Gen-Probe's Michael Watts sees five potential new product launches as delivering top-line growth next year.
Lauren Migliore: My name is Lauren Migliore; I am 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 vice president of investor relations, Michael Watts, to speak with us today about the competitive dynamics within the molecular diagnostic field. Thanks for joining us, Mike.
Michael Watts: Thanks very much for having me.
Migliore: Gen-Probe has pioneered the development of nucleic acid testing. What advantages does this form of testing have over traditional laboratory methods?
Watts: Well, you are right. We were the first company actually to have a Food and Drug Administration-approved molecular diagnostics test, all the way back in 1985, I believe. And today we're the largest stand-alone molecular diagnostics company in the world. So we have been a pioneer in the field.
The power of nucleic acid testing, or molecular diagnostics, we use the terms synonymously, is really to detect disease directly, by looking for a genetic marker. That could be RNA or DNA of a virus or bacteria. It could be a particular gene that's overexpressed in the presence of a certain disease, such as cancer. And the beauty of this is by going directly for the cause, the source of disease, we're able to identify diseases either earlier, faster or more accurately, or sometimes all three, than current tests, such as culture or immunoassay.
A good example of this is in the field of blood screening. We have molecular tests that screen donated blood for Hepatitis C, which causes liver disease. By looking for the virus directly, rather than waiting for the body's immune response to develop, we have helped reduced the risk of getting HIV or Hepatitis C from a blood transfusion down to about one in 2 million. So not only have we built a good business around this, but it's nice to be doing a good public health service at the same time, safeguarding the blood supply.
Migliore: Gen-Probe maintains a dominant share in the STD-screening market and the firm is growing its clinical diagnostic business at double-digit rates each quarter. What's behind the strong performance?
Watts: Well, truly two things. One is the performance of our assays, or our tests, and secondly is the unique advantage that we have in automation. So on the assay side, there have been a number of head-to-head studies that compare us to some of our competing tests, that show that our tests are really the gold standard in their fields. And by that, I mean they have higher sensitivity and specificity than competing tests, meaning they generate fewer false negative results and fewer false positive results. So we really are the gold standard in terms of test performance.
In addition, we have a fully automated system that's quite unique, called the TIGRIS, and TIGRIS is a high throughput, fully integrated system, primarily for large labs, whether they are reference labs, hospital labs, or public health labs. With TIGRIS, our lab customers can essentially do more tests more rapidly, than with any other system and with a minimal amount of hands-on time. So that means minimal need for hands-on intervention, minimal opportunity for manual error, and the ability to be more productive for their lab as a whole. So when you combine the test performance that we have in terms of the better sensitivity and specificity, with the automation of TIGRIS, that has really been a winning combination, and that's enabled us to take market share in the United States, as well as in Europe, where we're building out our commercial base.
Migliore: Well then turning to blood screening, the company's other main segment, Gen-Probe has an established partnership with Novartis, and the firm's products are used to screen over 80% of the donated blood supply in the U.S. But the financial performance over the last few quarters has been pretty volatile. So what's the outlook for blood screening going forward?
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Watts: Yeah, that's absolutely right. The important thing to differentiate between is, on the one hand the quarterly financial performance of the business, and on the other hand, the underlying dynamics of the business. The quarterly fluctuations have been due primarily to two things; one is changes in inventory levels at our commercial partner, which is Novartis. Novartis sells and distributes all of our blood-screening products around the world. And sometimes their inventory levels will flux, or their ordering patterns will flux. And that affects our revenue.
Also, we have been selling, as expected, fewer TIGRIS instruments to Novartis, and those are relatively expensive. We tend to sell them in bulk. So fluctuation in those numbers can have a big effect on the overall revenue.
Now, having said that, if you look beneath that, the underlying dynamics of the business haven't changed. Blood screening continues to be a terrific cash-cow business for us. It doesn't grow very much, but it's very profitable. Margins have been solid. ASPs have been solid. Revenue has been up. Donations screened with our tests have been up. Not very much, but a few percent typically. So the underlying dynamics of the business are quite strong, despite the quarterly fluctuation in the results. At the end of the year, when we look back on the year's results as a whole, I think we'll see that.
Migliore: Gen-Probe has a strong record of innovation. How have new product launches during the last year influenced the growth trajectory going forward, and what are their near-term catalysts, should we be on the lookout for in the coming months?
Watts: Sure, I mean, I think that's something that we're very excited about at Gen-Probe now. We are in the midst of, I think its five potential new product launches. The first one was our PANTHER Instrument, which is an automated instrument for the low- to mid-volume lab in Europe. That was launched maybe six months or so ago, maybe little more than that, and that's going very well.
The second product was a parasitic STD called Trichomonas which runs on our TIGRIS system that was launched in the U.S. It is also going very well, and we'll generate a few million dollars of revenue from that this year. Just in the last week, we got FDA approval of perhaps the single biggest incremental driver, which is our HPV tests, that's HPV for human papilloma virus, it's the cause of cervical cancer. Another assay that will run on our installed base of our TIGRIS systems.
And we're not done yet, we've got two more products that are still pending in front of the FDA, One is a PCA3 test which is used related to prostate cancer, to help men determine whether they need a second or third follow-up biopsy after having had a negative biopsy. Then finally, we're also seeking to get our PANTHER system approved in the United States as well, and hopefully both of those things will happen during the next couple of quarters. The upshot of that is that we look forward to return to double-digit top-line growth next year.
Migliore: It has been a busy year for Gen-Probe.
Watts: It has been a busy couple of weeks for Gen-Probe.
Migliore: So taking that and going forward, we see certain trends in the health-care space, such as personalized medicine and companion diagnostics that have been generating a lot of buzz. Gen-Probe has historically been dominant in infectious diseases and blood screening. So how is the firm able to leverage its diagnostic expertise into new adjacent markets like these?
Watts: There is a lot of interest in those markets, and I think, those will be very important markets over the long term in terms of improving patient care and better predicting, for example, response to various pharmaceuticals. The work that we've done, you're right, has been primarily focused on infectious disease. We do have a couple of opportunities where we've branched out a little bit. One is our prostate cancer initiative, and hopefully with the approval of PCA3 here in the coming quarters, that will be an important step forward to getting better information to men who are considering decisions around prostate cancer.
Another thing that's related, is we do have a small business now in HLA testing. So this is ensuring that there is a good match between donated kidneys, for example, and recipients of those kidneys; and we have both a gene-based as well as antibody business there. Over the longer term in the field, we're looking to develop new test for viral load monitoring for HIV, Hepatitis C, as well as Hepatitis B. The HIV market is the biggest of those three markets today, but we think that as new drugs are developed for Hepatitis C, that could also become a significant growth driver for us. Not this year or next, but in the 2014-and-beyond time frame, once some of the benefits from the products we're introducing now have annualized.
Migliore: Well, thank you for so much for joining us and sharing your perspectives in this space.
Watts: You're very welcome. Thanks for having me.
Migliore: I'm Lauren Migliore for Morningstar. Thanks for joining us.
