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Abaxis Remains Neutral

Zacks Equity Research

We recently reiterated our ‘Neutral’ recommendation on Abaxis Inc. (ABAX) with a target price of $28.00.

Abaxis reported EPS of 13 cents in the third quarter of fiscal 2012, missing the year-ago quarter EPS by 4 cents, as well as the Zacks Consensus Estimate of 16 cents.

Net sales during the quarter increased 5% year over year to $37.9 million, but lagged the Zacks Consensus Estimate of $41 million. The year-over-year growth was fueled by higher sales in both North America (up 6% to $31.8 million) and in the international market (up 2.8% to $6.0 million). Total consumable sales climbed 9% year over year to $2.3 million, while instrumental sales decreased by an aggregate of $210,000 or 2% year over year.

Veterinary market revenues witnessed an upside of 8% in the reported quarter to $28.5 million. Abaxis is executing well in its veterinary division with an expanded product line and a growing direct sales force. We expect the company’s VetScan VS2 blood chemistry analyzer to continue to capture market share in the veterinary market. Additionally, its i-STAT product line should assist Abaxis to drive new VetScan VS2 sales as well.

Alongside, the company’s new full-service laboratory testing facility, Abaxis Veterinary Reference Laboratories (:AVRL) is expected to compliment the company’s veterinary sector’s growth going ahead. AVRL currently completed its first 90 days of nationwide operations. In this period, it received over 5,000 requisitions averaging over 100 per day. Abaxis is optimistic regarding its consistent performance in the veterinary market and expects to maintain this growth momentum in the upcoming quarters.

Moreover, the company witnessed a consistent increase in Piccolo placement. During the reported quarter, total revenue from the medical market remained flat year over year at $8.1 million, as uncertainty regarding the future direction of healthcare continued to depress the market for capital equipment within the physician office. Notwithstanding this the US medical team sold 133 Piccolos (excluding the government) in the reported quarter, up 14% year over year and recorded a 46% increase sequentially.

This was primarily due to an increase in the sales volume of Piccolo chemistry analyzers to a distributor resulting from higher sales to end users. The company is also on the lookout for a large potential customer, interested in Piccolo for its in-store clinics. With various core-marketing programs being undertaken, Abaxis expects placement rates to increase further.

However, higher expenses remain the primary challenge for Abaxis. As a result, gross margin was down by roughly 106 basis points (bps), primarily due to higher manufacturing costs of Piccolo chemistry analyzers and higher costs of VetScan chemistry analyzers and hematology instruments. Gross margin was also negatively affected by the launch of AVRL and the loss of $317,000 in royalty income along with continued strong sales growth of lower margin OEM products.

We also remain apprehensive based on Abaxis’ dependency on distributors to sell its products and its increased legal expenses. Besides, the presence of many big players like Alere Inc. (ALR) and Idexx Laboratories Inc. (IDXX) that are endowed with greater resources on all fronts has made the human and veterinary diagnostic market highly competitive.

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