Note: All changes since the last report have been highlighted.
Reason for Report:Minor Changes
Prev. Ed.: June 18, 2012; 1Q12 Earnings Update (broker material as of June 15, 2012)
Brokers’ Recommendations: Neutral: 85.7% (12 firms); Positive: 14.3%(2); Negative: 0% Prev. Ed.: 13; 2; 0
Brokers’ Target Price: $79.78 (↓ $0.30from the previous report, 9firms)
Brokers’ Avg. Expected Return:-3.4%
* Although dated July 23, 2012, share price as of July 17, 2012.
Portfolio Manager Executive Summary
Gen-Probe Incorporated (GPRO) develops, manufactures, and markets nucleic acid products for clinical diagnostics and blood screening, as well as products to detect harmful microorganisms in environmental and industrial settings.
Of the 14firms providing ratings on Gen-Probe, 12 firms (85.7%) gave neutral ratings and two firms(14.3%)assignedpositive ratings.
Neutral or negative or equivalent outlook – 12/14: On April 30, 2012, Gen-Probe announced that women’s healthcare major, Hologic Inc. (HOLX) will takeover the company for $3,700 million (or $82.75 a share). The neutral firms believe that although the valuation of the deal was fair, there was still scope for other players who could have bid higher, provided it had been more of an open deal. Some of them also believe that the merger is not complementary as Gen-Probe’s blood screening business has nothing in common with Hologic’s women’s health business. However, Hologic has a strong internal infrastructure and larger international presence, especially in China, and Gen-Probe can tap this potential to boost its growth profile. Also, there is a considerable cross-selling opportunity post-acquisition, given Hologic’s stronghold in the Women’s Health testing market.
Positive or equivalent outlook – 2/14: The firms maintain a bullish stance on Gen-Probe as it is perceived to be a highly profitable and cash-generative company even in the current uncertain economic environment.The firms hold comfort in Gen-Probe's solid position in the molecular diagnostic and blood screening markets and multiple new product cycles. With the Food and Drug Administration (FDA) approval of the PANTHER System,a vital milestone has been achieved in the company’s endeavor to make this breakthrough product available in the U.S. blood screening market. The product has also received positive response in the overseas market and hence analysts believe that it will drive growth across global markets in the near term. With a healthy balance sheet, share buybacks, operating leverage and several catalysts in the form of new products, the company is viewed as a core defensive holding. The bullish firms believe that Gen-Probe's above-peer organic sales and earnings growth should accelerate on the back of new products. They expect that the company's shares should be boosted by a number of catalysts and accelerated revenue and earnings growth in 2012 and 2013. The firms also state that intermediate-term risk/reward profile is attractive given Gen-Probe's share gains in core clinical diagnostic business, meaningful opportunities from new tests (including Trichomonas and HPV) and expectations that PANTHER would fuel accelerated sales growth in 2012 and 2013.
Further, the firms are impressed by the company's ability to drive accelerated sales growth over the next couple of years on the back of new product cycles. Although growth in the company's core markets has decelerated, the firms feel that new products and regulatory catalysts have restored investor interest in the stock. Overall, the firms believe management will continue to leverage its financial strength to improve its growth profile.The company maintains significant flexibility to drive growth and optimize returns, even in a challenging macro environment. Gen-Probe is expected to maintain a sustainable competitive advantage for growth with its TIGRISand PANTHER systems and a strong pipeline of assays.
June 18, 2012
Overview
California-based Gen-Probe Incorporated has been a pioneer in the commercial and scientific development of nucleic acid testing (NAT) for the diagnosis of infectious disease. The company sells its products in the clinical diagnostic as well as blood screening markets. Gen-Probe has a leading market share in domestic gonorrhea/chlamydia testing with its PACE and APTIMA product lines and, through a partnership with Chiron, has developed a stronghold in the blood screening market with its Procleix HIV/HCV test. The company is also developing projects to leverage its core transcriptase mediated amplification (TMA) technology into oncology and industrial applications. Its website is
The firms identified the following factors for evaluating the investment merits of GPRO:
Key Positive Arguments / Key Negative ArgumentsGen-Probe has a leading position in molecular diagnostics and boasts of an attractive late-stage product pipeline. / The company faces fierce competition from larger, more established firms in the molecular diagnostic industry such as Roche, Becton Dickinson, and Abbott Labs.
The company’s products are of high value to customers and their adoption requires little capital investment. / Gen-Probe overly depends on its intellectual property (IP) portfolio for its future growth and must successfully defend its current IP and continue to add to the portfolio either through internal R&D or through external licenses and/or acquisitions.
Given Hologic’s exposure in the overseas market and solid internal infrastructure, it is well placed to accelerate Gen-Probe’s revenue growth. / The erratic growth rate in the company’s core product lines is of concern. Past weakness in the blood screening business arose due to lower instrument sales.
A slew of new product launches (notably the PANTHER instrument) and expansion into new nucleic acid test markets are seen as significant upcoming growth drivers.
Note: The company’s fiscal year ends on December 31.
June 18, 2012
Long-Term Growth
The market shift toward molecular testing benefits Gen-Probe. The worldwide molecular diagnostic test market currently exceeds $3.5 billion. Gen-Probe is the leading pure play molecular diagnostics company focused on the clinical diagnostic and blood screening markets. The company’s products are of high value to customers and its adoption requires little capital investment. The company’s molecular diagnostic tests and instruments are designed to improve results and increase lab operating efficiency. Gen-Probe has gained market share in part due to technology advantages including automation and superior performance with TIGRIS and DTS/eSAS systems.
With multiple projects in various stages of development, a constant flow of new opportunities is expected to materializein the years to come. Gen-Probe has a strong pipeline of novel assay products (across oncology, infectious disease and blood screening areas) that are expected to be the harbinger of future growth. The growth opportunities for the company include the U.S. approval and launch of the PANTHER instrument.
Industrial testing offers the biggest growth potential. With price points for Gen-Probe’s nucleic acid tests expected to be higher than current culture-based tests, the industrial testing market could easily exceed $3 billion if Gen-Probe is able to successfully develop appropriate products. Though industrial testing products will not be a contributor to sales or earnings in the near term, it could be a significant driver in the long run. The firms believe EPS can increase once these products reach final market approval.
Asia is the next big frontier for Gen-Probe. The firms see significant growth opportunity in Japan, as the country’s government has expressed interest in blood screening technologies.
June 18, 2012
Target Price/Valuation
The Digest average target price is $79.78 (↓ $0.30from the previous report).
Of the 14firms providing ratings on the stock, 12firms provided neutralratings and two assigned positive ratings.
Rating DistributionPositive / 14.3%↑
Neutral / 85.7%↑
Negative / 0.0%
Avg. Target Price / $79.78↓
Maximum Target / $83.00
Minimum Target / $69.00
No. of Analysts with Target Price/Total / 9/14
Downside from Current / 3.4%
Maximum Upside from Current / 0.5%
Minimum Downside from Current / 16.4%
Risks to the price target include fierce competition in the molecular diagnostics market, reimbursement risks, unanticipated changes in FDA and government regulations, failure of new products to gain market traction,a weak flu season, and acquisition integration risks.
Recent Events
On April 30, 2012, Gen-Probe reported 1Q12 earnings results. Highlights are as follows:
- Revenue was $153.4 million in 1Q12,up7% y/y.
- Adjusted EPS was $0.55 in 1Q12 versus $0.51 in 1Q11.
On the same day, Gen-Probe recently announced that women’s healthcare major, Hologic Inc.(HOLX) will takeover the company for $3,700 million (or $82.75 a share).
Revenue
Gen-Probe reported total revenue of $153.4 million in 1Q12, up7% y/y.
Outlook: Gen-Probe forecasts revenue of $630 million to $655 million for FY12, up 11.5%.
The company reports its topline results in two broad segments: Product Sales andNon-product Sales.
PRODUCT SALES
Product sales make up roughly 98% of revenue and include the blood screening and clinical diagnostics businesses.
Product sales climbed 9% y/y to $150.1 million in 1Q12as healthy sales across Blood Screening and Clinical Diagnostics franchises were partially offset by lower revenues from the Research Products and Services and Collaborative Research businesses.
The company derives the majority of its product revenue from the sale of clinical diagnosticsand blood screening technologies and from research products and services.
Clinical Diagnostics: Gen-Probe develops, manufactures, and commercializes DNA probe technologies for diagnosing STDs and microbial infectious diseases. Clinical diagnostic products are marketed to clinical labs, public health institutions and hospitals through direct sales employees in the U.S., Canada, and certain European countries. Gen-Proberelies on bioMerieux Inc. for the distribution of these products in Australia and much of the rest of Europe; and on Rebio Genin Japan.
Clinical diagnostics products include APTIMA Combo 2 assay (an amplified NAT for simultaneously detecting Chlamydia trachomatis (CT) and Neisseria gonorrhoeae), PACE product lines, Direct Tube Sampling (DTS) systems, Amplified Mycobacterium Tuberculosis Direct (MTD), AccuProbe Culture Identification tests and the APTIMA Trichomonas assay.
Clinical diagnostics revenue climbed 7% y/y (up 8% in constant currency) to $94.9 million in 1Q12,led by strong sales of APTIMA Combo 2, APTIMA HPV and APTIMA Trichomonas assays. Foreign exchange swing negated revenues by approximately $0.5 million.
Blood Screening: The company’s Blood Screening products are marketed and distributed worldwide by Novartis. Gen-Probe is the strongest in the U.S., where its products are used to screen the majority of the U.S. donated blood supply for HIV-1, HCV, and WNV.
Blood screening product sales increased 12% y/y (up 13% in constant currency) to $52.5 million, driven by higher shipping of TIGRIS devices to its partner Novartis. Foreign exchange swing reduced sales by roughly $0.1 million.
Research Products and Services:The segmentrepresents the acquired revenue from the Tepnel research andservices division (40% of Tepnel revenue). The division focuses on raw material testing, discovery support, methods detection, validation and sample analysis for biopharma, academic, and clinical customers (including food testing).
Revenue from Research Products and Services declined 13% y/y (both in reported and constant currency) to $2.7 million in 1Q12.
NON-PRODUCT SALES
Non-product Sales include revenue from collaborative research, royalties, and licensing.
Collaborative Research: Collaborative Research sales declined 61% y/y to $1.4 million, hurt by lower funding from Novartis for the development of the fully automated PANTHER instrument for blood screening.
Royalty and License: Royalty and license revenue increased 36% y/y to $1.9 million in 1Q12.
Pipeline Products
Management remains focused on improving its research and development (R&D) productivity, as evidenced by the spin-off of the industrial (non-human) testing pipeline and restructuring of the R&D organization to optimize commercialization of key product candidates.
APTIMA HPV isa highly specific molecular diagnostic test used to detect high-risk strains of the HPV, which causes cervical cancer. The centerpiece of the company’s R&D efforts remains the APTIMA HPV test, which targets 14 subtypes of cervical cancer-causing HPV.
The APTIMA HPV assay can be used with Gen-Probe’s TIGRIS system, the only fully automated testing system for molecular diagnostics. This will offer a convenient way for physicians and laboratories to provide fast and accurate detection of infectious diseases.
In late November 2010, Gen-Probe submitted a Pre-market Approval (PMA) application to the FDA for its APTIMA assay for the detection of human papillomavirus infections.On October 31, 2011, the company received the green signal from the FDA for the APTIMA HPV assay. Gen-Probe booked its first sale in 1Q12. In April 2012, the company submitted a PMA for its APTIMA HPV genotyping assay and expects to launch it in 2013.
APTIMA Trichomonas: On April 20, 2011, Gen-Probe received FDAapproval for its APTIMA assay for Trichomonas vaginalis, a sexually transmitted disease. The APTIMA Trichomonas assay was cleared in Europe in June 2010. The assay can be used with Gen-Probe’s TIGRIS system. It is the first approved amplified nucleic acid test (NAT) to specifically detect Trichomonas vaginalis. The assay is gaining traction within the U.S. with more than 110 clients either using or validating the product.
PANTHER Instrument: This fully automated system,PANTHER, is aimed at European labs, which are smaller and more fragmented, and mid-throughput labs in the U.S. Itis one of the valuable components of Gen-Probe’s product pipeline. This mid-volume instrument will allow the company to compete in the majority of laboratories effectively, thus reinforcing its strong presence in the lab community. The fullyautomated system will feature a sample-in, sample-out ease of use model.
In December 2010, Gen-Probe launched the PANTHERsystem in EU. The instrument was cleared for marketing in Canada in August 2011. The PANTHER system complements Gen-Probe’s TIGRIS system. The company believes that PANTHER will significantly contribute to its revenue growth in the years ahead as it broadens the testing menu for the instrument. It will allow Gen-Probe to reinforce its presence in the lab community.
In May 2012, Gen-Probe received FDA approval to launch its PANTHER system. The system has been given initial approval to be used with its market-leading chlamydia and gonorrhea test APTIMA COMBO 2.With the U.S. clearance, a vital milestone has been achieved in the company’s endeavor to make this breakthrough product available to the global blood screening market.
Progensa PCA3: Gen-Probe’s PCA3 assay, an aid in the diagnosis ofprostate cancer, detects the presence of cell-associated PCA3 mRNA in urine. PCA3 is a gene that is over expressed in 90% of prostate tumors and may predict biopsy results better than PSA testing. Ultimately the PCA3 assay will be run on the PANTHER system. European sales trends for PCA3 remain strong. On February 15, 2012, Gen-Probe revealed FDA approval of the Progensa PCA3 test.
Please refer to the Zacks Research Digest spreadsheet on GPRO for more details on the revenue estimates.
Margins
Gross margin on product salesdropped to 65.1%in 1Q12 from 69.6% in 1Q11 due to more revenue from lower margin instruments sold to Novartis and lower revenues from higher margin Prodesse influenza offerings.
Research and development expensesincreased 4.8% y/y to $28.2 million in 1Q12.Marketing and sales expenses climbed 15% y/y to $19 million due to expansion in the operations of women’s healthcare.General and administrative expensesincreased 4% y/y to $19 million as a result of continuing litigation.
Outlook: Gen-Probe expects adjusted operating margin of roughly 26.5% to 28% for FY12. Product gross margin forecast for FY12 is in a band of 68% to 69.5%.R&D expense is forecast to increase 10% y/y for FY12.
Earnings per Share
Gen-Probe reported adjusted (excluding one-time charges) EPS of $0.55, in 1Q12, versus $0.51 in 1Q11. On a GAAP basis, the company turned in a profit of $0.49 per diluted share in 1Q12 versus a profit of $0.48 a share in 1Q11.
Outlook: The adjusted EPS target for 2Q12 is in the region of $0.55 to $0.58. GAAP EPS is forecast in a band of $0.51 and $0.54.
The adjusted EPS target for FY12is in the region of $2.50 to $2.68. GAAP EPS is forecast in a band of $2.30 and $2.48.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
Gen-Probe exited1Q12 with $401.3 million in cash, cash equivalents and marketable securities. The company had short-term debt of $248 million at the end of the quarter, flat y/y.
The company generated $31.7 million in cash flows from operations during 1Q12 and invested $9.3 million in capital expenditure, resulting in free cash flow of $22.4 million.
June 18, 2012
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Discover what other investors are saying about Gen-Probe Inc. (GPRO) at:
GPRO profile on StockResearchWiki.com
Analyst / Nikita SharmaCopy Editor / Anita Ganguli
Content Editor / Rajiv Mukerji
Lead Analyst / Rajiv Mukerji
QCA / Rajiv Mukerji
No. of brokers reported/total brokers
Reason for Update / Daily