Diagnostic products maker Gen-Probe’s (GPRO) second-quarter fiscal 2011 adjusted (excluding one-time charges) earnings of 51 cents beat the Zacks Consensus Estimate by a couple of cents while it trailed the year-ago adjusted earnings by a penny.
However, profit (as reported) toppled 21% year over year to $22.3 million (or 45 cents a share) as the California-based company saw double digit declines across its blood screening and research products/services businesses.
Revenue Analysis
Revenues for the quarter dipped 2% year over year to $135.9 million, missing the Zacks Consensus Estimate of $138 million. Product sales remained flat year over year at $132.9 million as healthy growth in clinical diagnostic revenues was masked by softness across the blood screening and research products and services franchises.
Clinical diagnostic sales zoomed 18% year over year to $87.5 million, boosted by higher sales of APTIMA Combo 2 assay and GTI Diagnostics acquisition. Moreover, foreign exchange movements contributed roughly $1.3 million to the top line.
Blood screening product sales tumbled 22% year over year to $43.2 million, hit by lower shipment of assays and instruments (including the TIGRIS systems) to the company’s partner Novartis (NVS), unfavorable foreign exchange movements and supply-chain fluctuations. Assay and instrument shipments to Novartis fell $6 million and $5 million, respectively, in the quarter.
Revenues from research products and services slid 28% year over year to $2.3 million, due to sustained weakness in pharmaceutical outsourcing.
Collaborative research sales skid 61% year over year to $1.6 million, hurt by lower funding from Novartis for the development of the fully automated PANTHER instrument (for blood screening). Royalty and license revenues clipped 22% to $1.4 million.
Margins & Expenses
Gross margin on product sales improved to 70.3% from 66.6% a year-ago, supported by favorable sales mix (higher APTIMA sales) and foreign exchange tailwind. Total operating expenses rose 1.6% year over year to $106.1 million. Research and development expenses rose 2% year over year to $27.7 million.
Marketing and sales expenses jumped 11% to $17.5 million due to sales force expansion in Europe and addition of GTI Diagnostics. General and administrative expenses surged 25% to $18.7 million as a result of the GTI Diagnostics acquisition and higher legal expenses primarily associated with the patent infringement case with Becton Dickinson (BDX).
Balance Sheet and Cash Flows
Gen-Probe exited the second quarter with cash and cash equivalents and marketable securities of $529.4 million, up 11.5% year over year, and short-term debt of $248 million (up 3% year over year). The company generated $45.4 million in cash flows from operations during the quarter and invested $12.5 million in capital expenditure, resulting in a free cash flow of $32.9 million.
Guidance and Recommendation
Based on its year-to-date results and outlook for the rest of the year, Gen-Probe has narrowed the top end of its revenues and earnings forecasts for fiscal 2011. The company now envisions revenues in the range of $575 million to $590 million versus its earlier forecast of $570 million to $595 million.
Adjusted earnings per share forecast for the year have been trimmed to a band of $2.28 to $2.37 from the prior guidance of $2.28 to $2.40 to reflect increased share count and stock-based compensation expense. The current Zacks Consensus Estimates for 2011 revenue and earnings are $580 million and $2.32, respectively.
Gen-Probe still expects adjusted operating margin between 27% and 29%. Product gross margin target has been revised to between 69% and 70% from 68% and 69.5%.
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 be the harbinger of future growth. The company expects revenue growth in the second half to be driven by its APTIMA women’s health business. Moreover, Gen-Probe’s fully-automated molecular testing platform PANTHER will significantly contribute to its revenue growth in the years ahead as it broadens the testing menu for the instrument.
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 blood screening business is expected to remain under pressure due to lower instrument sales. Currently, we have a Neutral recommendation on Gen-Probe, backed by a short-term Zacks #3 Rank (Hold).
