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We retain our Neutral recommendation on diagnostic products maker Gen-Probe ( ) following its mixed third quarter results. Its adjusted earnings of 57 cents a share for the quarter topped the Zacks Consensus Estimate of 54 cents.
However, the California-based company incurred a loss in the quarter, hit by a sizable impairment loss on its equity investment in DNA sequencing firm Pacific Biosciences (PacBio).
Sales rose 5% year over year to $139.1 million, but missed the Zacks Consensus Estimate. Double-digit growth in the clinical diagnostic franchise was partly ebbed by the decline in the blood screening business.
Revenues from clinical diagnostic products spiked 16%, boosted by the company’s APTIMA women’s health business and acquisition of specialty diagnostics firm GTI Diagnostics. The company’s blood screening business continues to struggle with sales dipping 6% in the quarter, hurt by lower sales of TIGRIS systems to partner Novartis ( NVS - Snapshot Report ) . Gen-Probe once again narrowed its sales and earnings forecasts for fiscal 2011.
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. It is a dominant player in the nucleic acid testing (“NAT”) market, the fastest growing segment of the clinical diagnostic market.
We believe Gen-Probe is well placed with a strong cadence of new products that are expected to support growth in the years ahead. Moreover, the ongoing market shift towards molecular testing represents a tailwind for the company. The healthy growth trend in the clinical diagnostic business is expected to sustain through fiscal 2011.
Gen-Probe’s new APTIMA trichomonas assay is already gaining favorable traction. The company recently won the U.S. approval for the APTIMA human papillomavirus (“HPV”) assay which is viewed as a major new opportunity for its clinical business.
Moreover, the company’s fully-automated molecular testing platform PANTHER is expected to significantly contribute to revenue growth in the years ahead as it broadens the testing menu for the instrument.
Gen-Probe is also making prudent use of healthy free cash flows by means of acquisitions, overseas expansion as well as rewarding shareholders through share repurchases.
However, Gen-Probe is faced with increased competition in a maturing blood screening market and its clinical diagnostics products face reimbursement risks. The company competes with more established firms such as Roche ( RHHBY ) , Becton, Dickinson ( BDX - Analyst Report ) and Abbott Labs ( ABT - Analyst Report ) .
Moreover, the company’s blood screening business is expected to remain under pressure due to a soft market condition andl ower instrument sales to Novartis. Costs associated with product development may also weigh on the company’s bottom line. Our recommendation is in agreement with a short-term Zacks #3 Rank (Hold).
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