GoPro, Inc. (GPRO) Q4 2007 Earnings Call Transcript
Published at 2008-02-14 17:00:00
Good afternoon and thank you for standing by. All lines will be in listen-only until the question-and-answer portion of the call. [Operator Instructions]. Today's call is being recorded. If you have any objections, you may disconnect at this time. Mr. Nordhoff, you may begin sir. Henry L. Nordhoff: Turn over to Mike, Valerie.
Thank you, Valerie and good afternoon everyone. I am Mike Watts. I am Gen-Probe's Senior Director of Investor Relations. On behalf of Hank Nordhoff, our Chairman, President and CEO as well as Herm Rosenman, our Senior Vice President of Finance and CFO, as well as the rest of the Gen-Probe team, I am very pleased to welcome you to this conference call to discuss our fourth quarter 2007 business results. The press release announcing our results was issued today just after 4 o'clock 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, Herm will review our detailed results and initial 2008 guidance, then we'll take your questions. Before we begin, let me first review our Safe Harbor policy. Forward-looking guidance, financial or otherwise, is only provided in conference calls or in our press releases. Any statements in this conference call about our expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and are forward-looking statements. These statements are often but not always made through the use of words and phrases such as believe, will, expect, anticipate, estimate, intend, plan, foresee, could, should and would. For example, statements concerning 2007 financial guidance, financial condition, regulatory approvals and timelines, possible or assumed future results of operations, growth opportunities, industry ranking 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 aren't limited to those discussed in our SEC filings including our report on Form 10-K for the year ended December 31st, 2006 and all subsequent periodic reports. Copies are available on our website at www.SEC.gov and on request from our Investor Relations 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. Henry L. Nordhoff: Thank you, Mike and good afternoon everyone. As you saw in our press release, our fourth quarter results topped off another very good year for Gen-Probe, and we believe we are well positioned for a strong 2008 as well. We showed solid revenue growth in the quarter, even while some... even with some timing issues that affected product sales. Top line growth plus some tax benefits helped us increase earnings per share by 16%, once again ahead of expectations. In my remarks today, I will first review our product sales performance in the fourth quarter. Then I'll discuss some of our key highlights for the full year 2007, with a particular focus on our R&D achievements and investment. Gen-Probe's financial performance in the fourth quarter and in all of 2007 once again demonstrated our ability to execute against our stated financial objectives. Product sales in the fourth quarter were $92.4 million, up 8% comparing to the prior year period. Clinical diagnostic sales grew a solid 10% in the fourth quarter, once again led by our amplified APTIMA franchise for Chlamydia and gonorrhea testing. And we achieved a new record in clinical diagnostic assay sales in the quarter. In the fourth quarter, customers continued to upgrade to APTIMA assays from our oral non-amplified PACE product line. PACE sales declined 24% in the quarter, inline with our expectations. At the same time, however, we kept gaining additional STD market share. In fact, we added more than 30 competitive accounts during 2007, which we estimate translated into about 4 percentage points of additional market share on a dollar basis. We believe we remain the market leader in the United States with roughly 61% dollar share of the STD market, based on our combined APTIMA and PACE business. And we expect to continue gaining market share, based on the sensitivity and specificity advantages of APTIMA and the automation and throughput benefits of our TIGRIS system. Now let's turn to blood screening. Blood screening sales increased 6%, despite some uneven shipment patterns at both the front end and the back end of the fourth quarter, some of which we discussed in our last call. At the front end, you may recall that our third quarter results benefited from about $2 million of added shipment revenue, primarily related to our West Nile Virus assay that our partner, Novartis ordered in the third quarter instead of the fourth. In our last call, we predicted that fourth quarter shipments and therefore blood screening revenue would likely be reduced by a similar amount on a sequential basis, and that's exactly what happened. In addition, at the tail end of the fourth quarter, one international order shipped into the New Year based on the logistics of shipping around this year's lengthy New Year's holiday. This delayed shipment was worth another $1 million. If you look beyond these unusual timing issues, we believe our blood screening business had a solid quarter, led by good growth and market share gains for the PROCLEIX ULTRIO assay on the TIGRIS system overseas. For all of 2007, blood screening sales grew 11% and we think this represents a more normalized baseline for continued double-digit growth into 2008. That wraps up my discussion of product sales in the fourth quarter. Now I would like to spend a few minutes on our annual results for the full year 2007. As I alluded to earlier, both the APTIMA STD franchise and our PROCLEIX ULTRIO blood screening assay gained market share around the world in 2007, and both did so on the back of our unique fully automated TIGRIS instrument. In addition, we benefited from commercial pricing of our West Nile virus blood screening assay in the United States. As a result, product sales for the year were up 14%, total revenues also increased 14%. Pre-tax income grew by 20% and was 28% of revenues. Net margin grew as well to 21% of revenues, and earnings per share increased a very strong 41%, thanks in part to some additional tax benefits we recorded in previous quarters. All in all, this reflects a very strong performance for the company, especially on a GAAP basis that includes stock option expense. Gen Probe's financial success in 2007 went well beyond the income statement. We generated a record $110 million of operating cash and as a result, cash on the balance sheet increased by $144 million over the course of the year. In sum, we believe Gen-Probe's full year financial results tell a compelling investment story, the story highlighted by a growing income statement, a pristine balance sheet and a strong cash flow statement. 2007 was also a good year for R&D and regulatory achievements. In terms of development activities, we completed our first Millipore assay, which we shipped to our partner for commercial launch at year-end. We published important new data on our PCA3 test and launched the product in Europe. Early feedback from customers has been positive and sales are growing nicely off a small base. We finalized a very complicated APTIMA human papillomavirus assay that has generated promising results in early head-to-head clinical research studies. We remain on track to introduce our HPV test in Europe in the second half of this year and to initiate our U.S. clinical study this quarter. And we earned additional technical feasibility milestones from 3M for MRSA and food testing. In terms of regulatory progress in 2007, we believe we are once again working very productively and efficiently with the FDA. As evidence of this, we gained FDA approval of our TIGRIS instrument to screen donated blood for West Nile virus during 2007. We also secured regulatory approval to use the TIGRIS system with our PROCLEIX ULTRIO blood screening assay in the U.S. Although we did not initially receive a Hepatitis B screening claim for the ULTRIO assay, at the FDA's request, we successfully designed and initiated a post-marketing yield study to intercept HBV infected blood donations that were missed by serology test. We believe we have found two HBV yield cases in our post-marketing study and intend to file a supplemental Biologics License Application or BLA in about a month to seek an HBV donor screening claim for the ULTRIO assay. We expect the FDA to take 4 to 6 months to review our application, which might preferably take us into September for a potential approval. Our marketing partner Novartis will then need a couple of months to negotiate commercial contracts with potential customers. Since we record all blood screening donation revenue two months after Novartis does, we believe we are unlikely to see much incremental product sales revenue from ULTRIO in the U.S. during 2008. As a result, we are not including any benefit from domestic ULTRIO product sales in our initial 2008 financial guidance, we do believe however that we will earn full FDA approval in 2008, which would trigger a $10 million milestone from Novartis that would be recorded as non-product revenue. Herm will discuss this in a minute. We believe that our development and regulatory achievements in 2007 illustrate that we and our investors are getting good value from our R&D investment. As most of you know, as a percentage of revenue, we spend roughly twice as much on R&D as most of our competitors. You'll recognize that this investment is of great interest to the financial community, has well it should be. Balancing short-term and long-term results is one of our greatest responsibilities as managers, one that we take very seriously. We believe we have struck the right balance for 2008 and as you analyze this issue yourselves, I would encourage you to keep a few points in mind. First, even with our high level of R&D investment, we still expect to return more than 20% of total revenues to the bottom line after tax in 2008. We don't think you will find too many companies in our space or any space for that matter, that are able to achieve that combination. In addition, in 2008, we expect to grow pre-tax income at its fastest pace in 4 years; again, while investing aggressively for the future. Second, although most of our R&D investment goes towards longer term growth drivers, such as our HPV, prostate cancer, Panther and MRSA programs, a significant portion of our spending supports products that are generating revenue today. In 2007, for example, about 25% of our direct R&D cost supported marketed products, most notably the HBV yield program for our ULTRIO assay in the U.S. and ongoing enhancements to our TIGRIS platform. Without this investment, we would not be preparing today to file a supplemental BLA for ULTRIO, which could become one of the company's most important growth drivers over the next one to two years, nor would we have been able to generate roughly half of our APTIMA revenue on TIGRIS in the fourth quarter. Let me give you one more fact that illustrates the outstanding success we've had with TIGRIS and the importance of dedicating R&D dollars to support inline products. A year ago on this call, I told you we have more than doubled our installed base of TIGRISs during 2006. Well in 2007, we built on this success by installing more TIGRIS units on both sides of the business than we did even in 2006. And as a result, we have about 270 TIGRIS systems installed around the world today. The third point I'd like to make about R&D is that a significant portion of our expenses are reimbursed by partners including Novartis, 3M and Millipore and granting agencies like the Department of Defense. In 2007, we recorded $16.6 million of collaborative research revenue on our income statement, so partners such like these are a very cost effective way to expand the use of our technology into new markets. As we think about our prospects over the... over our five year strategic planning horizon, we see terrific opportunities in these new markets. We therefore believe, we are spending the right amount of money on R&D today to leverage one of the industry's deepest, broadest, and most diverse pipelines. At the same time, we are extremely focused on getting the maximum return from our investment. As a result, we are making changes organizational and otherwise, behind the scenes to ensure that we are maximizing the productivity of our human resources. And we are actively looking for ways to use our balance sheet to broaden our product and technology base as well as accelerate earnings accretion, either by increasing revenue or by reducing expense. In other words, if we see an economically attractive deal opportunity, or an opportunity to buy rather than make, we won't hesitate to pursue it. In terms of our current programs, our focus on execution some times requires trade-offs between discreet R&D projects and even trade-offs between R&D expense and other parts of the income statement. As we foreshadowed at our analyst day, we have decided to hold off on a PCA3 pivotal clinical study in the United States, until we can reformulate the assay to run on our investigational Panther instrument. And only while these key resources focused on our HPV program, we believe it will maximize the value of our oncology strategy over the long term. We continue to get very positive feedback on the clinical utility of PCA3 especially for men who have had a negative biopsy. However, we think we need to simplify the work flow surrounding the assay and provide automation and higher throughput capability to give it true blockbuster potential. The same way that TIGRIS has accelerated the growth of APTIMA Combo 2, we believe that Panther can drive sales of PCA3. At the same time, however, we are investing behind the commercial success of the PCA3 test we have on the market today. In the United States, many key opinion leaders continue to conduct and publish studies that illustrate how PCA3 can help provide more accurate, clinically relevant diagnosis of prostate cancer. And we hope these studies in turn will encourage more urologists and labs to adopt our PCA3 test. And in Europe, we are not required to conduct a large expensive clinical study. We are putting more feet on the street in terms of sales and marketing resources and also investing in marketing programs to continue increasing awareness among urologists. In other words, we are spending sales and marketing dollars to support sales of PCA3 in Europe today. We are pleased with the results we have seen in Europe thus far and therefore, anticipate additional growth in PCA3 sales in 2008, on top of the roughly $2 million that we recorded in 2007. So in Summary, 2007 was a very good year for Gen-Probe. Our APTIMA and ULTRIO products continue to grow and gain market share, thanks in part to the success we have had placing TIGRIS systems around the world. We gained approval for and launched our West Nile virus assay on TIGRIS. Our new products began to contribute to revenue growth, and made good progress with our hepatitis B yield studies in the United States and with our human papillomavirus development program. Our 2007 financial results reflect our operational success, and we anticipate another year of solid profitable growth in 2008. With that as a preface, I will turn the call over to Herm.
Thank you, Hank and good afternoon everyone. As you saw on our press release, Gen-Probe had a solid fourth quarter financial performance. Product sales grew 8%, compared to the same period in 2006, despite some uneven shipment timing that cost us about $3 million of blood screening sales. Total revenues increased 9% and earnings per share increased 16% on a GAAP basis, again exceeding our expectations. Hank already discussed product sales, so let me start with collaborative research revenue, which was $5.4 million for the fourth quarter, up significantly from $1.2 million a year ago. This increase came mainly from three sources. First, we earned $2.7 million of milestones and research reimbursement from 3M under our food testing collaboration. And milestone payments resulted from our successfully developing prototype assays for Campylobacter, Salmonella and Listeria, three common food contaminants. Although this collaboration has ended, Gen-Probe remains full ownership of these three assays and their commercial rights. We remain optimistic about our long-term potential in molecular food testing, especially given the resources that have been dedicated to food safety at the FDA and USDA. Second, we received research funding from 3M under our separate collaboration for healthcare associated infections, as well as our first milestone for achieving technical feasibility. And third, we benefited from the last piece of funding under our Department of Defense grant for prostrate cancer research. I would caution you that our strong fourth quarter performance on this line should not be taken as a run rate going forward, as neither the 3M Food payments nor the Department of Defense grant will continue in 2008. Royalty and license revenue was $1.1 million in the fourth quarter, down significantly from the $4.4 million in the prior year period. This decrease resulted primarily from the absence of license revenue from bioMérieux. As you might recall, we announced our licensing agreement with bioMérieux in 2004, and recorded the last installment of associated revenue in the fourth quarter of 2006. As we look ahead to 2008, our fourth quarter performance probably is a good indicator for royalty and license revenue. Gross margin on product sales was 69.2% in the fourth quarter, up from 67.6% in the prior year period. This increase was due primarily to the benefits of full commercial pricing of our West Nile virus assay, TIGRIS system, and to a favorable product mix, primarily reduced sales of lower margin instrumentation. Although instrument sales were down overall compared to the prior year period, sales of TIGRIS instruments to Novartis were good, totaling about $3.4 million and portending future growth in assay revenue. Research and development expenses for the fourth quarter were $24.3 million, up 17% compared to a year ago. This increase, which was expected, resulted primarily from the ramp up of our major development projects. These include the ULTRIO post-marketing yield studies in the United States, our APTIMA HPV program, our Panther project and our MRSA program with 3M. Marketing and sales expenses in the fourth quarter were $11.3 million, an increase of 18% compared to the prior year period. As we forecasted in our last call, marketing and sales costs increased primarily based on European market development costs associated with our HPV and PCA3 assays. General and administrative expenses were $12.3 million in the fourth quarter, up 14% versus a year ago. This increase was due primarily to compensation related costs as well as several miscellaneous expenses including legal fees. In terms of tax rate, there was a lot going on in the fourth quarter, all of it favorable to the bottom line. Our tax rate for the quarter was only 22%, as a result of three factors: The completion of an audit of our 2003 and 2004 California state income tax returns, true-ups associated with the completion filing of the company's 2006 California income tax return and adjustments to our effective tax rate for additional research and development credits earned in 2007. You might recall that in our last call, we guided to a fourth quarter tax rate of approximately 30%. But, we actually saw income tax reductions in excess of that. Specifically, of the $3.8 million in tax benefits we realized in the fourth quarter, about $2 million of it was not quantified in our previous financial guidance, leading to approximately $0.04 of additional earnings per share. All this nets out the fourth quarter earnings per share of $0.37, 16% higher than the prior year period; nearly double our 9% total revenue growth and ahead of expectations. Now, I'm returning to our 2008 guidance. We expect this year to be characterized by double-digit top line growth, appropriate R&D investment that supports, both near term product sales and long-term innovation, healthy net profit margins in excess of 20% on a GAAP basis, and pre-tax earnings growth at the fastest rate since 2004. Like in 2007, we expect low double-digit product sales growth to be driven by continued market share gains of the APTIMA Combo 2 assay, our commercial pricing of our West Nile virus assay on the TIGRIS system and by continued international expansion of PROCLEIX ULTRIO assay. In terms of instrument revenue, we had a very good year in 2007 and therefore, expect these sales to decline in 2008, based in part on the absence of TIGRIS spare part sales to Novartis. As you might recall, approximately $3 million of spare part sales passed through our income statement in 2007. As Hank said, we are not including in our 2008 guidance any incremental U.S. revenue from early adoption of the PROCLEIX ULTRIO assay in United States. As soon we file in March, we believe we could get approval in the third quarter based on the FDA standard review time. However, since it would take Novartis a couple of months to negotiate commercial contracts and since we record donation revenue two months after our partner does, it's unlikely we will see any material revenue before year-end. We could see some upside here based on an early approval, but a lot has to happen before we would be comfortable including this in our guidance. Overall, we expect total revenues of $443 million to $453 million in 2008, including low double-digit product sales growth. Product sales are expected to increase gradually on a sequential basis over the course of the year. In terms of collaborative research revenues, let me remind you that two major sources of 2007 revenue will not recur in 2008, namely, research reimbursement and milestones associated with our former food testing collaboration and our Department of Defense grant related to our prostate cancer program. However, non-product revenues are expected to benefit from two significant one-time items. First, MilliPROBE royalty and license revenue of about $16 million in the first quarter, representing Bayer's third and final payment under the settlement of our successful patent infringement lawsuit against them. And second, as Hank discussed, we expect to earn a $10 million milestone from Novartis potentially in the third quarter, based on the full approval of the PROCLEIX ULTRIO assay on the TIGRIS system in the United States. As an aside, we expect to record this ULTRIO milestone in collaborative research revenues rather than royalty and license revenue, which I believe is where most of you have modeled it. Apart from these two one-time items, we expect both collaborative research revenues and royalty and license revenues to be relatively flat in each of the four quarters of 2008. Now, let's turn to guidance for the expense lines. We expect gross margin on product sales to improve to between 68% and 70%. On the positive side, we expect the gross margin percentage to benefit from continued growth of our APTIMA STD franchise and from commercial pricing of our West Nile virus assay on the TIGRIS system. We also expect reduced sales of lower margin instrumentation in 2008, which reduces our top line relative to 2007, but helps our margin percentage. These benefits will be offset somewhat on a percentage basis, by the continued growth of the PROCLEIX ULTRIO assay outside the United States, including in many emerging markets, where pricing is less robust and pool sizes are smaller. I should point out however that the sales still provide incremental margin dollars, even when the margin percentage is lower, than what we might see in the United States or elsewhere. We expect R&D expenses to range from 23% to 24% of total revenues, down just slightly from 2007 levels on a percentage basis. As Hank discussed, we expect the big ticket items in 2008 to include inline product support, which will represent about 25% of our direct costs, mainly for the ULTRIO post-marketing program. In addition, we expect the HPV and Panther programs to consume about 40% of our direct costs. In HPV, we are on track to begin our U.S. clinical trial by the end of this quarter. Panther, we and our instrument development partner expect to focus on developing prototype systems during 2008. Moving on, we expect marketing and sales expenses to be between 9% and 10% of total revenues, consistent with 2007 levels on a percentage basis. We anticipate G&A expenses of about 11% of total revenues, which is down slightly on a percentage basis compared to 2007, reflecting tight cost controls across administrative functions. We foresee significant growth in other income in 2008, based primarily on our large and growing cash balance. That covers the major revenue and expense lines making up our initial 2008 financial guidance. But as your own analysis works towards our bottom line, I would encourage you to spend a minute on pre-tax income, since our 2007results were held by several one-time tax benefits. At the mid point, our guidance implies pre-tax income growth of roughly 30%, and this would represent our fastest on this line since 2004. With that said, we forecast that our tax rate for 2008 will increase to a more normalized rate of about 35% for the full year. I should point out however that we expect our effective rate to be a bit higher until the R&D tax credit is reinstated, then lower thereafter. All this leads to our initial 2008 earnings per share guidance of between $1.64 and $1.72 on a fully diluted GAAP basis. This guidance, which is based on weighted average of 56 million shares outstanding for the year, again represents a net profit margin in excess of 20%. We expect cash from operating activities to continue outpacing net income, with depreciation and amortization in the range of $36 million to $41 million in 2008. In addition, free cash flows should remain extremely strong. We expect capital expenditures of $50 million to $55 million in 2008, although $16 million of this is already behind us with the purchase of our blood screen manufacturing facility, which closed this month. In terms of the quarterly earnings per share splits for 2008, let me remind you that our fourth quarter results benefited from the lower effective tax rate and some non-recurring collaborative research revenue. When we normalize for these factors, incorporate a gradual sequential increase in product sales, and then add the $16 million we received from Bayer as part of the settlement of our patent infringement lawsuit, we believe our first quarter earnings per share could establish a new all-time high for the company, probably right around $0.50. So, to summarize the financial section of our conference call, our fourth quarter results capped off a very good year, in which we exceeded expectations for product sales, total revenues and earnings per share. And in 2008, we anticipate that solid top line gains can enable us to make significant investments in R&D while maintaining high levels of profitability, increasing pre-tax income at its fastest rate in four years. Now I would like to turn the call back over to Mike.
Thanks Herm. We are very happy to take your questions now. For the Q&A, we are joined by Carl Hull, who our Board of Directors just named President and Chief Operating Officer; Dan Kacian, our Executive Vice President and Chief Scientist; Bill Bowen, Senior Vice President and General Counsel; Harry Rittenhouse, Senior Director of Cancer Research and Kevin Herde, our Corporate Controller. Steve Kondor, our Senior Vice President of Sales and Marketing is out of the office on a personal matter and therefore couldn't be with us today. In order to ensure broad participation in the Q&A session, please be courteous and limit your questions to one plus a follow up, then jump back into the queue. Operator, we are ready to take the first question. Question And Answer
Thank you. [Operator Instructions] Quintin Lai from Robert W. Baird, you may ask your question.
Good afternoon. Congratulations on a nice year and congratulations to you, Carl, on your new promotion. Carl W. Hull: Thank you, Quintin.
As we take a look at some of the new products and the guidance for 2008, can you kind of tell us how PCA3 and ended the year in terms of the revenues and then the expectations that you have built into 08 and as well as the MilliPROBE business?
Yes, hi, Quintin, this is Herm. In terms of detailing and getting that granular, we are not going to do that on this call, probably not until later on in the year. But as we said, the sales of PCA3, both in the United States and in Europe are increasing at a fast rate, but off of a very small base. So I hope that answers your question.
All right. And then, Hank, you kind of mentioned a little bit about looking for opportunities for uses of cash, one of them you already announced with the $16 million purchase of your blood screen manufacturing facility. Are those the type of deals are you looking at, or could you be looking at more substantive deals in the M&A environment? Henry L. Nordhoff: Yes, we didn't mean to imply we are going to buy real estate. We really are serious about adding to the business. We've talked about this at some length and unfortunately all you've heard is talk, you haven't seen any results. But we are really stepping up the effort. We think there are opportunities out there to broaden our business, both geographically and from a scientific, technical, and product standpoint. And we are looking after those.
Would you stay within the suite of the different areas you've been currently focusing in, on the infection disease, oncology et cetera or would you look to broaden outside of those areas? Henry L. Nordhoff: I think those area are sufficiently large that we could stay within those, while still broadening our product offering. But if we have to go into a close related area, Quintin, we would certainly look at that as well.
Okay, thanks. Henry L. Nordhoff: You're welcome.
Sara Michelmore from Cowen and Company, you may ask your question.
Yes, thank you. I guess I'll ask a question on the guidance, specifically on the revenue line. I think if my math is correct, Herm, it looks like you are assuming that the product revenue growth for next year is sort of in a 9% to 11% band, and I assume that we should assume that the clinical diagnostics is a double-digit growth part of the business, and that blood screening a bit slower, just was hoping you could comment on that.
I can, Sara. I think we said in the prepared remarks, no double-digit. We... I think you can expect that on both sides of the business. So, the 9% to 11% is in the ballpark, but may be just a bit low.
Okay. So the guidance had... you did not include the one-time payments or the collaborative revenue payments, and you are talking double-digits?
The product we said double low double-digit product --
Product revenue. Okay. That was my mistake, I apologize. On the gross margin, I was hoping you could give us some quantitation, Herm, of what exactly or how big is the drag on the gross margin line from the ULTRIO business internationally? I am surprised that you are not getting a little bit more gross margin lift going into this year.
We obviously, we haven't gotten that granular. The much larger drag, of course of course, it's not a drag for the future, but it is today, is instrumentation. We did mention, of course, in the prepared remarks that we are seeing lower pricing in certain areas of the world, but that's it's out-shadowed significantly by the impact of instrumentation and ancillaries.
All right, I'll get back in the queue. Thanks. Henry L. Nordhoff: Thanks Sara.
David Lewis from Morgan Stanley, you may ask your question.
Good afternoon. Two questions here guys. I guess the first question is this. Hank, you talked the 2x spending in R&D versus your nearest competitor, and Herm talked about the best pre-tax growth heading into 08, but I think if you adjust for some one-time payments, that's probably not the case. And you are guiding to since your product sales growth represents the third consecutive year of deceleration. So, I guess, my question is what can you say to shareholders to give them comfort or assurance that decelerating growth is not acceptable and a company is going to take the appropriate steps in 08 to turn this around, or is the company happy with decelerating growth? Henry L. Nordhoff: Well, to take the second part first, David, no, we are not happy. I mean, growth rates in the low double-digits it's not horrible, but compared to what we have done in the past and comparing to what we are capable of doing, it is unacceptable. We are trying to accelerate certain programs to bring them forward faster. We are going to work the P&L as much as we can and to look for other opportunities, as I was I saying, in the conversation with Quintin to add to our business. I think we are capable of doing all of those things.
And are you capable of doing them in 2008? Henry L. Nordhoff: We can certainly do the former because that's within our control. When we are talking acquisitions of technology and products, and possibly companies, it really takes two to tango and it has to be a good deal for both parties. So I can't really commit to that, but we are working on it.
Okay. That's helpful. And the second question is, Hank, about 18 months ago, I think, at the prior Analyst Day, maybe a little earlier that year, I think you talked about industrial, I think you were asked the question how large of a business industrial could be for you, for the company. I think you made a comment that in five years it could be a third of the revenue base. And I actually can't remember if that was total revenue or diagnostics. Are you as optimistic now about the industrial business and would you make a similar commitment now that we are a year and a half into that prediction? Henry L. Nordhoff: Yes, I still feel pretty comfortable. I think the potential is huge for industrial, and that would include food testing as well. We do have those rise back. But getting involved in water testing and trying to monitor the production of drugs and biopharmaceuticals and because 3M is a customer getting involved in hospital and community acquired infections, outside industrial one of those opportunities, I think, is possible. The one area that we feel a little bit of caution or see a little bit of caution on the part of our partners is they think that their customers are fairly reluctant to make a big change in the short period of time. And we are a little more optimistic on that. So the potential is there, the size is certainly there, and we will achieve it. The question is timing and I am still optimistic that in 3.5 years it will still be or will be a very, very substantial part of our overall business, not just diagnostics.
Right, thanks for your candor. Henry L. Nordhoff: You are welcome.
Bill Quirk of Piper Jaffray, you may ask your question.
Yes, thanks and good afternoon. Henry L. Nordhoff: Hi, Bill.
First off, I guess, Herm, I guess I will pick on you since Steve is not in today, but the APTIMA Combo 2 projects product, was that up on a sequential basis?
Sequential to the third quarter?
Sequential to the third quarter, correct. Henry L. Nordhoff: I am going to, guess, yes. But that's a guess, because our assay sales were the highest they've ever been in a quarter.
I am going to tell in a second, Bill, hold on.
And them maybe I will just try the second...
Go onto your next one, I will check on it.
Bill, it's Mike. The answer is yes.
The answer is yes, okay, great, thank you. Secondly, Carl, congrats on the promotion. A question for Hank; if all goes according to the plan, I would assume it's probably safe to assume that Carl becomes the CEO next year and -- Henry L. Nordhoff: We are counting on him.
You are counting on it, excellent. Now having said all this, are there any projects, Hank, that you'd really like to see get across the finish line before you handover the CEO title? Henry L. Nordhoff: Bill, I probably worked harder than I have in the 14 years I have been here and traveled maybe 50% more. I think idea is to get some of these newer opportunities that David and I were just talking about very well established before giving out the CEO position and just remaining as Chairman of the Board. And that's where I am spending my time because I think the potential is enormous and because I think we have to prod our partners a little bit. I wouldn't be at all surprised to see CN [ph] is spending a lot time on food testing to see the possibility of some revenues this year. Now whether that's going to be... because we license it, we sell it, or we get some funding from a collaborator could range anywhere for a company in this field to the FDA. This is where we are working. We are trying to accelerate what we can bring in from those business into this year and beyond, but basically to make sure that they are very well established. And I just want to make sure that we have got the right people in the right positions here at Gen-Probe.
Understood, thank you. Henry L. Nordhoff: You're welcome.
Imron Zafar from Deutsche Bank, you may ask your questions.
Good afternoon. Thanks for taking my questions. First question on PCA3, could you just walk us through the terms of the DiagnoCure licensing agreement in light of the delay in starting your pivotal trial? In other words, is there any potential for that royalty rate to go up? Henry L. Nordhoff: I am a little bit reluctant to get involved in the specifics in this one, Imron. We have a good relationship with DiagnoCure. We work very closely now for a long time. Things have been a little bit different than we anticipated, both parties when we signed it we thought it was going to be a qualitative assay and it turned out to be quantitative. What we do will be in the best interest of both companies and more importantly in the patient population. So, we think we have got a great relationship with them. I think they feel the same way and don't think anything will come between that, or between doing the sort of program that we have discussed with them. As we have said before I think on multiple occasions, the current assay is a bit clumsy, is really only appropriate for the more esoteric labs. And we think the potential is much broader than that, and that's why we are going to reformulate it, and to put it on the Panther. It will be automated, it will its performance certainly will not be changed at all. It may be even increased and I think it will open the door to much wider usage throughout the world.
Okay. And then in the food testing endeavor, post to the 3M termination, is that program still being shopped around in terms of a partnership, or are you pretty set on going it alone there? Henry L. Nordhoff: We hate to use the word shop around, it's like Sara's word, drag on sales and all of that. We think there is opportunity, we think a lot of things have happened to really buttress our feelings since the funding from 3M is stopped. The FDA is really interested in it. We believe that we can help make through our technologies and our people the food supply as safe as we make the blood supply in the U.S. So we are exploring opportunities, this is probably a better way of putting it, with the both food processors, with the people who sell tests, and with people who have a stake in the game, like some government organizations that try to accelerate this CUDA instrument, which can be used to test onsite, perhaps to be used in China before certain materials are shipped to get at the prevention before the intervention and the response that the FDA keeps talking about.
Okay. And then one quick question on guidance; you refrained from giving sort of granular guidance on PCA3, but maybe just to give us a sense of the type of returns you are getting on you R&D, could you may be give us a rough sense of what the incremental revenues you expect from total new products in 2008?
Let me deal with PCA3, Quintin [ph], I mean, we said for 2007, it was a couple of million dollars, and we said it was growing from that base. So it is a small base, it is but it is growing smartly.
Okay, thank you very much.
Tycho Peterson from JPMC, you may ask your question.
Hey, good afternoon. Henry L. Nordhoff: Hi, Tycho.
I am actually going to pest with you with another question on the guidance, and just to be clear in terms of the outlook for this year, are you still assuming initial commercial revenues on the Legionella assay with GE? And then also, are there any technical milestones we should think about from 3M? I know you had $3 million last year for the HCAI, is there another potential technical milestone you may see this year? Henry L. Nordhoff: Yes, on the GE revenue, Tycho, probably this is still in the nascent stages. There are probably three different approaches we can take with the program, as it's being developed. One, we could take the initial CUDA, and try to use that now on the developing program, and may be derive some revenues. Secondarily, we could start now on an OEM system and generate revenues for sure. And then third, we could wait until the next generation or the next version, if you will, of the instrument for CUDA and that might take a little more time than 10 or 12 months. So, if we don't get them this year, it should be around the end of the year, beginning of next year, depending on the approach GE decides to take.
Spencer Nam from Summer Street Research Partners, you may ask your question.
Thanks for taking my question. I just have a couple of quick questions for you guys. On the ULTRIO outlook in terms of the approval from the FDA on HPV, sounds like you guys are being obviously being cautious for the right reasons, but can we assume that based on your outlook that we could safely assume that it is going to be approved by second half of this year, some time in Q3? Henry L. Nordhoff: We think so. When we submitted our last application, in the mean time, our competitor Roche had come up with two yields. Therefore the hurdle was raised for us. We believe that we have those two yields and that's we have told we were needed. So, unless things change, we expect that we could get it approved within the timeline. It is always a possibility that the approval time at the FDA could be less than 4 or 5 months, and that might give us a month or two of revenue. But for the most part, we expect that to be a not until 2009, but we are optimistic that we will get the $10 million payment from Novartis.
Great. The second question is, for the first time in a while that your talking about making an acquisition, strategic acquisition, to show up your growth potential, in terms of your planning, could you may be discuss where you are? Are you at do you have may be a list of companies that or the ideas that you guys are interested in? And if so, are you guys set on making this an accretive acquisition only or is it a little is the criteria a little broader than that? Henry L. Nordhoff: We were reluctant to get involved in any specifics, Spencer, for reasons that are easily understood. But in the past that we have talked about accretion and dilution, and said that if it's a real terrific one we will take a little dilution for the near term, so long as this is going to be accretive in the mid to longer term.
Okay, thanks. Henry L. Nordhoff: Thank you, sir.
Bruce Cranna from Leerink Swann, you may ask your question.
Thank You. Hi, Herm, I am sorry if I missed it. Did you throw an equipment number to Novartis? Was it 3.4 with the TIGRIS number?
Okay. And then, I guess, I too would like to spend a little time about the guidance in 08, I am trying to I am looking at your, let's say, $0.50 number for Q1 and then looking at 08, the remainder of the year, over the prior three quarters in 07 or the similar, the same three quarters in 07. It kind of implies flattish earnings growth; I am just trying to reconcile in my modal. So I have top line going up, margins on the gross end of things going the right way, and R&D coming down a bit. Why should I or we be thinking about, let's say, flattish last three quarters of the year EPS over last three quarters of 07?
I don't think we talked about flat earnings per share.
Well, I am just saying if I back out --
We talked about sequentially increasing slightly during the course of the year, at least at the products sales line, and there was no real lumpiness to any of the other lines, collaborative research, royalty, and license. And no spiking that we talked about in the guidance, in the expenses. So, I would expect that you'd see fairly good growth there, and fairly consistent.
Hey, Bruce, it's Mike. A couple of things to think about there. I mean, one, don't forget we are losing a couple of chunks of collaborative research revenue in 08 versus 07. One piece of that would be the food reimbursement, of course. Second would be the DoD grant. And also just make sure you are looking at a pre-tax I am sure you are looking at a pre-tax line and not an after-tax line to strip out some of the benefits that we had in 2007, which obviously make a big difference on the bottom line. Next year the tax rate will probably normalize more like 35%.
We've got the two big one-times. One in the first quarter, one in the...
I though I was accounting for that, but I will take another look at that. And then just in 08, just so I understand to the extent there are revenues from Millipore, would those drop in to product revenues or collaborative? How should we think about that?
I think it will drop into both. We introduced the first product recently and so that will be in product revenues to the extent the collaboration sells products to customers, and we share in the profits of that, you would see both revenues and profits. And then to the extent we get reimbursed from Millipore, which we will continue out into the future, that will be in collaborative research revenues.
On the product side, it would wind up in clinical, Herm?
Product side for Millipore will wind up in clinical, that's correct.
Okay. And lastly, I think I have asked this before when we were going through this on the West Nile Virus side, but let's assume there's a Q3 ULTRIO indication for screening, why can't Novartis negotiate ahead of time about on the pricing side, why wait for that product actually become commercial to then go ahead and negotiate pricing? Why take a couple of months to go through that process post presumed clearance?
Yes. Well, based on experience, that's what happened with PROCLEIX and when ULTRIO came out of the chute ex-US, but I think that's probably a better question to ask Novartis.
Unidentified Company Representative
It's a question we pose too.
Unidentified Company Representative
Thank you, Bruce.
Eric Kuskelo [ph] from Thomas Weisel Partners. You may ask your question.
Good afternoon. I am filling in for Peter Lawson. Just on the as far as PACE sales go, how much do they contribute now to product revenues?
Could you repeat that one, Eric, please?
Sure. As far as your sales of the PACE assay, how much are they contributing to revenues?
Yes, Eric, we never quite cut it exactly that way, but we've said that of the diagnostics number that we report somewhere in the neighborhood of 80% to 85% of that in most quarters is our STD business. Of the STD business, I believe, in the fourth quarter, we were running a little bit more than 80% APTIMA and the balance being PACE.
On a dollar basis, of course.
Okay, that's very helpful. Thank you. And one last question with pro-commercial pricing on the HPV West Nile Virus, what does that do to revenues and margins exactly, like what kind of increase can we see from that?
That's a great question. We don't know the answer because those pricings haven't been negotiated yet. What the guidance was from Chiron actually, last guidance on that was even pre-Novartis, was 30 to 35% uptick on PROCLEIX pricing, which at that time around the world was about $10. So, what they were saying at the time was roughly $3.50 increment. We don't know what it's going to be and we can provide some color on that after we get the approval.
Okay, great. Thank you very much. Henry L. Nordhoff: Thanks Eric.
Zarak Khurshid from Caris & Company, you may ask your question.
Hi, good afternoon. Congrats on the strong year and the progress on HPV yield. Henry L. Nordhoff: Thank you, Zarak.
Can you maybe elaborate a little more on the blood screening revenue guidance for 2008? It looks like TIGRIS placements picked up pretty significantly in the fourth quarter post the Analyst Day. So, maybe who are the new customers and how quickly are the instruments being implemented relative to earlier placements? Carl W. Hull: Zarak, this is Carl. The new customers we see on the blood bank side for TIGRIS are typically ex-U.S. customers and we are then entering new markets in some places that we haven't been before, and some places where they are automating for the first time around the ULTRIO assay. So, that's probably where the majority of that delta is coming from.
Okay, great. So... and as far as a bolus of instruments being sort of flipped on during the year, how should we be thinking about that? Carl W. Hull: They don't put on in a bolus fashion. These will typically be isolated placements or single placement in a national lab or dual placement. So you will see them around as they [ph] make the transition, but it's not as if one account is putting in 10 new instruments.
Okay great. And then my second question, with respect to the MRSA program, during the illustrate, it sounded like you were in the process of filing your unique IP in that area. Have the IP been filed and can you update us as to the timing for the start of the trial and the potential launch?
In MRSA Carl W. Hull: MRSA, intellectual property. R. William Bowen: I am not... this is Bill Bowen. I am not exactly sure of the timing of the filings. We are taking appropriate steps to protect the IP around that asset. Carl W. Hull: But as a follow-up on your question, in terms of the schedule and the milestones, we are still in the planning phases of the project, detailed level to give us specific dates for clinical trial and we don't have those yet and haven't disclosed yet and so that I think it's fair to say, the program is making good progress. There is an enthusiastic team from both companies 3M and Gen-Probe working together to identify all of the activities and working on those as we speak.
Unidentified Company Representative
Thanks Zarak.
Dan Leonard from First Analysis; you may ask your question.
All right. Thank you. My first question, on the clinical revenue, it was $49.7 million in the quarter, which was down from the third quarter. So, what was behind the decline sequentially?
Sorry, could you repeat the question?
Yes, your clinical diagnostics revenue declined in the fourth quarter compared to the third quarter, just what was behind that decline?
Yes, it was primarily the... we had large equipment sale in the third quarter, so, it's more comparative issue, I think we said APTIMA Combo 2 is up sequentially.
Okay. And then my second question on your HPV test. When you are launching that product in Europe, it will be... will the doctor have to sort of take a different box for a gene expression test than he or she would for an HPV DNA test or you are putting under the assumption that the doctors won't do anything differently and you market to the lab? Carl W. Hull: Dan, it's Carl. We don't see a significant proportion of physician choice being necessarily a key factor in Europe. Remember, the market is developing; it's developing in a different pace and a different time line than it has here in the United States. And, so we think the national decisions about practice have is and whether they are done in conjunction with traditional cytology or done as primary screening, will actually be the bigger determinants of our progress. Having said that, we'll enter the markets selectively, with feet on street that we've got in Europe and drive as fast as we can in each of those major markets.
Operator, I think we have time for maybe one more question and then we'll have some very brief closing remarks.
Thank you. Jeff Frelick from Lazard; you may ask your question.
Great, thanks. First one, for Hank. Hank, at the analyst day, you guys spoke a lot about international growth and driving that forward. Can you give us some color just what international sales were for what percent of revenues they were for 07 and expectations for that in 08 with respect to the guidance? Henry L. Nordhoff: Yes, I will ask Mike to give you the statistics and even talk about how we are going to drive them. Mike?
Yes Jeff, I think the only thing we've said there is that we kind of itemized APTIMA sales, that's what you asked, I think they were about $9 million or so in full year 2007. I believe that was up somewhere in the 60 to 70% range over 2006, I am not sure we'll grow at that rate in 2008, but something pretty close to it. Henry L. Nordhoff: And then some of the products that will help us specifically in Europe on the diagnostic side would be PCA3 followed by Tempress [ph], HPV and on the blood screening side, I know that Chiron, Novartis is spending a lot of time in the developing world China and Russia and Brazil, and we expect to see some nice growth there too.
Okay. And then just one quick follow-up for Herm, you mentioned the R&D spend working on... in shipment of prototypes for this year. Was that Panther only, or does that include CUDA?
That's... I was referring to Panther.
Okay. Thanks fellows. Henry L. Nordhoff: Well, thanks for all your questions. To wrap up, Gen-Probe's performance in the fourth quarter of 2007 capped off an outstanding year for the company. For the year, we grew the top line 14%, and the bottom line 41% including tax benefits and also advanced development of several future value drivers. We believe our 2007 performance has us well positioned for a successful year in 2008, a year in which we expect to deliver our highest level of pre-tax income growth in four years, even as we invest heavily in future innovation. Thank you for your time attention and interest today and please contact us if you have any follow-up questions.
This concludes the conference call. You may now disconnect. Thank you.