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Wells Fargo Downgrades Cepheid on 2017 Outlook

NEW YORK (GenomeWeb) — Wells Fargo has downgraded Cepheid to Market Perform from Outperform, calling into question the company's "credibility and visibility" after it revised its 2017 profit outlook.

Cepheid reaffirmed its 2015 fourth quarter outlook at the Piper Jaffray Healthcare Conference on Tuesday, and also provided initial revenue guidance of $618 million to $635 million for Fiscal Year 2016. The company also updated its FY 2017 outlook to a gross margin of 56 percent to 58 percent, compared to its previous guidance of 60 percent.

In a statement, Cepheid CEO John Bishop said the adjustment does not change the company's belief that it is "poised for a 'breakthrough' to profitability," and that he remains "confident in our ability to transition to solid and sustainable operating margin."

Indeed, most analysts seem to agree, reiterating their current ratings. Mizuho Securities USA cited Cepheid's "2016 top-line guidance" and reiterated its Buy rating, while William Blair said the 2017 outlook cut had been expected. Raymond James even called the 2017 outlook reset "a welcome event," saying that the previous targets had become unfeasible and were "creating an overhang" on Cepheid.

But Wells Fargo analyst Tim Evans disagreed. "The abrupt change is concerning to us, as it comes after many public and private reiterations of the targets, including as recently as six weeks ago," he wrote in a note. "This is not the first time the company has missed profitability targets, and while the reduction makes guidance look more realistic, it impairs credibility and our thesis, which hinged on making the targets."

Further, he added, the 2017 profitability targets have been in place for years, and Cepheid has held firmly to them, despite skepticism from the market. "We were (wrongly) a believer," Evans wrote. "Management has remarked to us that the factors affecting profitability were largely within the company's control. … The abrupt change is concerning."

Evans also suggested there may be reasons to be skeptical of Cepheid's largest test market, Methicillin-resistant Staphylococcus aureus (MRSA), citing a recent event with the Emmes Group which highlighted that total MRSA volume is flat and average volume per lab is falling. He also raised concerns about Cepheid's second-largest diagnostic market, C. difficile testing, citing a recent JAMA article that argued against the exclusive use of molecular testing to detect the bacterium.

Wells Fargo also cited concerns about Cepheid's plans to enter the viral load, point of care, and oncology diagnostic markets, which Evans called challenging. "Each has its own challenges, and our analysis suggests none will be easy. Without clearer visibility on these markets, we think a more cautious stance is warranted," he wrote.

In Wednesday morning trade on the Nasdaq, shares of Cepheid were down roughly 5 percent at $33.57.