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Piper Jaffray Downgrades Cepheid on Lingering Manufacturing Issues

NEW YORK (GenomeWeb News) – Piper Jaffray today downgraded Cepheid to a Neutral rating from Overweight, saying a manufacturing issue related to its Xpert cartridges could negatively impact fourth-quarter revenues.

In a research note, William Quirk said that at a conference in late November, Cepheid officials had described progress in addressing the issue — which caused Cepheid to pre-announce third-quarter revenues that fell short of Wall Street estimates — but failed to say that that the problem had been completely solved.

"Given management intra-quarter commentary, we believe there is a risk Cepheid missed its end of November target for the end of allocation, leading to potential 4Q12 downside," he said.

Cepheid first disclosed in September the manufacturing issue that relates to plastic parts used in the Xpert cartridges. The problem led to a $6.7 million cartridge backlog and accounts being placed on allocation. Additionally, Cepheid CEO John Bishop said during the firm's third-quarter earnings conference call that the problem was affecting new business development.

"Notably, the US sales team ended up spending significant time supporting customers through the allocation situation, which impacted new revenue generation in the closing phase of the quarter," Bishop said.

He said that the situation was anticipated to be resolved in late November, but at a conference late that month, management "described progress shipping its cartridge backlog as well as a reduction in the number of tests on allocation, but stopped short of describing an end to cartridge allocation," Quirk noted.

Separately, Cowen & Co., analyst Shaun Rodriguez on Thursday also voiced concern that the manufacturing issue "extended well past the end of November" although "significant improvements have been made recently."

After speaking with six lab directors about the subject since the end of November, he concluded that "the checks indicate clearly that backorder issues persisted well beyond Dec. 1 and likely beyond Dec. 31… [W]e believe it is fair to assume that Q4 will not be a 'clean' quarter, and given investor focus on execution, this could represent near-term risk to [Cepheid] shares," Rodriguez said in a research note.

He did not change his Outperform rating Cepheid, though.

In addition to downgrading Cepheid's rating, Quirk lowered the company's price target to $34 from $42.

Also, the US Food and Drug Administration cleared Cepheid's Xpert CT/NG test for marketing in the US. Quirk said that he expected clearance to occur earlier, and as a result lowered his revenue estimates for the fourth quarter to $92.5 million from $93.9 million.

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