MAKO Mako Surgical Corp. (MM)

Recently, Cepheid (CPHD) reported selected results for fourth quarter of 2012 based on preliminary analysis. The molecular diagnostic company also provided updates on the ongoing manufacturing issues and Xpert test availability.  

Elementary Results for the Fourth Quarter  

Cepheid currently expects revenues of about $92 million in the fourth quarter, up approximately 12.5% year over year. Growth was led by higher-than-expected revenues from commercial clinical reagents. However, it trails the company’s guidance as well as the current Zacks Consensus Estimate of $94 million.  

Cepheid envisages commercial clinical revenues to be around $72 million, higher than the prior outlook of approximately $69 million. Commercial clinical revenues were primarily driven by higher sales of Xpert Flu, Xpert MRSA and Xpert C.difficile as these offerings accounted for 30% normalized growth on a year-over-year basis. Moreover, placements of 59 GeneXpert systems in North America (accounting for lion’s share of Cepheid’s revenues) are expected in the quarter under review.

Clinical revenues from High Burden Developing Country (HBDC) program is expected to be in the neighborhood of $10 million, lower than the company’s forecast of $16 million. Cepheid failed to meet its own expectations due to choppy system placements in target countries and supply lag in the overseas operations. However, management expects to turn the tables in the first quarter of 2013.

As announced earlier, Cepheid expected adjusted commercial gross margin to be marginally above 60% and after considering HBDC business, the company targeted adjusted gross margin in the 51−52% range. Given the fact that Cepheid’s commercial clinical business is a high gross margin division relative to HBDC revenues, we expect Cepheid to achieve the target for gross margin for the fourth quarter.

Earlier, the company envisaged loss per share in the band of 1 cent and 3 cents on a GAAP basis and adjusted earnings in the band of 10 cents and 12 cents for the fourth quarter. Based on the preliminary analysis, Cepheid expects to surpass the high end of its earlier guidance for earnings. The current Zacks Consensus Estimate for the fourth quarter is loss of 2 cents.

Other Updates

As Cepheid faces a higher-than-expected demand for its Xpert tests for the fourth quarter, the company’s constant efforts to address manufacturing concerns is likely to pay off. The company disclosed that it is closer to returning to normal manufacturing operations after addressing the underlying issues, which negatively affected the financial results in the second half of 2012.

Cepheid expanded its capacity by setting up another Reagent on Board Automation Line (ROBAL) in Sunnyvale. The company is also set to round off its second ROBAL line at its manufacturing facility in Sweden and initiate related functions in the second half of 2013.

These initiatives are expected to yield positive results for Cepheid as the demand for Xpert offerings, mainly Xpert MRSA and Xpert Flu, continue to surge. While we believe that the disruption in the company’s manufacturing operations was temporary and waning, Cepheid’s efforts and management commentary encourage our confidence.

With a lukewarm end to 2012 for Cepheid, we look forward to 2013 with full optimism as the current headwinds take a backseat. The company has several catalysts to support long-term growth. We currently have a long-term Neutral recommendation on Cepheid. The stock carries a Zacks Rank #2 (Buy). Other medical sector stocks carrying a Zacks Rank #2 are Cyberonics Inc. (CYBX) and MAKO Surgical Corp. (MAKO).

 
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