Mixed 2Q for Abaxis

Zacks Equity Research

Abaxis Inc. (ABAX) reported earnings per share (“EPS) of 58 cents in the second quarter of fiscal 2013. However, after taking into account a net gain related to the legal settlement with Cepheid (CPHD), adjusted EPS for the quarter came in at 18 cents, in line with the Zacks Consensus Estimate and 3 cents above the year-ago earnings.  

Revenues during the quarter increased 11% year over year to $44.3 million, nominally missing the Zacks Consensus Estimate of $45 million. The growth was based on higher sales in both North America (up 12% to $36 million) and in the international market (up 4% to $8.3 million).

Within the customer group, Veterinary market revenues witnessed an upside of 11% in the reported quarter to $34.9 million, while Medical Market sales delivered 7% year-over-year growth to $7.9 million. However, sales from the Other customer group declined 26.3% year over year to $1.4 million. Excluding sales to the U.S. government, worldwide Medical sales escalated 17% year over year to $7.4 million.

Total consumable sales were flat year over year at $29.4 million while instrumental sales increased by 33% to $11.6 million. Sales from medical and veterinary reagent discs were down 4% to $22.0 million. Total medical and veterinary instrument unit sales were up 28% year over year to 1,567 units. In the medical market, excluding sales to the U.S. government, Piccolo unit sales were up 86%, and in the veterinary market, the sale of veterinary units increased 24% year over year. Moreover, service revenue from Abaxis Veterinary Reference Laboratories (“AVRL”) maintained its growth momentum and recorded sales of $1.1 million, up 26% year over year.

Although gross profit in the quarter increased 5% year over year to $23.1 million, gross margin contracted 277 basis points (bps) to 52.24%. The company recorded higher research and development (up 19.04% to $3.6 million), sales and marketing (up 23.2% to $11.5 million) and general and administrative expenses (up 2.8% to $4.6 million) during the quarter. Consequently, operating income declined 34.4% to $3.4 million, leading to a 520 bps contraction in adjusted operating margin to 7.7%.

Abaxis exited the first quarter with cash and cash equivalents and short-term investments of $78.9 million, up from $67.5 million at fiscal 2012 end.

Lawsuit with Cepheid Over

In September 2012, Abaxis reached a settlement with Cepheid regarding several patents related to reagent and chemical compositions and processes.  According to the settlement, Cepheid agreed to pay $17.3 million to Abaxis. 

Our Take

Abaxis operates in a niche market of portable medical and veterinary blood analysis systems. Low worldwide penetration provides the scope for substantial growth in this niche industry. Additionally, we are optimistic about AVRL’s encouraging performance that completed a full year, supporting the growth of the company’s veterinary segment.

Moreover, we are also optimistic about the company’s recently formed definitive distribution relationship with MWI Veterinary Supply, Inc. (MWIV), a worldwide distributor of animal health products. Per the deal, effective January, 2013, MWI Vet, as a business partner of Abaxis, will be able to store, market and promote the entire veterinary product line of Abaxis in the U.S.

We believe that this is a large market with high potential for growth. An increase in the number of households with pets, enhanced human-animal bonding, aging pet population, more focus on animal health or preventive care and advancements in pharmaceuticals and diagnostic testing would result in increased spending, which in turn would be  favorable for the company. However, the competitive landscape is tough with the presence of big players like Alere (ALR) in the human and veterinary diagnostic market.

Currently, Abaxis carries a Zacks #3 Rank (short-term ‘Hold’ rating). Over the long term, we maintain our ‘Neutral’ recommendation on the stock.

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Read the Full Research Report on ABAX

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