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Gen-Probe, Inc. (NASDAQ:GPRO)

Q3 2006 Earnings Call

November 1, 2006 4:30 pm ET

Executives

Mike Watts - Senior Director of IR

Hank Nordhoff - Chairman, President and CEO

Herm Rosenman - Vice President of Finance and CFO

Larry Mimms - Executive Vice President of R&D

Steve Kondor - Vice President of Sales and Marketing

Lynda Merrill - Vice President of Investor Relationships

Analysts

Quintin Lai - Robert W. Baird

Lee Brown - Merrill Lynch

Bill Quirk - Piper Jaffray

Bruce Cranna - Leerink Swann

Peter Larson - Thomas Weisel Partners

Spencer Nam - Summer Street Research

Sara Michelmore - Cowen and Company

Kenneth Levin - UBS

Tycho Peterson - J.P. Morgan

Presentation

Operator

Good afternoon and thank you for standing by. Welcome to the Third Quarter Earnings 2006 Financial Results Conference Call. Today's conference is being recorded. If anyone has any objections you may disconnect at this time. All participants are going to be in a listen-only throughout the duration of the conference call. We will have a question-and-answer portion at the end of today's call. I would like to introduce your first speaker for today's call Mr. Mike Watts. Sir, you may begin.

Mike Watts

Thank you Julian and good afternoon everyone. This is Mike Watts, Gen-Probe's Senior Director of Investor Relations. On behalf of Hank Nordhoff, Gen-Probe's Chairman, President and CEO; and Herm Rosenman, our Vice President of Finance and CFO, and the rest of the Gen-Probe team, I am pleased to welcome you to this conference call to discuss our third quarter 2006 business results. The 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 provide an overview of our top line performance in the quarter and discuss progress we've made on future growth drivers. Herm will then review our detailed results and updated 2006 guidance, and we will take your questions.

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 and would. For example, statements concerning 2006 financial guidance, financial condition, regulatory approvals and timelines, possible or assumed future results of operations, growth opportunities, industry rankings, and plans and objectives of management 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, 2005, 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 will turn the call over to Hank Nordhoff, Gen-Probe's CEO.

Hank Nordhoff

Thank you Mike, and good afternoon everyone. As described in our press release, Gen-Probe had an excellent quarter with robust increases in product sales and total revenues leading to high quality earnings growth. At the same time, we made important progress on our regulatory front, progress that we believe will bolster our already strong competitive positions.

In my remarks today, I'll cover our record third quarter results and discuss how our recent product approvals have us nicely positioned for future growth. We have a lot to discuss in our base businesses, so I will focus my comment there and allow time to provide additional color on our new business initiatives in the Q&A.

Let's begin with the quarterly revenue picture, which was highlighted by new records for both product sales and total revenues. In fact, both clinical diagnostics and blood screening product sales grew by more than 20% compared to the prior year period. We believe this balance growth off an increasingly large sales space reflects the sustainable value that our products and our people deliver to customers and also enables us to continue investing heavily for the future.

Product sales were $83.5 million in the quarter, a new all time high and 21% higher than last year. This strong growth in product sales helped drive total revenues in the third quarter up 21% versus last year to $92.2 million, a new record. Profits also grew nicely in the third quarter. Excluding the effects of share-based compensation under FAS 123R, earnings per share were $0.36 in the quarter, up 16% versus the prior year. We also maintained a net after-tax profit margin of roughly 21% on a non-GAAP basis which is impressive considering our hefty investment in research and development.

On a GAAP basis earnings per share were $0.28, slightly lower than last year due to the additional non-cash compensation charge under FAS 123R of $4 million, or roughly $0.08 a share.

Now let me dive into the details of our two key businesses; clinical diagnostics and blood screening. Clinical diagnostics sales totaled a record $43.3 million in the third quarter of 2006, up 20% compared to the prior year period. While we do not expect growth to continue at this level indefinitely, we are very pleased with the recent performance of this part of our business. As in the last several quarters, clinical diagnostics sales benefited from market share gains of APTIMA Combo 2, our amplified assay that simultaneously detects Chlamydia and gonorrhea. APTIMA is gaining share on the back of our fully automated TIGRIS system to be sure, but is also growing rapidly amongst smaller customers who are using our semi-automated instruments based in a large part on the superior sensitivity and specificity of the assay itself.

In addition, our growth continues to be broad based in various market segments, reference labs, hospitals, and public health centers. The growth in APTIMA Combo 2 on a percentage basis was more than two and a half times the decline in sales of PACE, our non-amplified test for the same bacteria. PACE sales declined by about 16% compared to the prior year period and 6% sequentially. Our planned efforts to drive conversion from PACE to APTIMA are paying off and as a result, we expect a decline in PACE to increase in the future.

In recent months, we also secured several regulatory approvals that we believe will solidify our already strong competitive position in the STD market. In August, we announced that the FDA have granted marketing clearance for customers to use the APTIMA Combo 2 assay and the TIGRIS system to test for STDs and two additional sample types, namely Cytyc Liquid Pap samples and clinician and self-collected vaginal swabs. This clearance adds to our TIGRIS menu making the system more attractive to our broader customer base and increases the convenience of testing for patients and physicians. We believe we have the broadest menu of STD products in the industry and [preview] publications have demonstrated the significant advantages our assays enjoy in terms of sensitivity and specificity, particularly when testing is done from less invasive sample types such as urine, Liquid Paps, and vaginal swabs, which the patients often prefer. We followed up this news with FDA clearance in October to run our standalone APTIMA Chlamydia and gonorrhea assays on the TIGRIS system. These approvals provide our lab customers greater flexibility to meet the needs of their clients. Within the STD space, our TIGRIS menu mirrors the three tests that were previously approved on our semi-automated platform. We believe this broad menu in combine with the technical superiority of our assays and our outstanding customer relationships provides us a sustainable advantage against our current and future competitors, and we think our results in the third quarter reflect that advantage.

Shifting gears to our viral products let me just mention that we gained marketing approval last month for APTIMA assay to detect HIV-1 RNA in clinical diagnostic settings. You might recall that this is the test we gained commercial rights to through our arbitration with Bayer. We were quite pleased with the broad and unique label the FDA granted us, specifically our tests are approved to aid in the diagnosis of both acute and primary HIV infection. This acute claim is unique because it means our Assay can be used to detect HIV during the seroconversion window before an individual develops antibodies that can be picked up by immunoassay test. In addition, customers can use our product to confirm HIV infection and an individual whose specimen is repeatedly positive for HIV-1 antibodies. This claim is important because it means our assay can be used in place of Western Blot test, which can be cumbersome to run and difficult to interpret. While we do not expect our APTIMA HIV assay to become a major commercial product, we are pleased with the high level of customer interest that we have received thus far, particularly from public health labs, our customer segment with which we believe we already have excellent relationships. Before I turn to blood screening, I want to let you know that we have met an important mile stone in our prostate cancer program by completing the requirements for CE marking of our PCA3 assay in Europe. We plan to launch the product later this month at four testing sites in the Netherlands, Belgium, Germany, and France, and remain optimistic about the product's ability to improve patient care through a high specificity for prostate cancer.

Now, let move on to blood screening, third quarter sales were $40.1 million, an increase of 22% versus the prior-year period. This growth was once again driven by international expansion and conversion to the PROCLEIX ULTRIO assay. For example, Chiron recently made its first sales in the Slovakia and also began selling ULTRIO in Thailand, which has slow been a duplex customer. We also gain regulatory approval for the ULTRIO assay in Mexico in the third quarter. While we do not expect near-term sales from Mexico, we look forward now to have any commercial discussions with the Mexican blood banks in 2007. Judging from several studies presented by international customers at the recent meetings of the International Society of Blood Transfusion and the American Association of Blood Banks, feedback on both the ULTRIO assay and the TIGRIS system remains positive and customers appreciate the advantages that our system offers over the competition. As a result, we are please that ULTRIO has continued to grow steadily around the world even as Chiron has began to compete against Roche country by country in smaller geographically diverse markets ranging from Eastern Europe to Africa to Southeast Asia.

As expected, the sales of TIGRIS instruments and spare parts to Chiron were down in the third quarter to about $2 million compared to $4 million in the second quarter. And as we told you in our last call, we also expect our level of TIGRIS sales to Chiron to decline in 2007 to roughly half of 2006 levels based simply on the large extent to which TIGRIS units have already penetrated the global blood screening market.

Our third quarter blood screening results also benefited from the full quarter of higher pricing for our West Nile virus assay. As you know, all our US customers are now paying either a full commercial price if they are solely using our semi-automated system or a revised cost recovery price if they are a TIGRIS customer. Chiron intends to transition all customers to the full commercial price once the TIGRIS is approved. On that note, while in the third quarter we responded a little ahead of schedule to the FDA questions regarding related to using our West Nile virus assay on the TIGRIS system. We remain confident in our application but we can't predict FDA review times.

Speaking of the FDA, let me bring you up to speed on the status of the PROCLEIX ULTRIO assay in the US. We were pleased to receive FDA approval for the assay on our semi-automated eSAS instrument last month. This approval represents a significant business milestone for the product as well as for our improving track record with the FDA. The FDA did not approve the assay for screening donated blood for hepatitis B since the size of our pivotal clinical study was not designed to and therefore did not detect hepatitis B yield and yield is defined as hepatitis B infected blood donations that were intercepted by ULTRIO, but test a negative according to surface antigen and anti-core antibody test.

In other words, hepatitis B yield is an infected donation intercepted in the seroconversion window period before the body's immune response to the virus can be detected. In order to gain a screening claim for hepatitis B, we and Chiron intent to begin a post-marketing study early in 2007 to demonstrate yield. The need to conduct this study reinforces what we have said many times before that we do not expect significant US revenue from the ULTRIO Assay before the TIGRIS system has approved. We do believe, however, that we will find yield and that the post-marketing study will therefore help develop the US market for hepatitis B testing.

In Europe as a parallel, we now have fairly extensive experience that indicates hepatitis B yield rates as high as 1 in approximately 50,000 donations when blood is tested individually, a much higher incidence than is observed with either HIV or hepatitis C.

In addition, they represented at the recent KABB meeting by Dr. Ron Gilcher from the Oklahoma Blood Institute or OBI indicates the potential importance of NAT testing for hepatitis B in the United States. For about 18 months OBI has been conducting individual donor testing with our discriminatory HBV assay, which is essentially the hepatitis B components of the ULTRIO product. As a reminder, our discriminatory HBV assay is available in the US under an investigational new drug application. Among approximately 309,000 blood donations screened individually, OBI intercepted five donations that were negative based on all serology tests, a rate similar to that what we have observed in Europe. Those five units of hepatitis B infected blood could have been transfused into as many as 15 people if not for testing with our assay. Dr. Gilcher summed up his study nicely when he said that if US blood banks look for hepatitis B with a highly sensitive NAT test they will find it.

Dr. Gilcher then diluted the yield samples to [simulate false] testing. He concluded that two of the five yield cases would have been intercepted only if the donations were tested individually. The third donation would have been positive in a pool of two donations to four in a pool of eight and the fifth in a regular pool of sixteen. This argues of course that the benefits of NAT testing for hepatitis B are maximized when blood is tested in small pools and we believe this additional testing volume can best be handled with the help of a fully automated system such as the TIGRIS.

Finally Dr. Gilcher retested the five yield cases with the PRISM hepatitis B surface antigen test which was only recently approved in the US. He found that PRISM would have intercepted only one of the five infected donations that were intercepted by our assay, but missed by the Ortho test used in the original study. However, the PRISM surface antigen test also missed one of the donations that was positive both by our discriminatory HBV assay and by anti-core antibody testing. In other words, relative to our tests, the PRISM surface antigen test still would have missed five HBV infected donations overall. These results should not reflect negatively on PRISM which we believe is an excellent immunoassay test. The data simply reinforce the inherent advantage of NAT testing versus serology and help explain why US blood banks currently use EIA tests plus NAT test to screen for HIV and hepatitis C. Overtime, we expect hepatitis B testing to evolve in a similar fashion with lab testing being conducted alongside serology assays.

So to summarize, Gen-Probe had an excellent third quarter with strong growth in both our cynical diagnostics and blood screening businesses. We also secured new product approvals that we believe will solidify our market-leading positions and that reflect an improving track record with the FDA. With that preface, Herm will review our third quarter results in more detail as well as our updated guidance.

Herm Rosenman

Thank you Hank, and good afternoon everyone. As described in our press release, Gen-Probe once again had a very strong third quarter. Both clinical diagnostic and blood screen sales grew impressively establishing another quarterly record for overall product sales. Total revenues also hit a new high and earnings per share exceeded expectations as well.

Hank already covered the dynamics of product sales. So, let me begin by discussing collaborative research revenues which were $1.5 million for the third quarter of 2006, a significant decrease compared to $6.3 million in the prior-year period. As we explained in our press release, this decrease resulted almost entirely from the removal of roughly $4.4 million of West Nile virus cost recovery revenue from this line of the income statement. Instead of showing up in collaborative research revenues, all sales of our approved West Nile virus assay are now being recorded in product sales. And, obviously this contributed to our strong product sales growth in the quarter. We expect collaborative research revenue to approximate $1.5 million in the fourth quarter as well, principally representing shared funding from Chiron and Millipore. Royalty and license revenues were $7.3 million in the third quarter, a big increase compared to $1 million in the prior year period. As you know, we recorded $5 million of license revenue from Bayer in the third quarter, which reflects their first payment to us under the settlement of our patent infringement litigation. In addition, we recorded another $1 million from Tosoh under our 2004 cross-licensing. That agreement called for Tosoh to pay us an addition of one-time license fee if their rights were expanded to include TMA assays or targets that were previously assigned exclusively to Bayer.

Looking ahead to the fourth quarter, we expect royalty and license revenue of around $3.5 million. Although, it could be as much as $1 million higher if bioMerieux decides to exercise its final option to pursue additional disease targets using our patented technologies under our 2004 agreement.

Now, let me turn to gross margin on product sales which was 71.5% on a GAAP basis and 72.4% on a non-GAAP basis in the third quarter of 2006 compared to 69% in the prior year period. The implementation of FAS 123R added 700,000 to cost of good sold. Despite this non-cash charge which we expect to increase again in the fourth quarter as the related inventory is sold, the gross margin percentage improved primarily based on higher pricing associated with commercial sales of our West Nile virus assay in the United States and from lower sales of low margin TIGRIS instruments and spare parts to Chiron. I should mention that as of today we continue to sell spare parts to Chiron, but we expect Chiron to soon begin buying these spares directly from our contract manufacturer resulting in minimal revenue from spares in the fourth quarter. Research and development expenses for the third quarter of 2006 were $24.2 million on a GAAP basis and $22.2 million on a non-GAAP basis compared to $17.5 million a year ago. The implementation of FAS 123R obviously added about $2 million to R&D expenses. R&D expenses were also high in the quarter because we purchased a large batch of HPV oligonucleotides from Roche as we told you about during our last call and due to the timing of various other programs and expenses. I should mention that our HPV program is proceeding well and we remain on track to introduce CE mark product in Europe in 2008. We anticipate that R&D expenses will remain high in the fourth quarter, probably around $23 million on a GAAP basis as we produced HPV development lots, make final preparations for the ULTRIO TIGRIS filing, develop the ULTRIO postmarketing study and as other projects ramp up. Marketing and sales expenses were $9.5 million in the third quarter of 2006 on a GAAP basis and $8.7 million on a non-GAAP basis compared to $7.6 million last year. In addition to $900,000 of stock compensation expense under FAS 123R, the increases were due to higher sales commissions associated with our strong clinical diagnostics performance and to increase headcount primarily engineers in field service to support our growing fleet of TIGRIS instruments.

General and administrative expenses were $12.7 million in the third quarter of 2006 on a GAAP basis and $10 million on a non-GAAP basis compared to $7.8 million in the prior year period. FAS 123R therefore added $2.7 million to R&D expenses. In addition, as we mentioned in our press release, G&A expenses included a one-time $2 million payment to our outside litigation counsel related to the Bayer settlement.

All this nets out to third quarter earnings per share of $0.28 on a GAAP basis. On a non-GAAP basis excluding solely the effects of FAS 123R, earnings per share was $0.36, a very solid increase of 16% compared to the third quarter of 2005. Based on our strong third quarter results we are doing some positive fine tuning to our full year 2006 guidance, specifically we now expect total revenues in 2006 of $349 million to $352 million, up slightly from our previous guidance of $345 million to $350 million. I have already given you some pretty specific guidance on non-product revenue and if you back out those figures you will see that we are anticipating product sales to be fairly flat on a sequential basis compared to the third quarter, but up significantly compared to the prior year period. We anticipate that the fourth quarter will be affected by the forecasted decline in sales of blood screening instruments and the more gradual penetration of small international blood screening markets that has characterized the last several quarters.

Now let's turn to guidance for the expense lines, I'll give our GAAP guidance first then subtract FAS 123R expense to non-GAAP guidance. In terms of gross margin on product sales, we expect to see continued sequential improvement in the fourth quarter leading to full year guidance of approximately 69% on the GAAP basis, or 69% to 70% on a non-GAAP basis. As I've said before, we expect R&D expenses in the fourth quarter to be roughly 23 million on a GAAP basis, thereby bringing full year spending to between 24% and 25% of total revenues. On a non-GAAP basis, we expect R&D expenses to represent between 22% and 23% of total revenues. This guidance is unchanged from our first call and as we have said before we expect the percentage of revenue we spend on R&D to be similar next year as well.

Our guidance for the other expense lines is also unchanged. We continue to anticipate 2006 marketing and sales expenses equal to between 10% and 11% of total revenues on a GAAP basis, or 9% to 10% on a non-GAAP basis.

G&A expenses are expected to range from 12% to 13% of revenues on a GAAP basis or 10% to 11% on a non-GAAP basis. This leads us to our new earnings per share guidance of between $1.9 and $1.12 on a fully diluted basis which raises the low end of our guidance by $0.03. This obviously implies fourth quarter earnings per share of between $0.27 and $0.30. Our earnings per share guidance continues to be based on a weighted average share count of 53.5 million shares and a full year tax rate of around 37%. On a non-GAAP basis we expect 2006 earnings per share to be between $1.37 and $1.39 as we have lifted the low end of our guidance by $0.02.

So in summary, we were quite pleased with our performance in the third quarter particularly our underlying clinical diagnostics and blood screening growth. Based on these results, we have increased our revenue guidance slightly and tightened our earnings per share guidance in a positive direction. This concludes the financial section of our conference call, which I will now turn back over to Mike.

Mike Watts

Thank you Herm. We are happy to take your questions now. For Q&A we are joined by Larry Mimms, Executive Vice President of R&D; Bill Bowen, Vice President and General Counsel; Steve Kondor, Vice President of Sales and Marketing; and Lynda Merrill, Vice President of Investor Relationships. In order to ensure broad participation in the Q&A section 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 question.

Question-and-Answer Session

Operator

Thank you. At this time, we are ready to begin the question-and-answer session. (Operator Instructions). Our first question comes from Quintin Lai from Robert W. Baird.

Quintin Lai - Robert W. Baird

Good afternoon. Congratulations on a nice quarter.

Mike Watts

Thanks Quin.

Herm Rosenman

Thanks Quin.

Quintin Lai - Robert W. Baird

With respect to the post-marketing study that you and Chiron will be conducting, do you anticipate doing that on pools of eight or will you being doing around IDT?

Herm Rosenman

Larry Mimms will address that question Quin.

Larry Mimms

We have been discussing this with our customers and we are hoping to get some time with the FDA in the very near future to discuss the new answers to that trial, but you are right, we'll be looking at 1 to 8 and also IET as a part of that trial.

Quintin Lai - Robert W. Baird

And then as a follow up to that question, the R&D general guidance that you gave in 2007, does that include all the post-marketing studies that you need to do for ULTRIO?

Hank Nordhoff

Yes, it does Quintin.

Quintin Lai - Robert W. Baird

Thank you.

Operator

And your next question comes from Lee Brown from Merrill Lynch.

Lee Brown - Merrill Lynch

Good evening everyone, how are you?

Hank Nordhoff

Hello Lee, how are you?

Lee Brown - Merrill Lynch

Good, thank you. Just a quick question on West Nile virus, could you give us an approximate figure for what it contributed to product sales in the quarter?

Herm Rosenman

Well, as you know we don’t break product sales down that finely. What we do know however and we've said is that in collaborative research revenue under cost recovery pricing was about 4.5 million.

Lee Brown - Merrill Lynch

Just gross up there.

Herm Rosenman

Well, I'll leave that you.

Lee Brown - Merrill Lynch

Okay, now that’s fair enough, and well that’s sort of limits any growth potential there, do you expect that to increase going forward?

Herm Rosenman

Actually it doesn’t Lee because as we’ve said before, a large portion of the increased pricing is revised for increased cost recovery pricing. So for those customers that have a TIGRIS as a part of their system, we are not yet charging -- the Chiron's not yet charging full commercial pricing. So there is growth left in West Nile Virus that full commercial pricing kicks in post approval.

Lee Brown - Merrill Lynch

I guess, I was just giving you a high time on volume time, Herm. Fair enough, just one another question. The completed application for CE mark with the PCA3 expected to be launched later this month, any sort of ballpark figures for what you're expecting for that product in '07.

Herm Rosenman

No.

Lee Brown - Merrill Lynch

Fair enough, gentlemen. Thank you so much, I get off and I'll get back in the queue.

Herm Rosenman

Thank you, Lee.

Operator

Our next question comes from Bill Quirk, Piper Jaffray.

Bill Quirk - Piper Jaffray

Thanks, good afternoon and I would like to add my congratulations as well.

Herm Rosenman

Thank you.

Bill Quirk - Piper Jaffray

Hanks, first off I am seeing some really nice robust growth year to date in Chlamydia and gonorrhea side of the business in particular last two quarters. We certainly have our own theories hereon on what's driving that but we would love to hear your take there and I then I guess as a follow up, what do you see in terms of sustainability of these particular trends?

Herm Rosenman

I'll do better than giving my take, Bill I'll give you Steve Kondor, head of sales and marketing.

Bill Quirk - Piper Jaffray

Perfect, very well.

Steve Kondor

Hi, Bill. Let me answer your questions. There are a variety of factors are have lead to our strong performance thus far. First is the OPT claim that we got some Cytyc last year that's helping fuel our growth. TIGRIS certainly is a big driver for us as well in the STD side, but perhaps most importantly there is an overwhelming amount of published data out there showing the superior performance of our tests and we used that data very effectively and we've done a good job with it this year. As far as sustainability, I can tell you that little more than 70% of our STD]revenue comes APTIMA and however 50% of our units are split between APTIMA and PACE, and we still have a significant amount of opportunity therefore, conversions and growth coming from the PACE conversion.

Bill Quirk - Piper Jaffray

Understood, thanks for the color and I can sneak one additional one in here, Larry can you walk us through the clinical pathway for HPV, will this be a three-year follow-up trial and then, when should we think about this beginning?

Larry Mimms

I am sorry, a three-year follow-up, I didn't quite get the question, could you repeat it?

Bill Quirk - Piper Jaffray

Yes, I am just trying to get a little more color on the clinical trial for HPV, what we have seen at least from the market leader is that they ended up doing a three-year follow-up. I believe that Roche is also, it's just finished actually their three-year follow up as well. I am just trying to get a sense as to re-look at those clinical trials as kind of a benchmark for you are going have to go through as well or do you think perhaps that we can actually get this test in the US market with some type of abbreviated clinical trial?

Larry Mimms

I think right now we are in the midst of discussion with the FDA on the clinical trials design, so I would like to get some further clarification from the FDA before we comment on that. Certainly we want to go as expeditiously as possible and we will pursue it as approaches with the FDA.

Bill Quirk - Piper Jaffray

Okay, thank you very much.

Operator

The next question comes from Bruce Cranna from Leerink Swann.

Bruce Cranna - Leerink Swann

Hi, good afternoon guys.

Herm Rosenman

Hi Bruce.

Bruce Cranna - Leerink Swann

Just some color on the clinical number, where there TIGRIS sale in that whatever it was the 43 million number.

Herm Rosenman

Yes.

Bruce Cranna - Leerink Swann

Can you quantify that a lot for us?

Herm Rosenman

You know we don’t break it down that finely, Bruce.

Bruce Cranna - Leerink Swann

Just trying.

Herm Rosenman

I know you were.

Bruce Cranna - Leerink Swann

Okay, and then I am sure you don’t want to dwell publicly about some business leaving Quest and going to LabCorp, the Universal Health, or United Health, but can you give us some sense, we have been thinking about LabCorp in STD testing, do you guys have any sense there as to, I mean is that really amplified shop that is things that you sell after the (inaudible) has been converted and then, do you know broadly in the STD business what percent, you are currently vile, I know it's early, but I'll be interested in any commentary there?

Herm Rosenman

Oka. Steve?

Steve Kondor

Okay, let me a crack, there are a few questions in there. First off, I will say that we've said this in the past that we don’t comment on specific accounts that we have in terms of what's going on, but I can tell you that we have a very good relationship with Quest, they are important customers of ours and we expect that relationship will continue. With regard the LabCorp, they are also obviously very important customer of ours. They are not just an APTIMA amplified shop, but they still do a fair amount of PACE well. I'm trying to think of your other questions in there, can you repeat if I missed something?

Bruce Cranna - Leerink Swann

I was wondering just if you had any idea at this already stage about percent of CTGC out of the vile looking at your whole business -- all you wrap in a business, what percent -- do you think it is even at the point where it's ascertainable what percent of that testing are out of vile?

Steve Kondor

I don’t have that figure exactly, but what I can tell you is and maybe this will give you a little bit more color that about 10% of our volume today comes from LPT in terms of revenues and we expect that’s going to continue.

Bruce Cranna - Leerink Swann

Okay. Last question from me, Hank, just quickly on APTIMA HIV. Should we be thinking about this assay making it on the TIGRIS at some point?

Hank Nordhoff

Possibility. We don’t expect to gain a huge amount of revenue from this. We expect an awful lot will be in the public health sector. If the demand exceeds our expectations, there is always that possibility.

Bruce Cranna - Leerink Swann

Do you have any idea how big the confirmatory market is today?

Hank Nordhoff

I was -- suppose it's fairly small relatively speaking to the rest of our sales.

Bruce Cranna - Leerink Swann

Okay. No, I just -- I don’t know how big that market is so I was kind of curious.

Hank Nordhoff

Yeah. I wouldn’t increase your numbers because of that one person.

Bruce Cranna - Leerink Swann

Alright. Fair enough. Thank you.

Hank Nordhoff

Thanks.

Operator

And your next question comes from Peter Larson from Thomas Weisel Partners. Mr. Larson your line is open.

Peter Larson - Thomas Weisel Partners

Good afternoon.

Hank Nordhoff

Hi Peter.

Peter Larson - Thomas Weisel Partners

First question around the future growth for PACE what are the drivers for that growth?

Herm Rosenman

PACE?

Hank Nordhoff

PACE is not growing --

Peter Larson - Thomas Weisel Partners

No. You mentioned it was going to be growing in the future?

Herm Rosenman

No. The convergence would be going to APTIMA and PACE will be declining

Hank Nordhoff

May be if they [figure the LPT].

Larry Mimms

Yes. Peter if I can clarify that a little bit, what we meant to say there is I think the PACE in the quarter was down year-over-year about 15% or 16%, I think 16%; and we actually said that because we have been successful with converting some of the PACE business to APTIMA that that rate of decline would actually accelerate going forward for PACE.

Peter Larson - Thomas Weisel Partners

Okay. Thank you for clarifying that. And I wonder if you give us some more color on the industrial applications with GE and Millipore projects of any timelines?

Hank Nordhoff

I'll put Lynda Merrill on who manages that business for us.

Lynda Merrill

We are unable to actually give you timeline at this specific point, but I will say that both are progressing well. We just recently Millipore [extension] alpha testing with their product and although it's still early, they've been very, very pleased; they've all been very pleased with the results and feedbacks from that alpha testing.

Peter Larson - Thomas Weisel Partners

Okay, thank you. And then finally the rollout of West Nile virus, is that going to continue into Canada or other countries?

Herm Rosenman

As far as I'm aware we are doing an evaluation in Canada, but in terms of the rate of acceptance remains to be seen. There is a feeling Peter that if you were to [dispatch] for West Nile virus, many, not all of all the Mediterranean countries and others you would probably find it. Currently except for Canada and I guess some test that we shift to Australia in the event of a "outbreak" there. It's limited to almost exclusively to the US market.

Peter Larson - Thomas Weisel Partners

Okay, thank you so much.

Herm Rosenman

Welcome.

Operator

Your next question comes from Spencer Nam from Summer Street Research.

Spencer Nam - Summer Street Research

[Technical Difficultly] about the guidance given the strength of the Clinical Diagnostics segment and also the blood screening business seems to be doing well. How should we think about this sort of sequentially flat guidance right now? Should we consider that as a more of conservative approach or how do you guys take a look at that?

Herm Rosenman

Well Spencer, as we mentioned, the spares and also the TIGRIS instruments will be declining as we go out into the future. So that kind of takes care of the revenue line. As far as the EPS line where we did tighten that up a little bit on a positive basis, again we have got bits and pieces, our expense guidance was pretty consistent with the past, but we are running off of a big revenue base and we say 10% to 11% throughout the 13% even if there is a few hundred thousand in each of those lines and I am particularly thinking of research and development expense that would definitely tighten up our ability to increase EPS. So I wouldn't see this particularly the answer to your question, particularly conservative and certainly not aggressive.

Spencer Nam - Summer Street Research

Okay. Great, thanks. And then just a one quick question, I was wondering if you had any additional docs or details on the current blood business where the Novartis is -- kind of what stage Novartis might be in evaluating that business, do you see any sort of a signal that Novartis may want to part with that, I realized I probably should throw out this question to Novartis but I was just curious if you guys were seeing anything?

Herm Rosenman

We can probably give you the same answer that Novartis will. I think they are still evaluating it. We may expect some sort of an indication at the end of this calendar year and it may take later.

Spencer Nam - Summer Street Research

So you expect something -- some sort of a decision by the end of this calendar year?

Herm Rosenman

We may receive something at the end of the calendar year that was an indication we got from them very early this year.

Spencer Nam - Summer Street Research

I see.

Herm Rosenman

But it may take longer.

Spencer Nam - Summer Street Research

Okay, great. I appreciate it thanks.

Herm Rosenman

Thank you sir.

Operator

Our next question comes from Sara Michelmore from Cowen and Company.

Sara Michelmore - Cowen and Company

Hey, good evening everybody.

Hank Nordhoff

Hi Sara.

Sara Michelmore - Cowen and Company

I would like to get an update on the Panther instrument, you guys haven't talked about that recently and I wanted to know what kind of progress you were making with that instrument?

Hank Nordhoff

We are making nice progress Sara, it is still early, things are looking good. We expect that will play a very important role in clinical diagnostics and quite obviously also in blood screening in the smaller blood banks in Europe and we try to give you more color on that and at the analyst day which is coming up in December.

Sara Michelmore - Cowen and Company

Okay and as a follow-up to that, does the timeline of the Panther effect any of the timeline of the new assays, so in terms of some other formats that are going after for some of these more complicated assays, is the Panther going be required still to commercialize those products, things like PCA3 and HPV?

Hank Nordhoff

No the Panther will not be required.

Sara Michelmore - Cowen and Company

Okay. And in terms of that the PCA3 commercial program, I know that you have also been evaluating not only that assay as a single marker, but also in combination with other markers in an effort to improve the sensitivity and/or specificity of the assay, could you just comment on your latest thoughts in terms of PCA3 standalone assay versus a combine products for the US market?

Hank Nordhoff

Well, I think we have to realize that currently PCA3 is the best assay out there and it's going to remain I think that way for period of time. We have more than TMPRSS2, we have Amicar, we have rights also to [PC Gen 1] to ERG, and we are going through the evaluation of -- and we have to evaluate each one independently and then try to deposit what it will be like in combination with another one, it's going to take some time. I don’t think as much we can tell you more on the analyst day, but as we learn more about them, we will certainly mention that to you. I should say that we went out to the Prostate Cancer Foundation's Technical Day in Phoenix and Arul Chinnaiyan, the inventor if you know, the discoverer of TMPRSS2 gave a talk and several people talked about Nobel Prize. So that's a very interesting one for us and getting an awful lot of interest and probably would be the best guess from people outside the company to be combined with PCA3, but we haven’t yet made that determination.

Sara Michelmore - Cowen and Company

Okay, and you have not made a determination at this point that you would forgo a single marker launch of PCA3 in the US in favor of a combine launch since the timelines are not so close that you would be required to make that type of decision at this point?

Hank Nordhoff

We haven’t made a decision on that one way or the other.

Sara Michelmore - Cowen and Company

Okay. And lastly is there any update on and I assume this might be when since Panther timeline on quantitative HIV, HPV products that you got some rights back to from Bayer arbitration?

Hank Nordhoff

We only got rights back from Bayer for the qualitative.

Sara Michelmore - Cowen and Company

The qualitative.

Hank Nordhoff

And there is work that’s proceeding PACE on the quantization of our instruments.

Sara Michelmore - Cowen and Company

Okay. Thank you.

Hank Nordhoff

Thank you.

Operator

The next question comes from [Kenneth Levin] from UBS.

Kenneth Levin - UBS

Hey guys good afternoon.

Hank Nordhoff

Kenneth, how are you.

Kenneth Levin - UBS

I was wondering whether you could close in on anything about you have been hearing about Abbott's M200 platform, had any success in placing instrument in US so far?

Hank Nordhoff

Steve will address that Kenneth.

Steve Kondor

Well, Kenneth, as you may know that they are not approved in the US for CTGC on M200, we don’t have an additional information on that, you'll have to ask Abbott, as far as outside the United States, they did launch the M200 with CTGC. We have very little information about the product performance on the [M2000]. We'll keep our eyes and ears on lookout for information. What we do know is very early preliminary data that we've seen needs to be validated is that the performance suggests that it's probably no better than what is available in the marketplace today in terms of our competitors.

Kenneth Levin - UBS

Thanks, that was helpful. Also can you anticipate providing guidance for '07?

Hank Nordhoff

We do. Just not now. We expect to do it in February when we have our call on 2006 results.

Kenneth Levin - UBS

Alright, great. Thank you.

Mike Watts

Thanks Ken. Operator, I think we have time for one more question and then we've got some closing remarks.

Operator

At this time, we have no further questions standing by, sir. I'm sorry, we do have one. Mr. Tycho Peterson from J.P. Morgan.

Tycho Peterson - J.P. Morgan

Hi, thanks for taking the call. Congratulations.

Hank Nordhoff

I'll try to show you out there, Tycho.

Tycho Peterson - J.P. Morgan

Yeah, I appreciate that. Don't worry, I'll give you few soft balls here. First, I guess, do you have anymore visibility on the size of the surveillance study that needs to be done for ULTRIO and eSAS, and is it fair to kind of think that that’s two to four months in terms of how long that will take?

Hank Nordhoff

Where is the soft ball Tycho?

Herm Rosenman

Well, the guidance that we have is that we need to find yield comparable to that found by Roche in their trials and so in their trials they found two yield samples. So that’s more or less the target we believe for those studies.

Tycho Peterson - J.P. Morgan

Okay. One thing we noticed out at AABB was there were a couple of posters talking about West Nile kind of migrating towards seasonal IDT versus Minipool, I guess, migrating to seasonal Minipool in the off season. Is that something that you've kind of factored in, in terms of how you look at the market overall and how prevalent you think that might become?

Hank Nordhoff

Our indication is that there is talk but it's only talk and we anticipate that there will continue to be year around testing for West Nile.

Tycho Peterson - J.P. Morgan

Okay. I mean are you assuming year around in IDT when you say that?

Hank Nordhoff

No. The IDT gets triggered when there is a certain incidence rate or [problem] rate in a limited population, but in general the pooling will continue as far as we know into the future.

Tycho Peterson - J.P. Morgan

Okay. And then finally Hank, I know you have been spending a fair amount of time in Washington, how do you or what do you say to I guess in terms of Head of Regulatory Affairs and how much of a priority is that by now?

Hank Nordhoff

We have gotten some really impressive candidates. It is a priority because right now it is reporting to me and it's kind of a learning process for me. But we expect -- I think you can see that our relationship with the FDA has improved and I think that will only continue with the addition of a professional and we expect to have someone in place probably by the end of this year.

Tycho Peterson - J.P. Morgan

Okay, thank you.

Hank Nordhoff

Thank you Tycho and thank you for all your questions. To ramp up Gen-Probe had a strong third quarter with excellent underlying growth from both clinical diagnostics and blood screening. Both product sales and total revenues grew by 21% and established new records. We maintain our healthy net profit margins and EPS grew by a solid 16% on a non-GAAP basis, once again ahead of expectations. Not only was our financial performance solid on the third quarter, we believe that five new product approvals we have recently received have helped us improve our track record with the FDA, solidify our already strong competitive positions and enhance our future growth prospects. Before we sign off Mike has asked to remind you that our Annual Analyst Day is planned for the afternoon of Tuesday December 12 at the Grand Hyatt in New York. Please watch your email for more information and we look forward to see many of you there.

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

Operator

Thank you for joining today's conference call. All parties may disconnect at this time. Thank you.

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Source: Gen-Probe Q3 2006 Earnings Call Transcript
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