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




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Xpert Flu/RSV XC: On Sep 2, 2014, Cepheid released Xpert Flu/RSV XC, an on-demand molecular test for rapid, accurate and reliable determination of Flu A, Flu B, and differentiation of RSV infection. 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 tests available to 18. Xpert Flu/RSV XC runs on Cepheid's GeneXpert System, the world's leading molecular diagnostic platform with more than 7,000 systems installed to date. Moreover, Xpert Flu RSV has been added to Cepheid’s CE-IVD menu during 3Q14. In 3Q15, the company witnessed increased demand for the Xpert Flu/RSV test, which is a system placement driver for new GeneXpert customers. Xpert Flu revenues contributed more than $10 million in 4Q15, flat on a y/y basis. New customer adoption and transitions to the company’s Xpert Flu/RSV test helped offset a delayed and milder flu season.
Pipeline Update
Cepheid continues to expand its list of test options for the GeneXpert system. The company currently offers 20 Xpert tests in the U.S. and 23 in international markets with plans to launch more going ahead.
GeneXpert Omni: On Jul 28, 2015, Cepheid unveiled the GeneXpert Omni, the world's most portable molecular diagnostics system enabling unprecedented access to accurate, fast and potentially life-saving diagnosis for patients suspected of TB, HIV and Ebola in even the most remote areas of the world. The GeneXpert Omni is battery-operated, wireless and web-enabled, setting a new standard in connectivity to transmit instrument and test information in real-time.
For the emerging markets, internally Omni testing has been underway for some of the Xpert tests targeted for this market, with a number of the tests successfully running on the Omni system. Majority of the test components are fully operational and functioning as expected. However, management plans to invest extra time to ensure that the detection and amplification module of the system, referred to as I-CORE, is functioning efficiently enough to address Hologic’s current and future test menu. As a result, management now expects to deliver the Omni system to the emerging markets no later than 3Q17. In the U.S., the system is likely to be available from late 2017.
Xpert Ebola: On Mar 24, 2015, Cepheid announced it has received Emergency Use Authorization from the U.S. Food & Drug Administration (FDA) for Xpert Ebola, a molecular diagnostic test for Ebola Zaire Virus that delivers results in less than two hours. The test runs on the Cepheid GeneXpert Systems, the molecular diagnostic platform with over 8,000 systems deployed globally in both developed and emerging market countries. Management received emergency use authorization from the FDA in March and cartridges were made available for shipment to US customers in April. Outside the U.S., field testing is underway in Sierra Leone. WHO analytical testing has also been started in Germany. Meanwhile, in 3Q15, Cepheid received CE Mark for Xpert Ebola.
On May 13, 2015 the World Health Organization (WHO) assessed and listed Xpert Ebola as eligible for procurement to Ebola affected countries.
Xpert HIV qualitative: On Apr 16, 2015, Xpert HIV-1 Qual, the qualitative 90-minute molecular HIV test, achieved CE-IVD status under the European Directive on In Vitro Diagnostic Medical Devices. The test runs on the Cepheid GeneXpert System. The test is currently in clinical trials and is expected to be released by 2016-2017. The release date could narrow down, upon earlier submission of the test to the FDA. During 2Q15, Cepheid added HIV qualitative to the CE-IVD menu. Xpert HIV-1 Qual has already been granted CE Mark in FY15. Currently, management expects to achieve pre-qualification for its HIV qualitative test from the World Health Organization (WHO) in the near term.
Xpert HCV viral load: On Apr 16, 2015, Xpert HCV Viral Load, the quantitative test that provides on-demand molecular testing for confirmation of infection and monitoring of Hepatitis C virus (HCV), achieved CE-IVD status under the European Directive on In Vitro Diagnostic Medical Devices. The test runs on the Cepheid GeneXpert System. Xpert HCV viral load is in clinical trials and expected to be released in the 2016-2017 timeframe. However, the release date could narrow down, once management get closer to the FDA submission. During 2Q15, Cepheid added HCV viral load to the CE-IVD menu. Xpert HCV Viral Load was CE Marked in FY15. HCV Load assays are in the clinical trials phase in the U.S. Management expects to submit to the FDA later in FY17. Management expects to receive the pre-qualification for its HIV qualitative test from the World Health Organization (WHO) following the receipt of the same for HIV qualitative test.
Xpert BCR-ABL (with Novartis as partner): Xpert BCR-ABL Ultra received the CE mark in FY15 and management now expects to submit the test to FDA in 1H16.
CLIA waived flu test: Cepheid’s CLIA-waived version of the Flu RSV and Xpert Carba-R were made commercially available in all markets that recognize CE Marks during 2014. During 2Q15, Cepheid submitted the CLIA-waived version of the Xpert Flu/RSV to the FDA. Management apprehends an increase in clinical trial expenses owing to U.S. trials for CLIA-waived assays. The second phase of market segment expansion program is on track post clearance of the company’s first CLIA-Waived test for Flu/RSV in December last year. Management currently plans to roll out the first Xpert Xpress test on GeneXpert Systems in the 2017/2018 flu season for the CLIA-waived market.
Further, Cepheid has decided to build on its experience with the CLIA-waived single module GeneXpert System and plans to introduce its existing II and IV module GeneXpert Systems to the CLIA-waived market. Management believes that this coupled with Cepheid’s Xpert Xpress program to provide tests with significantly shorter times to results should provide a differentiated point-of-care product portfolio, which will be more compelling when combined with the Omni system.
Xpert Trichomonas: Xpert Trichomonas is an in vitro qualitative nucleic acid amplification test (NAAT) for the detection of DNA from Trichomonas vaginalis to aid in the diagnosis of Trichomoniasis using the Cepheid GeneXpert Instrument Systems. Trichomonas has been made commercially available outside the U.S. in 3Q14, its U.S. Moreover, Xpert Flu RSV and Xpert Trichomonas has been added to Cepheid’s CE-IVD menu during 3Q14. Xpert Trichomonas for female urine claims was approved by the FDA in Nov 2015. Clinical trials are in process to support a male urine claim. Currently, Xpert Trichomonas for male urine claim is on track for FDA submission in 2Q16. Once approved, Xpert Trichomonas will be the first FDA-cleared molecular test in the market with a male urine claim.

Xpert Bladder: The bladder cancer monitor test – Xpert Bladder – is on track for its targeted commercial release outside the U.S. in 4Q16.

On Apr 21, 2016, Cepheid announced an agreement with Medline, the largest privately held distributor of healthcare products in the U.S., for the distribution of the GeneXpert System and menu of Xpert tests spanning healthcare associated infections, critical infectious disease, and sexual health. Under the terms of the non-exclusive agreement, Medline will begin offering the GeneXpert System to non-acute care laboratory customers in the U.S., including long-term care facilities with moderately complex labs, physician-office laboratories, women's health and large multi-specialty clinics, urgent care facilities, community health centers, correctional facility laboratories, student health centers, STD clinics, and reference laboratories.
On Mar 29, 2016, Cepheid announced commercial availability, outside the U.S., of Xpert MRSA NxG, a next generation version of the market-leading molecular diagnostic test for Methicillin-Resistant Staphyloccus aureus (MRSA). Xpert MRSA NxG has been updated to identify mecA- and mecC- containing MRSA strains and detect new and emerging SCCmec subtypes with enhanced performance. The assay has achieved CE-IVD status under the European Directive on In Vitro Diagnostic Medical Devices.
On Mar 24, 2016, Cepheid recognized World TB Day 2016 with the delivery of the 5,000th GeneXpert System to be deployed as part of the company's shared commitment, with partners including the Foundation for Innovative New Diagnostics (FIND) and USAID, to enable global access to industry-leading and potentially life-saving information from molecular diagnostic tests to patients regardless of geographic location.
On Mar 9, 2016, Cepheid announced it has received FDA clearance to market Xpert Carba-R, which is a qualitative in vitro diagnostic test for speedy, precise, and reproducible identification of 5 dissimilar families of carbapenem resistance genes.

On Mar 7, 2016, Cepheid announced the completion of the delivery of 10,000 GeneXpert Systems to the Hammersmith Broadway Clinic based in London.

On Jan 13, 2016, Cepheid announced a strategic partnership with MedImmune and COMBACTE in order to drive development of new drugs which will help fight against infectious diseases. Under the terms of the deal, the companies will develop a wide range of rapid diagnostic tests to classify Staphylococcus aureus (S. aureus) and Pseudomonas aeruginosa (P. aeruginosa) in respiratory secretions of mechanically ventilated patients.

On Jan 7, 2016, Cepheid announced that it will collaborate with the United States Agency for International Development (USAID) in order to support the White House's National Action Plan for Combating Multidrug-Resistant Tuberculosis.

On Jan 4, 2016, Cepheid announced a non-exclusive distribution agreement with Henry Schein Medical, the Medical business of one of the leading healthcare services distributors in North America – Henry Schein. Financial terms of the deal were not disclosed by either of the companies. The agreement will allow Henry Schein to distribute Cepheid’s fully integrated and automated on-demand molecular system GeneXpert, along with a portfolio of 17 moderately complex Xpert tests, as well as the Clinical Laboratory Improvement Amendments (CLIA)-waived version of the Xpert Flu/RSV assay, to non-acute care laboratories in the U.S.


Please refer to the Zacks Research Digest spreadsheet on CPHD for specific revenue estimates.





Margins
Cepheid's adjusted gross margin (considering stock-based compensation expense as a regular spending) contracted 420 basis points (bps) y/y to 50.4% primarily due to a 19.3% rise in adjusted cost of sales during 1Q16. This deterioration can be attributed to a less favorable mix which outweighed manufacturing efficiencies and a small royalty benefit.
The Zacks Digest average 1Q16 gross margin was higher than the company’s report.
In 1Q16, adjusted operating expenses spiked 12.6% to $73.4 million, led by an 11.3% rise in research and development (R&D) expenses to $29.9 million, and an 11% hike in sales and marketing expenses to $28.8 million. However, general and administrative expenses dropped 3.8% to $15.1 million.
Accordingly, adjusted operating loss incurred was $0.4 million, as against adjusted operating income of $7.3 million in 1Q15.
The Zacks Digest average 1Q16 operating margin was pegged at 5.5% versus 10.2% in 1Q15.

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


Margins ($ in Millions)

1Q15A

2015A

1Q16A

2Q16E

3Q16E

4Q16E

2016E

2017E

2018E

Gross

55.4%

51.4%

51.5%

51.7%↑

51.5%

53.6%

52.1%

57.3%↑




Operating

10.2%

2.1%

5.5%

2.2%↓

2.9%

7.6%

4.7%↑

16.1%↓




Pre-Tax

9.0%

1.0%

4.8%

1.3%↓

2.1%

6.8%

3.9%↑

15.4%↓




Net

3.6%

-6.2%

-1.9%

-6.4%↓

-6.0%

-0.6%

-3.6%

6.9%↓

9.1%↑



* Blank cells indicate brokers did not provide any figure.
Outlook
For FY16, Cepheid continues to expect adjusted gross margin at around 52%. The projection reflects the higher mix of HBDC and a likely benefit of 0.7% associated with the suspension of the Medical Device Tax. Management also continues to expect gross margin in 1H16 to lag the FY16 average, with a higher mix of HBDC, including placement of another 200 GeneXpert Systems to India to impact mix in 2Q16. For 2Q16, the company expects a marginally lower gross margin, compared to 1Q16 results.
Management had earlier targeted to achieve adjusted gross margin in the range of 56%–58% in FY17, to which the company currently expects its enzyme replacement program and the manufacturing automation initiatives to contribute 400 bps. Hologic also projected a marginal decline in operating expenses (excluding collaboration and profit sharing), as a percentage of revenues, in FY16 from FY15.
Research and Development (R&D) expenses, as a percentage of revenues, are expected to be slightly down in FY16 on a y/y basis. However, on a dollar basis, R&D expenses are likely to rise, primarily because of the company’s continuous investments in its test menu and system extension programs.
Clinical trial expenses are expected to escalate substantially in the remaining quarters of FY16. Sales and marketing expenses, as a percentage of revenues, are still expected to be almost comparable on a y/y basis while general and administrative expenses are expected to exhibit a modest decline on a y/y basis.
Adjusted operating margin in FY16 is forecasted at roughly 5%.
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