Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Gen-Probe Incorporated (NASDAQ:GPRO)

Q4 2011 Earnings Call

February 13, 2012 4:30 p.m. ET

Executives

Michael Watts – VP, IR and Corporate Communications

Carl Hull - Chairman and CEO

Herm Rosenman - SVP, Finance and CFO

R. William Bowen - SVP, General Counsel and Secretary

Eric Tardif - SVP, Corporate Development and Marketing

Kevin Herde - VP, Finance, and Corporate Controller

Analysts

Dave Clair - Piper Jaffray

Jon Groberg – Macquarie Capital

Bill Bonello – RBC Capital Markets

Vijay Kumar - Deutsche Bank

Dan Leonard – Leerink Swann

Jon Wood – Jefferies & Company

Ashim Anand – Natixis Bleichroeder

Quintin Lai - Robert W. Baird

Isaac Ro – Goldman Sachs

Tycho Peterson – JPMorgan

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session. (Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I will now introduce to your host for today’s conference Mr. Mike Watts, Vice President of Investor Relations. Sir, you may begin.

Michael Watts

Thank you, Sherry and good afternoon everyone. I am pleased to welcome you to this conference call to discuss our fourth quarter 2011 business results. A press release announcing our results was issued today just after 4 p.m. Eastern Time and is posted on our website at www.gen-probe.com.

After our prepared remarks today, we’ll take your questions for the balance of an hour, then post our script on our website for your convenience and reference.

Before we begin, let me review our safe harbor policy. Forward-looking guidance – financial or otherwise – is only provided on conference calls or in our press releases. Any statements about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are forward-looking statements. For example, statements concerning 2012 financial guidance, financial condition, regulatory approvals and timelines, the development and commercialization of new products, future results of operations, growth opportunities, plans and objectives of management, market trends, 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 most recent Form 10-K, and all subsequent periodic reports. Copies of these reports are available on our website, at www.sec.gov and upon request. Gen-Probe assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances occurring after this call or to reflect the occurrence of unanticipated events.

In addition, our presentation today includes information presented on a non-GAAP basis. We believe these non-GAAP financial measures provide meaningful supplemental information regarding the company’s performance by excluding certain expenses and other items that may not be indicative of core business results. We refer you to the press release we issued this afternoon, which is available on our website, for a reconciliation of the differences between the non-GAAP presentations and the most directly comparable GAAP measures.

Now I’d like to turn the call over to Carl Hull, Gen-Probe’s Chairman and CEO.

Carl Hull

Thank you Mike, and good afternoon everyone. I’m pleased to report that Gen-Probe finished 2011 strongly. In the fourth quarter, revenues were in line with our expectations, and earnings per share came in a little better than we had forecast.

Clinical diagnostics revenues continued their solid growth in the quarter, led by the APTIMA women’s health portfolio, while sales of blood screening products increased significantly as supply chain shipments rebounded.

Just as important, we enter 2012 with excellent momentum. We have three important new product launches – PANTHER in Europe, and Trichomonas and HPV in the U.S. – that are off to good starts around the world, with two more expected soon, pending FDA approval.

In my remarks today, I’ll discuss our revenue results for the fourth quarter, and spend a few minutes on our near-term growth drivers. Herm will then discuss fourth quarter expenses and our 2012 guidance. In that context, he will highlight future investment priorities that we believe will drive sustainable organic growth for the next several years.

You’ll notice a consistent theme in our remarks today, a focus on one unique, differentiating capability that plays a role in almost all our past successes and future plans. And that’s our ability to deliver automation to our laboratory customers. For example, blood banks around the world continue to value the automation and process controls of the TIGRIS system, which led to significant sales of instruments to Novartis in the fourth quarter.

The automation of TIGRIS is also driving continued growth in sales and market share for the APTIMA Combo 2 assay, more than a decade after we launched the product for STD testing. At the same time, TIGRIS automation is enabling adoption of two new products, our APTIMA Trichomonas assay and our APTIMA HPV test, as we begin to see the early benefits of adding menu to a large installed base of instruments. 2012 will be a year in which our razor-razor blade business model really begins to pay off in clinical diagnostics.

Finally, the automation of PANTHER – which enhances what we have accomplished with TIGRIS, but at a significantly lower cost – is making good inroads in Europe. This motivates us to add new capabilities and assays that will drive overall company growth in the medium-term.

These new projects include developing viral load assays using real-time TMA for the current PANTHER system, and adding real-time PCR chemistry for the next-generation PANTHER instrument. Both these efforts will be key R&D programs in 2012, adding expense in the short-term but also the promise of sustainable organic growth for years to come.

Now, let’s get into our fourth quarter results, which I will discuss on a non-GAAP basis. Product sales established a new record of $155.2 million in the quarter, up 18% compared to the prior year period. The strong growth in product sales led to total revenues of $158.2 million in the quarter, another all-time high, and consistent with the forecast of $157 million to $162 million we provided in our last call.

Herm will discuss the various expense components, but let me jump down to the bottom line, where a healthy operating margin of almost 29% and a favorable tax rate led to non-GAAP earnings per share of $0.72, another record and ahead of our last guidance range, which was $0.66 to $0.70 per share.

Turning to the components of product sales in the fourth quarter, clinical diagnostics sales were $90.6 million, up a strong 13% compared to the prior year period. Growth was again led by our APTIMA Combo 2 assay for detecting chlamydia and gonorrhea, which grew at a low double-digit rate globally as a result of continued market share gains. Based on recent commentary from our largest competitor, we roughly doubled their growth rate in the quarter.

As I mentioned earlier, TIGRIS has been, and continues to be, a key contributor to the success of APTIMA Combo 2. We now have placed approximately 275 TIGRIS systems at clinical diagnostics customers since the instrument was launched in early 2004, and the sustained level of interest from potential new customers continues to surprise us on the upside.

But instrument placements don’t tell the full story of how TIGRIS creates value for customers and shareholders. Since we place most of our diagnostics systems on a reagent rental basis, we generate the bulk of our revenues from assay pull-through. The extremely high throughput of the TIGRIS instrument helps it shine in this regard. The average annual revenue stream on a diagnostics TIGRIS placement is now about $575,000 a year, a number you won’t find anywhere else in the molecular diagnostics industry. Importantly, this level of pull-through still leaves us with plenty of capacity to add our Trichomonas and HPV tests to the daily menu.

Let’s discuss those new products now, starting with our APTIMA Trichomonas assay. As we said at a recent investor conference, more than 80 customers in the United States, or about 40% of our TIGRIS accounts, have adopted or are evaluating our Trichomonas assay roughly nine months after launch.

Importantly, assay revenue is just now starting to accelerate, as our lab customers are very early in their own market development efforts. Trichomonas sales increased sequentially in each quarter of 2011 and added nearly a point to total product sales in the fourth quarter.

In addition, January represented our best month of Trichomonas sales, continuing last year’s momentum and giving us confidence in our trajectory for 2012. As a point of reference, it took approximately 23 weeks after FDA clearance for us to record our first $1 million in U.S. Trichomonas sales. The second million took less than 10 weeks, while the third million took less than eight weeks. This defines a sales chart that is progressing in the proper direction, up and to the right.

We have similar high hopes for our APTIMA HPV assay, although our launch is at a much earlier stage since FDA approval was just granted in the fourth quarter. We spent a fair amount of time in our last call discussing the advantages of our next-generation HPV assay, so I won’t repeat that today. Suffice it to say that our key message of about 25% fewer false-positive results is resonating nicely with customers.

I will remind you, however, that our APTIMA HPV assay also runs on the TIGRIS system, which remains a powerful draw for high-volume customers who are eager to improve their own operations. Our primary competitor in this arena has said that 90% of their HPV business comes from large labs. This puts them squarely in our sights, since many of these customers already have one or more TIGRIS systems for chlamydia and gonorrhea testing.

Now, with the approval of our HPV and Trichomonas assays, these customers can test hundreds of samples daily with any of our three assays on the TIGRIS system. This testing occurs from the same primary sample, with less than an hour of hands-on time, boosting efficiency for the lab within a single shift. No other company can offer this kind of synergistic women’s health menu today, let alone the ability to run all the assays on a single automated platform.

To extend our leadership in automation and to further leverage our core instrument development capabilities, we recently announced efforts we have underway to develop a small, standalone instrument to facilitate the de-capping and transfer of liquid-based cytology specimens to the TIGRIS, PANTHER and other systems. We expect this new instrument to be commercially available next year.

Overall, we are extremely pleased with customer interest in our HPV value proposition, which is based on TIGRIS automation and substantially improved performance as a next-generation screening assay. Many large customers are evaluating our product, and we have already recorded our first commercial sales, a couple of months sooner than we expected. We look forward to providing you with more color as the launch progresses.

To wrap up our discussion of clinical sales in the fourth quarter, PRODESSE revenues were up slightly compared to the prior year, but short of our expectations, as the flu season got off to a very slow start and remains mild thus far.

On the other hand, our LIFECODES transplant diagnostic products performed well in the quarter. The former GTI Diagnostics, which we acquired in December of 2010, added a few hundred basis points to product sales, as expected. The financial benefits of this acquisition have now annualized, so our growth estimates for 2012 are fully organic.

Now let’s turn to blood screening revenue in the fourth quarter. Sales were $62.1 million, up 30% compared to the prior year period. As we forecast in our last call, this resulted primarily from increased shipments of both assays and instruments to Novartis Diagnostics, our commercial partner in blood screening. These higher shipments essentially compensated for supply chain fluctuations that hit our results earlier in the year. Compared to the prior year period, approximately half of the $15 million improvement came from higher assay shipments, and half from increased instrument orders, primarily reflecting continued strong placements in China and other emerging markets.

We were not overly concerned with the negative supply chain fluctuations earlier in 2011. So, by the same token, we don’t want to overstate the importance of the positive uptick in the fourth quarter. Underlying our strong reported number, global donations were essentially flat in the fourth quarter, consistent with the market environment we have described over the last few years.

Before wrapping up, let me quickly say that we continue to make progress with the FDA on the two major products still under U.S. regulatory review, our PROGENSA PCA3 assay and the PANTHER system.

On PCA3, we think we are close to approval after a long review process that is typical for oncology products. We believe our PCA3 assay will add significant clinical value for clinicians and patients who are contemplating the need for a repeat prostate biopsy.

Regarding the PANTHER submission, which was filed in May of last year, our best guess for clearance continues to be sometime in the first half of 2012. This would be well within normal bounds for a complex instrument 510(k).

Outside the United States, we feel very good about our progress with PANTHER. We met our goal of placing a few dozen instruments internationally in 2011, and reliability remains high. Assay revenue is picking up as customers complete validations and more systems come on line for regular testing. PANTHER-related revenues added more than 100 basis points to product sales in the fourth quarter, even excluding instrument shipments to our commercial partners Novartis and Roka.

Due in part to the positive customer feedback we have received on PANTHER, we are aggressively pursuing avenues to increase the depth of menu on the system, and to broaden its appeal to potential customers. Customers love PANTHER, and our engineering and marketing teams have embraced the challenge of increasing its utility further.

For example, our development of viral load assays for the PANTHER system is proceeding well. These tests, which employ real-time TMA chemistry, will be our largest assay development program over the next couple of years, utilizing many of the dollars that were allocated to HPV. Our viral load assays remain early in development, but we continue to expect our first international product introductions around 2014.

Another way we are striving to increase the reach of PANTHER is by adding real-time PCR capabilities for the next-generation system. The ability to combine isothermal amplification with thermocycling on a single instrument is a significant technical accomplishment, one that reflects the creativity, innovation and expertise of our instrument development team.

Initially, adding real-time PCR to the PANTHER system will provide a proprietary platform for our PRODESSE respiratory assays in the 2015 timeframe. As PCR-based flu customers install the next-generation PANTHER system, they can also run APTIMA women’s health assays, increasing potential pull-through. Further down the road, we plan to develop additional assays that will enable us to participate in emerging markets that historically have been dominated by PCR chemistries.

Strategically, we believe that adding viral load assays and PCR chemistry to PANTHER will provide important sources of organic growth over the medium term. Our successful ongoing launches of PANTHER, Trichomonas and HPV have reminded us how much fun it is to have new products, and our R&D investments in 2012 are a down payment on maintaining that continuous flow of new product innovation in the future.

Before I turn the call over to Herm, let me wrap up by re-emphasizing the commercial value of our well-established lead in automation.

On the foundation of TIGRIS, Gen-Probe has built two vibrant, market-leading, highly profitable franchises in women’s health testing and blood screening. Our financial performance in the fourth quarter of 2011 speaks to the success of our strategy.

2012 and 2013 will be years in which we strengthen these franchises with the new assays that you have heard a lot about – HPV and Trichomonas – and the new instrument – PANTHER – that extends our competitive advantage in automation. These launches are proceeding well, and we expect them to underpin low double-digit organic growth this year, an acceleration compared to the recent past.

At the same time, we are acutely focused on maximizing the value of PANTHER to customers and shareholders. For example, the R&D investments we are making today will begin to pay off in 2013, 2014 and 2015, as we introduce additional assays and capabilities for the PANTHER system that have the potential to drive sustainable, profitable growth for the foreseeable future.

As I hope you can tell, we’re pleased with how we finished 2011, excited about our prospects for double-digit growth in 2012, and confident that the years beyond hold great promise as well.

Now I’d like to turn the call over to Herm. Herm?

Herm Rosenman

Thank you, Carl, and good afternoon everyone. I’ll start by reviewing collaborative research revenue, which was $1.4 million in the fourth quarter, down 62% from the prior year period. This decrease was due, as expected, to Novartis hitting their cap for reimbursement of PANTHER blood screening development costs earlier in 2011.

Royalty and license revenue was $1.6 million in the fourth quarter, down 16% from the prior year period due mainly to lower royalties from Novartis related to the plasma testing market.

Now let me turn to quarterly expenses, which I will discuss on a non-GAAP basis. Gross margin on product sales was 66.7% in the fourth quarter, compared to 69.5% in the prior year period. As we forecast in our last call, gross margin was down due to increased sales of low-margin TIGRIS instruments to Novartis. These instrument sales, of course, are a necessary precursor to higher-margin assay sales down the road.

If you back out the effects of all instrumentation from our fourth quarter results, gross margin on product sales would have been 72.8%, 60 basis points higher than the comparable number from the prior year period. Research and development expenses for the fourth quarter were $28.2 million, up 5% compared to the prior year period due primarily to the addition of GTI’s R&D programs.

Marketing and sales expenses in the fourth quarter were $17 million, up 13% compared to the prior year period, due mainly to strategic investments in our European commercial infrastructure and the addition of GTI’s cost structure.

General and administrative expenses were $15.6 million in the fourth quarter, 6% higher than in the prior year period, again due mainly to the addition of GTI’s cost structure. Total other income in the fourth quarter was $400,000, roughly half the level of the prior year period. This decrease, which we forecast in our last call, was due mainly to foreign exchange losses.

Our effective tax rate in the fourth quarter of 2011 was 27%, better than we expected primarily due to the utilization of foreign losses and higher ex-U.S. sales. Obviously this translated into a nice benefit on earnings per share in the quarter.

Our weighted average share count in the fourth quarter was 46.9 million, lower than the prior year period due to the completion of our $100 million buyback. So, on the bottom line, all this nets out to $0.72 of non-GAAP earnings per share in the fourth quarter, a new record and ahead of the guidance we gave in our last call.

Cash conversion was strong in the fourth quarter. We generated operating cash flow of $53.4 million in the quarter, while spending $7.2 million on property, plant and equipment, leading to record free cash flow of $46.2 million.

Moving on to the balance sheet, we closed 2011 with $368 million in cash, cash equivalents and marketable securities, lower than at the end of 2010 due to significant stock repurchase activity. Yet we still maintain about $2.50 of net cash and equivalents per share. This is net of $248 million of short-term debt, on which we pay interest at less than 1% pre-tax.

Now I’d like to turn to our 2012 financial guidance.

As I said in our press release, we expect to return to low double-digit organic revenue growth based on the new product launches that Carl discussed. We forecast a similar rate of bottom-line growth, as we invest in commercial resources to ensure the product launches are successful, and R&D projects that will drive our next wave of growth. We expect to achieve this level of bottom-line growth despite headwinds from unfavorable foreign exchange rates, lower non-operating income, and higher taxes.

I will provide our 2012 guidance on a non-GAAP basis that excludes acquisition-related intangibles amortization, other transaction-related expenses, and restructuring charges. Full GAAP guidance is also included in our press release.

Beginning with product sales, we forecast that blood screening revenues will grow slightly in 2012, driven by progress in emerging markets, Novartis’s entry into plasma testing, and a contractual step-up of 100 basis points in our share of collaboration revenues related to hepatitis C-containing assays.

In clinical diagnostics, we expect our APTIMA Combo 2 assay to continue growing solidly in 2012, benefiting from market share gains on TIGRIS, as well as the PANTHER launches in both Europe and the United States. We also forecast good growth from our LIFECODES transplant diagnostics franchise.

Last but certainly not least, we anticipate a few percentage points of incremental product sales growth from our new assays, namely trichomonas, HPV, and PROGENSA PCA3, which will help us cross into double-digit territory overall. Obviously these contributions will be greater in the second half of the year than the first, based on anticipated approval timing and the resulting sales ramp.

Collaborative research revenues should be higher than in 2011, based on a $5 million milestone that we anticipate earning from Novartis in the second half of 2012, when the PANTHER system is launched internationally for blood screening. Royalty and license revenues are forecast to be similar to 2011 levels.

All this adds up to our total revenue guidance of $630 million to $655 million, which represents about 11.5% growth at the midpoint, an acceleration compared to 2011.

Working down the income statement, we forecast product gross margin of between 68% and 69.5% in 2012, roughly the same as last year. Foreign exchange is expected to be a headwind to gross margin at current levels, masking the underlying improvement that we expect to see on our core products.

As Carl alluded to, both research and development and sales and marketing expenses are expected to increase substantially in 2012. In the case of R&D, significant resources will be devoted to the two new instrument programs that we announced in January, to the viral load assays on PANTHER, and to complementary women’s health assays such as HPV genotyping and Trichomonas on PANTHER.

In addition, we are still spending on the mandatory long-term follow-up of women enrolled in our APTIMA HPV trial. Together, we forecast that these projects will cause R&D expenses to increase by more than 10% in 2012.

We recognize this is a significant investment, but we believe it is warranted in 2012 by both discounted cash flow and strategic analyses. In addition, we remain committed to achieving significant leverage from our R&D spend over time.

In terms of sales and marketing, we have said many times before that this expense line will grow faster than revenue in 2012, as we invest in European commercial expansion and successful launches of our new products. We only get one chance to launch Trichomonas, HPV, PANTHER and PCA3, and we want to do it right.

We expect to achieve good leverage from G&A expense in 2012, even as we incur significant legal costs associated with our patent infringement lawsuit against Becton-Dickinson. All this should lead to an operating margin that is fairly similar to 2011 levels, ranging from 26.5% to 28%.

Below the operating income line, we expect some headwinds that will drag on earnings per share growth in 2012. Specifically, we forecast a significant decrease in other income, due to lower cash balances and the absence of realized investment gains that added nearly $6 million to our results in 2011. You might recall that in our last call, we guided to a significant drop in other income in the fourth quarter of 2011, and forecast that this run-rate would continue into 2012.

In addition, our tax rate is likely to increase to between 30.5% and 32.5% in 2012, as we cannot count on releasing reserves tied to expiring audit statutes, which benefited us in 2011. Please note that our guidance assumes that the federal R&D tax credit will be reinstated late in 2012, as it has been in recent years. This means our tax rate will be higher in the first three quarters of 2012 and lowest in the fourth quarter.

We anticipate a diluted share count of roughly 47 million shares, as we do not currently have an authorized share repurchase program.

All this leads to our 2012 earnings per share guidance of between $2.50 and $2.68 on a non-GAAP basis. At the midpoint, this represents approximately 11% growth over 2011, despite lower non-operating income and higher taxes.

In addition, I should point out that our guidance incorporates recent foreign exchange rates, which are subtracting about $4 million from our anticipated 2012 revenues and roughly $0.05 from EPS. So on a constant currency basis, assuming the same rates as in 2011, our 2012 guidance would be that much higher. It appears that recent foreign exchange rates have not been incorporated into most Wall Street estimates, given their inherent volatility.

In terms of the pacing of quarterly results, we anticipate a steep sequential ramp in revenue and earnings as the year progresses. The primary drivers of this are new product sales that are expected to increase over the course of 2012, and certain expenses that are front-end loaded.

Specifically, in the first quarter we expect revenues of between $148 million and $152 million. This is much less than the fourth quarter of 2011 primarily due to lower anticipated shipments of blood screening assays and instruments to Novartis. In addition, we’re not getting much help from the flu season, which is very light to date.

Operating expenses are forecast to increase materially in the first quarter, again due to the timing of discrete R&D projects and other activities, leading to earnings per share of between $0.48 and $0.52 in the quarter.

In closing, let me summarize the financial section of our conference call by saying that we had a solid finish to 2011, with revenues in line with our expectations and earnings ahead of forecast. We enter 2012, an important and exciting year for the company, with the wind at our backs due to several new products that are performing well so far. We believe these new products will help us return to double-digit growth on the top line this year. At the same time, we are very deliberately choosing to invest in NPV-positive R&D projects that will drive our next wave of growth. We anticipate double-digit earnings growth at the midpoint of our guidance range, despite headwinds from foreign exchange rates, lower non-operating income, and a higher tax rate.

Now I’d like to turn the call back over to Mike.

Michael Watts

Thanks Herm. I’d like to introduce the members of management who are joining us for Q&A today. We have Bill Bowen, senior vice president and general counsel; Eric Tardif, senior vice president of marketing and corporate development; and Kevin Herde, vice president of finance and corporate controller.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Bill Quirk of Piper Jaffray. Your line is open,

Dave Clair - Piper Jaffray

Yeah, good afternoon everybody. It’s Dave Clair here for Bill. I guess, the first question, given that we are three months into the HPV launch here, is there any change to your pricing strategy, and what are you hearing feedback from accounts so far?

Carl Hull

Well, Dave, we've pretty much made it a practice not to discuss our pricing strategies in public forums. I think it’s fair to say that you’re seeing a market space that has had increased competition over the last nine months with the entrance of Roche and us into a space that previously was really dominated by one party. I think that you could expect different people have different reactions. Our point of view is we have a differentiated offering both in terms of automation and assay performance and we intend to capture the value associated with that differentiation.

Dave Clair - Piper Jaffray

Okay. Then a quick follow-up here on guidance. What are the assumptions between the high end and the low end? What’s the delta there?

Herm Rosenman

Well, as we’ve said in the past, the way we handle the guidance is we generally take a look at the upside, downside. We do our forecasting from the bottom up and then we take a look at from the top down and what the ranges could be for things like foreign exchange effects and the like. That’s pretty much how we go about doing on that.

Operator

Our next question comes from Jon Groberg of Macquarie Capital. Your line is open.

Jon Groberg – Macquarie Capital

Hi, thanks a million for taking the questions. I guess, Carl, obviously if you look at the guidance on what you are expecting for the year, the big question is obviously the significant ramp that you must be expecting in the second half. Can you maybe talk a little bit about – a lot of that would be, I guess, trich that you alluded to in HPV. So you have the TIGRIS instruments there, you have to run them in batches, obviously very automated for the batches that you run. Can you maybe just talk a little bit more specifically about your customers that are running that are doing this or running trich, kind of the feedback they are getting? And just what gives you the confidence that you are going see to that big ramp in the second half?

Carl Hull

Sure. Jon, I think there are several elements to it. First, it’s just practicality with introducing new products and building momentum. And take the example I gave of the doubling time, if you will, for trich that we experienced this year in the United States, gives you a good example of that. So we get a couple of things working in our favour. The first is the PANTHER installed base in Europe. Those instruments, I said, have been coming out and getting validated, coming fully operational. So those start to kick in and we expect to continue placements in Europe and those will begin to generate revenue in the back half of the year.

As we launch PANTHER in the United States, we’re really not expecting that in and of itself, to be a big contributor this year while it’s a very significant contributor in ’13, and ’14 as those instruments through just like in Europe come more mature placements and are really up and running. As we look at trich, we’re just seeing continued strong interest, especially from major laboratory customers. They have a sales channels that to get the word out and develop the market and develop the demand. And that effort is ongoing. As I said, we’re very pleased with the results thus far and the discussions I’ve had with many of our major customers directly, that are thrilled with the product offering and it allows them to expand the menu on the services that they offer to customers. So you combine that with trich, you look at HPV, we do think of HPV in the United States as likely to be a discontinuous variable. In other words, it’s going to be a couple of big accounts that will influence the overall shape of the marketplace. So very hard to project those kind of things but they won’t have it right away. They will take some time to implement.

So that’s kind of how we see it.

Jon Groberg – Macquarie Capital

So just as a follow-up, just to be clear. So I think in the past, you thought maybe HPV within a year or so, you could get to kind of that similar market share that Hologic had gotten. Just to be clear, it sounds like you are saying, it could be a little bit lumpy as you go throughout the year. And then just kind of follow up here, getting the revenue numbers out there. For PANTHER for blood screening, do you anticipate that internationally, are you getting sales for that in 2012? Thanks.

Carl Hull

Let me parse on a couple of different things to answer your question kind of working backwards. With PANTHER for blood screening, I don’t think you will see significant assay revenues in 2012. There is, however, $5 million milestone payment once it’s commercialized for blood screening and that is baked into our numbers.

With respect to HPV, if I wasn’t clear, we do expect to see a number of accounts adopting. I mentioned earlier, we’ve already achieved the first commercial revenues and have customers ordering and reordering. We are quite pleased with that at this stage of the launch. So I think that will go on throughout the course of the year. But what I was referring to is that you may see really big upsides against our baseline forecast if a big customer too decides to move in our direction. But again, all that stuff is likely to be back-end loaded.

Operator

Our next question will come from Bill Bonello of RBC Capital. Your line is open.

Bill Bonello – RBC Capital Markets

Just a question on, maybe a follow up on the guidance. And just trying to understand a little bit more the gross margins guidance. Maybe you can give us a quantification of sort of the basis point impact of the currency, that impact on gross margin in 2012?

Herm Rosenman

It’s within our range of 68% to 69.5% gross margin. We’re basically looking and sensitize it $5 million or $10 million, I am not going to tell you where but some number like that on either side. And so that’s included in the range that we have out there, Bill.

Michael Watts

Hey, Bill, it’s Mike. So that FX effect, as you might recall, falls straight to gross margin. So that’s the single biggest item affecting the gross margin percentage for 2012.

Herm Rosenman

In addition, we also have high amount of instruments in there as well. So that’s going to affect gross margin too. In our prepared script, you could see there was a couple hundred basis points between the net margin that is reported and what it would have been if you take instruments out. And there’s going to be significant instrumentation every year.

Bill Bonello – RBC Capital Markets

Okay. That’s helpful. And just in terms of a follow-up on the Q1 revenue guidance. It looks like you are looking for sort of exceptionally low growth at the low end of the guidance, and appreciate a limited flu season and the ramp in the back half of the year. But what else in Q1 would make growth just so much lower than what it’s been the last many quarters?

Herm Rosenman

Well, certainly for the last quarter, our sequential basis is a huge amount of blooding screening assay revenue and instrumentation. That’s going to be the biggest one.

Bill Bonello – RBC Capital Markets

Right, but it’s lower than sort of where you’ve been trending prior to that.

Herm Rosenman

Well, as we said in the prepared script, Bill, that flu has been very weak, and certainly the biggest one I can think of, top of my head is going to be Novartis.

Operator

Our next question comes from Vijay Kumar of Deutsche Bank. Your line is open.

Vijay Kumar - Deutsche Bank

Hi, thanks for taking my question. So I guess, my first one was in CT/NG, I know that Roche recently had their array approved, could you guys talk about sort of what you are seeing in that marketplace?

Carl Hull

Yeah, Vijay, I can give you a little color and maybe I will ask Eric to step in here as well. Roche has not, as you know, been a significant factor in the overall market for CT/NG here in the United States. Obviously much different outside the United States where they had a historically strong position. Let me ask Eric to tell you what we understand about the most recently cleared assay.

Eric Tardif

Yeah, and thanks for the question. It’s our understanding that for now at least that their CT/NG assay is cleared on a limited set of sample types. And so that clearly limits the uptick that they can target and also they continue to be at a disadvantaged from an automation point of view. So we’re watching the development but right now it does not appear to be a significant commercial impact for us.

Vijay Kumar - Deutsche Bank

Okay. And my follow-up was or I guess, my next question was on cap deployment. And could you talk about what the focus will be in ’12? I know that you are ramping up on investments, building up your commercial organization. But like you said, you’ve fulfilled your existing buyback programs. So what’s the focus?

Carl Hull

Yeah, Vijay, I think that our philosophy, if you will, remains unchanged here. We’ve demonstrated the board’s view that there is really two major issues of our strong operating cash flow. The first of those is clearly strategic acquisitions when they make sense to us. Eric and his team are active in that area, scanning the opportunities that exist. And failing opportunities to utilize the cash on that fashion we think the buybacks have made historical sense. And I think that philosophy is going to stay that way for the time being.

Operator

And our next question comes from Dan Leonard of Leerink Swann. Your line is open.

Dan Leonard – Leerink Swann

Thank you. Can you talk a little bit about the performance of APTIMA COMBO 2 in the U.S. during the fourth quarter? Was it still growing, is there still PACE conversion or competitive takeaways to be had in the U.S. market?

Carl Hull

Why don’t I ask Mike to answer that for you?

Michael Watts

Yeah, Dan, APTIMA had another good quarter in the U.S. and internationally, up double digits in the U.S. Some of that, of course, is PACE conversion. The PACE is a pretty small product left for us right now. The biggest chunk was market share gains. So we’re enthusiastic about that.

Dan Leonard – Leerink Swann

Okay, thanks Mike. And then my follow-up on the guidance for 2012. Herm, I know you have a lot of visibility in your blood business than you used to. Is there anything we should be aware of in terms of quarterly cadence of that blood revenue throughout 2012?

Herm Rosenman

We hope not. Yeah, we think that’s ramped back up to normal inventory levels.

Carl Hull

And Dan, I think we’ll pay as close attention to that as we can. It is a complex logistical relationship that we have with our partner. And we know what to be paying attention to it.

Operator

Our next question comes from Jon Wood of Jefferies. Your line is open.

Jon Wood – Jefferies & Company

Hey thanks a lot. It doesn’t sound like you rolled up your guidance this way Herm but I will ask this anyway. If PCA3 and PANTHER are not approved in the U.S., can you still hit the bottom end of your revenue forecast for the year? And then I will just do my follow-up quickly. Can you give us cash flow outlook for ’12, CapEx included if you have it? Thank you.

Herm Rosenman

Well, our guidance rolls up with assumptions that – so I think we implied that in our prepared comments are approved, we said probably for the instrument PANTHER by mid-year. And PCA3 we talked already in the past about discussing labelling with the FDA and that normally implies you’re getting closer to the finish line.

In terms of cash flow, I mentioned a few times in the $13 million to $15 million of cash flow per month. We tend to spend roughly in the $40 million to $50 million range per year, which gives you enough to work with, Jon.

Carl Hull

Hey, Jon, it’s Carl. I will be a bit little bit more direct with the first part of your question. I think the answer is yes. We can’t do that but you have to temper that right. As I said earlier, PANTHER contributions to assay revenues in the United States given an assumption of clearance in the first half would not be a terribly significant overall whereas it’s much more important in 2013. And as you do know, we continue to sell PCA3 as an analyte specific reagent here in the U.S. and kitted product outside the United States. So there will be base business that goes on. It’s not like it’s going from zero to some big number.

Operator

Our next question comes from Ashim Anand of Natixis. Your line is open.

Ashim Anand – Natixis Bleichroeder

Thanks for taking my questions. I was wondering what was the growth rate of revenue in Europe for 2011?

Herm Rosenman

Yeah, in Europe for – I will do for diagnostics, was in a high single digits.

Ashim Anand – Natixis Bleichroeder

So in terms of guidance, to the extent you can comment, obviously you guys have been doing extremely well in Europe, high teens growth. However, the situation in Europe has changed, however it’s very demographic based, southern Europe, northern Europe et cetera. So to the extent Europe affects your guidance if you can comment on that.

Michael Watts

Ashim, it’s Mike. Let me just clarify one thing too on the numbers. So sorry, I think we’re going back and forth between blood screening and diagnostics. But diagnostics ex-U.S. which is how we look at it internally was up around 20% for the year, so nice strong growth there.

Ashim Anand – Natixis Bleichroeder

Okay. So overall how do you guys are thinking about Europe this year in terms of your guidance? In terms of the various variables where does it stand, obviously there are new products and stuff like that. So just if you can give us a general commentary how much you are worried about Europe or you’re not worried about Europe. So just general – anything general you can comment on?

Carl Hull

Ashim, it’s Carl. I’ll take a shot at it. I think for us it was sort of the good news, bad news, right. The good news is we didn’t have a whole bunch of business in Europe prior to this that was at risk. That's equally the bad news. So we've been trying to build it out.

I think from the point of view of headwinds, you’re hitting on the things that are probably much more significant to our business substantially than in the United States but on much, much smaller base. So I would tell you that as we look at it right now, we think that the growth that we are seeing with APTIMA COMBO 2 across the board, coupled with the launch of PANTHER and the menu expansion of PANTHER should be two good drivers even in the face of economic headwinds overall. And keep in mind that we are not operating a capital intensive model where it’s necessary for customers who are cash-starved to come up with significant investment to adopt our technologies. So that would be my take on it. Mike, do you have anything to add to that?

Michael Watts

Well, the only other thing I would add, Ashim, is that most of our business in Europe, it goes back to what Carl said, good news, bad news is the major industrialized markets. It’s the UK, it’s Germany, it’s France. So those economies certainly have not been as impacted as severely as some of the Mediterranean countries.

Operator

And our next question comes from Quintin Lai of Robert Baird. Your line is open.

Quintin Lai - Robert W. Baird

A question, a little bit on the R&D pipeline. You talked about real-time TMA, real-time PCR, maybe give us – you could explain what your strategy is there. What assay do you see being real-time TMA focused and why putting on real-time PCR on the heels of that? Or do you envision your platform to have capabilities to do both?

Carl Hull

Let’s start off with the question real-time PCR just period. I think we mentioned that one of our focuses is coming up with the right long-term platform for PRODESSE business and our ability to expand and to leverage that. After a lot of careful thought and evaluation of the alternatives, we concluded that integrating real-time PCR on to PANTHER was an optimal solution for that. So that was one very important factor in our thinking.

The second piece of it is as you look at the future of the business, there are many assays that can be done easier or better with one technology or the other, whether it’s qualitative TMA, quantitative TMA or quantitative PCR. And we don’t want to be in a situation where we are locked into having only one hammer. We like having multiple different hammers so that we can go out and add menu as customer needs dictate not as technological limitations dictate. So that’s really our thinking. And as you look at the long-term development of the market, a lot of the stuff today that’s considered early stage clinical markers that are being validated or being run perhaps in other (ph) settings, a lot of them are on PCR type platforms and they may make good sense for us to be thinking about as part of our portfolio five years, or 10 years down the road.

Operator

Our next question comes from Isaac Ro of Goldman Sachs. Your line is open.

Isaac Ro – Goldman Sachs

If I could just start on the investments you are making on the expense side this year with regards to new products. Maybe if you could just add a little more color. You mentioned R&D and the growth rate there but for sales and marketing just maybe qualitatively some of the things you need to do to be successful against your goals in HPV and PCA3 in terms of sales force, that kind of stuff.

Carl Hull

Isaac, hi, it’s Carl. I think that the most important things that we are looking at on the non-R&D side are really in the commercial support of the new product launches. So you saw us build out in Europe and we’re comfortable that Europe at the scale that it’s at right now is well equipped to support business that is there right now. But we have some pretty high expectations for growth in Europe. So you could expect us to see or you could expect to see us expand our sales and field service capabilities as that business expands.

Much importantly though is the United States, thinking about it really two perspectives. One is the launch of PANTHER in the U.S. and then the second, of course, is just the continuing growth of the business and how we are going to spend marketing dollars for launch of the new products. I will ask Eric to comment on the market spend here in just a second. The thinking again about sales and service, we have intentionally not expanded the U.S. sales and service organization in front of the PANTHER launch. We wanted to time it more closely to when the instrument is actually available. We have a very detailed plan that we put together over the last nine months of where we want to add resources, what kind of resources we want to add, and the majority of them will be field-based in support of the actual launch of the instruments. So that’s how we are kind of doing it operationally. Let me ask Eric to comment on the market stuff.

Eric Tardif

Yeah, I think on the marketing side, we are in a nice position that we are launching two important new differentiated products in the U.S. in HPV and hopefully PCA3 this year. And in both cases, I think there is a need to carry a message, in some cases, to clinicians and certainly to labs. And so we’ve signaled this for a while that, while we are not planning on building a large physician oriented sales force, we certainly will invest to be able to get a clinical message out into the marketplace. And that’s a big part of the expansion you will see.

Isaac Ro – Goldman Sachs

Right. Thanks and just a follow up on PRODESSE, actually I think when you guys purchased the asset that was running about $15 million annualized in revenue. And I understand, of course, this year was a tough flu season, but if we look at sort of a normalized growth rate for that business going forward, how are you guys looking at your goals for that portfolio of assets and technologies?

Eric Tardif

I would say it is obviously very contingent on how the flu season goes. Last year was a nice growth year for PRODESSE off a stronger flu season that in the previous year. And this year we have been modeling an average flu season which so far hasn’t come to pass. So that business continues to do well in terms of gaining market share, in some cases, and fending off an increasing number of competitors. And certainly as we look out in the future with PANTHER becoming available as proprietary platform, we look at that as a major growth engine for PRODESSE.

Operator

Our next question comes from Tycho Peterson of JPMorgan. Your line is open.

Tycho Peterson – JPMorgan

A question maybe just on some of the incremental R&D spend here. You’ve got, kind of the announcements you made earlier this year on the new instruments. Obviously you’ve got some follow-up work-on APTIMA, HPV in terms of studies. And then some near term stuff in terms of porting over additional assays to PANTHER, can you help us think about – are you able to put any of that in the buckets, how much of the incremental is going to be on follow-up studies versus some of these longer term projects versus the incremental spend on porting assays over the PANTHER or TIGRIS?

Carl Hull

Tycho, it’s a good question that we probably won’t answer for you at the level of detail that you like. We have a very clear view internally of where those funds are going to go and how we’re going to apply them. I think what you see us doing right now is making a combination of what we term derivative products. So you can think about doing assays using existing formats. So that could be a new PRODESSE assay, or it could be a new TMA assay on one of our instruments versus breakthrough investments which really fall more in the category, say, of what we are doing with the next generation of PANTHER and adding real-time PCR to it.

So from a portfolio view, Eric and his team have us look at those investments in major buckets of type of spend. And once we determine that we strive to have a balanced set of investments. So we are not doing all derivatives on the one hand, but we are also not doing all breakthrough projects on the other. Eric, well if you want to add anything.

Eric Tardif

No, I think that’s the right way to look at it. It’s all about striking balance and positioning us for the next wave of growth a few years out with the key projects we just announced.

Tycho Peterson – JPMorgan

But on the follow-on studies that you talked about previously, should we think about those rolling off there this year, next year? How do we think about the magnitude of when those will start to wear off?

Carl Hull

Yeah, the HPV follow up which the probably the most significant finishes sometime late next year.

Tycho Peterson – JPMorgan

And on the chlamydia and gonorrhoea, I know you had the question earlier on Roche. Can you talk about within the core business, how are you thinking about pricing trends for chlamydia and gonorrhoea specifically? And I mean, you are withdrawing PACE officially from the market this year, is that right, I know it’s a small piece of business but just wondering about that.

Carl Hull

Yeah, that is correct, Tycho. I would tell you that the pricing trends, CT and NG have been stable as a board for a long, long period of time. It’s something that we look at extremely carefully that we have seen no negative impact at all.

All right. Operator, it looks like we are at the bottom of the hour here. So we’ve a couple of concluding remarks. So with that I’ll just wrap up by saying that we appreciate your time today and thanks for your questions. Our fourth quarter financial results were solid. We look forward to a year of accelerating top-line growth in 2012, driven by the new products that build on our core competency in automation.

We are also excited about the opportunity to leverage our PANTHER platform with new assays and capabilities that will generate long-term, sustainable growth.

In closing, let me remind you that our prepared remarks will be posted on our website momentarily, and we encourage you to refer to them if you missed a fact or a number during the call. Thanks for your time and attention today, and please call us if you have follow-up questions.

Operator

Thank you for participating in today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts