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Cepheid Posts Wider-Than-Expected Loss; View Sombre

Zacks Equity Research

Cepheid (CPHD) reported second-quarter 2013 adjusted loss of 8 cents per share, significantly wider than the Zacks Consensus Estimate of loss of 3 cents per share. The result also missed the year-ago mark of earnings of 3 cents per share.

Adjusting for amortization expenses, Cepheid reported net loss of $6.6 million (or 10 cents per share) in the second quarter, a massive decline from net income of $1.1 million (or 2 cents per share) in the prior-year quarter.

Quarter in Detail

Revenues improved 19% year over year to $96 million in the second quarter, edging past the Zacks Consensus Estimate of $93 million. This reflects a record shipment volume of GeneXpert Systems and Xpert test cartridges. Growth was led by higher-than-expected revenues from High Burden Developing Countries (:HBDC) and robust growth in overseas commercial clinical business.  

Among the segments, the Clinical segment (up 26% year over year to $87.5 million) consisting of Clinical Systems (up 20% to $16.7 million) and Clinical Reagents (up 27% to $70.8 million) contributed about 91.1% to the total revenue in the quarter. Cepheid’s Non-Clinical business revenues dropped 25% year over year to $8.5 million.

On a geographic basis, product sales from mainstay North American market grew 1% year over year to $57.4 million whereas the overseas market recorded a 61% year-over-year surge to $38.6 million.

Placements of Cepheid’s GeneXpert systems improved slightly with its commercial Clinical business placements of 156 systems (compared with 133 in the year-ago quarter). Placements as part of the HBDC program were higher at 279 systems (138 in the prior-year quarter). This is also a sizeable rise from 122 placements in the sequentially prior quarter. Including the HBDC systems, a cumulative 4,522 systems (compared with 3,350 systems in the year-ago quarter) have been placed worldwide as of Jun 30, 2013.

Adjusted gross margin was 44.9% in the reported quarter, down 1,180 basis points (bps) from the year-ago period. The margin contraction was on account of unfavorable mix towards the lower-margin HDBC business.

Operating expenses amounted to $56.8 million, up 22.5% year over year, on the heels of higher research and development expenses (up 15.2% year over year to $18.8 million) and higher sales and marketing expenses (up 26.5% to $19.1 million) partially offset by lower general and administrative expenditure (down 12.7% to $9.6 million). Adjusted operating loss was $4.1 million in the quarter.

Cepheid exited the quarter with cash and cash equivalents of about $85 million compared with $95.8 million at the end of 2012.

Outlook Tweaked

Cepheid updated its guidance for 2013 to reflect ongoing business mix and higher investment in manufacturing operations. It expects revenues in the range of $380–$385 million compared with the prior outlook of $375–$385 million. The current Zacks Consensus Estimate is pegged at $383 million.

The company expects 2013 adjusted loss per share (considering the stock based compensation as a regular expense) in the range of 21–24 cents. The current Zacks Consensus Estimate of loss per share of 3 cents lies well ahead of the guidance range.

Per management, the guidance reflects a challenging capital spending environment in North America, uncertain contributions from products like Xpert CT/NG, Xpert Blood Culture and MTB and choppy HBDC program revenues.

Our Take

Cepheid reported a disappointing second-quarter as it missed the Zacks Consensus Estimate for bottom line by a wide margin. The low growth in the mainstay North American market was another downside in the quarter. Margin pressure as the HDBC business picks up is another area of concern. Furthermore, management expects the softness to continue in the third quarter reflected in its expectations of a nominal decline in top-line for the ongoing quarter.  

The dismal outlook for 2013 also failed to boost confidence. Although Cepheid has an impressive pipeline with 14 tests under active development, the company’s expectations for full-year results reflect heavy caution and looming uncertainties. As a result, we also prefer to avoid the stock as gaining positive momentum in the near-term seems to be an uphill task for the company.

Following the disappointing earnings performance, Zacks Investment Research downgraded Cepheid to a Zacks Rank #5 (Strong Sell) on Jul 19. However, other stocks such as ResMed Inc. (RMD), Align Technology Inc. (ALGN) and MAKO Surgical Corp. (MAKO) appear impressive. While MAKO holds a Zacks Rank #2 (Buy), the other two are Zacks Rank #1 (Strong Buy) stocks.

Read the Full Research Report on ALGN

Read the Full Research Report on RMD

Read the Full Research Report on CPHD

Read the Full Research Report on MAKO

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