Cepheid (CPHD) Stays Neutral

We recently reiterated our Neutral recommendation on Cepheid (CPHD) with a target price of $16.00.

Cepheid reported a loss per share of 3 cents in the second quarter of fiscal 2010, compared to a loss of 12 cents in the year-ago quarter and the Zacks Consensus Estimate of a loss of 10 cents. Excluding special items, the company reported an EPS of 5 cents, compared to the year-ago loss of 4 cents per share.

Revenues were $49.6 million, up 21% from the year-ago quarter, of which $48.6 million (up 23%) was derived from product revenues. The company derives revenues primarily from the sale of two instrument platforms – SmartCycler and GeneXpert systems and associated reagents and disposables in the Clinical, Industrial, Biothreat and Partner markets. Revenue contribution from these markets was $37.7 million (up 41% y-o-y), $4.7 million (up 8%), $5.1 million (down 35%) and $1.2 million (up 47%), respectively.

Cepheid recorded an adjusted gross margin of 50% during the quarter, up 600 basis points from the year-ago period. Manufacturing process changes which led to reduced royalty payment to Abaxis (ABAX) and manufacturing efficiency led to the improvement in margin. In addition, gross margin was positively impacted by scale and to a lesser extent, product mix.

We also note that Cepheid’s royalty commitment to Roche (RHHBY) for certain PCR-related patents have already expired in this month, which amounted to 7.5% of US clinical system and test sales. Based on the product mix and the potential royalty payments for other agreements, which are expected to increase marginally, Cepheid expects gross margin of 53% during the fourth quarter.

We are also encouraged by the favorable industry dynamics. Molecular diagnostics, the fastest growing segment of the In-Vitro Diagnostics (17% CAGR 2008 – 2013), is expected to be an $8.7 billion market by 2013 from $3 billion in 2008. In addition, significant growth is expected in oncology and infectious diseases in the critical care segment as there is a high unmet need with respect to turnaround time, accuracy and costs. Many of Cepheid’s tests are expected to address these issues, which should result in robust revenue growth.

During the reported quarter, the company placed 106 GeneXpert systems and 478 modules taking the cumulative total to 1,605 GeneXpert systems and 8,618 modules. We are pleased to note that 60% of domestic installations are using 2 or more tests, up from 55% in the last quarter and 45% in the third quarter of 2009. This implies that sales of reagents are expected to rise going ahead. Steady sales of the instrument over the past few quarters coupled with greater utilizations of reagents should drive the company’s top line.

CEPHEID INC (CPHD): Free Stock Analysis Report

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