% to $16.5 million, partly due to sales force expansion in Europe and market development initiatives. General and administrative expenses bumped up 24% to $18.2 million owing to the addition of GTI Diagnostics and legal expenses related to the company’s patent infringement case with Becton Dickinson (BDX).
Balance Sheet, Cash flow & Share Repurchases
Gen-Probe ended the quarter with cash and cash equivalents and marketable securities of $491.3 million, down 8% year over year, and short-term debt of $250 million (up 4% year over year). The company generated $40.1 million in cash flows from operations during the quarter and invested $10.8 million in capital expenditure, resulting in a free cash flow of $29.3 million. The company repurchased 756,000 shares for $48 million in the quarter.
Guidance Reaffirmed
Gen-Probe has backed its financial forecast for fiscal 2011. The company continues to envision high single-digit growth in product revenues and expects improving margins to drive healthy earnings growth, despite higher litigation expanses.
Revenue target for fiscal 2011 remain in the range of $570 million to $595 million. Adjusted earnings per share for the year have been projected in the range of $2.28 to $2.40, unchanged vis-à-vis prior guidance.
Gen-Probe still expects adjusted operating margin between 27% and 29% and product gross margin between 68% and 69.5%. The current Zacks Consensus Estimates for 2011 revenue and EPS are $581 million and $2.34, respectively.
Our Take
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.
Gen-Probe has a strong pipeline of novel assay products that are expected to drive future growth. Moreover, the ongoing market shift away from traditional diagnostic methods towards molecular testing represents a tailwind for the company.
However, Gen-Probe competes with more established firms such as Roche (RHHBY), Becton, Dickinson and Abbott Labs (ABT) in the maturing molecular diagnostic industry. Moreover, the company’s clinical diagnostics products are susceptible to reimbursement risk and its international sales are subject to foreign exchange swings. Currently, we have a Neutral recommendation on Gen-Probe.
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