We reiterate our Neutral recommendation on diagnostic products maker Gen-Probe (GPRO) following its mixed third-quarter fiscal 2010 results. Earnings for the quarter topped the Zacks Consensus Estimate riding on top line growth.
Revenue growth (up 8% year over year) was supported by higher sales from the company’s core clinical diagnostics (up 8%) and blood screening product (up 11%) businesses. However, sales trailed the Zacks Consensus Estimate. Based on the lower-than-expected third quarter revenues and an anticipated softness in its clinical diagnostics and blood screening franchises, Gen-Probe has pared its financial forecasts for fiscal 2010.
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.
We believe Gen-Probe is strongly placed with a strong portfolio of new products. Moreover, it will benefit from the ongoing market shift away from traditional diagnostic methods (such as antibody-based assays) toward molecular testing, which offers greater precision and sensitivity in the detection of biological events.
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 (especially in the overseas markets) and its international sales are subject 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. All these factors lead us to take a cautious stance on Gen-Probe.
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