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Gen-Probe Remains Neutral

Zacks Equity Research

We reiterate our Neutral rating on Gen-Probe Inc. (:GPRO). Its first-quarter 2012 adjusted earnings of 55 cents per share beat the Zacks Consensus Estimate of 51 cents. Revenues of $153.4 million were ahead of the Zacks Consensus Estimate of $151 million.

Product sales increased 9% as healthy sales across Blood Screening and Clinical Diagnostics franchises were partially offset by lower revenues from the Research Products and Services and Collaborative Research businesses.

Revenues from Clinical Diagnostics segment grew 7% (up 8% in constant currency) year over year, led by strong sales of APTIMA Combo 2, APTIMA HPV and APTIMA Trichomonas assays. Blood Screening sales rose 12% (up 13% in constant currency) in the quarter, driven by higher shipping of TIGRIS devices to the company’s partner Novartis (NVS).

Gen-Probe, in May 2012, received the U.S. Food and Drug Administration’s (:FDA) approval to launch its fully-automated molecular testing platform, PANTHER. The system has been given the initial approval to be used with its market-leading chlamydia and gonorrhea test APTIMA COMBO 2. The PANTHER system is expected to significantly contribute to the company’s revenue growth in the coming years as it broadens the testing menu for the instrument.

Gen-Probe recently announced that women’s healthcare major, Hologic Inc. (HOLX) will buy it for $3.7 billion (or $82.75 a share). The transaction is expected to be completed by second half of 2012, subject to certain clearances and approval of Gen-Probe’s shareholders. Gen-Probe believes that the merger will leverage the women’s Diagnostic product range of both the companies and thereby, increase the focus on the molecular diagnostics market. Further, the acquisition will benefit the shareholders as it will offer additional cash value to their shares.

However, the merger agreement with Hologic can also have a negative impact on Gen-Probe’s operations, in case customers plan to postpone their orders and purchases or employees decide to resign in the face of acquisition-related uncertainties. In addition, management’s focus on merger-related issues might divert their attention away from potential business plans resulting in failure of quarterly operating outcomes, which could lead to fall in share prices.

Also, if the merger is not completed due to some unforeseen circumstances, the company might run the risk of legal proceedings along with payment of a termination fee of $128 million to Hologic or reimburse Hologic for its transaction-related expenses of $20 million.

Gen-Probe’s clinical diagnostics products are susceptible to considerable reimbursement risks. Third-party payers are increasingly seeking to curb health care costs by limiting both coverage and the level of reimbursement for medical products and services. Any unfavorable change in the reimbursement policies (or levels) by third-party payers may materially affect the demand and price levels of Gen-Probe’s products and its revenues. In the most recent quarter, collaborative research sales plunged 61% on account of less reimbursement received from Novartis owing to the development of the PANTHER instrument.

Gen-Probe is a dominant player in the rapidly expanding nucleic acid testing (“NAT”) market, the fastest growing segment in the clinical diagnostic market. It is a market leader in domestic gonorrhea and chlamydia testing with its PACE and APTIMA assay product lines. Gen-Probe competes with more established firms in the molecular diagnostic industry such as Roche (RHHBY), Becton, Dickinson (BDX) and Abbott Labs (ABT).

Our recommendation on Gen-Probe is in tandem with a short-term Zacks #3 Rank (Hold).

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