Diagnostic products maker Gen-Probe Inc. (GPRO) reported third quarter fiscal 2010 adjusted (excluding one-time gains and charges) earnings of 57 cents, topping the Zacks Consensus Estimate of 50 cents and the year-ago earnings of 48 cents. Net income soared 23% year-over-year to $27.4 million (or 56 cents a share) on the back of healthy top line growth.

However, the California-based company chopped its fiscal 2010 outlook, which pushed down its shares $4.06 (or 8.3%) to $45 in after-hours trading on October 28. 

Revenue Analysis

Revenues surged 8% year over year $132.6 million, but missed the Zacks Consensus Estimate of $135 million. Sales were boosted by higher revenues from clinical diagnostics and blood screening product businesses. Clinical diagnostic revenues spiked 8% to $74.9 million, supported by the higher adoption of APTIMA Combo 2 assay and Prodesse products.

Gen-Probe’s blood screening products revenues soared 11% year over year to $50.3 million, led by increased shipments of Procleix Ultrio assay and higher sales of TIGRIS systems to strategic partner Novartis (NVS).

Revenues from research products and services, however, dipped 21% year over year to $3.1 million, primarily due to the divestiture of the BioKits food testing business in 2009 and unfavorable foreign exchange translation.

Margins & Expenses

Adjusted (excluding acquisition-related depreciation charges) gross margin for the quarter fell to 67.2% from 69.5% a year ago as low-margin products mostly constituted the sales mix. Research and development expenses were flat year over year at $27.4 million. Marketing and sales expenses rose 3% to $13.9 million as a result of sales force expansion in Europe and market development initiatives. 

Balance Sheet, Cash Flow & Share Repurchases

Gen-Probe exited the quarter with cash and cash equivalents and marketable securities of $467.5 million (down 9.7% year over year) and short-term debt of $240.2 million (flat year over year).

Gen-Probe generated $44 million in cash flow from operations during the quarter and invested $7.5 million in capital expenditure, resulting in a free cash flow of $36.5 million. The company repurchased 776,300 shares in the quarter for $35.8 million.

Outlook

Based on the lower-than-expected sales in the third quarter and an anticipated softness in its clinical diagnostics and blood screening franchises, Gen-Probe has pruned its forecasts for fiscal 2010. The company now expects adjusted EPS in the range of $2.12 to $2.15 versus the earlier projection of $2.12 to $2.25.

Revenue outlook has been cut down to $541−$546 million from $545−$562 million and adjusted operating margin target has been narrowed to 27% from 27%−28%. The current Zacks Consensus Estimates for 2010 revenue and EPS are $556 million and $2.15, respectively.

Gen-Probe is a dominant player in the rapidly expanding nucleic acid testing (“NAT”) market, the fastest growing segment in the clinical diagnostic space. It is well placed to benefit from the ongoing market shift away from traditional diagnostic methods (such as antibody-based assays) toward molecular testing.

Moreover, the company has a strong pipeline of novel assay products that are expected to be the harbinger of future growth. Gen-Probe has already completed four out of its five targeted regulatory submissions in the U.S. in 2010. The company aims to file for the approval of its APTIMA HPV test in November.  

However, Gen-Probe is faced with increased competition in a maturing blood screening market. The company competes with more established firms in the molecular diagnostic industry such as Roche (RHHBY), Becton Dickinson (BDX) and Abbott Labs (ABT).

Moreover, Gen-Probe’s clinical diagnostics products are susceptible to reimbursement risks and its international sales are subjected to foreign exchange swings and price regulations. Also, the dilutive impact of rising costs associated with product development and international sales force expansion represents a headwind for the stock. We are currently Neutral on Gen-Probe, supported by a short-term Zacks #3 Rank (Hold).

 
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