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Diagnostic products maker Gen-Probe’s (GPRO - Snapshot Report) fourth-quarter fiscal 2011 adjusted (excluding one-time charges) earnings of 72 cents a share topped the Zacks Consensus Estimate by 4 cents while exceeded the year-ago adjusted earnings of 61 cents.

However, the California-based company’s profit (as reported) plummeted 27% in the quarter to $19.9 million (or 42 cents a share), hammered by a $12.7 million charge related to the impairment of goodwill and intangible assets .

For the full year, adjusted earnings of $2.34 a share outperformed the Zacks Consensus Estimate of $2.31 and surpassed the year-ago earnings of $2.19. Profit (as reported) for the year more than halved year over year to $50.1 million or $1.04 a share.    

Revenue Analysis

Revenues for the quarter surged 16% year over year to $158.2 million, essentially in line with the Zacks Consensus Estimate. For the fiscal, sales rose 6% year over year to $576.2 million, just missing the Zacks Consensus Estimate of $577 million.

Product sales soared 18% to $155.2 million in the fourth quarter as double-digit growth across clinical diagnostic and blood screening businesses more than neutralized the decline in revenues from research products and services.

Clinical diagnostic revenues spiked 13% year over year to $90.6 million, boosted by higher sales of APTIMA Combo 2 assay across domestic and overseas markets and GTI Diagnostics acquisition. However, foreign exchange swings trimmed sales by roughly $0.1 million. The APTIMA women’s health business remains the key growth engine for the clinical diagnostic franchise.

Gen-Probe clocked solid growth in its blood screening business in the quarter with sales zooming 30% year over year to $62.1 million, paced by higher shipment of assays and instruments (including the TIGRIS systems) to Gen-Probe’s partner Novartis (NVS - Analyst Report). Foreign exchange movements had a favorable impact of $0.2 million on blood screening sales.

Revenues from research products and services slid 29% year over year to $2.4 million. Collaborative research sales tanked 62% year over year to $1.4 million, hurt by lower funding from Novartis for the development of the fully automated PANTHER instrument for blood screening.

Gen-Probe expects to launch the PANTHER system in international blood screening markets in 2012. Royalty and license revenues dipped 16% to $1.6 million on account of lower royalties from Novartis associated with the plasma testing market.

Margins & Expenses

Gross margin on product sales slipped to 66.7% in the quarter from 69.4% a year-ago, resulting from unfavorable sales mix. Total operating expenses jumped 29% year over year to $128.7 million. Research and development expenses rose 5% year over year to $28.2 million.

Marketing and sales expenses climbed 13% to $17.1 million due to the investment in European commercial infrastructure and addition of GTI Diagnostics. General and administrative expenses rose 6% to $16.2 million as a result of the GTI acquisition.

Financial Health

Gen-Probe ended the fiscal with cash and cash equivalents and marketable securities of $368 million, down 25% year over year, and short-term debt of $248 million (up 3% year over year). The company generated $53.4 million in cash flows from operations during the fourth quarter and invested $7.2 million in capital expenditure, resulting in a free cash flow of $46.2 million.

The company bought back 1.7 million shares during the fourth quarter for $100 million, thereby completing the $100 million repurchase program announced in November 2011.

Guidance and Recommendation

Moving ahead, Gen-Probe expects to register low double-digit organic sales and earnings growth in 2012 on the back of multiple new products (including APTIMA Trichomonas and APTIMA HPV). The company envisions modest growth in its blood screening business in 2012 while clinical diagnostic revenues are expected to be boosted by strong sales from APTIMA Combo 2 assay.

For 2012, Gen-Probe expects revenues in the range of $630 million to $655 million. Adjusted earnings per share target for the year have been pegged between $2.50 and $2.68. The current Zacks Consensus Estimates for 2012 revenue and earnings are $641 million and $2.59, respectively.

Gen-Probe expects operating margin (on a reported basis) in the band of 24.5% to 26% and adjusted operating margin of between 26.5% and 28% for 2012. Product gross margin (both reported and adjusted basis) is expected between of 68% and 69.5%.

For first-quarter 2012, the company expects sales between $148 million and $152 million and earnings in the range of 48 cents and 52 cents a share.

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.

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, Gen-Probe’s PANTHER molecular testing platform will significantly contribute to its revenues as it broadens the testing menu for the instrument.

However, Gen-Probe competes with more established firms such as Roche (RHHBY - Analyst Report), Becton Dickinson (BDX - Analyst Report), and Abbott Labs (ABT - Analyst Report) in the maturing molecular diagnostic industry. Moreover, the company is exposed to foreign exchange headwinds which may hurt its sales and margins in 2012. Higher tax is also expected to weigh on its bottom line this year.

Currently, we have a long-term Neutral recommendation on Gen-Probe, which is in tandem with a short-term Zacks #3 Rank (Hold).

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