Zacks_Analysts' Blog : Reaffirming Gen-Probe at Neutral - Analyst Blog

We maintain our Neutral recommendation on diagnostic products maker Gen-Probe (GPRO). Revenues and earnings for first-quarter fiscal 2011 beat the Zacks Consensus Estimates, buoyed by healthy growth in the company’s clinical diagnostic business. However, profit dipped year over year as revenue growth was masked by higher costs.

Product revenues rose 6% on the back of higher sales from clinical diagnostic products. However, the company’s blood screening business (sales down 6%) remained lumpy, hit by lower sales of TIGRIS systems to partner Novartis (NVS). The California-based company backed its financial guidance for fiscal 2011.

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.

We believe Gen-Probe is well placed with a slew of new products that are expected to drive growth in the years ahead. Moreover, the ongoing market shift away from traditional diagnostic methods towards molecular testing represents a tailwind for the company.

The company’s acquisition of specialty diagnostics firm GTI Diagnostics in late 2010 represents a positive step, providing a boost to its top line. Higher sales of GTI Diagnostics products catalyzed double-digit growth in the clinical diagnostic business in the first quarter.

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 as well as rewarding shareholders through share repurchases.

However, Gen-Probe competes with more established firms such as Roche (RHHBY), Becton, Dickinson (BDX) and Abbott Labs (ABT) in the maturing molecular diagnostic industry. Moreover, the company’s clinical diagnostics products are susceptible to reimbursement risk and its international sales are subject to foreign exchange swings.

Gen-Probe’s struggling blood screening franchise may remain under pressure due to a soft market condition and fewer TIGRIS systems sold to Novartis. While new product development and international expansions are vital for sustaining future growth, associated high expenses (R&D investment and sales/marketing expenses) may weigh on the company’s bottom line moving forward. Our recommendation is supported by a short-term Zacks #3 Rank (Hold).