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Cepheid Plans to Buy Plastics Firm, Signs Second Agreement to Increase Adoption of TB Test

NEW YORK (GenomeWeb News) – One day after saying that its third-quarter revenues would fail to meet expectations, Cepheid said on Thursday that it is acquiring a plastics company and bringing at least some of its molding operations in-house.

Company officials also said that the firm has signed the second of three agreements aimed at increasing adoption of its Xpert MTB/RIF test in resource-poor areas of the world with multi-drug-resistant tuberculosis.

The announcements were made at Cepheid's analyst day meeting, one day after the company said that revenues for the third quarter would be in the range of $79 million to $81 million, short of its own target range as well as Wall Street's average estimate of $83.8 million.

The Sunnyvale, Calif.-based firm blamed the revenue miss on "intermittent interruptions in the supply of Xpert cartridge parts" during the third quarter "as we were developing higher capacity production tools and processes, limiting our ability to manufacture at the volumes necessary to meet growing demand."

In an effort to mitigate such issues in the future, Cepheid is acquiring a molding operation, CEO John Bishop said Thursday. He did not identify the company being acquired but said that it is a "high-quality" molder that does "the bulk of the work that we're doing right now."

The price of the acquisition is in the mid-teens of millions of dollars, Cepheid CFO Andrew Miller said.

Bishop told analysts that Cepheid had "contemplated and anticipated problems" such as the one that led to the third-quarter revenue miss, "and we know that we need to have better … control of that."

The firm being bought will be included in a new facility, and new equipment will be brought in to ramp up the overall volumes of the molding process, Bishop said. Once that is completed, Cepheid will establish its own molding operations in the firm's Swedish facility "so that we'll have control over plastics parts over there."

The acquisition is expected to be completed before the end of the first quarter of 2013, pending an audit of the acquired firm's financial statements, Miller said. The deal is expected to help Cepheid's gross margins, he added, but said the company being bought is not a high-margin business.

On the current problem that led to the revenue miss, Bishop said that during October the company will fill in the backlog and during the rest of the fourth quarter it will build back inventory.

Bishop also announced that Cepheid has signed an agreement with the US Agency for International Development as part of the High Burden Developing Countries Program, making it the second agreement signed as part of that program. The company announced the signing of the first agreement in August with the Bill and Melinda Gates Foundation to make its Xpert MTB/RIF test available to eligible nations at $9.98 per test, compared to its regular price of $16.86. The Gates Foundation is funding an initial payment of $3.5 million to make the test immediately available at the lower price in 145 HBDCs.

Bishop did not provide details about the agreement reached with USAID. He said that the third and final agreement related to the HBDC Program is expected to be signed with Unitaid before the end of the year.

Cepheid's test is a fully automated nucleic acid amplification test for the rapid testing of tuberculosis. The World Health Organization endorsed it in late 2010. Unitaid said in June that its board approved $30 million to fund adoption of the test in HBDCs, but Cepheid said that the announcement, which it characterized as "premature," negatively impacted its second-quarter revenues as many customers put off buying the test in anticipation of a price cut.

Cepheid also unveiled at its analyst day a number of innovations that it plans to make to its GeneXpert platform over the next five years in order to help it move beyond infectious disease diagnostics and increase its presence in the oncology, epidemiology, and biodefense markets. Among those advances are a new disposable test cartridge design that will enable multiplexed, nested PCR amplification and detection of up to 1,000 targets in a single disposable, as well as protein detection capabilities.

An in-depth report on these initiatives can be found in the current issue of GenomeWeb Daily News sister publication PCR Insider.

In Friday morning trade on the Nasdaq shares of Cepheid were down around one percent at $34.66.