CPHD Cepheid (MM)

Recently, we reaffirmed our Neutral recommendation on Cepheid (CPHD) with a target price of $34.00.

Cepheid reported an adjusted EPS of 2 cents during the first quarter of fiscal 2011, much better than the loss of 6 cents in the year-ago period and the Zacks Consensus Estimate of a loss of 1 cent. Revenues during the quarter increased 25.4% to $60.2 million, beating the Zacks Consensus Estimate of $57 million.

The upside was driven by a 22% growth in product sales to $57.6 million attributable to strong sales of reagents and systems. Based on strong revenue growth, Cepheid was able to improve its bottom line.

Among the different markets, the Clinical segment consisting of Clinical Systems (up 20% year over year to $11.6 million) and Clinical Reagents (up 31% to $38.6 million) contributed about 87.2% to total product sales during the quarter. Cepheid’s Non-Clinical business dropped 6% year over year to $7.4 million. Sales from North America and the international market recorded a year-over-year increase of 14% and 53%, respectively.

The strong growth in the Reagents business was based on more than 30% growth in Healthcare Associated Infections (HAI) test portfolio. Within the HAI test portfolio, every test grew both sequentially and on a year-over-year basis. While MRSA continues to grow, the C. difficile test maintained its strong performance recording more than 100% growth driven by both new customers and higher adaptation within the installed base.

Cepheid also witnessed a strong quarter in terms of systems placements in both its commercial business and in High Burden Developing Countries (HBDC). Excluding HBDC, the company placed 120 GeneXpert systems during the quarter consisting of 43 in the US (compares favorably with 36 and 31 systems in the corresponding quarters of 2010 and 2009, respectively) and 77 in the international market.

International system placements were driven by strong performance in Germany, where discussions are ongoing regarding potential guidelines for MRSA surveillance of high risk patients. The company also placed an Infinity system in Scandinavia, which represents its second European placement for the system.

Interest in C. difficile testing continues to contribute to GeneXpert system demand. It is also encouraging to note that the first Infinity system customer in Europe (a major University in London) has witnessed a lower C. difficile infection rate thereby resulting in fewer ward closures. Moreover, the company is working towards expanding the test menu, which in turn should make GeneXpert more attractive.

Cepheid recorded an adjusted gross margin of 57.5% on product sales during the reported quarter (54.6% in the fourth quarter of 2010), and up by a noteworthy 1,100 basis points compared year over year. This was due to a favorable product mix and a greater proportion of higher-margin Clinical Reagent sales.

We also note that Cepheid’s royalty commitment to Roche (RHHBY) for certain PCR-related patents had expired in August 2010, which amounted to 7.5% of US clinical system and test sales. The royalty phase out (May 2012) will continue to benefit the company over the next 15 months. For the full year, depending upon actual product and geographic mix and HBDC contribution, Cepheid expects the adjusted gross margin in the range of 55%−57%.

However, Cepheid continues to remain cautious about the general capital spending environment in both the US and Europe. The company does not expect a significant change in capital spending in 2011 compared to 2010.

Although system placements for the HBDC program during the quarter were encouraging, Cepheid remains cautious with respect to system placements, and any associated revenues in the near term.

This is because revenues from this program depend on the development of separate implementation guidelines for each country and the availability of funding. Consequently, uncertainty remains regarding the gestation period for funding arrangement.

 
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