GoPro, Inc. (GPRO) Q2 2011 Earnings Report, Transcript and Summary

Good afternoon, everyone. Thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the call over to Mike Watts, Vice President of Investor Relations. Sir, you may begin.

Thank you, Michelle, and good afternoon, everyone. I'm pleased to welcome you to this conference call to discuss our second 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. In today's call, Carl will first review our second quarter product sales and our pipeline progress. Herm will then discuss expenses and our updated 2011 financial guidance. We'll take your questions for the balance of an hour, then post our prepared remarks on our website for your convenience and reference. Before we begin, let me first review our Safe Harbor policy. Forward-looking guidance, financial or otherwise, is only provided on conference calls or in our press releases. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are forward-looking statements. For example, statements concerning updated 2011 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 as well as 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 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 adjustments 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 CEO.

Well, thank you, Mike, and good afternoon, everyone. Gen-Probe's financial results in the second quarter of 2011 were in line with our expectations overall. A record performance by our APTIMA women's health franchise helped offset blood screening sales that were below our forecast, mainly due to supply chain issues that I will discuss with you in a moment. Just as important, we are off to a very good start with the U.S. introduction of our APTIMA Trichomonas vaginalis assay, and our other major pipeline initiatives remain on track for domestic launches over the next few quarters. Now let's get into our second quarter results. Product sales were $132.9 million in the quarter, basically flat compared to a tough comp in the prior year period. Total revenues of $135.9 million were a couple of million dollars light of the forecast we provided in our last call, which was about $138 million. In addition to blood screening, a shortfall in sales in our research products and services contributed to the variance relative to our forecast. Turning to margins. We are very pleased with our strong profitability in the second quarter. The non-GAAP product gross margin percentage, up 70.4%, was the highest it has been since the first quarter of 2009. Gross margin was helped by favorable product sales mix, namely strong sales of our APTIMA COMBO 2 Assay for Chlamydia and gonorrhea detection and by the weak dollar. This led to non-GAAP EPS of $0.51, ahead of the guidance we gave last quarter, which was $0.47 to $0.49 a share. Now let me turn to the components of product sales in the second quarter. Sales of our clinical diagnostic products were $87.5 million in the quarter, up a very strong 18% compared to the prior year period or 17% in constant currency. The biggest contributor to clinical diagnostics growth in the second quarter was our APTIMA COMBO 2 Assay for detecting Chlamydia and gonorrhea. APTIMA sales grew at a mid-teens rate compared to the prior year, the fastest growth we have seen since the third quarter of 2009, powering through a mixed utilization environment in the United States and continued funding challenges in Europe. In Europe, APTIMA grew solidly in the second quarter as it has in the recent periods. Underpinning this performance, customer feedback on PANTHER has been positive, and we are on track to meet our PANTHER placement goals for this year. We look forward to continued growth in Europe as PANTHER installations and testing volumes increase. In the United States, we were pleasantly surprised at the strength of APTIMA in the second quarter as the domestic growth rate was only slightly below the rate of international growth. Some of this growth continues to come from customers upgrading to APTIMA from our older PACE product, which declined 26% in the quarter to less than $3 million. More importantly, the last few months have been good ones for us in market share gains in the United States, which gives us confidence in our future trajectory. We are achieving these gains based on the high level of customer service provided by our sales and technical support team, the accuracy of our assays and the durable value that our fully automated TIGRIS system provides for high-volume labs. Our field force is gearing up to extend this automation advantages to a broader customer base with the PANTHER system, which we submitted to the FDA for regulatory clearance in May. Based on customer feedback we have received at trade shows over the past few months, we are very excited about the potential for PANTHER in the United States. In addition, our upcoming PANTHER launch further supports our confidence in future growth from Chlamydia and gonorrhea testing even as competition increases. To wrap up our discussion of clinical diagnostics sales in the second quarter, I would add that the acquisition of GTI Diagnostics, which we completed in December, added a few hundred basis points to product sales growth in the second quarter as expected. In addition, the acquired franchises within our clinical diagnostics line, those being the LIFECODES transplant diagnostic products and PRODESSE's respiratory infectious disease products, both showed good growth compared to the prior year period. As we think about the second half of this year, we are very pleased with the early returns from our APTIMA Trichomonas launch. As most of you know, our assay for this parasitic STD can be used to test the same female sample types from the same sample tube as our APTIMA COMBO 2 assay. In addition, our amplified assay can be run on our large installed base of TIGRIS systems and enjoy significant advantages in sensitivity and speed compared to traditional tests. The coming-out party for our APTIMA trichomonas assay occurred earlier this month in Québec City at the biannual conference of the International Society for Sexually Transmitted Disease Research. At the meeting, independent researchers published the results of a study of 7,593 women who were also being tested for chlamydia and gonorrhea. Using our highly sensitive assay, the researchers determined that 8.7% of these women were affected with trichomonas overall, higher than the combined rate of chlamydia and gonorrhea. Interestingly, trichomonas was most common in women over 50, where 13% had the infection, and in women over 40, where prevalence was 11.3%. Building awareness of the importance and prevalence of trichomonas infections is a long-term initiative, but we believe studies such as this one are important building blocks in that effort. More immediately, over 50 customers are already using or validating our trichomonas assay. For those who have begun commercial testing, pricing is fairly similar to that of our APTIMA COMBO 2 Assay. Sales are ramping nicely so far, and we are optimistic that we will achieve at least a few million dollars of trichomonas revenue that is contemplated in our 2011 guidance. Now let's turn to blood screening. Second quarter sales were $43.2 million, down 22% as reported or 24% on a constant-currency basis. To put this performance in context, let me remind you that in our initial 2011 guidance, we forecast that blood screening revenues for the full year would decline by a few percentage points based mainly on lower sales of TIGRIS instruments to Novartis. In addition, in last quarter's call, we said that blood screening sales would fall on a sequential basis from the $46.7 million posted in the first quarter, which also implied a significant reduction compared to the prior year period. The percentage decline in blood screening sales this quarter is also magnified by a tough comp from a year ago. Specifically, in the second quarter of 2010, blood screening sales were $55.7 million, more than $5 million higher than in any other quarter last year. I want to be clear that we believe the strong fundamentals around our blood screening business have not changed. Blood screening remains a stable, highly profitable business for Gen-Probe, one with growth rates expected to be flat or up in the low-single digits on an underlying basis. Now I'm going to spend a fair amount of time providing support for this statement. I'm also going to explain why we believe that the decrease in blood screening sales in the second quarter resulted mainly from reduced instrument revenues, supply chain fluctuations and a reduction in Novartis' inventory levels. Lower sales of TIGRIS instruments to Novartis played a significant role in our second quarter blood screening results as we had expected. The prior year period was an exceptionally strong one for TIGRIS, driven in part by the installation of a large number of instruments in France. This led to total blood screening instrument sales of nearly $7 million. In comparison, in the second quarter of this year, total instrument sales were only about $2 million, creating a delta of $5 million that accounted for a significant portion of the year-over-year change. Despite the decline in blood screening instrument sales this quarter, we do expect our sales of TIGRIS systems to Novartis to increase later this year in support of new customer demand. This should contribute to better growth rates in the fourth quarter of the year. In addition, we were very pleased with the positive customer feedback on the PANTHER system emerging from the recent International Society of Blood Transfusion meeting in Portugal. Novartis remains on track to launch the instrument internationally next year. Now let's turn to assay revenues. On a gross basis, blood screening assay sales by Novartis to end customers actually increased in the second quarter of 2011 compared to the prior year period. This speaks to the strength of our competitive position, especially compared to our primary competitor, which recently reported a 1% decline in quarterly blood screening revenue. Although this total blood screening assay revenue for our joint business was up in the second quarter, our assay shipments to Novartis were nearly $6 million less than they were a year ago, reducing our reported revenue by the same amount. Additional fluctuations in Novartis' inventory levels further reduced our reported revenues by approximately $3 million. Those of you who have followed Gen-Probe for a while know that our partner is contractually obligated to maintain minimum inventory levels under our collaboration as measured by months of supply. This is done both to facilitate accurate forecasting and to ensure the continuity of the blood supply. However, various factors, such as shipment timing and the transition from ULTRIO to ULTRIO Plus that is now underway in international markets, can cause significant lumpiness in our quarterly results. In the past, that lumpiness had been somewhat obscured by underlying growth in the overall market. As the market has matured, however, these supply chain fluctuations can become more visible in any given period. Although we forecasted these unfavorable ordering patterns in our last call, we probably underestimated their impact by a couple of million dollars, which contributed significantly to the top line variance we saw relative to our prior guidance. As I said earlier, underneath this quarterly volatility, blood screening remains a stable, slow-growing, highly profitable business. The total number of blood donations screened with our test increased slightly in the second quarter, both sequentially and year-over-year. In addition, prices were stable, and our gross margins were up. All in all, we feel good about our blood screening business today. Novartis' customer base is sticky, and we believe there may be some upsides to growth in the near term. In addition to the launch of the PANTHER system, these include continued growth in emerging markets such as China, where a major evaluation of nucleic acid blood screening continues and adjacent markets such as plasma screening, which we expect to begin contributing to revenues in 2012. Before I turn the call over to Herm, let me provide a very rapid-fire update on some of our other key pipeline initiatives. All these projects remain on track with our previously communicated time lines. First, our APTIMA HPV assay continues under active FDA review. The agency has not requested an advisory panel meeting, although they could do so later in the process. Most of you probably saw the results of our pivotal clinical trial that were presented at the EUROGIN meeting in Portugal in May. The data showed that our APTIMA assay has similar sensitivity but better specificity than the market leader. Second, the U.S. clinical trial for our HPV Genotyping assay on TIGRIS is underway. We expect this product to be an important complement to our HPV screening assay for those physicians and labs who want to identify genotypes 16 and 18 and 45. We expect to submit a PMA application for this test next year. Third, we have also begun a clinical trial for our trichomonas assay on PANTHER. This should be a nice addition to our existing menu of women's health products and broaden the appeal of the instrument to more low- and mid-volume labs. We expect to launch this product in Europe and file a 510(k) application in the U.S. within the next 12 months. And fourth, the FDA has confirmed the date for a meeting of their immunology advisory panel to review our PROGENSA PCA3 assay for prostate cancer. The meeting will be held October 14. Extensive internal preparations are underway, and in preparation for launch, we are also making plans to beef up our medical marketing capabilities in the urology field. As you can tell, there's a lot happening in Gen-Probe. We are rapidly approaching potential approval for PANTHER, HPV and PCA3 in the United States, which we expect to accelerate the new product cycle that has just begun with our trichomonas assay. We are building out a full menu of tests on PANTHER as well as a complete and complementary portfolio of women's health products, and all the while, we are driving profitable growth for mature markets such as chlamydia and gonorrhea where we hold lasting leadership positions. Herm will now review nonproduct revenues, expenses and our updated 2011 guidance. Herm?

Thank you, Carl, and good afternoon, everyone. Collaborative research revenue was $1.6 million in the second quarter, down 61% from the prior year period. This decrease was due as expected and we've already seen their cap [ph] for reimbursement of PANTHER blood screening development costs earlier this year. As Carl said, we look forward to introducing PANTHER in international blood screening markets next year. Royalty and license revenue was $1.4 million in the second quarter, down 22% compared to the prior year period due to a number of small variances. Now let me turn to quarterly expenses, which I will discuss on a non-GAAP basis. Gross margin on product sales was very strong in the second quarter at 70.4%, significantly better than the 66.7% margin we reported in the prior year period. Gross margin also increased on a sequential basis despite lower sales of high-margin PRODESSE influenza products in the second quarter. This speaks to stable pricing in our core franchises and our ability to drive operational efficiencies. Gross margin benefited mainly from a favorable product sales mix, most notably higher sales of APTIMA assays, decreased sales of low-margin TIGRIS instruments to Novartis and favorable currency fluctuations. Research and development expenses for the second quarter were $27.7 million, up 2% compared to the prior year period, due primarily to the addition of GTI's R&D programs. Marketing and sales expenses in the second quarter were $17.5 million, up 11% compared to the prior year period, due mainly to strategic investments in our European commercial infrastructure and the addition of GTI's cost structure. As we've said before, we expect marketing and sales expense to continue rising more rapidly than revenue as we invest in the European market and prepare to launch new products in the United States. General and administrative expenses were $17.3 million in the second quarter on a non-GAAP basis, 21% higher than in the prior year period. This increase was due to 3 primary factors: first, the addition of GTI's cost structure; second, outside legal costs associated mainly with our patent infringement lawsuit against Becton Dickinson. Incidentally, we do not have an update or ruling from the marketing hearing that was held in May. And third, the increase in our share price has had a significant effect on our noncash stock compensation expense, which hits G&A costs heavily. Our non-GAAP results exclude $2.7 million of transaction-related amortization expense, consistent with last quarter, as well as $1.4 million of transaction-related and restructuring costs. Total other income in the quarter was $3.8 million on a non-GAAP basis, an increase of 48% compared to the prior year period. During the quarter, we realized approximately $2.1 million in gains on sales of high-grade municipal bonds, which helped offset the increase in our share count and higher stock compensation expense. For the rest of this year, we forecast that other income will return to sub-$1 million levels on a quarterly basis as we redeploy cash into stock repurchases and cash balances shrink accordingly. Turning to taxes. Our effective rate in the second quarter of 2011 was 33.1% on a non-GAAP basis, in line with our expectations. Our weighted average share count in the second quarter was 49.3 million, basically flat compared to the prior year period due to our higher share price. A higher share price puts our more previously granted options in the money and therefore adds them to our diluted share base. Higher share prices also increase our share count by reducing the number of shares assumed to be locked back under the treasury stock method. So on the bottom line, all this nets out to $0.51 of non-GAAP earnings per share in the second quarter, ahead of the guidance we gave in our last call, which was $0.47 to $0.49. We achieved good results on the bottom line based on a number of offsets throughout the income statement. Higher-than-expected sales of APTIMA women's health products counterbalanced softness in blood screening and research products and services. Very good gross margins canceled out higher G&A expenses. And realized gains made up for a higher share count and stock compensation expense. We continued to do an excellent job of converting earnings into cash. We saw strong operating cash flow of $45.4 million in the second quarter, more than double the GAAP net income of $22.3 million. Purchases of property, plant and equipment were a little higher than usual in the quarter at $12.5 million, mainly due to investments in our Manchester, U.K., manufacturing facility, but we still generated free cash flow of $32.9 million. Moving on to the balance sheet. We closed the second quarter with $529.4 million in cash, cash equivalents and marketable securities. During the second quarter, cash balances benefited from $20.9 million received from employee stock option exercises. Net of $248 million of short-term debt on which we pay interest at less than 1%, and maintained nearly $6 of net cash and equivalents per share [ph], provides us tremendous strategic and financial flexibility. Now I'd like to turn to our updated 2011 financial guidance, which we have tweaked based on our results in the first half of the year. I'm only going to spend time today on the specific line items that have changed. As a reminder, our guidance is on a non-GAAP basis that excludes acquisition-related intangibles amortization, contingent consideration adjustments, other transaction-related expenses and restructuring charges. On the top line, we are tightening our revenue guidance range by $5 million on both the high and low ends. We now expect total revenues of between $575 million and $590 million in 2011. This revenue guidance includes collaborative research revenue and royalty and license revenue that are expected to be roughly equal to their second quarter levels for the balance of 2011. Backing these out, the midpoint of our guidance still assumes high-single-digit growth in product sales for the year. Underlying this will be solid growth from our women's health, transplant diagnostics and PRODESSE businesses, the addition of GTI and a slight decline in blood screening sales. Of our anticipated new product [indiscernible] with trichomonas revenue in our 2011 guidance. So depending on timing, anticipated regulatory approvals should have us well positioned for a return to low-double-digit growth in 2012 consistent with the goals we outlined at our Analyst Day back in December. Turning to expenses. We are raising our gross margin guidance slightly to 69% to 70% to reflect our strong results in the first half of the year. We expect other income to total about $5 million in 2011. It increased from our last guidance based on investment gains realized in the second quarter. We now forecast that diluted shares will total about $49 million for the year, up slightly based on our higher share price over the last several months. On the bottom line, all this leads us to our new non-GAAP earnings per share guidance of $2.28 to $2.37 on a fully diluted basis. The $0.03 reduction in the top end of our range is due mainly to an increased share count and stock option expense resulting from our higher share price. More specifically, the combination of these 2 factors has clipped our internal forecast by almost $0.10 this year compared to our budget. We have made up some but not all of this variance with our higher gross margin percentage, cost savings across the business in nonoperating items. Now let me highlight a few items related to the timing of results over the second half of the year. In the third quarter, we anticipate that total revenues will increase by a few million dollars on a sequential basis, probably to around $140 million, based mainly on continued growth in our women's health and transplant diagnostics businesses and slightly more favorable ordering patterns in blood screening. On the expense lines, we expect project timing to drive R&D costs up substantially in the third quarter to more than $30 million. Sales and marketing costs are expected to increase sequentially. Our G&A expenses are forecasted to decline from second quarter levels. On the bottom line, we forecast that these puts and takes will lead to third quarter earnings between $0.53 and $0.55 per share on a non-GAAP basis. We are well aware that this third quarter guidance implies a big fourth quarter on both the top and bottom lines. This has been our internal assumption all year, and there are several reasons for it. In terms of revenue, we anticipate that ordering patterns in blood screening will be more positive in the fourth quarter. This applies to both assays and TIGRIS instruments. We also believe that women's health sales will continue their steady growth, buoyed by recent market share gains in the United States, and PANTHER placements coming online in Europe. And finally, we forecast that PRODESSE sales will increase in the fourth quarter according to a normal seasonal influenza pattern. At the same time, we forecast that all our major expense lines, R&D, sales and marketing and G&A, will be lower in the fourth quarter than in the third. Coupled with higher gross margin dollars, this would obviously magnify the benefits of strong revenue down to our bottom line. In closing, let me summarize the financial section of our conference call by saying that strong growth in our APTIMA women's health franchise and good profitability enabled us to exceed our earnings goals in the second quarter of 2011. We are on track for a successful full year in line with our original goals and well prepared for multiple upcoming new product launches that have the potential to boost our overall growth rate. Now I'd like to turn the call back over to Mike.

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 Lai, Senior Vice President of R&D; Eric Tardif, Senior Vice President of Marketing and Corporate Strategy; and Kevin Herde, who's our Vice President and Corporate Controller. [Operator Instructions] Operator we're ready to take the first question.[Technical Difficulty]

[Operator Instructions] [Technical Difficulty]

Michelle, we had a queue about 15 seconds ago.

[Operator Instructions] [Technical Difficulty]

We apologize for that. We appear to have had some difficulties, but it's reloading.

Our first question is from Peter Lawson with Mizuho Securities.

This is actually Eric, filling in for Peter. I guess just on -- the IOM is scheduled to kind of update 510(k) policy or potentially update 510(k) policy. And I was kind of -- just kind of wondered if you have any ideas, any thoughts on the particular issues that may come up or how you might be positioned for any changes that you think may or may not occur.

Yes, Eric, it's a very important question. And I that think the answer is, do we know what's going to be in it? No. I believe that the IOM has been doing a lengthy examinations, probably almost year 2 of the study, and the results are scheduled to be released tomorrow. We certainly understand that the FDA has asked the IOM to look at some of the most significant issues with respect to the 510(k) approval process and that those will each be important considerations for all the companies that are involved in the space. What we can tell you is that the first part of this year, the FDA will release the issue or release their recommendations and changes that they're planning on making, not including those that they punted to the IOM. We felt reasonably comfortable with them. We understand the nature of the regulatory changes that they're making, and we're well equipped to deal with those. The IOM results will then address some of the thornier issues, and we expect that the FDA would have to go through their normal rule-making process in order to implement any of those changes. It's also possible that the IOM will make some recommendations that would require legislative changes, which may take a longer time. I think -- in short summary, we think that any changes that tighten the regulatory process will probably be manageable by companies that have sophisticated regulatory capabilities, like Gen-Probe. We think, though, that for smaller companies and those perhaps without that track record of regulatory success, some of those changes may be much more significant. So time will tell, and we'll see tomorrow what [indiscernible].

And just on a modeling issue, did you break out how much total new acquisitions contributed to the top line?

We didn't break it out, Eric, because we don't really manage the business that way. What we've said before is that we -- the only one that's in there is GTI right now, and what we've said before is we expect that, that would add a few hundred basis points to product sales growth. And so you can infer from that about what it was.

Our next question is from Bill Quirk with Piper Jaffray.

So first question, Carl or Herm, if we could parse guidance down between clinical diagnostics and blood screening, would it be fair to say that the clinical diagnostics, since you had a positive bent to it based on the results thus far and then obviously given some of the supply chain issues and what have you at Novartis, that, that obviously has a negative bent to it, as we think about the global guidance for the company?

Yes, I think that's correct, Bill.

You got it.

Okay. Great. Sorry, Herm?

I said I think you got it.

Okay, and then secondly, Carl, you mentioned in your prepared remarks that you've had some recent share gains in chlamydia and gonorrhea. Can you talk at all if this is at all influenced by the recent trich approval and/or the fact that accounts knew that you were going to be coming out with this new product?

Interesting question, Bill. Let me think about it for a second. I would say that what we're seeing and what we're referring to in the current quarter results is probably independent of trich. These were closes and competitive takeaways that were in the pipeline before the trich approval was announced, and so I think they stand on their own. As you know, the other vendors in the area haven't really delivered good automation solutions, so we find that the proven success of TIGRIS worked pretty well there. Now on a go-forward basis, we do think trich will be important to people and may actually allow us to accelerate some of those competitive conversions, but time will tell.

Our next question is from Mr. Anand from Natixis.

I was wondering if you guys would like to comment on the nice [ph] recently advised against ELUCIGENE FH20 in favor of comprehensive genetic analysis. I am assuming there isn't much revenue effect, but if you can kind of talk about it, what effect it might have. And also just in terms of industry, how the regulators are thinking of specific mutations versus comprehensive analysis.

Yes, Ashim, it's a very good question, probably one that's more complicated than I'm capable of answering. I think that, first of all, the direct impact of that on our total business is tiny. So it's not a significant factor. Secondly, you are seeing regulators and advisory bodies all over the world try to wrestle with the issue of companion diagnostics, and it's clear that they have reached no conclusions that are definitive or consistent that I can see. I think that as you look at the bigger markets, the FDA in particular is really wrestling with the issue of companion diagnostics They just put out a draft guidance document on it, and I think that for those of us in the diagnostics industry, we're not sure that it changes terribly much what used to be there. It just mandates the fact that pharma companies are going to have to do these things in tandem and that they're going to have to have their diagnostic approved or they're not going to get their drug approved. So that's a -- obviously a big change from their perspective, but it still means we got a lot of work to do to get companion diagnostics cleared.

Okay. And would you guys like to tell us how much PANTHER equipment you have placed in Europe?

Well, Ashim, we're not going to give the specific number on quarterly basis, but we'll tell you we're on track to hit our full year guidance, which we've said would be a handful, of dozens -- a few dozen placements. It look really good right now, and we're quite comfortable with that.

Tycho Peterson with JPMorgan Chase.

Maybe just following up on the Europe question. Can you just talk a little bit about the PANTHER adoption, new customers versus displacement utilization in the field? And any comments on the mix between diagnostic labs and HPV.

Yes, Tycho, I can, and I think it's an important question because it goes to the heart of did we get our assumptions right going into it. And I think in general, what we're seeing is pretty consistent with what we anticipated. I would say that around 60% of our placements so far have been competitive takeaways. When we see those competitive takeaways, they're coming from Roche and BD on the chlamydia, gonorrhea side and Abbot and QIAGEN on the HPV side. So we're right where we thought we would be. We also have the opportunity to upgrade long-standing accounts from our semi-automated systems, and that's going on as well. I think as I mentioned I think in the last call, we are devoting more resources to getting these customers up and running fully faster, and we're seeing them run both APTIMA COMBO 2 and HPV. More customers were on the APTIMA COMBO 2 only. Some customers were on the HPV only, and the remainder are a mix. And so all that's pretty consistent with what we were hoping and the volumes that they're running are also consistent with our forecast.

And then I just want to make sure I understood the guidance correctly. I think you talked about lower expenses in the fourth quarter. I'm trying to reconcile that with the launches. And maybe additional color you can provide on kind of beefing up the urology marketing capabilities that you talked about for PCA3 would be helpful too.

Well, Tycho, let me ask Herm to comment on the first part with respect to the guidance. Then,= I'll ask Eric Tardif to comment a little bit on the commercial plans.

Okay. Yes, so we said that the third quarter is going to be our highest quarter in terms of over $30 million in R&D. We have a number of things ramping up there. Probably the major one is starting on the virals, both in terms of specimens and starting, actually starting the work that [indiscernible] we've got some additional -- we've got the HPV PANTHER trials. So we've got a number of major things starting in the third quarter, and that's going to be just naturally lower in the fourth. We said we seek continued spending in sales and marketing. That's going to happen in the third, but it's just going to happen to be less in the fourth. In terms of G&A, it's primarily going to be BD litigation expenses, which will be lower in the fourth quarter.

And Eric?

Tycho, it's Eric. So on that -- in the case of urology, our plans for commercialization there aren't yet final, because the products are not yet approved. We're not right now planning to build [indiscernible] urology sales force, but we are considering a more targeted medical marketing effort. So we don't envision a huge cost, but it'll certainly contribute to an expansion of our sales and marketing expenditure going into next year.

Okay, and then last quick one. Can you quantify the share gains in blood and maybe comment on whether volumes were up? I'm just trying to reconcile what the underlying growth rate is there.

Yes, they were small, Tycho. I mean there were slight fluctuations, but we're up a little bit while the other guy's down a little bit. So you can kind of infer that from what we were trying to say.

Our next question is from Bill Bonello with RBC.

I just have a question on your latest thoughts on the use of cash. Herm, you mentioned it is an important strategic asset, but it's one that you've had for 4-plus years now. And just curious if you have any intention of maybe getting a little bit more aggressive on share repurchase especially in light of what's happened with the stock as of late.

Yes, I think we're committed to utilize the authorization we have, roughly $100 million left on it, Bill. We will continue on that path as the year goes on. In addition, we continue to look at strategic acquisition potential. So the use of cash really hasn't changed.

Amit Hazan with Gleacher.

The first question I have is regarding HPV and your thoughts around, it's early thoughts, I guess, around marketing plans. We heard from Roche in recent months in recent weeks that they're building their sales force directly to the OB/GYN. And I'm wondering if you're planning any kind of strategy that's similar to that outside of just calling on the lab to either the OB/GYN or the physician -- or I'm sorry, or the patient?

I'll take that question. This is Eric, Amit. I think the question is almost similar to the urology question. As we look into going into next year, there certainly is going to be a mix required of marketing efforts to support the HPV program, some of it centered on the lab, some of it centered on the physician, and carrying the message into the -- carrying a clinical message into the marketplace. Our plans aren't final yet there, and we have a little bit of time, so I don't think we intend to communicate them right now. But you'll certainly be hearing more about it as the year progresses.

And I think, Amit, maybe I could add to that by just saying that look, the notion of the direct sales force and direct promotional activity probably depends heavily on the success or sustainability of the strategy of branding HPV tests and getting physicians to request specific brands of HPV tests. But as you might imagine, laboratories don't necessarily like that or support it. They're in the business of being as efficient as they can be, and I think that they're pretty good position to determine appropriate technologies. So, for example, nobody has a branded amylase test that you ask for. And so I think it's going to depend on a view of the physician and the market as to is whether in today's environment, it's sustainable to differentiate in that fashion. And that's something that we have a view on, and it'll become apparent over the next couple of quarters.

All right. And then kind of sticking maybe to a related question on HPV, then also. I think I'm going to tee this one up for you pretty good. So the new IOM guidelines that have been -- that came out and have been in the press to cover co-pays for DNA-based HPV tests, specifically, say, DNA-based HPV test. Do you think that's something that is in a way kind of worded to benefit the current players and not players like yourself that are coming on the market? Or do you think that's just something that has to do with the fact that you're test isn't approved yet?

No, I think when you look at those IOM recommendations, they're really focused on the notion of eliminating co-pays from -- for preventative services in order to allow patients to take full advantage of those and encourage them to do so. So we think that the way that, that's written just reflected the fact if you looked at the market at the time that they were developing the headlines, that's what their -- I don't anticipate that a DNA, RNA distinction would be a sustainable one.

Quintin Lai with Robert W. Baird.

Okay. So looking at the share count, you kind of mentioned that because of the high share price, the Q2 numbers were higher. But as I look over the quarter, I mean, the stock kind of went up and it came down. I mean, is it an average share price? Or is the share price at the end of the quarter? And then, if it's an average share price, then shouldn't the share count in Q3, Q4, unless you're assuming the stock's going to go back up where it was, kind of moderate?

Well, it is the average for the quarter, and I mean, you have to kind of look at it day by day, Quin. You're exactly right. And it also goes back to our plan and where we thought the stock would be at certain points. But by definition with the treasury stock method, as the stock goes up and closes the quarter at a higher average, by definition, it's going to be dilutive, right?

Right. Okay. All right, so now here's my related follow-up. Do you have any comment on the share price volatility contained [ph] each other the dims things [ph] that are found with that?

No. We don't have comment, Quin.

Brian Weinstein with William Blair.

Just wanted to clarify a comment. I think you said in the script that there was some new customer demand for TIGRIS in blood screening. And was that referring to the trial in China? Or were there other things that you expect to happen here in the second half?

Yes, Brian, thanks. It is related to both China and new business that's being closed pretty much outside of the United States and the major European markets. So Novartis is getting some good traction. They see some upsides there, and I think their anticipation is that they're going to need several more [ph] from us than they had originally forecast.

Okay, and then on PRODESSE, you've had it for a while now, and it's gotten you access to PCR. I'm kind of wondering what additional products that you're developing here especially in light of what's seeming to be a tougher differentiation as other companies come on the market to kind of where PRODESSE's products were previously.

Yes, Brian, this is Eric. I'll take that. I think first of all, we're still very pleased with the acquisition. It's performing certainly to expectations. And in terms of the related products that we're taking a look at, there are adjacent categories. They make a lot of sense. Obviously, we are right now concentrated in the flu category, and we're looking at other categories outside of that, that will help diversify that offering. But for the time being, we feel very good about our competitive position with that business. And we're looking at branching into other categories that are going to help -- can sustain the differentiation.

Our next question is from Doug Schenkel with Cowen.

Following up on, I guess, one of Amit's questions a couple back. Given what's going on with healthcare reform and broader economic concerns here in the U.S., are you feeling at all incrementally more positive about your ability to gain traction with hospitals in making the pitch that they should stop sending out HPVs as a means of capturing better economics, meaning keep it in-house and keep control, keep the economics?

Yes, I think that it is, in fact, what's -- what we see happening, Doug. It's clearly been a driver of business in chlamydia and gonorrhea over the years as well, and I think now that many of those hospitals have already acquired capacity in the form of the TIGRIS to do that testing incrementally. Adding HPV, if they're sending it out, makes a lot of sense to them and as -- certainly, as we think about the future with the launch of PANTHER in the United States and the ultimate menu there, I think that's going to be a key driver.

And I guess a related question, given again, what's going on with the economy and the uncertainty, did you see anything abnormal in terms of the pacing of sales during the quarter, maybe more directly anything that you heard in terms of physician office visits, broader healthcare utilization and any pressure on pricing related to these dynamics?

Yes, I think -- look, I think on utilization, it's clearly a mixed picture. The IMS office visit data shows overall declines, but OB/GYN is a category which is obviously very important to us, we're up slightly. I think as we see it generally, testing volumes at our key customers have been up and look pretty good right now. But funding pressures still continue to affect the public health sector, unquestionably, and that doesn't seem to be easing. So I think with all that taken together, that's what the quarter looked like. And we still had a very good quarter in diagnostics. Could it have been better under different circumstances? Yes, probably. And as we think about the price issues, I don't think these types of things directly contribute to price pressures, and our pricing has certainly remained stable.

Isaac Ro from Goldman Sachs.

This is actually Jeff, in for Isaac. Looking at the midpoint of the operating margin guidance for this year of 27% to 29%, so taking that and looking at where you guys were last year, it's about 200 basis points of margin expansion. Looking at the new products coming out next year as well as all the incremental investment in sales and marketing, are you guys comfortable with a similar level of margin expansion? Or are we going to be in a less of a stepped environment?

Well, look, I don't really want to go to 2012 at this point. It's little bit premature to do that. It will certainly be an issue that factors into our thinking about 2012 and how we guide it when we get there. But in general, what you're seeing today in those improvements reflects, as Herm said, improved mix, especially as we have a lot of APTIMA business. If expand the trich business rapidly, I think that will also continue to be a favorable trend. And then as we look at the company itself, we're really focused on operational efficiencies. And we think that longer term, some of the investments that we're making, say in consolidating European manufacturing in Manchester -- and for example, part of investment pieces when we acquired GTI was to improve the profitability of LIFECODES. So we're looking actively for ways to continue that.

And then just switching over to chlamydia and gonorrhea for the second and the strength in the quarter, how much of that was like accelerated conversion of APTIMA -- from PACE to APTIMA versus true share gains or utilization improvement?

Well, you see could from the numbers and back calculate it, we said that PACE was down 25%, and it's down under [ph] about $3 million. So not much of that growth was really just attributable to PACE conversions. I think it's really more of the competitive takeaways.

Our final question is from Spencer Nam, Madison and William.

I'll be very quick, so I can give another person a chance. First question, so PANTHER in the U.S. with this FDA, people talking about with pressure from FDA to scrutinize these approval processes, are you seeing anything different that you hadn't seen before? For example, when you're going to a TIGRIS versus PANTHER, any difference in the FDA's attitude or approach to the approval?

Well, obviously, I don't want to comment on the specifics of our interactions with the FDA around a particular product for obvious reasons. But I would say that as you talk to other people in the industry and you see some of the work being done by APTIMA [ph] and other industry associations, it is fairly clear that the FDA has become, if you will, I don't want to say more rigorous. They've always been fairly rigorous but have become much more challenging in review processes. Enforcement activities are up, generally, across the board and can be quite challenging for a number of folks. So we're seeing much more action with the FDA in product reviews than there has been. As you look forward at the potential changes to the 510(k) process, those could be very significant. Again, we always like to remind people that a lot of the concerns about the 510(k) process have to do with devices. Now we're always wanting the devices and diagnostics space, but relatively infrequently, our diagnostic products, a particular concern in the use of the 510(k) pathway. And often, for example, in our business, when we do microbiology-related submissions, which are many, even in our 510(k)s we include clinical data. So it's not quite the same as people perceive it about the device side of the business. So I think the answer is the FDA is getting tougher, and you have to have sophisticated and extensive regulatory capability to stay up with it and we feel that we do.

And then a quick question. How long did you know about the PCA3 panel date?

Oh, I think we learned in the last couple of weeks. Something like that.

Jon Wood with Jefferies.

This is Brandon Couillard, in for Jon. Herm, does the guidance contemplate any share repurchase activity and/or any deleveraging?

It does. We intend to be active with our authorization. I mentioned before, we have roughly a little bit more than $100 million left. We intend to use that throughout the rest of the year.

Okay, and then quickly on the trich backlog, would you characterize the interest there as coming from competitive takeaways or these greenfield opportunities from those customers so far?

Yes, well, we wouldn't characterize it as backlog. It's just the launch process and getting everybody up and running. But I think it's actually a little bit of both. There are clearly existing methods that are out there today, but they're not very easily done and not readily scalable. So I think some of the interest we're seeing is from those areas, and then this will also become [ph] an opportunity because of the common sample type for other laboratories that cannot be doing the testing to add a capability.

And Michelle, thanks for your help today, and thank you, all, for your questions. I'd just like to wrap up by saying Gen-Probe's second quarter financial results were in line with our expectations overall as strength in women's health sales offset softness in blood screening due to supply chain fluctuations. The bottom line's strong profitability enabled us to exceed our stated EPS goal for the quarter. We also remain excited about the pipeline as the very early success of our trich launch and the performance of PANTHER in Europe gives us confidence in future U.S. product launches. Before we sign off, 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. Thank you for your time and attention today, and please call us if you have any follow-up questions.

Thanks very much for participating in today's call. You may disconnect at this time.