Brexit, FDA demands and other pressures hit Neogen’s top line in Q1

Neogen is enjoying strong demand for its gene tests that help farmers select ideal traits in their animals.
Michigan-based Neogen ($NEOG) managed to chart 12% sales growth in Q1, despite the U.K.’s decision to leave the European Union, which had an immediate impact on revenues from the company’s rapidly growing Scottish operation. Neogen has been expanding its genomic-testing services, which it offers to farmers looking to breed animals with sought-after traits, and its DNA testing facility in Scotland contributed to 21% worldwide revenue growth for its genomics business, the company said on September 27.
Neogen, which also markets a range of animal- and food-safety products, reported total revenues of $83.6 million in the quarter, and net income that increased 6% year-over-year to $9.9 million, or 26 cents per share. Although negative currency translation against the Brazilian real and the euro stabilized during the quarter, the company reported, Brexit caused the British pound to fall 10% against the dollar. Overall currency declines shaved $1.9 million off revenues and 2 cents off the bottom line.
First-quarter income beat analysts’ estimates by a penny, but revenues fell short by more than $2 million, and Neogen’s stock dropped nearly 5% to $54.78.
Neogen CEO James Herbert tried to focus on the upsides in the company’s earnings report. Neogen has reported revenue increases in all consecutive quarters of the past 11 years, for example. And in animal genomics, Neogen has boosted its market share in the cattle, pig and swine markets.
But there were other hurdles in the first quarter, not the least of which was trouble from the FDA. Neogen had been marketing a thyroid supplement for dogs, but it was one of six companies warned by the agency in January that its product had not been approved for safety and efficacy issues and may be forced off the market. Neogen registered for FDA approval of its product ThyroKare, but on July 28, the company had to stop marketing it, Herbert said during a phone call with analysts after the earnings release. The product brought in about $6.6 million in sales last year.
The company is “continuing to aggressively pursue that approval,” Herbert said, estimating that it would take six months to complete a clinical trial required by the FDA. And even though ThyroKare wasn’t Neogen’s biggest seller, “it’s been a nice revenue generator, and will be again in the future,” he said.
Strong growth in Neogen’s genomics-testing business helped moderate the pressure on the top line. The company expanded its overseas presence by opening a lab in Europe and by purchasing Deoxi Biotecnologia, a genetics-testing lab in Brazil.
Neogen is riding a wave of demand for products that allow animal breeders to use genomics to improve herd health. Merck Animal Health formed a partnership with Neogen in 2014 to co-market genomic tests to dairy producers. Among the other animal health companies forging into this area is Zoetis, which this March introduced Clarifide, a genetic test to detect the risk for six common diseases in Holstein cattle.
During the earnings call, Herbert told investors Neogen is out looking for acquisition targets in both its food-safety and animal-health businesses, both of which play in industries that are facing “consolidation time,” he said. “We’ll be looking at places to do bolt-on acquisitions, and we’ll continue to build on our international markets.”
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