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Gen Probe, Inc. (NASDAQ:GPRO)

Q4 2008 Earnings Call

February 17, 2009, 4:30 pm ET

Executives

Michael Watts - VP, IR and Corporate Communications

Hank Nordhoff - Chairman and CEO

Carl Hull - President and COO

Herm Rosenman - SVP, Finance and CFO

Steve Kondor - Sr. VP, Sales & Marketing

Analysts

Imron Zafar - Deutsche Bank

Bill Quirk - Piper Jaffray

Dan Leonard - First Analysis

David Lewis - Morgan Stanley

Sameer Harish - Needham & Company

Sam Jin - JP Morgan

Zarak Khurshid - Caris & Company

Jeff Johnson - Robert W. Baird

Spencer Nam - Summer Street Research

Eric Criscuolo - Thomas Weisel Partners

Bruce Cranna - Leerink Swann

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). I would like to advise all participants today's conference is now being recorded. If you have any objections you may disconnect at this time.

Now, I would like to turn this meeting over to your host Mr. Michael Watts, Vice President of Investor Relations and Corporate Communications. Mr. Walts, you may begin.

Michael Watts

Thank you, Cathy, and good afternoon everyone. On behalf of our management team, I am pleased to welcome you to this conference call to discuss our Fourth Quarter 2008 Business Results. A press release announcing our results, was issued today just after 4 pm Eastern Time and is posted on our website at www.gen-probe.com.

In our call today, Hank will first give an update on several strategic priorities. Carl will review our quarterly financial results, then Herm will discuss our 2009 guidance. We will take your questions before wrapping up within an hour. Immediately after that, we will post our prepared remarks on our website for your convenience and reference.

Before we begin, let me first review our Safe Harbor policy. Forward-looking guidance, financial or otherwise, is only provided on conference calls or in our press releases. Any statements in this conference call about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words and phrases such as believe, will, expect, anticipate, estimate, intend, plan, foresee, could, should and would. For example, statements concerning 2009 financial guidance, financial condition, regulatory approvals and timelines, possible or assumed future results of operations, growth opportunities, our proposed acquisition of Tepnel, industry rankings, plans and objectives of management and future economic conditions are all forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.

Factors that might cause such differences include, but are not limited to, those discussed in our SEC Filings including our report on Form 10-K for the year ended December 31, 2007, and all subsequent periodic reports. Copies are available on our website at www.sec.gov, and on request from our IR department.

Gen-Probe assumes no obligation, and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after the date of this call or to reflect the occurrence of unanticipated events.

With that administrative detail out of the way, I'll turn the call over to Hank Nordhoff, Gen-Probe's CEO.

Hank Nordhoff

Thank you, Mike, and good afternoon everyone. As you saw in our press release, our fourth quarter results capped off an excellent year of Gen-Probe. With both revenue and earnings growth exceeding our long term goals. Moreover we are off to a fast start in 2009, and have already made significant progress on several strategic priorities.

At our analyst day in November we outlined six of the strategic priorities for the next couple of years. And we have pursued them diligently.

Our first strategic priority is to profitably grow our STD business and maximize the reach of our fully automated TIGRIS instrument by adding human papillomavirus or HPV to its menu.

As you will hear from Carl our STD business remains strong driven by the continuing success of TIGRIS. In addition our HPV program remains on track as highlighted by the nine oral presentations and two scientific posters discussed in November at the major European HPV meeting called Eurogen.

Another strategic priority is to complete the development of our PANTHER Instrument and establish it as the platform of choice for molecular diagnostics. This is a longer-term initiative, and the development program is progressing according to plan.

A third goal we discussed in November is to maximize the potential of our prostate cancer franchise. Our PROGENSA PCA3 test continues to grow robustly in Europe driven by numerous articles in the peer-reviewed scientific literature and by highly targeted marketing efforts.

In the United States, we are encouraged by very recent conversations with FDA and opinion leaders and are considering moving ahead with the clinical trial that could lead FDA approval of our current test on our semi-automated instrument platform within three years.

So on these three strategic priorities, the (inaudible) business, PANTHER and prostate cancer, we are pleased with our accomplishments to-date, and look forward to providing more detailed updates in the future.

Now let me turn to our other three strategic goals, where much has happened in recent months. As you know we are working to increase our European commercial infrastructure to boost sales of our existing products and diversify our products sales base.

We believe our proposed acquisition of Tepnel will speed our effort in this regard. Since we have already had a conference call on Tepnel, I'm not going to repeat the same content today. I will confirm however that Tepnel is a very different kind of company than Innogenetics, the Belgian company that we tried to last summer.

Our Tepnel acquisition is fundamentally in that growth. Growth in the HLA testing and transplant diagnostics growth into the genetic testing market and potential growth in the companion diagnostic based on Tepnel's relationships with the leading pharmaceutical companies.

Tepnel also strengthens our ability to sell our own products mainly APTIMA Combo 2, PROGENSA PCA3 and APTIMA HPV in Europe. Tepnel does not have a huge sales force because they haven't needed one, but selling diagnostics in international markets takes more than just sales people. It also requires local market knowledge, established infrastructure that enables reps to use their time efficiently and sometimes local legal entities and manufacturing facilities all of which Tepnel possesses. Tepnel existing infrastructure will provide a supportive backdrop for our ongoing efforts to build our European sales force organically, a goal that we have outlined in the past.

At this point we see continuing organic growth as more likely than large infrastructure based acquisitions. The one thing these kinds of assays either no exist today or they aren’t for sale. In addition, as we have said many times before, we are not interested in using our cash on large significantly diluted transactions, we would consider taking on some dilution if these strategic fit were compelling and if we saw a very clear and rapid path to meaningful accretion. But for now, on a acquisition larger than Tepnel seems unlikely.

At the same time we plan to deploy our balance sheet in a complimentary way via the $250 million share repurchase plan that we put in place last year. So, in the fourth quarter we took advantage of volatile market conditions by repurchasing approximately 1.5 million shares of our stock for $65 million.

One other reasons we have such a strong balance sheet today is the historical success we have enjoyed in our blood screening business, that’s why we are excited about extending and expanding our collaboration with Novartis thus delivering another strategic priority we outlined in November.

Renegotiating our Novartis agreement enables us to realize progressively greater economy value from our blood screening business. This is terrific for us and our shareholders especially because the incremental value starts benefiting us this quarter and boost our top line in the years before our long term pipeline matures. At the same the renegotiation provides many other benefits.

Most importantly it revitalizes our partnership with Novartis and enables both parties to focus on solidifying and expanding what is an excellent business today.

Second, it aligns the partner's incentives around maximizing mutual profitability through the sharing of cost of goods sold.

Third, it clarifies the path forward for cancer and blood screening and provides funding to modify the instrument.

Four, it provides an entree in the pharmacogenetics to exploratory non-exclusive collaboration.

Fifth, it provides us greater input and visibility in the sales, marketing and distribution decisions.

And sixth, it enables the substantial cost and risk that would have been associated with our building out a global distribution infrastructure to mirror Novartis'.

For all these reasons we believe extending and expanding our partnership with Novartis is good for both partners, good for blood screening customers and good for shareholders.

It took us a while to get the deal done but we are delighted with the outcome and what it pertains for our future success.

The final strategic priority that we outlined in November relates to optimizing our cost structure and realizing some of the operational leverage that’s inherent in our business model. Our goal here is not to cut for the sake of cutting but rather to ensure on a continuous basis that we are getting a highest return from the dollars we spend.

In research and development for example, we have focused our efforts in recent quarters to ensure that we maximize efficiency and give our key development projects like PANTHER and HPV the resources and expertise they need. At the same time, we have reduced non-core activity such as our former research operations molecular like technology in Wales to drive operational leverage.

Going forward, we expect our new Senior Vice President of R&D, Eric Lai, to help further increase efficiency. Eric joins us from GlaxoSmithKline where he enjoyed a long and successful carrier primarily in generics research and we look forward to benefiting from his leadership and expertise. As an origination, we remain deeply committed to our robust vibrant R&D capabilities that drive short, medium and long-term product sales growth. And we believe Eric can help us to accomplish a great deal based on the excellent people and capabilities on Board today.

Our reference to optimize costs extent far beyond R&D, however, and you should notice this leverage in our 2009 guidance which Herm will discuss. Our operations group has done a terrific job of managing costs of goods sold while we continue to exercise tight control over general and administrative expenses.

In addition, our tax rate should not be much higher than it was in 2008 and our share count should be lower due to our buyback program. Unlike many companies we have not let total headcount growth get out to control or outpace revenue growth. We have added people when we need them such as in sales and marketing, but at the same time managed overall employment levels through attrition.

As a result we employee about 1000 people today roughly the same number as a year ago. At another way we have tried to grow in a smart disciplined manner for '09, while realizing leverage down the road including in 2009.

So in summary, it's been a very busy and very productive start to 2009 in the midst of volatile economic conditions. We closed our books on another financially successful quarter and year.

We announced plans for a small economically attractive acquisition that expands our growth opportunity and strengthens our foothold in New York. And we extended and expanded our blood screening collaboration on favorable quantitative and qualitative terms. Things are looking good at Gen-Probe.

Now I will turn the call over to Carl to discuss our fourth quarter results.

Carl Hull

Thanks Hank. Gen-Probe's financial results for the fourth quarter should not come as a surprise since we essentially provided quarterly guidance on our last call and since we reiterated that guidance at the JP Morgan Conference in mid January.

Our fourth quarter results were predictable in another way as well. They reflect what the company has consistently done since 2002. Execute on our financial commitments and deliver top line and bottom line growth regardless of macro economic conditions and independent of settlements surrounding stock. With that brief preface let’s review our results.

Gen-Probe had a very solid fourth quarter. Product sales were $105.8 million up nearly 15% compared to the prior year period. Total revenues increased 10% and EPS grew 5% on a GAAP basis.

Earnings growth would have been much higher if not for the exceptionally low tax we have enjoyed in the prior year period.

Turning to the components of product revenue, clinical diagnostics sales grew a healthy 16% in the quarter and established a new record, once again led by our amplified APTIMA franchise for Chlamydia and gonorrhoeae testing.

In the fourth quarter customers continue to upgrade the APTIMA assays from our older non-amplified pace product line.

Pace sales declined 26% in the quarter inline with our expectations. Pace generated only 11% of our STD revenue in the quarter it still represented about 25% of our volume. So we anticipate the positive mixed shift to continue although perhaps not at the same rate as in recent years.

We estimate that our total dollars share of the domestic STD market exceeded 61% in 2008 up about three percentage points compared to the full year of 2007.

We continue to gain share based on the superior sensitivity and specificity of our assays, combined with a throughput and automation of TIGRIS. The fact we estimate that we won 39 accounts from the competition in 2008.

Some of these competitive wins came internationally, while APTIMA continues to grow rapidly.

In the fourth quarter, about 11% of our diagnostic assay revenue came from outside North America, with APTIMA sales growing almost 50% compared to the prior year period.

Despite this growth we estimate that our market share outside North America was only 26% in 2008. So we have lots of room for expansion especially given the ongoing commercial build out Hank discussed.

Now let's turn to blood screening, blood screening sales increased by solid 13% lead by good growth and market share gains for the PROCLEIX ULTRIO assay on the TIGRIS system overseas. As we predicted in the last call West Nile virus shipments in the fourth quarter were bit soft as Novartis began to work off some of the excess inventory that accumulated last summer in anticipation of increased infections which did not materialize.

As previously discussed we expect this softness to continue for the next couple of quarters.

In addition we continue to watch closely effects of foreign exchange rate fluctuations on our blood screening business.

In the first three quarters of 2008, a weakening dollar benefited our blood screening sales as we discussed in our quarterly calls. But as you know the dollar began to strengthen dramatically against most currencies in this summer and became a slight headwind for us in the fourth quarter versus the prior year period.

As Herm will discuss we expect this headwind to stiffen in the first half of 2009 given the continued strength of the dollar.

Now let me turn to non-product revenues. Collaborative research revenues was $2.1 million for the fourth quarter of 2008 down 61% from a year-ago. This decrease resulted mainly from the termination of our collaboration with 3M to develop rapid test for healthcare associated infections.

As we have said in our last call we expect collaborative research revenues to average around $1 million per quarter in 2009 or even a little less given the current but temporary long and shared blood screening development projects.

Royalty and license revenue was $1.3 million in the fourth quarter up 18% compared to the prior year period. This small increase only about $200,000 in dollar terms was due to a number of minor fluctuations. So our fourth quarter number should represent a good run rate going forward through 2009.

Gross margin on product sales was $69.6% in the fourth quarter up from 69.2% in the prior year period. This slight improvement resulted primarily from our favorable product sales mix.

Gross margin on product sales would have been about 90 basis points higher if not for approximately $900,000 of cost associated with the voluntarily recall of certain AccuProbe culture identification kits.

We decided to recall certain lots of this older product when we became aware of the manufacturing error that resulted in certain acid tubes blocking the proper reagents. Although we were obviously disappointed by any such incident we believe the problem has been corrected and the costs are behind us.

In addition we were very pleased by the support our customers showed as we responded quickly and fully to the problem.

Research and Development expenses for the fourth quarter were $24.2 million, essentially unchanged from the year ago.

Although the aggregate number was similar to last year, the component that has been shifted as cost associated with our ULTRIO post-marketing yield studies diminished while expenses related to our APTIMA HPV and PANTHER project increased.

Marketing and sales expenses in the fourth quarter were $11.8 million, up 4% compared to the year period. As expected these cost increase primarily based on our European market development cost associated with our APTIMA Combo 2, HPV and PCA3 assays.

General and administrative expenses were $13.8 million in the fourth quarter, up 12% versus a year ago. This increase was due to primarily to higher business development, legal and compensation cost. Total other income in the fourth quarter of 2008 was $3.8 million, up 3% versus last year due to mainly to higher short-term investment balances and good yields on our portfolio of high grade municipal bonds.

It's worth noting that other income increased compared to the year prior, even though we took advantage of market conditions by repurchasing $65 million for the stock during the quarter. Our tax rate in the fourth quarter of 2008 was 32%, which benefited from the reinstatement of the Federal R&D tax credit.

All this nets out to a strong quarter of net income and fourth quarter EPS up $0.39, an increase of 5% that would have been much higher if not for the exceptionally low tax rate of 22% that we enjoyed in the prior year period. All in all, we are pleased with our fourth quarter performance and extremely happy about our annual income statement as well.

Our financial successes in 2008 were well beyond the income statement however. In an economic crisis that once gain made cash king, we generated bunch of it. To be precise, we had $178 million in operating cash flow for the year, which was about 66% higher than our full year net income.

At the same time, our capital expenditures in 2008 were just less than $40 million of $16 million of that related to the acquisition of our blood screening manufacturing facility. Even including this one-time purchase this [works out] to a free cash flow yield of close to 6% at our recent share price.

The strong cash flows layered over and above been already healthy cash balance, give us tremendous strategic, operational and financial flexibility. We saw evidence of this in the fourth quarter when we repurchased to $65 million worth of stock and in January when we announced the acquisition of Tepnel. So to wrap, the fourth quarter was a typical solid Gen-Probe quarter to put the finishing touches on an outstanding 2008.

For the full year, we grew both, our top and bottom lines in excess of our long-term goals. We generated shareholder value from our balance sheet with the proposed Tepnel acquisition and with our buyback program. We made excellent progress on three of our strategic goals with the other three very much on track as Hank explained. And in a time of economic uncertainty, we had very steady growth, strong cash flows and pristine balance sheet.

Now, I'll turn the call over to Herm for the guidance discussion.

Herm Rosenman

Thank you, Carl, and good afternoon, everyone. I would like to provide more color on the 2009 guidance that we first announced the couple of weeks ago on January 27th. We expect this year to be characterized by solid top line growth, leverage throughout the income statement, even as we invest fully in key R&D and strategic initiatives, healthy net profit margins in excess of 20% on a GAAP basis and robust cash flows in a difficult macro economic environment.

As we said in our press release, we are not including in our current financial guidance any revenue or expense associate with our pending acquisition of Tepnel. We will incorporate these effects when the deal closes probably in the second quarter.

So excluding Tepnel, we expect total revenues of $460 million to $490 million in 2009. This includes a little less than $10 million of aggregate non-product revenues significantly lower than the $43.5 million of non-product revenue we recorded in 2008.

As you know most of our non product revenue in 2008 came from two non-recurring payments. We recorded $16.4 million of royalty and license revenue from Bayer in the first quarter, which represented their third and final payment under our patent infringement settlement. And we recorded a $10 million milestone from Novartis in the third quarter following the full FDA approval of the PROCLEIX ULTRIO assay on the TIGRIS system.

In addition, we booked $2.7 million of previously differed collaborative research revenue in the second quarter following the termination of our 3M collaboration around healthcare associated infections. And finally, we recorded $2.6 million of non-recurring product sales in the second quarter to correct some past errors in our blood screening collaboration with Novartis.

All in all, these non-recurring items added about $32 million of revenue to our 2008 financial statements. While it was great to receive this cash, their GAAP recognition in the income statements does create extremely tough comps for 2009. But if you look beyond these non-recurring payments, you will see solid underlying product sales growth in 2009. We believe this growth will be driven by continued domestic and international market share gains of the APTIMA COMBO 2 assay and by continued international expansion of our PROCLEIX ULTRIO assay.

We have not included in our guidance any incremental US revenue for the ULTRIO assay as no customer contracts have yet been signed. So, any domestic sales of ULTRIO that we may see later in the year would represent upside.

Before I give guidance for the expense lines, let me spend a few minutes on foreign exchange. Foreign exchange has emerged as a significant variable in our financial results as currencies have become more (inaudible) and as our international revenues have grown rapidly. Foreign exchange rates benefited us for most of 2008, but have become a potentially significant headwind in 2009. Well, I think the dollar will weaken based on our country's growing debt burden, its impossible to predict when this might occur.

To put the issue in perspective, we had about $90 million of revenue in 2000 that was denominated in currencies other than US dollars. This included both blood screening and clinical diagnostic sales. Almost half this amount was in euros about 15% in the British pound, a little less than 10% in each of the Canadian and Australian dollars and about 20% in all of the currencies combined.

So, a 10% move in the weighted basket of these currencies creates about $9 million of potential revenue variability in either direction. This explains why our revenue guidance ranges is wider than usual, but you should make no mistake about the underlying health of the business. In fact, if we had given our 2009 guidance on a constant currency basis with 2009 rates equal to 2008 rates. You would be looking at a tighter range with a mid-point about $17 million higher than where we are guiding. Set in other way, if foreign exchange rates were to stay at current levels throughout 2009 they would reduce our top line growth rate by about 3.6% compared to 2008.

We have begun to take steps to protect our bottom-line against these currency fluctuations. We have implemented a month-to-month receivables edge that will protect us against intra-month variability. But not necessarily against a long-term strengthening of the dollar. In addition, we have a small, but growing natural hedge with close to $10 million of foreign currency denominated expenses forecast this year.

Foreign exchange also will affect our gross margin on product sales which we expect to range between 69% and 72% in 2009. We do expect gross margin to improve in 2009 compared to 2008 unless we see significant dollar appreciation from current levels. We expect the gross margin percentage to benefit from continued growth of our APTIMA STD franchise from the improved profitability flowing from our renegotiated blood screen contract with Novartis and from ongoing efforts to drive operational efficiency.

Continuing down the income statement, we expect R&D expenses between 20% and 22% of total revenues in 2009 a range that brackets our actual 2008 percentage of 21.4%. As you would expect the big ticket items for 2009 will continue to be our APTIMA HPV and PANTHER development programs. Both of these are tracking nicely to our previously communicated timelines as Hank mentioned.

We expect marketing and sales expenses to be between 10% and 11% of total revenues up slightly from 2008 levels as we execute on our commitment to increase our European sales and marketing group to capitalize on favorable market dynamics and growth opportunities. We anticipate G&A expenses of 10% to 11% of total revenues down slightly on a percentage basis compared to 2008, reflecting tight cost controls across administrative functions.

As I mentioned, under the new accounting rule FAS 141R we do expect additional one time charges to G&A expense when the Tepnel deal closes. But these expenses are not included in our full-year guidance.

To round out our guidance we believe other income in 2009 to be approximately equal to 2008 levels as we use much of our free cash flow to buy back stock. This will help shrink our diluted share count to between 52 million and 54 million shares below 2008 levels.

And finally, we foresee a tax rate of approximately 34% not much changed from our 2008 level. All this leads to our initial 2009 earnings per share guidance of between $1.80 and $2.05 on a fully diluted GAAP.

At the mid-point of the $1.93 this guidance again represents a net after-tax profit margin in excess of 20%.

Although this mid-point is basically flat compared to 2008 keep in mind that last year’s results included a net $0.34 from one-time items, excluding these items 2008 earnings per share would have looked more a like $1.61 and the mid-point of our 2009 guidance would represent approximately 20% growth.

In terms of the quarterly phasing of our financial results over the course of 2009 we expect earnings per share to track a long side product sales for the most part since we do not anticipate much quarterly variability in non-product sales or expenses.

Specifically we expect product sales and earnings per share to be a bit higher than usual in the first quarter as the favorable catch-up effects of our new Novartis agreement outweigh negative foreign exchange rates.

We currently forecast the first quarter total revenues of between $113 million and $117 million and earnings per share in the mid-to-high 40s. We believe both product sales and earnings per share will decline sequentially in the second quarter then increase on a sequential basis from there.

Turning to the cash flow statement we expect depreciation and amortization around $35 million in 2009 in-line with 2008.

In addition free cash flows should remain strong. We expect CapEx of about $35 million in 2009 down slightly from 2008 levels, but including additional investment and information systems and PANTHER instruments.

So to summarize the guidance section of our conference call we are in good shape as we head into 2009 based on our solid fourth quarter performance and renegotiation of our blood screening agreement with Novartis.

For the full year 2009, we expect solid top line growth with the magnitude growth somewhat dependant on currency fluctuations, increased leverage down the income statement, net after tax margins in excess of 20% and continued robust free cash flows in an environment where cash really does matter.

Now I would like to turn the call back over to Mike.

Mike Watts

Thanks Herm. We are happy to take your questions now. For the Q&A, we are joined by Dan Kacian, Executive Vice President and Chief Scientist; Bill Bowen, Senior Vice President and General Counsel; Steve Kondor, our Senior Vice President of Sales and Marketing; Paul Gargan, Senior Vice President and Business Development; and Kevin Herde, Vice President and Corporate Controller.

In order to ensure broad participation in the Q&A session, please be courteous and limit your questions to one plus a follow-up, then jump back into the queue. Operator, we're ready to take the first questions.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from Imron Zafar from Deutsche Bank. Your line is open.

Imron Zafar - Deutsche Bank

Hey, good afternoon and thanks for taking my question. My first question is on guidance. Can you just talk about the relative growth rates you are assuming by segment for 2009 and how much of that is can be driven by share gains versus end market growth?

Carl Hull

Imron, you can see what we are implying is about 11% growth.

Imron Zafar - Deutsche Bank

Right.

Carl Hull

We haven't historically passed that out into diagnostics versus blood screening at this juncture and don’t intend to do it today. But I think you can tell that we are looking for a good year, a very good year in 2009. Condition of course as we said on some very vital foreign exchange rates.

Imron Zafar - Deutsche Bank

Okay. And then maybe a big picture question. You have talk in the past about the electro diagnostic market growing sort of in the 12% to 15% range over the next few years. And maybe looking at your 2009 guidance, you sort of add little bit a lot of depending on FX I guess, can you just comment, given your comment Hank about the unlikely how you are going to do any meaningful M&A in the foreseeable future, what do you see your long-term growth rate relative to the market that 12% to 15% range? Thanks.

Hank Nordhoff

I think last year at this time Imron we guided to about 11% growth and it came out to be, much higher than that. We did not say we were not going to do any acquisitions. We said that, that was probably unlikely that we would acquire a company larger than Tepnel. I think the upside will be ULTRIO in the US and we have been little bit cautious about talking about this adoption in the US I think I went on inline and I expected the first sales to be in the first half of this year but we have not quantitated that. I think overall as see the growth rate in diagnostic to be just about double in Europe what it is in the US you can see that we are investing over there to try to capitalize on that best.

Imron Zafar - Deutsche Bank

Okay. Thank you very much.

Hank Nordhoff

You welcome.

Operator

Thank you. Our next question comes from Bill Quirk with Piper Jaffray. You may ask your question.

Bill Quirk - Piper Jaffray

Thanks. Good afternoon.

Carl Hull

Hey Bill.

Bill Quirk - Piper Jaffray

I know you guys didn’t want to include ULTRIO in the US in the guidance, but how should we think about the pacing of negotiations right now? Obviously there is one very large customer out there, and there is number of smaller ones. I think you said in the past you expect smaller deals to likely come through first.

Hank Nordhoff

I don't know if we have any more information to change that goal. That's probably the way it will be. There is a BPAC meeting coming up. It may be discussed then, we are not really sure.

Bill Quirk - Piper Jaffray

Understood, and then Herm just a quick and picky accounting question if I can. On the cost of goods sharing with Novartis, I understand this can booked as product revenue. In past deals where you had these R&D sharing you booked it as collaborative research revenue. How come we are not going to book these [cards], since I guess change the title, if you will, to collaborative revenue.

Herm Rosenman

Well, because it really is product revenue. It's the way the split is calculated. We could have even picked out another item to add to whatever our gross revenue split is, but we wanted to align the company. So our actual revenue split as a percentage a number and also 50% of another number.

Bill Quirk - Piper Jaffray

Okay, understood. And then one last one if I can speak in, what is the TIGRIS contribution for blood bank revenue this quarter?

Herm Rosenman

I don't know, we do have that.

Hank Nordhoff

It is about 4.5 seconds where Kevin is looking at.

Kevin Herde

Bill this is Kevin Herde. It was approximately $2 million.

Bill Quirk - Piper Jaffray

Perfect. Thanks very much guys.

Hank Nordhoff

Thank you, Bill.

Operator

Dan Leonard with First Analysis. You may ask your question.

Dan Leonard - First Analysis

Hi Good afternoon.

Hank Nordhoff

Good afternoon.

Dan Leonard - First Analysis

Hank, you mentioned in your comments that your discussions with the FDA, on the prostate cancer tests are proceeding favorably, could you provide some detail on the discussions please?

Hank Nordhoff

Only in gross term [Len], we have been, I don’t want to use the word harass, but some of the opinion leaders, Dan had said that, (Inaudible), but the fact is not IBD approved has cut into the sales potential.

So we took that and went to the FDA to see what we can do to speed things up. And I think they, we are will not scarifies the anything at all had given us a lot of encouragement that leaves me to say that once we begin the clinical studies, we should have it on the market within three years.

Dan Leonard - First Analysis

Okay. And then for Herm, Herm, how would an favorable outcome with the FDA and the prostate cancer discussions impact your R&D forecast for this year?

Herm Rosenman

Well, they would probably require us to shift with other projects and gating of other projects, but we are not quite at that point yet. So I can't provide an off a lot of cover on it.

Dan Leonard - First Analysis

Okay. Thank you.

Operator

Thank you, David Lewis with Morgan Stanley. You may ask your question.

David Lewis - Morgan Stanley

Good afternoon.

Hank Nordhoff

Hi, David.

David Lewis - Morgan Stanley

Hi, Hank. I wonder just given the very significant growth we saw on the core business last year, if you could just sort of re-update us on what do you think is a reasonable new multiyear top line target for Gen-Probe? And then maybe Herm, can you kind of provide us how long the business could generate 20% type bottom line growth if that top line growth rate begins to slip below 10%.

Hank Nordhoff

David our goals that we have been talking about for six years, since we have been a public company, is top line 15% and product sales hopefully better than that and the bottom line and we are sticking to that. We will have years, when it’s going to be well over 15% and some years when it's going to be under. This year is going to be bit of challenge, but don’t forget we have not included any sales of the Tepnel products into our guidance, so we are sticking with a 15 and 15.

David Lewis - Morgan Stanley

Okay, and that still looks pretty good for your target?

Hank Nordhoff

Yeah, I think it looks very good.

David Lewis - Morgan Stanley

Great, and then Herm just to give a product status, you said a 11%, did that a 11% include that step up from Novartis?

Herm Rosenman

Yes, it did.

David Lewis - Morgan Stanley

Okay, so in that piece is something around $10 million for 2009?

Herm Rosenman

We haven’t given that specifically David but in the ballpark.

David Lewis - Morgan Stanley

Okay, that’s very helpful. And then maybe Hank you talked about R&D privatization you gave some granularity , do you talk maybe more specifically about thing is that had been reprioritize in 2009, or maybe this is sort of a 2009 and 2010 question?

Hank Nordhoff

Let me ask Carl to talking about that, David.

Carl Hull

Sure, David. I think the major focus is making sure that we have enough resources of the right types on the tough programs, being obviously defined those PANTHER in HPV at all times, so that can move the programs forward as fastest we can. That will requires a lot of balancing with other programs in house, because as you might imagine. On an instrument system for example, we are putting multiple assays on it simultaneously, so we need expertise from different parts of the organization at different times as those flux went to the instrument program, we have run with them for awhile, and then they complete their task related to that and than they move back to other program.

So I would say first its just the, the consistent adequacy and top priority of those two programs into everything else that we do. And then after that I don’t think we have pulled our horns and intentionally on other major programs where we see commercial opportunities we just recognized that we will have a certain number that we can undertake and we are trying to balance a few long-term strategic priorities with shorter terms paybacks or say claim extensions on existing products where new applications in different geographic areas, where we have them up until now sold and so, that’s kind of how we do the process.

David Lewis - Morgan Stanley

Okay, then one last question, I will jump back in queue, and thank you, Carl, it's very helpful. Herm just looking at the middle income statement obviously there is often has been opportunities for upside to the bottom-line, but specifically on tax rate what is, if you are comfortable with that 34% number kind of seems that percentage of that number could be not materially lower but certainly lower here for 2009. Are there are certain factors that could drive that number lower.

Herm Rosenman

Well certainly the acquisition of Tepnel completing that one, have been cancelled that out and integrated debt but would have the effective lower income tax rate.

David Lewis - Morgan Stanley

Okay. Thanks.

Hank Nordhoff

Thank you, David.

Operator

Thank you. [Joy Thomas], Needham & Company. You may ask your question.

Sameer Harish - Needham & Company

Hi. This is Sameer Harish from Needham.

Hank Nordhoff

Hello Sameer, how are you?

Sameer Harish - Needham & Company

Good. I wanted to just ask a couple of questions on pricing, outside of the impact of FX can you give us a sense on what you saw across the movement in pricing, directionally, internationally both on the blood and clinical science.

Hank Nordhoff

Steve?

Steve Kondor

Yes, I will speak to the clinical diagnostic side, pricing is more aggressive outside the United States, we have got a number of more competitors, however, we have been fortunate that with TIGRIS selling the value in the automation outside this as well as the value of our APTIMA Combo product we have been able to keep our pricing premium as we have in United States.

Sameer Harish - Needham & Company

Okay. And as far as the US markets for the clinical, if that market starts to mature, when do you think you might start to see price increases from Gen-Probe, that in near-term seeing or more long-term.

Steve Kondor

I am sorry, price increases?

Sameer Harish - Needham & Company

Yes.

Steve Kondor

Price increases in United States, I am sorry I didn’t understand the question; we have competitors coming into the United States, so prices will continue to be put under pressure because of competition coming in.

Sameer Harish - Needham & Company

Okay, got it. Just wanted to switch gears a little bit into the PCA3 can you give us any sense of what the cost of the US SK trial would be and any details on the structure of the trial.

Hank Nordhoff

It’s going to be fewer numbers than we thought and the cost is going to be lower than we thought, but we can't give you any numbers on it at this point.

Sameer Harish - Needham & Company

Okay, fair enough. Thank you guys.

Hank Nordhoff

You’re welcome.

Operator

Thank you Tycho Peterson, JP Morgan. You may ask your question.

Sam Jin - JP Morgan

Hi. This is [Sam Jin] for Tycho. Thanks for taking the questions. We saw an article today written on this paper regarding rising unemployment rate impacting the volume of blood donations and we are wondering if you are seeing that type of trend nationally and how that might impact on the blood screening business?

Hank Nordhoff

Good question very timely. We haven’t seen any impact as alluded to in that article. I think it’s something to be mindful of, but we keep a close eye and have improved visibility in our new relationship with Novartis to the underlying terms, but we don’t seen anything that would suggest donation rate in the United States is taking any kind of significant hit. Clearly some of the things they were talking about would mix how much it comes from blood mobiles or corporate donations versus other locations those may well be going on but in the micro sense have an effect in the business.

Sam Jin - JP Morgan

Great. And also in terms of going back to the R&D priorities, as far as [MRSA] and water testing are concerned, are they pretty much in the back burner currently and also if you could comment on your development with Millipore.

Hank Nordhoff

Yes, so we have certainly have communicated that we ave taken a look at the MRSA market after the termination of relationship with 3M and don’t feel that there is an independent path we are going to pursue right now. We continue to monitor the market space, we think particularly the dynamic of where that testing will be done whether it will be done closer to the patient, morning unit-dose setting or in a more traditional batch laboratory setting is the key market development factor and as those conditions evolve and becomes clear we can always reexamine that.

With respect to our industrial work we continue the collaborations with our partners with GE and Millipore. But we certainly don’t see any material revenue impact from them in the current year?

Herm Rosenman

I should add that we are making nice progress in both relationships and have some nice news recently in the Millipore collaboration. And as it confirms itself we are going to talk about in a few months.

Sam Jin - JP Morgan

Thank you.

Herm Rosenman

You're welcome.

Operator

Thank you. Zarak Khurshid, Caris & Company. You may ask your question.

Zarak Khurshid - Caris & Company

Yes, Zarak Khurshid of Caris. Thanks guys for taking the question. Could you provide a little more color on the R&D expense guidance? It seem like if we take the high end of the ranges versus the high low, variances is almost 60 million bucks, so what happened in those two different scenarios and specifically how does the HPV trial cost play into that?

Herm Rosenman

I think I understand the question Zarak and that's a function of wide, wide range because of FX which will not affect R&D expenses than real expense almost all of them were done here in the US. One way to look at it will be the midpoint, then to go 20% to 22% off the mid point and ignores the ends. The ends are really more revenue, a revenue wish all does drive the expenses.

Zarak Khurshid - Caris & Company

Got you. And then Carl, I think I heard you say that the non-US STD business was growing on the order 50% is that right? How sustainable is that level and then if you kind of qualitatively talk about the European growth in that segment that will be great?

Carl Hull

Let Steve comment on it.

Steve Kondor

Yes, Rick, the numbers are smaller, number sort of percentage of necessarily become bigger, but having said that we have added the sales people in countries towards the backend of last year. Actually middle of the last year until now, and we are seeing a very nice return on that investment sale force in countries that we have not sold into.

Carl Hull

So we think that we’ll probably continue in the near term.

Steve Kondor

Especially with regard to launch of PANTHER and to continue to pursue with HPV in Europe.

Zarak Khurshid - Caris & Company

Great. Thank you.

Hank Nordhoff

Thank you.

Operator

Our next question comes from Quintin Lai of Robert W. Baird. Your line is open.

Jeff Johnson - Robert W. Baird

Hi, guys this is Jeff for Quin. Just quick on the cash which is assuming that Tepnel closes in Q1, Q2 as you guys were talking about what are your thoughts on buybacks versus for the M&A?

Hank Nordhoff

Our position Jeff is basically the same as always been. We are committed to the buyback program, but because we generated so much cash, that does not include looking around and being opportunistic.

Jeff Johnson - Robert W. Baird

Alright, thanks. And then, quickly just housekeeping HPV enrollment in clinical trial has anything changed since the Q3 call in that?

Hank Nordhoff

Well certainly number have increased, so that’s a good thing. We are tracking well with our overall objectives in the program and are endeavoring to find ways, to actually enrollment rates above the current levels. To accelerate the study we have investigators meeting at this weekend here in San Diego where we are pulling in majority of our investigators to talk about ways to do just that.

Jeff Johnson - Robert W. Baird

All right thanks, one last question the 3.6% FX headwind assuming rates stay as they are. Is that on product revenue or overall revenue. And what's the EPS impact to that.

Steve Kondor

Both on total revenue.

Jeff Johnson - Robert W. Baird

Okay and EPS impact?

Hank Nordhoff

3.6% rate.

Jeff Johnson - Robert W. Baird

Is it just flow through?

Hank Nordhoff

Right real flow through.

Carl Hull

Jeff we do have some hedge there that hedges us against the portion of that exposure on the bottom line based on our international operations and some other banks. But it is a minority of that exposure that's hedged.

Jeff Johnson - Robert W. Baird

All right thanks a lot.

Hank Nordhoff

You are welcome.

Operator

Thank you, Spencer Nam with Summer Street Research. Your line is open.

Spencer Nam - Summer Street Research

Thanks for taking my questions. Just couple of questions on, one on acquisition and another one on HPV. The Tepnel acquisition related in terms of long term when you guys think about opportunities outside of the current pipeline. What kind of areas you guys interested in right now thinking seriously about potentially looking at the outside opportunities. And also in terms of 2009 and may be only 2010 you talked about not really at this point no major or sort of top process in terms of M&A you guys in terms of Tepnel what kind of role will it play in your long term strategic growth trajectory and kind of what is going to drive the long term value of that acquisition?

Hank Nordhoff

Well Tepnel brings us some new product categories where we did currently do not have the entries HLA, it’s a relatively small market but they probably are in the number two position. And we think by combining some of our technologies with theirs and maybe looking for additional complimentary technologies. We can do very well in that field. They also put us in genetics and also through their pharmaceutical services business gives us relationships with pharmaceutical companies and our ultimate goal is to do something in a large way in pharmacogenomics. Again we think that phases and other ballistic question of not so much that is not going to happen, question is when its going to happen. So we expect that company and its products will provide a nice source growth in the coming years.

Spencer Nam - Summer Street Research

Appreciate that, on the HPV side, we have been hearing some feedback, rounded about the FDA that, they have some thoughts on the number of sample sizes with respect to ongoing HPV trials that have ended. Do you guys feel that your current target sample sizes, sufficient enough to, be dealt with through the FDA process?

Hank Nordhoff

We do, Carl is going to comment on that further. I was going to say we do that we are summing for me, I think you are absolutely correct, the agencies views here are critical both about the size physical power of what we are trying to accomplish and how that products to claims, you are going to after for your product, we believe its been great deal of time in the early and recent stages of the project testing and retesting our assumptions validating them through the appropriate IDA and other meetings with the agency to confirm the validity of our design and then in that context we are always for ways to exceed those design wins.

So that we have a comfortable margin of safety. But its certainly completely fare to say that the most important part of the program is convincing the FDA of the statistical power of the results that you have generated and we are comfortable with our approaches.

Spencer Nam - Summer Street Research

Right, thanks very much.

Hank Nordhoff

You are welcome.

Operator

Thank you our next question comes from Eric Criscuolo with Thomas Weisel Partners. Your line is open, Sir.

Eric Criscuolo - Thomas Weisel Partners

Hi guys just filling in for Peter tonight.

Hank Nordhoff

How are you?

Eric Criscuolo - Thomas Weisel Partners

I am doing well, thank you.

Hank Nordhoff

Good.

Eric Criscuolo - Thomas Weisel Partners

I guess just quickly on the recall, you said that you expect that you are pretty much through it, but are there any other I guess product lines that roll off that manufacturing line that could be possibility affected down the growth from the same issue?

Herm Rosenman

No, Eric. We don't believe, so we have thoroughly investigated and isolated the answer, and we understand that and we found (inaudible) it.

Eric Criscuolo - Thomas Weisel Partners

Okay, great. And then just as for I guess the hedging those, I assume that sStephen kind of a new policy put into place. Could you maybe just dive a little deeper into that and say you maybe when its going to maybe taking effect and maybe some little more on the basic mechanics of it?

Stephen Kondor

Yeah, it's in effect, Eric, and it’s been in effect for now roughly a month or so. And it's really buying forward foreign currencies on a monthly bases to edge receivable balances, and protect the income statement.

You may have some small cash differences when we close out the contract and enter into a new contract minimal cost, far less expensive less than bigger one necked hedge to the future, so we think it will do the job for us.

Eric Criscuolo - Thomas Weisel Partners

Okay, great. Thanks a lot guys.

Hank Nordhoff

Yeah, I think we have time for one more.

Operator

Thank you. And our last question comes from Bruce Cranna with Leerink Swann. Your line is open.

Bruce Cranna - Leerink Swann

Good afternoon, guys.

Hank Nordhoff

Hi, Bruce.

Bruce Cranna - Leerink Swann

It's better than never.

Hank Nordhoff

Well, we will see.

Bruce Cranna - Leerink Swann

So Carl, I know we have kind of been over this, but just so I'm clear on the AccuProbe thing. When you say it's behind you, it's behind you as in 4Q nothing sort of moved into 1Q?

Carl Hull

We would have had expenses in, both the fourth quarter and the first quarter of this year. But I think the majority of it was taken in the first quarter, and there will be slight odds in size in the fourth quarter.

Bruce Cranna - Leerink Swann

May be just some slight residual in Q1.

Carl Hull

Yeah, very slight.

Bruce Cranna - Leerink Swann

Okay. And one point, I think it was a few quarters ago. You guys were actually nice enough to give us (inaudible) in better term in installed base of TIGRIS in clinical segment. I am wondering if you could perhaps comment on that again.

Herm Rosenman

Yeah, we do. We have about 160 TIGRIS systems worldwide on the clinical diagnostic side.

Bruce Cranna - Leerink Swann

I am sorry 160.

Herm Rosenman

160

Bruce Cranna - Leerink Swann

Yeah, on the both side?

Herm Rosenman

And about 200 in blood screening.

Hank Nordhoff

350 in total.

Bruce Cranna - Leerink Swann

Got it, okay. And then lastly Herm, I know Tepnel is not in your guidance one way or the other. But just our curiosity if it were to close in 2Q, is there any change to the way you think about FX on the year, is it potentially a net positive from the operational hedging standpoint?

Herm Rosenman

Yeah, it's a fairly small net positive though.

Bruce Cranna - Leerink Swann

Okay.

Herm Rosenman

Their revenues are also somewhat exposed aggressively, do business in different countries and a lot business in US.

Bruce Cranna - Leerink Swann

Yeah, got it. All right, thank you guys.

Hank Nordhoff

Thank you, Bruce. And thank you all for your questions. To wrap up Gen-Probe's performance in the fourth quarter of 2008 capped off an outstanding year for the company.

For the year we grew the top line 17%, the bottom line 23% and made significant progress on several of our strategic priorities. We believe our 2008 performance combined with our new blood screening contract, and our anticipated Tepnel acquisition have us well positioned for a successful year of profitable underlying growth in 2009.

Thank you for time and attention today, and please contact us and Mike if you any follow-up questions.

Operator

Thank you. This concludes today's conference call. And at this time everyone may disconnect.

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Source: Gen Probe, Inc., Q4 2008 Earnings Call Transcript
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