Narrower-than-Expected Loss at Cepheid, View Tweaked

Cepheid (CPHD) reported a loss of 10 cents per share in the first quarter of 2014, a substantial decrease from the year-ago income of 2 cents a share. However, loss was narrower than the Zacks Consensus Estimate of a loss of 19 cents. Including one-time items, the company reported a loss of 13 cents per share.

Revenues in Detail

Revenues grew 16.3% year over year to $106.9 million in the first quarter, edging past the Zacks Consensus Estimate of $105 million.

This increase came on the back of strong market adoption of GeneXpert Systems and broadening reach of the Xpert test portfolio. Growth was also driven by strong business in High Burden Developing Countries (:HBDC) and improved performance in the commercial clinical business.

Segments in Detail

The Clinical segment (up 26.1% year over year to $100.4 million) contributed about 93.9% to total revenues in the reported quarter. The Clinical segment comprises Clinical Systems (up 38.4% year over year to $17.3 million) and Clinical Reagents (up 23.8% year over year to $83.1 million). The company expects Commercial Clinical revenues in the range of $335–$346 million in 2014, up 14% – 18% from 2013.

On the other hand, Cepheid’s Non-Clinical & Other business revenues declined 47.2% year over year to $6.5 million. The company expects non-Clinical business revenues to decline to approximately $27 million in 2014.

During the reported quarter, Cepheid installed 181 GeneXpert systems in its commercial Clinical business and another 322 GeneXpert systems as part of its HBDC program. The total count of systems placed worldwide, including the HBDC systems, scales 6,012 as of Mar 31, 2014.

Operational Update

Cepheid’s gross margin (considering stock-based compensation as regular expense) declined 370 basis points (bps) year over year to 50.6% in the reported quarter, reflecting an unfavorable mix toward the lower-margin HBDC business. Cost of goods sold during the quarter spiked 25.7% to $52.9 million.

In the reported quarter, operating expenses amounted to $58.4 million, up 26.4% year over year.

Financial Update

Cepheid exited the quarter with cash and cash equivalents and short-term investments of $267.8 million compared with $74.9 million as on Dec 31, 2013. The company issued convertible Senior Notes in Feb 2014 thereby collecting net proceeds of $336.4 million.

In the first quarter of 2014, Cepheid used $16.9 million in operating activities compared to generation of $15 million cash flow from operations in 2013. Capital expenditure decreased 1.9% year over year to $8.8 million.

2014 Guidance Tweaked

Cepheid revised its earnings per share guidance for 2014. While it continues to expect total revenues in the range of $446 – $461 million, the company now expects a loss of 22 – 27 cents per share in 2014. This includes the impact of stock-based compensation expense. Earlier, the company was expecting a loss of 25–30 cents per share. The new guidance reflects the issuance of convertible Senior Notes in Feb 2014.

Excluding the impact of stock-based compensation expense, the company expects earnings in the range of 19–24 cents per share (old guidance: 24–29 cents per share)

The Zacks Consensus Estimate of $457 million is towards the higher end of the revenue guidance range.

Cepheid expects total revenues in the range of $113 – $115 million in the second quarter of 2014. Moreover, excluding the impact of stock-based compensation expense, the company expects bottom line results to range from a loss of a penny to earnings of 2 cents per share.

Our Take

We are encouraged by the better-than-expected first quarter results. Going forward, Cepheid’s prospects seem strong with growing adoption of the high throughput Infinity system and an expanding molecular diagnostics test menu. Moreover, the launch of Xpert HPV and Xpert Norovirus outside the U.S. provides confidence regarding the company’s potential.

Additionally, with the company expanding its geographical boundaries to Italy, Spain and Scotland, strategies to expand in emerging markets like India and China, and Xpert Trichomonas and Xpert CARBA-R targeted for CE-IVD release in the second quarter of 2014, we are optimistic about Cepheid’s potential to improvise its performance in 2014.

However, the non-performance of the Non-clinical business in the first quarter will continue to remain a concern for the company.

Currently, Cepheid carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader healthcare sector that warrant a look are Amgen Inc. (AMGN), Myriad Genetics Inc. (MYGN) and ANI Pharmaceuticals, Inc. (ANIP). All these companies sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CPHD
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