We reaffirm our Neutral recommendation on diagnostic products maker Gen-Probe (GPRO) following its mixed fourth-quarter fiscal 2010 results. Earnings for the quarter beat the Zacks Consensus Estimate, helped by lower costs and tax. However, revenues declined 2% year over year, in part due to lower blood screening product sales, missing the forecast.
Product revenues slipped 3% in the fourth quarter as higher sales from clinical diagnostic products were eclipsed by double-digit declines across the blood screening and research products and services businesses.
Gen-Probe’s blood screening products business struggled in the quarter with sales tumbling 11% on account of lower sales of TIGRIS systems to partner Novartis (NVS), which the company expects to continue through 2011.
California-based Gen-Probe develops and markets nucleic acid products for clinical diagnostics and blood screening as well as products for detecting harmful microorganisms in environmental and industrial settings. It has been a pioneer in the commercial and scientific development of nucleic acid testing (“NAT”) for the diagnosis of infectious diseases.
Gen-Probe is a dominant player in the rapidly expanding 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 be the harbinger of future growth. Moreover, the company boasts a reasonably sound balance sheet and is making prudent use of healthy free cash flows by means of acquisitions and overseas expansion initiatives as well as rewarding shareholders through share repurchases.
We view the company’s acquisition of specialty diagnostics firm GTI Diagnostics in late 2010 as a positive step, providing a boost to its top line.
We believe Gen-Probe is well placed with a slew of new products that are expected to usher growth in the years ahead. Moreover, the ongoing market shift away from traditional diagnostic methods towards molecular testing represents a tailwind for the company.
However, Gen-Probe is faced with increased competition in a maturing blood screening market. The company competes with more established firms in the molecular diagnostics 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 subject to foreign exchange swings and price regulations.
The company’s blood screening franchise may remain under pressure moving forward due to a soft market condition and fewer TIGRIS systems sold to Novartis. Also, the dilutive impact of rising costs associated with product development represents a headwind for the stock. All these factors lead us to tread with caution. Our recommendation is backed by a short-term Zacks #3 Rank (Hold).
ABBOTT LABS (ABT): Free Stock Analysis Report
BECTON DICKINSO (BDX): Free Stock Analysis Report
GEN-PROBE INC (GPRO): Free Stock Analysis Report
NOVARTIS AG-ADR (NVS): Free Stock Analysis Report
Zacks Investment Research
