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Cepheid's Diagnostic Test Menu Expansion to Fend Competition

Zacks Equity Research

On Aug 8, we issued an updated research report on Cepheid ( CPHD). The company recently reported better-than-expected second-quarter 2014 results with narrower loss than the Zacks Consensus Estimate and revenues steering ahead of the mark. Moreover, the successful launch of three new products during the quarter (Xpert HPV, Xpert Norovirus and Xpert CARBA-R) in the international market bolsters our confidence in Cepheid's positive momentum over the long haul.


Revenues surged a robust 21.3% to $116.5 million, ahead of the Zacks Consensus Estimate of $115 million. However, the loss of 10 cents per share, although narrower than the Zacks Consensus Estimate of a loss of 13 cents, was 25% worse than the year-ago loss of 8 cents.


Despite the disappointing numbers, the company offered a decent revenue outlook for 2014. It now expects total revenue in the range of $452–$461 million, narrower than the earlier range of $446–$461 million. The Zacks Consensus Estimate of $459 million falls within the guidance range. However, Cepheid anticipates adjusted loss in the range of 34–37 cents per share, higher than the earlier loss per share expectation of 22–27 cents. The current Zacks Consensus Estimate of loss of 52 cents per share is pegged far beyond the expected range.


Cepheid serves a fast-growing molecular diagnostic market with strong demand for its tests. At present, the company has an impressive pipeline with 12 tests under active development in the ongoing year. We believe that the company has been successful in expanding its market share overseas, with a strategic interest in the emerging markets of Asia and Latin America. Evidently, Cepheid has shipped 926 GeneXpert systems to High Burden Developing Countries (:HBDC) in the last reported quarter. In our opinion, test menu expansion is a significant growth catalyst for this molecular diagnostic company.


The quarterly top-line performance at Cepheid generates optimism. The year-over-year revenue improvement came on the back of better-then-expected HBDC sales and improvement in commercial clinical business, which came on par with the company's expectations with impressive growth in the U.S. A solid increase in Cepheid's overall clinical business, which outweighed the expected decline in its legacy non-clinical business of $3 million, also contributed to the year-over-year rise in the top line.


In the last reported quarter, the company managed to overcome its prior poor margin performance and delivered a 330 basis points gross margin improvement. This reflected management's consistent progress in margin improvement initiatives within operational segments. 


However, we remain a tad unimpressed with the widened loss guidance for 2014, which we feel is in consideration of the ongoing difficult capital spending environment. Also, a consistent tough competitive landscape for key products continues to pose challenges for Cepheid. The stock currently carries a Zacks Rank #3 (Hold).


Key Picks from the Sector


Nonetheless, other medical instruments stocks such as Alphatec Holdings, Inc. ( ATEC), RTI Surgical Inc. ( RTIX) and Accuray Inc. ( ARAY) are expected to do well. While Alphatec and RTI Surgical carry a Zacks Rank #1 (Strong Buy), Accuray holds a Zacks Rank #2 (Buy).

Read the Full Research Report on CPHD
Read the Full Research Report on ARAY
Read the Full Research Report on ATEC
Read the Full Research Report on RTIX

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