We recently reiterated our Neutral recommendation on Cepheid (CPHD) with a target price of $38.00.
The company reported a mixed second quarter. Its adjusted earnings per share (“EPS”) of 3 cents surpassed the Zacks Consensus Estimate by a penny while revenues of $81 million fell short of the $83 million expectation.
System placements remain strong as Cepheid expands its test menu and enters into strategic partnerships to support distribution. In the reported quarter, the company placed 133 GeneXpert systems in its commercial business that included 54 systems in North America (including 7 Infinity systems) and 79 in the international market. Revenues from clinical systems (including the HBDC business) increased 5% year over year and 11% on a sequential basis to $14 million.
With revenues from High Burden Developing Countries (“HBDC”) being flat, the growth was almost entirely associated with the commercial business. The company witnessed growth despite the persistent economic uncertainty in Europe and renewed concerns in the US regarding the potential impact of healthcare reforms.
Apart from menu expansion, Cepheid is also looking to expand its market reach in both the US and international markets. The company, with its decision to go direct in Germany in the first quarter, placed 15 systems in Germany to support the National Infection Control mandate that was effective from March, 2012. Cepheid has witnessed outright purchases rather than reagent rentals, and is thereby targeting the regions of UK, France, South Africa and the Benelux on a direct basis. While the situation in southern Europe continues to remain challenging, the outlook is promising for the north. Although the international market emphasis is in its initial stages, it represents tremendous opportunities.
Cepheid has continuously worked on expanding its portfolio of tests. Although the company is one of the leading players in the HAI segment, it has also been successful in the non-HAI markets. This includes critical infectious diseases, women’s health, virology and oncology and genetics. Several tests are under development and the company is looking forward to introducing the tests in each of these markets over the next few years. This is significant as the market is highly competitive with the presence of players such as Myriad Genetics (MYGN) and Genomic Health (GHDX), among others.
However, revenues associated with the HBDC business during the reported quarter were lower than the company’s expectations. With the agreement in place to bring down the price of the Xpert MTB/RIF test in August, the first few quarters will record negative gross margin from HBDC sales as accounted. In addition, Cepheid had to lower its EPS guidance to reflect changes in its outlook for gross margin for the HBDC business and a less favorable currency movement. Moreover, operating expenses are on the rise to support various developmental programs.
Our longer-term Neutral recommendation is backed by a Zacks #3 Rank (hold) in the short term.
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