Flash Update Cepheid's (cphd) Q2 Loss Narrower than Estimate, View Up – Jul 29, 2016

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Aug 4, 2016

Cepheid, Inc.



Note to Readers: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 2Q16 Earnings
Prev. Ed: Jun 28, 2016: 1Q16 Earnings (broker price and share price are as of Jun 15, 2016)
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Flash Update

Cepheid's (CPHD) Q2 Loss Narrower than Estimate, View Up – Jul 29, 2016

Cepheid posted 2Q16 adjusted loss (considering stock-based compensation expense as a regular spending) per share of $0.09, reflecting a y/y improvement of 33.3%.
This adjusted loss figure also compared favorably with the Zacks Consensus Estimate of a loss of $0.14.
Including one-time items, the company’s reported net loss in 2Q16 was $10.2 million or loss of $0.14 per share, compared with the net loss of $16.7 million or loss of $0.23 per share of 1Q16.
Revenues in Detail
Cepheid witnessed a 10% y/y growth (up 12% at constant exchange rate or CER) in revenues of $146 million in 2Q16. The revenue figure remained in line with the Zacks Consensus Estimate. The y/y improvement was driven by balanced segmental growth.
Geographically, Cepheid witnessed 7% increase in its 2Q16 North American revenues of $81.2 million. This quarter recorded North American revenue’s return to growth with system placements reaching more than 2,000 and total global placements exceeding 11,000.
On the other hand, Cepheid’s international revenues improved 21% at CER to $64.8 million, driven by growth in both HBDC and commercial businesses.
Revenues at the Reagents and Disposable segment improved 12% y/y (14% at CER) to $121.2 million. This segment benefited from record revenue in each of the company’s franchise families HAIs, Critical Infectious Disease, excluding Flu, Sexual Health, Virology and Oncology and Genetics.
Operational Update
Cepheid's adjusted gross margin expanded 200 basis points (bps) y/y to 51%, on account of a 5.9% hike in adjusted cost of sales.
In 2Q16, adjusted operating expenses spiked 8.9% to $78.5 million. Adjusted operating loss incurred was $6.2 million, as against the adjusted operating loss of $9.3 million of 1Q16.
Financial Position
Cepheid exited 2Q16 with cash and cash equivalents and short-term investments of $323.5 million compared with $292.3 million as of 1Q16. Year-to-date, Cepheid witnessed $24.7 million of cash flow compared with the cash flow of $7.9 million at the end of 2Q15.
Cepheid updated its financial guidance for FY16. The company currently expects adjusted loss per share in the range of $0.22–$0.25 (an improvement from the earlier projection of loss of $0.29–$0.35) on revenues of $618–$635 million (unchanged) (representing growth of 15%–18% over 2015). The current Zacks Consensus Estimate for revenues is $622 million while that for the loss figure is $0.32 per share.
Details, other news update and broker comments will be provided in the next edition.

Portfolio Manager Executive Summary

Cepheid (CPHD) develops and markets systems to rapidly conduct nucleic acids (NA) analysis. The systems developed by the company can perform a broad range of assays, including diagnosis of infectious organisms, identification of bioterrorism agents, and determination of genetic profiles helpful in cancer diagnosis. The company's primary instrument platform is the GeneXpert system.
Of the 17 firms analyzing Cepheid, 9 (52.9%) assigned neutral ratings while 8 (47.1%) provided positive ratings. None of the firms gave a negative rating on the stock.

Neutral or equivalent outlook – (9/17 firms): As per estimates by neutral firms, Cepheid’s 1Q16 results exceeded estimates as well as market’s expectations. In spite of this, neutral firms remained on the sidelines owing to declining growth witnessed in the company’s core business over quite some time. As per one of the firms, the revenue beat was driven by benefits of a late surge in flu season and record systems placements, particularly in commercial systems which included 9 Infinity placements. On the profitability front, Cepheid’s gross margin exceeded most of the neutral firms’ estimates due to materialization of manufacturing efficiencies. However, the firms were disappointed with the y/y decline in Cepheid’s 1Q16 gross margin figure, driven by lower-margin HBDC (high burden developing country) sales. A few firms view the delay in launch of the point-of-care test – Omni system – as an opportunity for Cepheid’s competitors to gain traction in the molecular diagnostics market as they already have a point-of-care molecular test in the market. Further, one of the firms considers Cepheid’s reiterated FY16 view as a conservative one, despite the company beating results in 1Q16.

Positive or equivalent outlook – (8/17 firms): For majority of the bullish firms, Cepheid’s 1Q16 results squarely beat their estimates as well as market expectations. As per one of the firms, the revenue upside was primarily driven by growth in most of Cepheid’s portfolio categories along with benefits from the company’s recently hired sales force. A few firms were particularly upbeat about Cepheid’s notable strength in systems sales and increasing sales force productivity. However, bullish firms differed in their opinion with respect to Cepheid’s delay in expected launch of its point-of-care test – Omni system. While one of the firms believed that this news will hurt the company’s share price over the near term, another believed that it will have no impact on Cepheid’s FY16 revenues. Overall, the firms with a bullish stance were not happy with the postponement.
On a brighter note, one of the firms was encouraged to notice Cepheid’s plans to obtain CLIA-waivers for GeneXpert II and IV and introduce them to the U.S. point-of-care market. This is expected to help the company capitalize on its existing 20-test menu in this valuable market segment. Lastly, most of the bullish firms were impressed with the extensive test menu, large installed base and broad line-up of leading instruments offered by Cepheid in the molecular diagnostics space.
Jun 28, 2016

Cepheid (CPHD) is a molecular diagnostics company that develops, manufactures, and markets fully integrated systems for genetic analysis in the clinical, industrial, and biothreat markets. The company's systems enable rapid, sophisticated genetic testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. The company's systems integrate a number of complicated and time-intensive steps, including sample preparation, DNA amplification and detection, which enable the analysis of complex biological samples in its proprietary test cartridges. The company headquartered in Sunnyvale, CA, was founded in 1996. More information is available on the company’s website www.cepheid.com.
The firms identified the following factors as crucial for considering investment in Cepheid:

Key Positive Arguments

Key Negative Arguments

Cepheid’s flagship product, GeneXpert system, is poised to deliver value to the clinical diagnostic and industrial sectors with a growing test menu.

Cepheid faces competition from strong players such as Roche Diagnostics, Abbott Laboratories, Hologic, Becton, Dickinson and Meridian Bioscience.

The company currently has a broad test menu that runs on the system. The firms are positive about the robust growth of the commercial franchise.

Although the HBDC program provides certain strategic benefits to Cepheid, gross margin in HBDC sales is lower.

Cepheid is the market leader in molecular diagnostics for HAIs with a substantial portion of revenue generated from MRSA testing.

Cepheid is also exposed to increasing average selling price (ASP) pressures in its core HAI market.

Cepheid’s Xpert CT/NG test remains a major growth catalyst, going forward. The firms are optimistic about incremental revenue from the test going forward.

Cepheid’s ongoing investments can negatively affect near-term earnings growth.

Note: The company’s fiscal year coincides with the calendar year.

Jun 28, 2016

Long-Term Growth

The molecular diagnostics market is the fastest growing portion of the U.S. in-vitro diagnostics market. Molecular tests have several advantages over other forms of diagnostic testing, which include higher sensitivities, the ability to perform multiple tests and the ability to test for drug resistance or individual genes; this segment of the market remains the fastest growing. Cepheid differentiates itself from its competitors with the GeneXpert system, which is a fully integrated, easy-to-use system for PCR-based DNA testing in the market.
Cepheid is focused on driving growth, primarily by penetrating further in the clinical market and launching new products. Moreover, over the last few years, public awareness has been generated regarding the dangers of methicillin-resistant Staphylococcus aureus (MRSA). With information about the negative effects of MRSA, healthcare providers are trying hard to tackle the situation. In this backdrop, Cepheid is expected to witness increasing market adoption of its tests. The company is a leading player in the Hospital-acquired infection (HAI) segment. Although Cepheid is one of the leading players in the HAI segment, the company is also looking at expanding in non-HAI markets for other infectious diseases and oncology. The firms believe that the company’s CT/NG test marks the onset of Cepheid’s foray into non-HAI markets. The firms share a unanimous opinion that the CT/NG test from Cepheid has bright growth prospects.
Cepheid plans a menu of 9 oncology tests in leukemia, bladder, breast, and pancreatic cancers, which the company is developing in partnership with academic researchers. The firm believes that while some investors may be skeptical about Cepheid’s ultimate success in this challenging market, it is optimistic that the company will eventually drive significant incremental revenue and profitability, over the long run.
In addition, management is consistently working toward the commercial launch of its products in emerging markets, especially India and China. This, along with the increasing adoption of the GeneXpert platform in commercial as well as HBDC markets, will increase the company’s addressable market. Moreover, management is extending every effort possible in expanding the market share of Cepheid’s differentiated platform to ensure the company’s leadership position over the long run.
Thus, the neutral firms believe that backed by the best-in-class molecular platform technology, industry-leading installed base, a long potential runway for continued base business growth, and the broadest and deepest pipeline in the industry, Cepheid’s shares represent a core long-term holding for growth investors.

Jun 28, 2016

Target Price/Valuation

Rating Distribution


47.1% ↓


52.9% ↑



Avg. Target Price

$37.71 ↓

Maximum Target

$47.00 ↓

Minimum Target

$28.00 ↓

No. of Analysts with Target price/Total


Upside from current


Maximum Upside from current


Minimum Downside from current


Risks to the target price include FDA and other government regulations, intellectual property, technological obsolescence, tightening hospital capital budgets, pipeline execution, potential gross margin pressure driven by competition and potential market saturation of GeneXpert systems, new product ramps, and capital spending.

Mar 10, 2016

Recent Events

On Apr 28, 2016, Cepheid reported 1Q16 results. Highlights are as follows:

  • Cepheid reported adjusted loss (considering stock-based compensation expense as a regular spending) per share of $0.04 in 1Q16, compared to adjusted income per share of $0.06 in 1Q15.

  • Cepheid witnessed a 9% year over year (y/y) growth in revenues to $144.8 million in 1Q16.

  • For FY16, Cepheid maintained its revenue projection at the range of $618–$635 million, which reflects year over year (y/y) growth of 15%–18%. Cepheid also continues to expect to post adjusted loss per share in the range of $0.29–$0.35.

Other Events
On Jun 15, 2016, Cepheid announced that its Xpert HIV-1 Qual test has been awarded World Health Organization (WHO) prequalification, making it one of the first molecular point of care tests designed for HIV to be given this designation. Inclusion in the prequalification list signifies that Xpert HIV-1 Qual meets WHO's stringent performance, quality, safety and reliability standards, and fulfills a performance measure established for many developing countries and global health participants before they can allow broad deployment of a new technology.
On May 18, 2016, Cepheid welcomed publication of new guidance from the US National Tuberculosis Controllers Association (NTCA) and the Association of Public Health Laboratories (APHL) for users of Xpert MTB/RIF to support decision-making on using Airborne Infection Isolation (AII), commonly referred to as respiratory isolation, in healthcare settings. Cepheid's Xpert MTB/RIF test received FDA clearance for expanded claims relating to respiratory isolation in Feb 2015, but this is the first formal set of guidelines by NTCA and APHL for users of Xpert MTB/RIF.

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