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Citigroup Initiates Coverage of Cepheid with Buy Rating

NEW YORK (GenomeWeb) – Citigroup this week initiated coverage of Cepheid with a Buy rating and a price target on its shares of $52.

In a report, Citigroup analyst Daniel Arias highlighted as positives the Sunnyvale, Calif.-based molecular diagnostic firm's RT-PCR technology, which he called "best in class;" its market leadership in infectious diseases, and an installed base of more than 7,000 GeneXpert systems. He added that he anticipates total commercial instrument sales to grow 6 percent in 2014 and 7 percent in 2015.

Arias estimated Cepheid's full-year revenues at $456.1 million, translating to a net income of $4.9 million, or $.07 per share. On an adjusted basis, he estimated a per-share loss of $.58. The consensus Wall Street estimate for Cepheid's full-year 2014 revenues is $458.8 million with a net loss of $.52 per share.

In his report he said that laboratory trends favor Cepheid as facilities continue to consolidate testing onto fewer instruments. At the same time, they are transitioning their testing to molecular diagnostic platforms from other technologies. Arias said that Cepheid will add five assays to its MDx menu during the coming three quarters, including viral tests, helping to drive its growth. He also anticipates data that will be presented by Cepheid next month at the Association of Molecular Pathology's annual meeting will serve "as a starting point for market penetration discussions."

A challenge for the company has been a consistent ability to reach profitability and during the past 12 quarters, Cepheid has been in the black only three times, Arias said. For its most recent reporting period, the second quarter of 2014, it reported a net loss of $9.8 million.

"That said, current margin headwinds are largely related to investment in menu build-out — which we see as necessary to enhance the value proposition for customers and keep competitors at bay," Arias said.

With Cepheid's shares down about 5 percent year to date, "we see upside over the next 12 months, as the company executes an aggressive test menu expansion plan that should make a strong competitive position even stronger," he said.

Challenges ahead for the firm include markets, such as cancer, that may prove to be more difficult to gain and maintain a foothold in than the hospital-acquired infection space that has fueled Cepheid's success so far. Furthermore, Arias said that the impact of the company's high-burden developing country program on profitability has been negative.

"[T]he high volatility of quarterly instrument placements and potential for increasing margin headwinds from new HBDC tests [are] key risks," he said.

He also cautioned against possible price erosion as other MDx firms enter the hospital-acquired infection and chlamydia/gonorrhea testing arena at price points "well below those run on the GeneXpert," and he warned against possible spending pressures felt by hospitals that may limit their spending. Hospital spending trends "are less than robust" and Arias noted Citigroup's estimates that hospital capital expenditures will continue to grow only in the single digits until 2016.

"Increased sluggishness on the part of institutions would put our instrument placement and revenue estimates at risk," Arias said.