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Cepheid Sees Increasing Competition in HAI Test Market as Q1 Revenues Rise 27 Percent

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Cepheid is expecting more molecular diagnostics competitors to jump into the hospital-acquired infection testing market, as the firm plans to develop additional tests for that segment.
 
Company officials said during Cepheid’s first-quarter conference call last week that the firm is developing a few more tests that will round out its portfolio for hospital-acquired infections. Though they see a rapid revenue opportunity for the firm’s recently FDA-cleared methicillin-resistant Streptococcus aureus test, other companies are starting to line up to challenge the tests currently sold by Cepheid and rival Becton Dickinson.
 
Cepheid also last week reported that its first-quarter revenue jumped 27 percent as sales of its clinical products were up 103 percent year over year.
 
Last month, Cepheid received FDA clearance to sell its Xpert MRSA test, which runs on the company’s GeneXpert system and identifies methicillin-resistant S. aureus in just over one hour, according to the firm (see BioCommerce Week 4/25/2007).
 
MRSA infections are the leading cause of nosocomial infections and kill as many as 100,000 patients a year in the US. Industry analysts agree that the market potential for a rapid molecular test for MRSA is massive, and right now Cepheid’s primary competition comes from Becton Dickinson, which is the only other firm to sell an FDA-cleared molecular-based MRSA assay.
 
“We continue to expect to see a rapidly developing MRSA market opportunity,” said John Bishop, CEO of Cepheid, during the conference call last week.
 
But Cepheid and BD are likely to face competition within the next few years from several firms that have expressed an interest in developing and selling an FDA-cleared MRSA test. Among those firms are BCW Index participants Qiagen, Third Wave, and Beckman Coulter, as well as other molecular diagnostic players, such as Roche and Gen-Probe.
 
Just last week, 3M and Gen-Probe said they would collaborate on developing and marketing a series of molecular-based tests for hospital-acquired infections, such as MRSA. And Third Wave President and CEO Kevin Conroy said during his firm’s first-quarter conference call last week that the company is considering developing such tests.
 
“You can bet that we’ve looked at that area very closely,” said Conroy. “We have a very significant number of hospital customers.” 
 
Answering a question from an analyst during Cepheid’s call, Bishop said he was not surprised by the Gen-Probe deal with 3M.
 
“We’ve been saying right along that when you have a potential $3 billion market you’re not going to leave that market with just two participants there,” he said. “Frankly, I wouldn’t be surprised to see some other announcements. I think Qiagen announced that they’re going to be looking at the hospital-acquired infection market as well.”
 
However, Bishop said he believes Gen-Probe will have some challenges because of the technology it is using. He said Gen-Probe’s transcription-mediated amplification technology is a RNA-directed technology, and “the target of conferring resistance for MRSA is a DNA target. So, I think it’s frankly questionable as to how well the TMA technology is going to work here,” said Bishop.
 
He said he also believes Gen-Probe will run into problems in multiplexing with the TMA technology, and noted that Gen-Probe recently stated that it wouldn’t be entering the market for three years.
 
Beyond MRSA
 
While the MRSA test is a crucial product for growing Cepheid’s revenue in the near term, the firm has begun developing a variety of other molecular diagnostics for the hospital-acquired infections market.
 
Among those products is a combination MRSA and MSSA (methicillin-sensitive S. aureus) test for use in diagnosing skin and soft tissue infections, and for use with blood culture testing. He said the firm hopes to obtain the CE Mark and launch this test in Europe in the fourth quarter of this year.
 
“It is very important as we move into actual diagnostics for wounds … and the same thing is true for the blood culture testing,” said Bishop. “You want to be able to truly differentiate as to whether you’re dealing with MRSA as well as MSSA.”
 
Bishop said the firm is also developing tests for C. difficile and vancomycin-resistant enterococcus, “which will round out our hospital-acquired infection portfolio.”
 
Cepheid also is developing tests for drug-resistant tuberculosis, sepsis, flu, and factors II and V in hemostasis testing.
 
In February, Cepheid acquired Swedish firm Sangtec Molecular Diagnostics, a division of Altana Pharma, for roughly $27 million in cash (see BioCommerce Week 2/21/2007). Among Sangtec’s RT-PCR kits are assays for cytomegalovirus, Epstein-Barr virus, herpes simplex virus 1 and 2, hepatitis B virus, varicella zoster virus, BK virus, and aspergillus.
 

“We’ve been saying right along that when you have a potential $3 billion market you’re not going to leave that market with just two participants there. Frankly, I wouldn’t be surprised to see some other announcements.”

The inclusion of these assays and the others in development has Cepheid considering expanding its sales and marketing staff.
 
“Based upon early indications of our success in the clinical market, we are evaluating a potential further expansion of our US direct sales force ahead of planned additions,” said Bishop during the call last week.
 
“On the sales and marketing side, that’s the area that we need to add incrementally,” he said, “and frankly, that’s going to be a strategic balancing act, because we do feel that is important to get to profitability. On the other hand, we’re not going to be pennywise and pound-foolish on holding back and adding resources when we should.
 
“We’re also going to likely add some marketing personnel, and we’re going to be looking at establishing a more robust national accounts plan, all of which are directed at these rapidly evolving markets,” said Bishop. “We want to have the platform of choice for the central lab as well as the disseminated test markets setting [such as] the hospitals, and the doctor’s office.”
 
Q1 Revenues Rise 27 Percent
 
Cepheid last week reported that its first-quarter revenue increased to $25.5 million from $20.1 million year over year.
 
The firm’s instrument sales rose around 51 percent to $6.8 million; reagent and disposable sales increased 3 percent to $15.2 million; contract revenues nearly tripled to $1.9 million; and government and government-sponsored research revenue rose five-fold to $1.6 million.
 
The company said sales of its clinical products more than doubled to $7.43 million. Bishop said the clinical market is “emerging as the key driver to the growth of our business with a substantial level of opportunity.”
 
He added that the firm expects its industrial and biothreat products to “provide a continuing base of sales, but growth rates will likely vary.”
 
Cepheid’s R&D spending in the quarter rose to $6.9 million from $5.8 million year over year.
 
The firm’s first-quarter profit fell to $6.2 million, or $.11 per share, from $6.7 million, or $.15 per share, in the year-ago period.
 
Cepheid finished the quarter with $7.9 million in cash and cash equivalents.
 
Company officials maintained their previous 2007 guidance of revenue of between $112 million and $120 million. They expect the firm to post a net loss of $8 million to $11 million, or $.14 to $.20 per share. Including stock-compensation expense, they said the net loss is expected to be between $15 million and $18 million, or $.27 to $.33 per share.

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