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The share price of Abaxis (ABAX - Analyst Report) reached its 52-week high last month and has witnessed some profit booking since then. Given its stretched valuation, we expect a limited upside potential for the stock at present and hence we revert back to Neutral with a target price of $40.00.

The veterinary market is a major contributor to the company’s top-line growth. Abaxis reported strong results in the first quarter of fiscal 2013 (up 17% year over year) based on strength in this market. Alongside, the company’s new full-service laboratory testing facility, Abaxis Veterinary Reference Laboratories (AVRL), is complimenting the growth of the company’s veterinary segment. AVRL, in its third full quarter of operations, generated revenue of $860,000 (up 83% sequentially).

Moreover, the company witnessed a consistent increase in Piccolo placement. During the reported quarter, total revenue from the medical market increased 18% year over supported by 48% increase in Piccolo placement. The company is also working on getting large-scale business for Piccolo. With various core marketing programs being undertaken, Abaxis expects placement rates to increase further.

We also note that the company is taking initiatives to expand in the international medical market. The recent contract with a leading international biotechnology company to deliver 300 Piccolo Xpress instruments is a big step in this regard.

However, we remain apprehensive about Abaxis’ dependence on distributors. Abaxis has had issues with its international distributors in the past, which made it difficult to establish a steady distribution network overseas. Thus, the failure to successfully develop and maintain relationships with these distributors could adversely affect the company’s business.

We are also concerned about the bottom-line pressure faced by Abaxis. In the reported quarter, the company incurred legal expense of $850,000primarily related to a patent infringement case against Cepheid (CPHD - Analyst Report) with respect to Cepheid’s Methicillin-resistant Staphylococcus aureus(“MRSA”) product, on which Cepheid has ceased paying license royalties. The situation could further deteriorate for Abaxis if these issues are not resolved in the near future.

Notably, in 2005, Abaxis and Cepheid entered into a royalty license agreement for certain patents related to lyophilization technology under which Cepheid introduced a manufacturing process outside the scope of Abaxis patents.

Besides, the presence of many big players like Alere Inc. (ALR - Snapshot Report) and Idexx Laboratories Inc. (IDXX - Analyst Report) that have greater resources has made the human and veterinary diagnostic market highly competitive.

Last week Alere reported its second quarter 2012 adjusted EPS of 42 cents, trailing the corresponding Zacks Consensus Estimate of 50 cents. Net revenues came in at $700.5 million in the reported quarter, up 23.5% year over year, easily surpassing the Zacks Consensus Estimate of $654 million. Idexx Laboratories announced its second quarter 2012 results on July 20, 2012. The company reported a 10% year over year increase in EPS to 91 cents on revenues of $335.6 million (up 6% year over year).

Abaxis on the other handreported an EPS of just 13 cents in the first quarter of fiscal 2013, which missed the Zacks Consensus Estimate by 4 cents or 23.5% (although the 30% increase from last year was encouraging).

Revenues during the quarter increased 17% year over year to $42.0 million, and surpassed the Zacks Consensus Estimate of $40 million. The growth was based on higher sales in both North America (up 12% to $33.2 million) and in the international market (up 41% to $8.8 million).

The company has not provided any outlook for the upcoming period. However, the Zacks Consensus revenue and EPS estimates for the second quarter of fiscal 2013 remain at $45 million and 19 cents, respectively.

Abaxis currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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