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Wells Fargo Bullish on Cepheid, Less so on Qiagen and Quidel, as it Initiates Coverage

NEW YORK (GenomeWeb) – Wells Fargo Securities today initiated coverage of Cepheid with an Outperform rating, Qiagen with a Market Perform rating, and Quidel also with a Market Perform rating.

Analyst Tim Evan also gave Cepheid a 12-month valuation range of $56 to $58 based on a method of valuing a firm called discounted cash flow and said that in an industry "where competitive advantage is rare and where a path to solid profitability can be uncertain, Cepheid offers both." He added that through menu expansion the company can achieve revenue growth of at least 15 percent through 2018, while attaining an operating margin in the high teens.

Evans was particularly bullish about Cepheid's GeneXpert platform, which he said is better than, or is at least as good as, competing platforms on all fronts except price. "Cepheid's ability to compete at high price points in a notoriously price-sensitive industry is a bullish point," however, he noted.

Also, the platform was launched in 2005, ahead of other systems with similar technology and workflow solutions, providing Cepheid a head start in instrument placements and creating a "meaningful barrier" to entry by other firms.

Additionally, through its high-burden developing country program, the firm has a substantial first-mover advantage in emerging markets, "which could prove to be a meaningful growth driver as developing economies move beyond tuberculosis testing (particularly into HIV)," Evans said.

He also called chlamydia/gonorrhea testing a market opportunity for the company, noting that the Xpert CT/NG assay was CE marked and cleared by the US Food and Drug Administration in 2012. Cepheid has a low-single digit share of the CT/NG market currently but Evans said he anticipates that to increase during the next few years.

In afternoon trading on the Nasdaq on Thursday, shares of Cepheid rose a fraction of 1 percent to $48.09.

Meanwhile, Evans said that his Market Perform rating on Qiagen is based his belief that the company's future growth will rely on a diagnostics market "where sustainable advantages are hard to find." Qiagen's historical strength has been in the sample preparation market, he said.

The company has five growth initiatives, most of which are directed at Qiagen's diagnostics business. Evans is optimistic about three of the initiatives — the QuantiFeron technology, personalized healthcare, and bioinformatics — but has qualms about two others, QIAsymphony and GeneReader.

Qiagen acquired the GeneReader next-generation sequencing technology through its purchase of Intelligent Biosystems. In addition to being behind schedule on development of the technology, when the instrument launches, possibly in 2015, it will confront a market "dominated by Illumina." The instruments specs have not yet been released, making it difficult to measure how competitive the GeneReader will be. Its main advantage may be in price, "but price may not be enough to sufficiently differentiate the instrument," Evans said. "In short, commercialization of the GeneReader could prove very challenging."

At the same time, the QIAsymphony's high-complexity status could put it at a disadvantage as the diagnostics space becomes crowded with moderately complex systems, he said.

Evans added that HPV testing remains a headwind for Qiagen. The market was once the company's main revenue source but during the first quarter US HPV sales represented 9 percent of total revenues, down from 14 percent in the year-ago period, and Qiagen anticipates US HPV to be a 4 percent drag on revenue in 2014. If Cepheid enters the HPV market in 2016/2017 as expected, Qiagen could see further pressure, he said.

Evans estimated Qiagen's 12-month discount cash flow-derived valuation at between $23 and $25. Qiagen shares on the Nasdaq were down a fraction of 1 percent at $24.44 in Thursday afternoon trading.

Lastly, Evans initiated coverage of Quidel at Market Perform with a 12-month discount cash flow-derived valuation of $22 to $24 and said that until the company launches its Savanna molecular diagnostics platform, Quidel's business will likely be dependent on its flu and respiratory illness operations.

The Savanna instrument "represents the most interesting opportunity" of Quidel's potential growth drivers, but it may not achieve meaningful impact on the company's bottom line until at least 2017, Evans said. Quidel is set to debut the instrument at the American Association of Clinical Chemistry conference later this month, and then to roll it out in Africa for HIV testing, with commercialization in developed nations in 2016.

When Quidel launches Savanna in the developed world, it will likely require a larger test menu, and "the company's growth outlook could be hampered should the development time line hit unexpected delays or hurdles," Evans said.

Of the company's other molecular diagnostic products, he called AmpliVue "a niche opportunity [that] has proven to be a more difficult launch than the company expected, likely due to intense competition." The Lyra brand of tests, Evans added, has only limited opportunity because of a complex workflow, "which we think will limit near-term uptake."

Shares of Quidel on the Nasdaq were down 1 percent at $21.20 in Thursday afternoon trading.

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