CPHD Cepheid (MM)

We reiterate our Neutral recommendation on Cepheid (CPHD) following its fourth-quarter 2011 results. The company reported a strong fourth quarter with both revenues ($80.1 million) and earnings (6 cents per share) going past the Zacks Consensus Estimate.

We are impressed with Cepheid making a record placement of 175 GeneXpert systems in the fourth quarter in its commercial business, taking the total number of systems placed during the year to 565. The company placed 88 systems in North America based on its relationship with LABSCO and 14 Infinity systems, half of which were sold to new high volume customers. The company’s HBDC (High Burden Developing Countries) Program continues to gain traction with 181 system placements in the fourth quarter of 2011 (141 in the third quarter and 38 in the second quarter) taking the total number of systems placed under this program to 418 in 2011.

Apart from expansion of its menu, Cepheid is also looking toward expanding its market reach in both the US and international market. The company is in the process of expanding its direct sales force in Germany and South Africa. Having witnessed strong potential in the healthcare associated infection (“HAI”) market in Germany, Cepheid acquired the business from its distribution partner in early January and is developing its own direct sales organization. The company plans to acquire its distributor in South Africa shortly. Germany presents the largest revenue opportunity in Europe, given its upcoming infection control mandate. Although the emphasis on international market is in its initial stages, these markets hold tremendous opportunities.

The Sunnyvale, California based company currently offers 11 tests in the US and 12 outside the US. By the end of 2012, Cepheid expects to launch 2 additional tests in US (CT/NG and BCR-ABL v1) and Europe (CT/NG and BCR-ABL v2). Although the company is one of the leading players in the HAI segment, it is also looking at expanding in non-HAI markets, which includes critical infectious diseases, women’s health, virology and oncology and genetics. Several tests are under development and the company is looking at launching 10 new tests in each of these markets in the 2013–2014 timeframe. The company is also targeting up to 7 CLIA waived tests by the end of 2016, which would significantly expand the market potential of the GeneXpert system beyond hospitals and reference laboratories. The company has accelerated the development of CLIA-waived Xpert test (targeted toward flu) and expects the product to be available in the US during the 2013–14 flu season.

However, the current economic uncertainty continues to be a major headwind for the company. Cepheid’s peers such as Myriad Genetics (MYGN) and Genomic Health (GHDX) too are suffering from these market conditions. Despite high system placements under the HBDC Program, the company prefers to maintain a guarded stance. Our current recommendation on Cepheid is backed by a Zacks #3 Rank (Hold) in the short term.

 
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