Lauren Migliore: Hi, my name is Lauren Migliore. I'm a health-care analyst here at Morningstar. Gen-Probe is a leading provider of molecular diagnostic products used to diagnose human diseases and screen donated blood. We're pleased to welcome the firm's CFO, Herm Rosenman to speak to us today about the competitive landscape in the diagnostic industry. Thanks for joining us, Herm.
Herm Rosenman: It's my pleasure, Lauren. Thanks for having us.
Migliore: Gen-Probe pioneered the development of nucleic acid testing. What are some of the advantages of this form of testing over traditional laboratory methods?
Rosenman: Well, the major advantage of nucleic acid testing, or as some call it, molecular testing is the closure of what we call the window period. That's the time between infection and detection. Using old tests--and I'll use an example in blood screening, which represents about 40% of our business. So, we screen whole blood in the United States and throughout the world for diseases like hepatitis C, hepatitis B, West Nile virus, and importantly HIV. To try to make the blood supply a lot safer so that when it's transfused into individuals, they don't contract these diseases.
The old window period using the test prior to molecular testing, for example, hepatitis C was about 60 days, which meant that you could have infected blood in the system for transfusion during a 60-day period, because the old antibody test couldn't pick it up.
Our test, which goes for the genome itself rather than the antibodies, which build up later on, closes that window period down to 28 days or less. So, by doing that there is less infected blood in the system.
Migliore: So, quicker and more sensitive is really the advantage?
Rosenman: Quicker, more sensitive, more specific.
Migliore: Gen-Probe maintains a dominant share in both the STD and blood screening markets. Can you talk about some other barriers to entry involved in your core businesses and what are the key growth drivers for your existing product lines?
Rosenman: Well, if we take those two as the existing product lines, although we do have others. The growth will come from blood screening outside the United States, because in the United States we have a very dominant market share, considerably over 80%. Outside the United States it depends on which country we're talking about. In some cases, we have 100% of those donations, in some cases our only competitor worldwide in this duopoly, Roche, would have a 100%, and in some countries we split it with them.
There is also some home-brew done in certain countries, and that could provide growth in the future, as well as the BRIC countries, which currently have not adopted molecular testing for screening whole blood. So that could be some pretty good growth.
Additionally, there are some provisions in the contract with our distribution partner worldwide, Novartis, which ratchet up our share of the revenues over time; that will provide a little bit of growth too.
In STDs, it's going to continue to be for a little while APTIMA Combo 2 on the TIGRIS instrument, which is our fully automated high-throughput instrument, primarily in Europe. There will be more growth in Europe, because again in the United States we have such dominant market share, over 60%.Read Full Transcript
In terms of barriers to entry, they are very high. In blood screening, our distribution partner, Novartis, has intellectual property on HIV and hepatitis C, which basically precludes others from entering the market unless they get a license from Novartis. Novartis has not issued certainly hepatitis C license, which is their primary intellectual property, for several years.
In addition, you've got to be able to create these tests. We have tests for all of those diseases, and those tests have to be extremely accurate, extremely high sensitivity and specificity. For example, the chances with our tests in blood screening of getting HIV from a transfusion are less than 2 million to 1. Those are pretty high barriers to entry.
Migliore: As you alluded to earlier, the company has taken some efforts recently to diversify its revenue stream. How have acquisitions, for example, allowed you to expand into adjacent markets?
Rosenman: We've been successful in expanding into adjacent markets through primarily two acquisitions we have done recently. One was Tepnel, the earlier of the two. We paid about $137 million U.S. for a company that had several businesses. But the primary one we were interested in was HLA, human leukocyte antigen testing or transplantation diagnostics, of matching donors and recipients to get the best match and try to have the most successful transplant or stem cell transplant.
That's gone well as far as integration. We're in the process now of getting our arms around the business and trying to expand their product line, and we think we'll be very successful doing that.
The other acquisition we did late last year was Prodesse. Prodesse is primarily in the flu business, benefited as you can imagine from the H1N1 period during the fall and into the winter of last year. That gets us further down the line in infectious diseases, and we think that will be a very good acquisition for us. It enabled us to really leverage our sales reps and our salesforce throughout the United States and soon throughout the world, and we think we'll able to really gain market share.
Migliore: We've also seen certain trends emerge within the drug development industry, for example, personalized medicine seems to be the wave of the future, and new therapies like hepatitis C have the potential to dramatically increase treatment rates as soon as next year. How has Gen-Probe positioning itself to capitalize on these opportunities?
Rosenman: Well, that's a great question and that is the future, we think, personalized medicine. We think we can capitalize on that well, at least today through two and maybe in the future more, but two areas. One, with the Tepnel acquisition, we've got a company called Elucigene in the generic testing business. That will be based in Manchester, U.K. And we have a number of tests that we have currently, and we are in the process of developing more, so we think we can participate there.
Also we've made a recent investment in third-generation sequencing in a sequencing company called Pacific Biosciences, made a $15 million investment there, and we think they will be certainly one of the horses, if not the major one, that gets to finish the finish line in third-generation sequencing.
Migliore: Gen-Probe has a strong record of innovation. What's coming down the pipeline over the next year and what are the important near-term catalysts for the firm?
Rosenman: Well, we have a lot. We do have a reputation for innovation. We received recently last year or two the National Technology Award, and we have several factors and assays and an instrument that will be coming out over the next year or so, led by our PANTHER, an innovative, fully automated molecular testing instrument. That will come out with several assays on it, and we will build out that menu over time.
That instrument is not only qualitative--in other words it gives you the answer, yes, that disease is present or no, it is not, but also quantitative. And it will be able to tell you how much of the disease is there what is viral titer. So that's important in the treatment for example of HIV viral load to determine which therapies should be prescribed for the treatment of the patient.
In addition, we'll have a full suite over time of molecular tests for STDs, chlamydia, gonorrhea, human papilloma virus, which are the assays that the instrument will be introduced within the next month or two in Europe. CE marked as well as the assays, and that will be the launch platform.
Additionally, over time, we would probably have viral assays on there, such as HIV, hepatitis C, perhaps others, Trichomonas, another one of our new women's health assays; PCA3, our prostate cancer test, will be reformulated from the current CE marked test to a test that can be done on a fully automated basis on the PANTHER. The PCA3 test also is one of the tests that we filed for clearance by the FDA just recently. It was filed this fall.
The HPV test, as I mentioned before, we are going to file that by the end of this year. We also filed the Trichomonas test recently. So, we have a lot of catalysts right now, and we think that would drive growth for the next several years.
Migliore: Definitely been a busy year for Gen-Probe.
Rosenman: It's been a busy year, yes.
Migliore: Well, thank you so much for your comments and for being with us today.
Rosenman: Thank you, Lauren.
Migliore: I'm Lauren Migliore for Morningstar. Thanks for joining us.