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Cepheid Cites Sales Force Expansion Delays in Lackluster Q3 Earnings

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NEW YORK (GenomeWeb) – Cepheid stumbled in the third quarter, but yesterday the firm asserted that the setback in its revenues is an aberration.

During a call to recap its third quarter earnings — which were pre-announced last week, missed guidance on the top and bottom lines, and led to a double-digit percentage drop in stock value — Cepheid's CEO John Bishop was contrite, offering a number of explanations.

"Clearly, we are disappointed with our third quarter execution, and, more importantly, the need to revise our fourth quarter and full-year guidance," Bishop said, adding, "We believe that the challenges we shared with you last week are transitory [and] fundamentally, we believe there is no change to Cepheid's investment thesis."

Chief among the transitory challenges was unexpected delays in the expansion of the US sales force, which included remapping and adding sales territories.

The firm first described the expansion plans during a Q1 earnings call this year, as reported by GenomeWeb. The firm planned to hire 53 new sales reps who would act as "franchisees" in newly carved out geographical territories, Cepheid said. The initial ambition for these new hires was to accelerate menu utilization with existing customers.

Bishop said these plans ultimately took longer to implement than the firm expected.

Specifically, the 53 new salespeople have now been brought on, to expand the force to 96 people, because "our analysis showed that the previous organization was simply stretched too thin to drive the expected growth consistent with the opportunity we face," Bishop affirmed.

The firm's previous 27 sales territories were re-carved to create 48, each led by a sales executive, of whom 21 were new to the firm. Cepheid also added to its team of instrumentation sales specialists, and a number of these were also new hires. All told, "More than half of our sales organization is new to the company in their role, with an average tenure of only five months," Bishop said, noting that the new sales hires completed the last of four phases of training at the end of last week.

"We had originally targeted approximately $3 million of sales expansion-driven growth in Q3 and ultimately reported less than $1 million," Bishop explained.

Because of this experience, the firm lowered guidance for sales expansion-driven growth in systems and reagents from about $6 million to about $1.5 million in Q4.

"We remain very confident that this investment will start to contribute to growth in 2016, but in the meantime, we believe we have effectively derisked this item for the fourth quarter," Bishop said.

However, Peter Farrell, the firm's executive vice president of worldwide commercial operations, also noted during the call that the redistribution and rescaling of sales territories was, "a major disruption, and that's part of what we maybe did not plan for appropriately." Bishop followed up, saying, "People are getting introduced to new accounts they weren't necessarily in before."

Bishop said, however, the new force is "enthusiastic" to work for the "most innovative company with the fastest-growing product line: this is the place to be if they want to make a lot of money on commission."  

Expanding test utilization

During the call the firm also announced the US Food and Drug Administration cleared its molecular assay for Trichomonas vaginalis. In a separate statement released today, Cepheid noted that the product is an on-demand, same-day test that can use urine or patient-collected endocervical or vaginal swabs to detect the parasite. In the call, Bishop highlighted new CDC guidelines recommending nucleic acid amplification testing for this sexually-transmitted infection, suggesting these are spurring further development of the US market.

With the addition of the Trich test, the firm currently has 18 assays approved by the FDA.

Forty percent of the company's GeneXpert installed base now uses four or more Xpert tests, while 65 percent uses three or more tests, Bishop reported.

"Both of these metrics have grown since the last time we shared them at the end of 2013," he noted, but added that this highlights the opportunity for the expanded sales organization that now has "a basket of 18 tests for customers to choose from."

He also said only 15 percent of North American customers are using six tests or more, "and that is something that we're focused on improving."

For the first time, the firm also disclosed that it sees between 200 and 300 new and existing customers go live with new Xpert tests per quarter.

Looking to 2016 and beyond, the development timeline for additional test menu items remains as presented at an analyst event in July, Bishop said.

Other factors

Cepheid executives cited other factors cited as contributing to the lower-than-expected revenues. For example, about $2 million of primarily clinical reagents revenue was realized in Q2 rather than the Q3 as expected this year.

The firm also encountered less uptake than expected during rollout of its international virology products, with Bishop noting there may be "some education and market development required." Notably, manufacturing issues with new viral load tests caused higher "scrap" costs, which Bishop said were normal and anticipated. Nevertheless, the firm is implementing additional production controls to enhance visibility into ramp-up costs associated with new product introductions in the future.

The firm's MRSA testing business is growing in the low single digits. "We have certainly seen some customers reevaluate and narrow the target population for surveillance programs," Bishop said, but noted that this is a headwind faced by all molecular test manufacturers.

For the Xpert Clostridium difficile test, Bishop also pointed specifically to a recent Journal of the American Medical Association study on over-diagnosis of the infection, saying "We have seen the Polage paper in the US being raised by accounts considering molecular testing."

That study claimed molecular tests detect too many people who are asymptomatic carriers of C. diff, as reported by GenomeWeb. However, in a previous interview with GenomeWeb, Cepheid Chief Medical Officer David Persing made strong arguments that detecting these carriers could also help reduce hospital acquired infection rates.

For the Xpert C. diff, "We continue to see overall growth in the low-teens and believe that Cepheid will continue to grow in the mid-teens," Bishop said, but noted that the primary competition is an immunoassay-based glutamate dehydrogenase toxin algorithm, rather than another firm's molecular test.

On the more positive side, Bishop highlighted 20 percent growth in commercial TB products, and a near-doubling year-over-year of the Xpert Flu/RSV products.

The sexual health franchise also grew 20 percent overall, and Bishop said the firm would be initiating US shipments of the Trich test in early November.

Cepheid also manufactures a CE-marked HPV assay, and Bishop noted that many countries and institutions have recently changed or are planning to change their HPV testing algorithms in the coming years.

When the FDA approved Roche's HPV test for use in primary cervical cancer screening in April,  the benefits of this approach became the subject of ongoing debate in the literature, as did the meaning of variations amongst the different tests, as reported previously.

However, Cepheid is not yet in a position to fully compete in the primary screening market overseas until it meets certain European HPV guidelines, Bishop said.

The firm has generated data on clinical performance and reproducibility, and hopes to meet the standards and begin competing in the primary screening opportunities outside the US in the beginning of 2016, he said.

And in the point-of-care market, Bishop said the firm would benefit from the fact that, particularly for flu testing, the firm's competitors are already in the market.

Educating the market on what it means to do molecular flu testing would be "an investment that frankly would be a heck a lot of bigger number" if it were only Cepheid doing it, Bishop said, adding that "the fact is, the market is being educated already and being introduced to flu testing."

"Cepheid continues to grow at industry-leading rates," Bishop said. "Stumbles along the way are of course regrettable, and the best we can do is learn from the experience to further strengthen our execution going forward."

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