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Cepheid Reports Q4, FY '12 Revenue Growth, but Looks to Address Issues from 'Challenging' Year

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Despite what its CEO called a "challenging" 2012 rife with "growing pains," Cepheid last week reported a 15 percent increase in fourth-quarter year-over-year revenues and a 19 percent increase in full-year revenues.

Cepheid also provided an update on its recent manufacturing woes and its high-burden developing country program, noting that variables associated with these items affected the company's ability to make good on its 2012 guidance, and have been factored into Cepheid's guidance for the coming year.

The company also provided an update on its extensive molecular diagnostics pipeline, in particular highlighting its high expectations for its Xpert CT/NG test for diagnosing chlamydia and gonorrhea, which is on the market in Europe and was to begin shipping in the US this week.

CEO John Bishop provided investors with updates on these and other items in a conference call last week following release of the company's Q4 and full-year 2012 earnings.

For the three months ended Dec. 31, 2012, Cepheid logged revenues of $92.4 million, up from $80.1 million in the year-ago period, but short of the $92.9 million expected by analysts.

Cepheid reported $14.1 million in system sales during the fourth quarter, down 31 percent from $20.4 million a year ago. Reagent sales shot up 34 percent, however, to $75.6 million from $56.6 million.

Cepheid said that during Q4 it placed 153 GeneXpert systems in its commercial clinical business, as well as 68 GeneXpert systems as part of its high-burden developing country program — which essentially comprises GeneXpert systems and an associated MTB/RIF assay for diagnosing tuberculosis and rifampin resistance.

Cepheid increased its R&D spending to $17.3 million, up 4 percent from $16.7 million a year ago, while SG&A costs rose 5 percent to $25.8 million from $24.6 million.

The company posted a profit of $5.6 million, or $.08 per share, compared to a loss of $1.6 million, or $.03 per share, in the year-ago period. On an adjusted basis, its EPS was $.20.

For full-year 2012, revenues increased 19 percent to $331.2 million from $277.6 million in 2011, matching analyst expectations. System sales fell 11 percent to $55.4 million from $61.9 million a year ago. Reagent sales offset this decrease, though, rising 31 percent to $266.1 million from $203.6 million.

The company placed 523 GeneXpert systems in its commercial clinical business in 2012, and 506 GeneXpert systems as part of the HBDC program, it said. As of the end of 2012, the company had placed a cumulative 3,835 GeneXpert systems globally.

Challenging Year

During the conference call, Bishop noted that the company's ability to place that number of GeneXpert systems in 2012 was "a particularly strong performance in light of the prevailing economic and political uncertainty during the year, not to mention the distractions to our sales organization and customers throughout the test allocations."

In terms of distractions, Bishop may have been referring to a manufacturing snafu in the latter half of 2012 that caused intermittent interruptions in the availability of its plastic Xpert test cartridges and in turn took the company off of its yearly revenue target.

Although those manufacturing issues were largely resolved by the beginning of this year, lingering issues surrounding the problem continued to plague the company in 2012.

Further, Cepheid entered 2012 with a good deal of momentum surrounding its HBDC program, based primarily on strong endorsements from international agencies such as the World Health Organization regarding the performance of the Xpert tuberculosis test.

The company received an additional boost in this area when, in August, the United States President's Emergency Plan for AIDS Relief and United States Agency for International Development partnered with UNITAID and the Bill and Melinda Gates Foundation to buy down the cost of Xpert MTB/RIF from about $17 to around $10 in high-burden countries — the first of a series of several agreements designed to increase access to Xpert MTB/RIF in the developing world (PCR Insider 12/6/2012 and 8/9/2012).

Nevertheless, as has been the case from the test's launch, variability in the HBDC program played its part in confounding revenue expectations.

"This was a challenging year, as we worked through growing pains associated with our scale up of our manufacturing operations and adapted to the incremental variability associated with our HBDC program," Bishop said during the call last week.

"These items clearly impacted our ability to consistently execute against our guidance in 2012, a fact which is inconsistent with our performance in recent years," he added.

Regarding the manufacturing operations problem, in response to an analyst's question, Bishop acknowledged that the company may have lost some customers due to the manufacturing problem, and may have scared off others that were anticipating adopting the new Xpert CT/NG test.

In response, "what we’re doing is stepping up communication with the customers," Bishop said. "It’s been a very frustrating time for our customers and something that we absolutely do not want to repeat going forward. That said, our customer relationships are very, very strong. Clearly, I think we’ve lost an account or two — no major trends, [but] there are some frustrations out there."

Nevertheless, Bishop noted that the numbers for 2012 and Q4 indicate that "the customers are staying with us. They absolutely appreciate the benefits of this system and what it’s doing within their institutions. And frankly we’re continuing to expand. We’re winning on head-to-head competitions. We’re facing competitors, new entrants … [in hospital-acquired infection testing]; and frankly, [competitors] are … undercutting our prices very significantly and we’re still taking the business from those customers."

However, Bishop also said during the call that all of its commercial products are now out of allocation, except for its Xpert Flu test, which is seeing higher demand than anticipated because of the strong flu season; and Xpert MTB/RIF, which will remain on allocation likely through the first quarter.

"We expect, however, that our highest-volume commercial tests, namely Xpert MRSA and Xpert C. difficile, will be freely available for customers to order," Bishop said. He added that the company believes that US customers looking to adopt Xpert CT/NG will be able to do so with the first shipments, which were set to begin this week.

And, after recently beefing up its manufacturing capacity in its Sunnyvale, Calif., headquarters; and addressing a backlog problem with Xpert MTB/RIF production in the company's Swedish facility, "as compared to our manufacturing capacity at the start of 2012 … we will have more than triple our test production capacity by the end of 2013," Bishop said.

Women's Health

Bishop also provided investors with an update on Cepheid's test pipeline, drawing particular attention to the Xpert CT/NG test, which gained the CE Mark last year, and was approved by the US Food and Drug Administration this month with a moderate complexity rating under the clinical laboratory improvement amendments.

"This is an extremely exciting product for Cepheid as it represents the first potential high-volume commercial test outside of Cepheid’s traditional HAI portfolio," Bishop said during the call.

He noted that Cepheid saw its first revenue from the test outside the US in 2012 from accounts in the company's Xpert install base in northern Europe, as well as new accounts in southern Europe.

Bishop said that the majority of early adopters were bringing a CT/NG molecular test in house for the first time, but that the company was also seeing "a promising contribution from customers that we’re converting from older technologies, which include [Becton-Dickinson] ProbeTec; Roche Amplicor and TaqMan; Abbott m2000; and Gen-Probe products."

Further, Bishop said that the company has won "a number of head-to-head evaluations against the Gen-Probe Panther system," although he didn't provide specific details of these wins. "Typical volumes of these customers so far range from 20 to more than 500 tests per month and system size runs the full spectrum of our uniquely scalable platform," he said.

"Looking forward, we’re very excited about Xpert CT/NG's prospects now that the test is cleared in the US, aside from its unique position as the only moderately complex molecular test for CT/NG available," Bishop added. "This product is highly differentiated in terms of the built-in controls and dual targets for [Neisseria gonorrhoeae, which we believe will contribute to the higher performance and confidence; but also … multiple sample types" such as vaginal swabs and urine, the latter of which is desirable due to the ease with which that sample can be collected.

Guidance

In terms of revenue guidance, CFO Andrew Miller said during the call last week that the company expects first-quarter 2013 revenues to be "modestly down" sequentially from Q4 2012.

For the full year, Cepheid expects total revenues to be in the $375 million to $385 million range, representing year-over-year growth of between 13 percent and 16 percent. This includes commercial clinical revenue of $293 million to $303 million driven by approximately 19 percent to 24 percent growth in commercial clinical reagents and low single-digit growth in commercial clinical systems.

The company also provided a range of $.05 net loss per share to earnings per share of $.01. On an adjusted basis EPS is expected in the range of $.41 to $.46.

"There are a number of considerations that we have carefully factored into our guidance for the year," Miller said. "First, we remain cautious about the capital spending environments and the global economy in general. Second, as we saw once again in 2012, there is an underlying variability inherent in two distinct elements of our business — commercial system placements, which tend to vary significantly from quarter to quarter; and the HBDC business, where we have seen variability in both system placements and quarterly reagent revenues."

Factoring in the "extreme variability" that Cepheid saw in its HBDC business in 2012, Miller said that the company expects revenues in this area to be approximately $45 million for the year.

"Bear in mind that, once we exhaust the remaining USAID funding, we will be recognizing $9.98 per test, which means we will need to ship significantly more tests during 2013 to deliver the same revenue," Miller said. "For example, we sold approximately 1.4 million HBDC tests in 2012. To deliver the same $23.8 million in revenue, however, we would need to ship 2.4 million HBDC tests."

And, while the company is "optimistic" about its prospects for the CT/NG test, as well as the other new tests it expects to bring to market in 2013, "we are always cautious with respect to how much revenue we include in our guidance for any product in its first year of availability," Miller said. "Finally, we feel that it is prudent to factor some caution into our guidance for any potential market impact stemming from our second half 2012 manufacturing challenges."

Pipeline

In other expectations for 2013, Cepheid noted that revenues for its Xpert MRSA nasal test grew 17 percent in 2012 as the company adds customers switching from culture-based methods, and that the test enters 2013 at an annual normalized run rate of almost $120 million, with particular strength in the US and Germany.

Cepheid has 14 tests in active development currently. Highlighting a few of these, Bishop noted that it continues to target US commercial release of an Xpert MTB test for multi-drug resistant TB around the middle of the year.

Xpert HPV, meantime, "is progressing through early CE IVD clinical [trials] and remains on track for CE IVD release late in 2013," Bishop said. "Our Xpert virology portfolio continues to make excellent progress and remains on track for commercial release in the 2014 to 2015 time frame; and Xpert Norovirus is progressing and continues to be targeted for commercial release outside the US at the end of 2013."

Cepheid also recently made a couple of modifications to its previously reported pipeline. Namely, the company is now focusing on a dedicated test for Trichomonas rather than a combined Trich/Candida panel, primarily in response to shifting market demands to be able to test both women and men for Trichomonas.

In addition, "in part to our deliberate decision to ship cartridges to customers rather than use them for clinical trials this quarter, we have decided to delay the trials of our CLIA-waived flu test until next flu season," Bishop noted. "This does remain a strategic priority for the company. But in the immediate term, we have felt it more appropriate to give priority to current customer demand."

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