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Cepheid Boosts Diagnostics Business with PCR Licensing Deals, New VP Hire


With a series of small moves in the licensing and personnel area, in recent weeks Cepheid has pointed its bow firmly toward the clinical diagnostics star.

On June 23, the Sunnyvale, Calif., company announced that it had obtained a non-exclusive license to Applera’s Real-Time PCR apparatus patents for its SmartCycler and GeneXpert RT-PCR thermal cyclers, enabling it to sell these instruments into the human diagnostics field with the exception of HIV and Hepatitis.

Then, June 24, the company licensed PCR-related intellectual property from Roche that would it enable it to make, use, and sell PCR-based products into the in vitro human diagnostics field, beginning July 1.

Finally, on June 30, the company announced it had brought on Kerry Flom, from Abbott Molecular Diagnostics, as vice president of clinical affairs. Flom’s resume also includes a stint at the clinical affairs department at Vysis, which developed the PathVysion test to select patients that could benefit from Herceptin, and a PhD in biochemistry form the University of Illinois.

In the last month, the company’s stock has risen on this and other news, from 9.33 per share June 1, to 10.67 per share in afternoon trading July 7.

The series of moves are part of an effort to achieve leadership in molecular diagnostics based on its SmartCycler and GeneXpert systems.

“What the company has developed is a basic platform that enables virtually anyone to be able to do genetic testing on a broadly disseminated basis,” Cepheid CEO John Bishop told Pharmacogenomics Reporter last week. Now, he said, “the focus needs to go to menu expansion on utilization of the platform, and in that regard that’s why we completed the licenses.”

The ABI license gives the company access to the markets on the instrumentation side “with the with the exception of HIV and HCV which we’re not targeting.” Similarly, the Roche license gives the company access to markets “on the reagent side,” so it can utilize PCR and Real-Time PCR in its diagnostics.

The company is paying Applera $11.5 million over the next two years for the license, and it is paying Roche an undisclosed fee plus royalties on sales of products that use the licensed intellectual property. While the companies did not disclose the specific amounts of these royalties, Cepheid said in its last 10-Q filing with the US Securities and Exchange Commission that it had set aside $1.3 million for royalty payments on past product sales.

With these licenses in hand, Cepheid is focusing its efforts on clinical diagnostics in infectious disease and oncology.

“We’re looking to develop a broad line of analyte specific reagents, or ASRs, certainly in infectious disease and additionally, we’ll be looking at oncology as well,” said Bishop. “Then we have a clinical program for actually taking a number of products through the FDA.”

Currently, Cepheid is developing for clinical diagnostics a group B Strep test as well as an enterovirus meningitis test. Both run on the GeneXpert, which performs automated sample prep while the SmartCycler does not. Additionally, the company is developing “a long list of ASR products in the infectious disease area.”

Cepheid already is marketing a methicillin staph resistance, or MSRA test and a Group B Strep test on the SmartCycler, which were developed by Infectio Diagnostic, a Quebec-based company that has a partnership with Cepheid. The MSRA received FDA approval in March and launched in the US in late May. Bishop said he saw the market for MRSA tests as the biggest single opportunity in infectious diseases, estimating that it could be as large as $900 million. He also estimated that the potential worldwide market for Group B Strep will be as large as $300 million. The company plans to develop an additional version of the MSRA test on the GeneXpert.

Cepheid expects to begin clinical trials for the Strep B test this summer, and have both the Group B Strep test and the enterovirus meningitis test on the market next year, said Bishop. The company also plans to have six ASR infectious disease products available for the SmartCycler this year, he said.

In oncology, the company’s efforts are earlier along. It is developing a leukemia ASR for the SmartCycler to detect “minimal residual disease” by detecting in a small number of cells a 922 chromosomal translocation that is present in chronic myelogenous leukemia; and a breast cancer test that can detect two genes uniquely expressed in breast tissue that do not express in sentinel node tissue. This breast cancer gene expression test could be used eventually for diagnosis of breast cancer in lymph nodes while the patient is on the operating table, Bishop said. But currently, both the leukemia test and the breast cancer test are aimed at research use only. The company plans to offer the leukemia ASR by the end of the year.

Cepheid’s Other Business

While this flurry of activity in the clinical arena has been going on quietly, Cepheid has seen growth in its biothreat detection business.

The company has developed for the United States Postal Service a Biohazard Detection System, which uses PCR to detect DNA of anthrax and other biological agents in the mail as it moves through mail sorting equipment. Northrop Grumman, Smiths Detection, and Applied Biosystems are also involved in the $175 million dollar project to deploy these systems in the postal service this year. In early June, the company announced that it was resuming deployment of the system nationwide in 283 US post offices after initial problems were corrected.

This work represents “a major near-term revenue event” for the company, Bishop said.

In fact, the company stated May 10, in its last 10-Q filing with the US Securities and Exchange Commission, that in the first quarter of 2004, “we derived the majority of our revenues from sales of GeneXpert anthrax cartridges and modules to Northrop Grumman and Smiths Detection for use in the USPS program,” as well as sales of SmartCyclers and disposables and reagents, as well as a collaboration with French diagnostics giant bio-Mérieux. The company indicated that it expected sales of GeneXpert anthrax cartridges to “continue to contribute a substantial portion of our revenue” throughout 2004.

Lately, the company has redirected some R&D funds away from basic engineering projects, and into the development of biologic tests, Bishop said. This does not mean that the company will abandon the biothreat market — which Bishop sees as a growing $750 million to $1 billion sector. But in the long-term, the company will mainly focus on clinical diagnostics, according to Bishop, and the value of this direction is something that investors have not yet grasped, he said.

“There’s a lot of focus and you get a lot of press coverage vis-a-vis biothreat, but I think there’s a lot of lack of appreciation of the overall power that resides within the company as we look at the clinical markets,” said Bishop. Biothreat “is driving some substantial ramp up in near-term revenues, but then the clinical market augments that market and really will be the largest of the markets on a strategic basis.”


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