Gen-Probe third quarter research revenue increases 70% to $3.4 million

Oct 29 2010

Gen-Probe Incorporated (Nasdaq: GPRO) today reported financial results for the third quarter of 2010, highlighted by 19% growth in non-GAAP earnings per share (EPS) and 8% growth in product sales and total revenues.

"Gen-Probe's third quarter financial results demonstrate our ability to generate solid top- and bottom-line growth in the face of challenging business conditions," said Carl Hull, the Company's president and chief executive officer.  "In addition, the major R&D initiatives that we expect to reinvigorate product sales growth remain on track, with four US regulatory filings already complete this year and our APTIMA® HPV submission anticipated in the next month."

Key financial results for the third quarter of 2010 were ($ in millions, except EPS):

Revenue Detail

"Third quarter product sales were about one percent shy of our expectations from last quarter, as the cumulative effect of macroeconomic headwinds finally weighed on overall testing volumes," Hull said.  "At the same time, we continue to out-grow our domestic and international markets, and our competitive positions, market shares and pricing are solid."

Clinical diagnostics sales growth in the third quarter of 2010 was driven by the APTIMA Combo 2® assay for detecting Chlamydia and gonorrhea, and by Prodesse products, which were not part of Gen-Probe in the prior year period.  Compared to the prior year period, foreign exchange fluctuations reduced clinical diagnostics sales by an estimated $0.5 million, or less than 1%.  

Blood screening sales grew solidly based on:

• Increased sales of the PROCLEIX® ULTRIO® assay.
• Increased sales of TIGRIS® instruments to Novartis, the Company's blood screening collaboration partner.
• The contractual increase in the share of revenues Gen-Probe receives under its collaboration with Novartis.

Compared to the prior year period, foreign exchange fluctuations reduced blood screening sales by an estimated $1.0 million, or 2%.  

Sales of research products and services in the third quarter of 2010 declined mainly due to the divestiture of the BioKits food testing business late in 2009, and foreign exchange fluctuations.

Third quarter product sales were ($ in millions):

Collaborative research revenues in the third quarter of 2010 were $3.4 million, compared to $2.0 million in the prior year period, an increase of 70% that resulted primarily from increased funding from Novartis associated with the development of the fully automated PANTHER™ instrument for the blood screening market.  

Royalty and license revenues in the third quarter of 2010 were $0.8 million, compared to $1.8 million in the prior year period, a decrease of 56%.  This decrease resulted primarily from lower royalties received from Novartis.

Expense Detail

Gross margin on product sales in the third quarter of 2010 was 67.2% on a non-GAAP basis, compared to 69.5% in the prior year period.  This decrease resulted mainly from increased sales of low-margin instruments, which are generally a precursor to future assay sales, and from lower margins in the blood screening and acquired Tepnel businesses that were caused in part by unfavorable foreign exchange rates.  On a GAAP basis, including $0.1 million of acquisition-related depreciation expense, gross margin on product sales was 67.2% in the third quarter of 2010, compared to 69.4% in the prior year period.

On a GAAP basis, acquisition-related amortization expenses were $2.2 million in the third quarter of 2010, compared to $1.1 million in the prior year period, an increase of 100% that resulted mainly from the October 2009 acquisition of Prodesse and its related intangible assets.

Research and development (R&D) expenses in the third quarter of 2010 were $27.4 million, similar to $27.5 million in the prior year period.

Marketing and sales expenses in the third quarter of 2010 were $13.9 million, compared to $13.5 million in the prior year period, an increase of 3% that resulted primarily from European sales force expansion and market development efforts.

General and administrative (G&A) expenses in the third quarter of 2010 were $10.8 million on a non-GAAP basis, compared to $14.2 million in the prior year period, a decrease of 24%.  This decrease resulted primarily from the receipt of a $2.9 million arbitration award from Qiagen, which covered attorneys' fees and costs related to the companies' HPV dispute.  On a GAAP basis, including transaction-related costs, G&A expenses were $11.5 million in the third quarter of 2010, compared to $15.2 million in the prior year period, a decrease of 24%.

Total other income in the third quarter of 2010 was $2.9 million on a non-GAAP basis, compared to $4.3 million in the prior year period, a decrease of 33% that resulted primarily from lower realized gains from the sale of marketable securities, lower yields on the Company's municipal bond portfolio, and lower investment balances due to share repurchases, the acquisition of Prodesse, and the investment in Pacific Biosciences.  On a GAAP basis, including a $1.5 million non-cash gain on a change in the fair value of contingent consideration, total other income was $4.4 million in the third quarter of 2010.

Income tax expense in the third quarter of 2010 was $13.2 million on a non-GAAP basis, corresponding to a tax rate of 32%.  Income tax expense benefited from an expired statute of limitations for past tax returns and a true-up related to the prior year returns.  On a GAAP basis, including adjustments to contingent consideration that largely are not taxable, income tax expense was $12.4 million in the third quarter of 2010, corresponding to a tax rate of 31%.

In the third quarter of 2010, Gen-Probe generated net cash of $44.0 million from operating activities, and spent $7.5 million on property, plant and equipment, leading to free cash flow of $36.5 million.  The Company repurchased approximately 776,300 shares of its stock in the third quarter for $35.8 million.

Gen-Probe continues to have a strong balance sheet.  As of September 30, 2010, the Company had $467.5 million of cash, cash equivalents and marketable securities, and $240.2 million of short-term debt.  The Company pays interest on substantially all this debt at a rate 0.6% above the one-month London Interbank Offered Rate (LIBOR), which has been below 0.3%.  

Updated 2010 Financial Guidance

Notes on Presentation

In this press release, all per share amounts are calculated on a fully diluted basis.  Some totals may not foot due to rounding.  Certain prior year amounts have been changed to conform to the current year presentation under ASC 260.  Estimates of "constant currency" growth exclude currency fluctuations associated with revenue from Prodesse, which was not part of Gen-Probe in the third quarter of 2009.