Diagnostic products maker Gen-Probe Inc (GPRO) reported fourth-quarter fiscal 2010 adjusted (excluding one-time gains and charges) earnings of 61 cents, surpassing the Zacks Consensus Estimate of 55 cents and the year-ago earnings of 52 cents.
Net income (as reported) for the quarter jumped 13% year over year to $27.2 million (or 56 cents a share) as lower costs and tax offset a decline in sales. For the full year, adjusted earnings of $2.19 per share also topped the Zacks Consensus Estimate of $2.14 and the year-ago earnings of $1.95.
Revenue Analysis
Revenues for the quarter slipped 2% year over year $136.7 million due to lower product sales, missing the Zacks Consensus Estimate of $137 million.
Product sales dipped 3% year over year to $131.1 million as higher clinical diagnostic revenues were more than offset by double-digit declines across the blood screening and research products and services businesses. For fiscal 2010, revenues climbed 9% year over year to $543.3 million, but narrowly missed the Zacks Consensus Estimate of $544 million.
Clinical diagnostic sales rose 3% to $80.1 million in the fourth quarter, supported by the higher sales of APTIMA Combo 2 assay, partly offset by a decline in PRODESSE influenza assay revenues. Blood screening products revenues clipped 11% year over year to $47.6 million owing to lower sales of TIGRIS systems to Gen-Probe’s strategic partner Novartis (NVS), which the company expects to continue through 2011.
Revenues from research products and services slid 23% year over year to $3.4 million, primarily due to the divestiture of the BioKits food testing business in 2009. Unfavorable foreign exchange movements hit sales across all product categories.
Collaborative research sales catapulted 85% to $3.7 million boosted by increased funding from Novartis for the development of blood screening products such as the fully automated PANTHER instrument and the PROCLEIX ULTRIO Plus assay. Royalty and license revenues surged 36% to $1.9 million.
Margins & Expenses
Gross margin on product sales for the quarter increased to 69.4% from 67.2% a year-ago. Research and development expenses decreased 2% year over year to $26.9 million. Marketing and sales expenses were relatively flat year over year at $15 million.
Balance Sheet, Cash flow & Share Repurchases
Gen-Probe exited the quarter with cash and cash equivalents and marketable securities of $489.7 million, down 2.3% year over year, and short-term debt of $240 million (flat year over year). The company generated $43.8 million in cash flows from operations during the quarter and invested $8.6 million in capital expenditure, resulting in a free cash flow of $35.2 million.
The company bought back 245,000 shares for $11.9 million in the fourth quarter to conclude its $100 million repurchase program. The Board has authorized a fresh $150 million share repurchase program, underscoring the company’s commitment to maximize shareholder value.
Outlook
Looking ahead, Gen-Probe envisions high single-digit growth in product revenues and expects improving margins to drive healthy earnings growth. However, the company expects decline in instrument sales in 2011.
Gen-Probe expects revenues for fiscal 2011 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.
Moreover, Gen-Probe expects adjusted operating margin between 27% and 29% while product gross margin target has been pegged at 68%-69.5%. The current Zacks Consensus Estimates for 2011 revenue and EPS are $583 million and $2.36, respectively.
Gen-Probe is one of the leading players in the clinical diagnostic space and is poised for growth in a rapidly expanding market for molecular diagnostic tests. Moreover, a slew of new products are expected to usher growth in the coming years.
Gen-Probe completed five regulatory submissions in the U.S. in 2010, of which, it has filed for the APTIMA human papilloma virus and APTIMA trichomonas assays in the fourth quarter.
However, Gen-Probe competes with more established firms such as Roche (RHHBY), Becton Dickinson (BDX) and Abbott Labs (ABT) in a 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 and price regulations. We are currently Neutral on Gen-Probe.
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