Recently, we upgraded Cepheid (CPHD) to Outperform from Neutral impressed as we are by its strong system placements over the past few quarters and a robust growth outlook.
System placements continue to remain strong as Cepheid has been expanding its test menu besides entering into strategic partnerships to support distribution. We are impressed with the record placement of 175 GeneXpert systems in the last reported quarter in its commercial business, taking the total number of systems placed during 2011 to a healthy 565. Moreover, system placements under the High Burden Developing Countries (‘HBDC’) category were also encouraging.
Apart from expansion of its menu, Cepheid is also looking toward widening its market reach in both the US and international markets. Since the company records only 20% of its Clinical revenues from outside the US, it has a lot of room for market share gains overseas. 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 plans to acquire its distributor in South Africa shortly. Germany presents the largest revenue opportunity in Europe, given its upcoming infection control mandate. The company has established its operation in China and Japan and is working on securing regulatory approval for certain Xpert products there.
Cepheid is also working on expanding its portfolio of tests. Although the company is one of the leading players in the HAI segment, it is also looking to make inroads in the non-HAI markets, which include 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 seven 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 for flu) and expects the product to be available in the US during the 2013–14 flu season. Successful commercialization of these tests should further improve Cepheid’s top line going ahead.
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) are also suffering from these external factors. Despite high system placements under the HBDC Program, the company prefers to maintain a guarded stance. Consequently, the company provided a wide guidance range of 30−50% growth of HBDC revenues during 2012 given the uncertainties in the funding environment.
Our recommendation is backed by a Zacks #1 Rank (Strong Buy) in the short term.
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