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Investment Firm Downgrades Cepheid to Sell

NEW YORK (GenomeWeb News) – Investment firm ISI Group today downgraded shares of Cepheid to Sell, saying it expects the Sunnyvale, Calif. molecular diagnostics firm's base business to slow due to increased competition in the hospital-acquired infection space.

In a research note, analyst Vijay Kumar put Cepheid's price target at $34 per share and outlined three factors that he expects to constrain the company's growth in the medium term. They include competition in the HAI space; limited upside to the company's new products; and pricing pressures and higher cost of goods sold.

On the HAI front, Kumar said that methicillin-resistant Staphylococcus aureus and Clostridium difficile represent about half of Cepheid's total sales. MRSA historically has grown at more than 20 percent while C. difficile has grown in the "strong double digits."

Moving forward, he expects Cepheid's MRSA growth to be in the mid-single digits to low-double digit range, as the product has "meaningful penetration" in the market already. Additionally, lower priced alternatives, such as a test from Becton Dickinson, could eat into the Cepheid's market share, Kumar suggested.

Meanwhile, growth in the company's C. difficile franchise is expected to narrow to the mid-teens in the face of other tests launched by competitors. Companies that have recently developed molecular C. difficile tests include Quidel, BD, and Nanosphere.

Cepheid recently launched tests for chlamydia/gonorrhea and for tuberculosis. While TB could be a $15 million to $35 million opportunity, the CT/GC test faces challenges, Kumar said, including volume constraints since CT/GC tests are ordered primarily by doctors rather than hospitals. Additionally, he cited the fiercely competitive CT/GC market, and added that while Cepheid's test has an average sales price in the low-to-mid $20 range, the current leading seller's test is priced at about $9.

"As such, we expect contribution from CT/GC and TB to partly offset the slowing HAI growth, and expect total revenues to grow in [the] low teens over next two years," which would be below the consensus estimate, he said.

Lastly, Kumar said that Cepheid's cost of goods sold per cartridge is in the $9 to $14 range, "and we believe this supports a blended gross margin of [approximately] 60 percent" in the long term. Meanwhile, operating expenses have been estimated in the 30 percent to 40 percent range.

"Given this cost structure, and negative pricing trends within [molecular diagnostics], we believe peak EBITDA margins could be 30 percent to 35 percent" or lower, Kumar said. Based on those figures, he calculated Cepheid's share price at $34, "yielding greater than 10 percent downside," he said.

In Friday afternoon trade on the Nasdaq, shares of Cepheid were down 4 percent at $37.56.