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




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Revenues
Cepheid’s revenues of $144.8 million improved 9% y/y (up 13% at constant exchange rate or CER) in 1Q16, which exceeded management’s expectation.

The y/y upside in revenues is primarily attributable to solid overall performance, with both of its segments reporting strong y/y growth. Notably, Cepheid’s 1Q16 placements included the company’s milestone 10,000th GeneXpert System. Impressively, although Cepheid has been placing GeneXperts since 2006, more than half of the 10,000 system installed base has been added in the last 10 quarters, highlighting strong momentum in system adoption.

On a geographic basis, in 1Q16, product sales from the mainstay North American market remained flat y/y at $82.4 million, since a substantial decline in non-clinical revenue neutralized growth in Cepheid’s Clinical business. The overseas market recorded a 24% y/y (up 35% at CER) improvement to $62.4 million in 1Q16, driven by growth in both HBDC and commercial businesses.

From 1Q16, Cepheid’s operating segments include Systems and Other and Reagents and Disposable.

Revenues at the Systems and Other segment grew 30% y/y (33% at CER) to $24.3 million, contributing 16.8% to total revenue in 1Q16. Notably, 1Q16 marked the highest revenue for systems in any first quarter in the company's history. Growth in this segment was primarily backed by strong placements of the GeneXpert system.

Revenues at the Reagents and Disposable segment improved 6% y/y (up 10% at CER) to $120.5 million, contributing 83.2% to total revenue. This segment benefited from a severe flu season, which in turn boosted revenues.

The Zacks Digest average for 1Q16 revenues were in line with the company’s report.

Provided below is a summary of revenue as compiled by the Zacks Digest:


Total

Revenue

($ in

million)

1Q15A

2015A

1Q16A

2Q16E

3Q16E

4Q16E

2016E

2017E

2018E

Total

Revenue

$132.6

$538.6

$144.8

$145.8 ↓

$155.1

$177.2

$623.0↓

$714.9↓

$814.7↓

Digest

High

$132.6

$539.0

$145.0

$146.0 ↓

$161.0

$182.3

$628.1

$734.3↓

$837.8↓

Digest

Low

$132.6

$538.6

$144.8

$145.0 ↓

$152.5

$169.0

$618.3↓

$704.0↓

$789.0↓

y/y Growth

24.1%

14.6%

9.2%

10.1% ↓

22.6%

20.5%

15.7%↓

14.7%↓

14%↓



Outlook: Cepheid’s FY16 revenue projection is maintained in the range of $618–$635 million, reflecting 15%–18% growth from FY15. At CER, the growth rate is expected at around 18%–21%.

In FY16, management earlier expected a small hedge loss in total y/y impact of almost $8 million. Cepheid also projected a strong contribution from its emerging market business, inclusive of HBDC in FY16 with considerable contributions from India.

Management was previously optimistic that the developments in infrastructure will bode well for the company’s growth in FY16. Additionally, management expected the North American sales team to help drive adoption, which in turn, has the potential to boost revenues.

Meanwhile, management was of the opinion that the distribution of revenues in FY16 will be more loaded in 2H16.

Instrument and Systems

Cepheid’s commercial system placement count for 1Q16 was substantially higher than any other first quarter in the company's history. Commercial system placements included 9 Infinitys, highlighting the company’s strong start to FY16.
Reagents
Notably, Cepheid’s commercial reagent business topped $100 million for the first time in the history of the company.
Further, Cepheid’s HAI franchise remained the largest dollar contributor to Reagent revenues although the company was upbeat about the Critical Infectious Disease franchise that has been witnessing continued growth in Flu, Flu/RSV and TB. During 1Q16, HAI contributed less than 40% of Cepheid total revenue. Management expects this trend to continue as growth in the Critical Infectious Disease, Sexual Health and Virology product portfolios continues to outpace growth in HAIs.
Currently, Cepheid FY16 HAI priorities include driving faster adoption of a number of new tests such as Carba-R. Similar to MRSA, Carba-R is evolving into a diagnostic and surveillance opportunity. Moreover, Cepheid expects some of its customers to introduce screening programs amongst high-risk patient populations in areas that have seen outbreaks of carbapenemase-producing organisms (CPOs). Cepheid expects the global molecular HAI market to continue to grow in the days ahead.
Within the HAI portfolio, critical Infectious Disease performed strongly during 1Q16, with higher-than-expected flu revenue associated with continued gains in market share. Per management, Cepheid’s customers are increasingly recognizing the benefit of products with improved sensitivity and specificity, especially in seasons where influenza strain variants can impact conventional test performance.
On the other hand, Cepheid’s sexual health business continued to show considerable growth, while management was particularly encouraged by the opening of a second Dean Street-style sexual health clinic in London, which points to the potential proliferation of this model for delivery of sexual health services. Management believes that this high volume point-of-care application for Hologic’s GeneXpert Infinity System is a compelling reference for even the highest throughput customers.
With respect to virology, the company’s revenue grew 40% sequentially, albeit off of a small base. Per management, this is clearly a new market for Cepheid. Currently, Cepheid is at an early stage of penetration in the virology market, which naturally gives the company ample opportunity to expand. Nevertheless, management believes that the company is making solid progress in the market.



Total

Revenue

($ in

million)

1Q15A

2015A

1Q16A

2Q16E

3Q16E

4Q16E

2016E

2017E

2018E

Systems & Others

$18.7

$90.7

$24.0

$25.7

$22.6

$29.8

$102.8

$97.1

$71.0

Reagent & Disposable

$114.0

$447.9

$120.7

$120.6

$133.5

$146.9

$521.3

$621.2

$718.0


Xpert CT/NG Test:
Cepheid received the FDA clearance and the European CE Mark for its Xpert CT/NG test in 2012. Xpert CT/NG is an innovative, high-quality in vitro molecular diagnostic test, based on the GeneXpert Systems, used for the detection and differentiation of Chlamydia trachomatis (CT) and Neisseria gonorrhoeae (NG). The clearances ensure that same-day patient consultation and treatment is possible for two of the most common sexually transmitted bacterial infections in the U.S. The Xpert CT/NG can deliver results within 90 minutes. Gonorrhea and chlamydia can be treated more easily in case of early detection and diagnosis. The optimal way to reduce false positive results for gonorrhea is by including more than one genetic target. Hence, Cepheid’s latest offering including tests for both CT and NG improves the accuracy of results.
The Xpert CT/NG test was Cepheid’s fastest dollar-grosser in the commercial portfolio in 2Q15. During the quarter, the company had 600 customers in the U.S. and 350 in its direct market internationally. The CT/NG Test is now almost a $36 million annualized business for Cepheid.
Xpert MTB/RIF Test: On Aug 28, 2013, the U.S. FDA categorized Cepheid's Xpert MTB/RIF test as 'Moderate Complexity' under the Clinical Laboratory Improvement Amendments (CLIA). The test is the first and only molecular TB (tuberculosis) test to be categorized as Moderately Complex. The test runs on Cepheid's GeneXpert Systems and is designed especially for the rapid molecular detection of Mycobacterium tuberculosis complex (MTB-complex) DNA. Cepheid believes it has the most differentiated offering in the molecular diagnostics space. Arguments in favor include unmatched analytical performance, ease-of-use, speed and scalability. Xpert MTB/RIF Ultra is currently on track for commercial release outside the U.S. in the later part of FY16. The company has received order from India for roughly 800,000 MTB/RIF tests scheduled to be delivered in FY16.
Per management, a new consensus statement recommends that in-patients with suspected infections pulmonary TB can be released from respiratory isolation after two Xpert MTB/RIF negative results. These recommendations from the U.S. National Tuberculosis Controllers' Association (NTCA) and the Association of Public Health Laboratories (APHL) in conjunction with the expanded FDA claims that were obtained in Feb 2015 is expected to drive standardization of patient management and use of Xpert MTB/RIF in the algorithm for managing patients suspected of pulmonary TB infection in the U.S.
Xpert HPV Test: On Apr 2, 2014, Cepheid announced the commercial launch of Xpert HPV in Europe. Xpert HPV is a 60-minute test capable of diagnosing high-risk human papillomavirus DNA in captured cervical cells. The test runs on Cepheid's GeneXpert System. Management saw increased HPV adoption in the first quarter almost doubling the number of customers using the test in the company’s direct geographies.
Per management, in the international market Cepheid’s Xpert HPV test currently has the potential to support the transition to a rapidly growing HPV primary screening market. Indeed, there are many countries and institutions that have recently changed or are planning to change their HPV testing algorithms in the coming years.
Xpert Norovirus: On Apr 10, 2014, Cepheid reported the release of Xpert Norovirus, a qualitative in vitro diagnostic test for rapid identification and differentiation of Noroviruses genogroup I (GI) and genogroup II (GII), to be marketed as a CE IVD product under the European Directive on In Vitro Diagnostic Medical Devices. The test runs on Cepheid's GeneXpert System, the world's leading molecular diagnostic platform. It was made commercially available in 2014. On Jul 27, 2015, Cepheid received a warning letter from the FDA which concerned its Xpert Norovirus test and deficiencies in the production quality at its Stockholm, Sweden manufacturing facility. The company is currently working with the FDA to address and resolve the problems cited in the letter. However, as the Xpert Norovirus test is not sold or distributed in the U.S., its sale is likely to remain unaffected in the domestic market.
Xpert TV: On Sep 3, 2014, Cepheid released Xpert TV, an on-demand molecular test for rapid, accurate and reproducible identification of Trichomoniasis (TV) infections in both males and females. The test will be marketed as a CE-IVD product under the European Directive on In Vitro Diagnostic Medical Devices, bringing the total number of CE-IVD tests available to nineteen. Xpert TV runs on Cepheid's GeneXpert System, the world's leading molecular diagnostic platform with more than 7,000 systems installed worldwide. On Oct 21, 2015, Cepheid announced FDA clearance for commercialization of Xpert TV. It will be used for precise and reproducible identification of TV in symptomatic and asymptomatic female patients, using urine, endocervical swab or vaginal swabs collected by the patient in a clinical setting.
Xpert Carba-R: On Jun 16, 2014, Cepheid reported the release of Xpert Carba-R, an on-demand molecular test for rapid and accurate detection of carbapenemase-producing Gram-negative bacteria, which will be marketed as a CE IVD product under the European Directive on In Vitro Diagnostic Medical Devices. Xpert Carba-R detects and differentiates genes encoding the most prevalent carbapenemases — reporting five gene families that comprise 68 known individual resistance genes, including KPC, NDM, VIM, OXA-48 and IMP-1. Xpert Carba-R was submitted for review with the FDA in mid-September 2015 and duly got the marketing approval in 1Q16, in line with management’s expectation.
Further, as extension to the existing FDA-cleared bacterial isolates claim for Xpert Carba-R, Hologic submitted data at the end of 1Q16 to support additional claims for use with rectal and perirectal swab specimens. If cleared, these additional claims would allow the test to be used as an aid to infection control and the detection of carbapenem non-susceptible bacteria that can colonize or infect patients in healthcare settings.
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