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Cepheid's Q1 Revenues Grow on Strong Clinical Reagent Sales; Analysts 'Unconcerned' with Net Loss

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Cepheid last week reported a 28 percent spike in first-quarter revenues driven primarily by strong sales in its clinical diagnostics business, including record sequential growth in clinical reagent sales.

Despite the sales growth, Cepheid reported a net loss of $5.5 million for the quarter, compared to a profit of $527,000 in the first quarter of 2011 — a result that company officials chalked up to "unanticipated challenges" associated with a manufacturing scale-up.

However, analysts took the news in stride, in general viewing the lower gross profit margin as a hiccup, and instead focusing on the encouraging clinical reagents sales as a harbinger of continued growth at the company.

For the quarter ended March 31, Cepheid logged revenues of $77.3 million compared to $60.2 million in Q1 2011. On average, analysts had expected revenues of $77.4 million.

Cepheid's clinical products revenue increased 33 percent to $66.9 million from $50.2 million a year ago, and non-clinical revenues edged up to $8.4 million from $7.4 million. The company said that system sales tallied $13.2 million, up from $12.7 million in Q1 2011, and that consumables sales totaled $62.1 million compared to $44.9 million a year ago.

In a conference call discussing the first-quarter results, CEO John Bishop noted that although instrument sales were relatively flat in Q1 — especially compared to a strong fourth quarter — this was buoyed by reagent sales, which grew by more than $5 million, or 11 percent, over Q4, making it the largest sequential growth for reagents in the company's history.

Cepheid's GeneXpert test for methicillin-resistant Staphylococcus aureus continued to be the largest contributor to clinical revenues, leading both year-over-year and sequential growth, Bishop said. Growth of this test was "well in excess of 20 percent year over year," Bishop said, reflecting growth in North America and overseas, particularly in Germany.

Meantime, the second largest contributor to revenues was Xpert C. difficile, sales of which exceeded $10 million, growing more than 50 percent year over year, and "suggesting a more than $40 million business on an annual basis," Bishop said.

Cepheid's third largest revenue contributor was Xpert MTB/RIF, its molecular test for multi-drug-resistant tuberculosis and rifampin resistance. Sales of this test were around $6 million, relatively flat compared to the fourth quarter of 2011, Bishop said.

In addition, Bishop noted that placements of Cepheid's GeneXpert systems and MTB/RIF tests continue to grow in high-burden developing countries, with 61 of the 145 eligible countries having purchased systems and tests, and South Africa emerging as a leading purchaser. However, revenues related to the HBDC program were roughly flat compared to the fourth quarter of 2011, at around $9 million, highlighting the inherent variability of this program, Bishop noted. Cepheid did not provide year-over-year comparisons for MTB/RIF sales.

In terms of system sales, the company placed 271 GeneXpert platforms in Q1, including 122 commercial systems, which "was within our range for what tends to be a weaker quarter for system placements," Bishop said. This figure included 48 placements in North America, including nine higher-end GeneXpert Infinity systems, compared to 43 in Q1 2011. The company placed 74 GeneXpert systems internationally, led by sales in Germany.

Despite the strong quarter in terms of sales, various manufacturing scale-up challenges and other unanticipated expenses impacted Cepheid's bottom line.

"While our revenue performance was very strong in the first quarter, our profit performance was impacted meaningfully by the scale-up of our manufacturing operations in support of our growing business, and a higher than expected investment in the completion of our CT/NG clinical trial," Bishop said in a statement. In the conference call, he noted that R&D spending was about $2.5 million higher than expected due to the acceleration of trials for Xpert CT/NG, a test designed to detect the organisms that cause chlamydia and gonorrhea from clinical samples.

"We are not satisfied by our bottom-line performance, which was less than satisfactory to say the least," Bishop added during the call. "We encountered some challenges during the quarter, which resulted in lower-than-targeted gross margins. These were challenges that we did not anticipate but that we have subsequently isolated, assessed, and addressed."

In a research note, analysts from William Blair noted that "while we always take gross margin weakness seriously … in this case the gross margin issues are merely very frustrating (and were at least partially avoidable), as they stem from increased freight costs, higher scrap rates, and a change in accounting. These kinds of issues (as opposed to pricing or mix issues) are not nearly enough to alter our view about the very strong long-term growth story that is unfolding at Cepheid."

Similarly, analysts from Robert W. Baird wrote in a research note that they were "unconcerned with the higher-than-expected Q1 costs, as it reflects growing pains of Cepheid trying to keep up" with its tenth consecutive quarter of 19 to 36 percent year-over-year revenue growth.

Analysts from Raymond James highlighted the strong sales in Q1, noting that while the results "took a step back from the record Q4, we believe the quarter offered some encouraging data points, particularly the sizeable reagent utilization and continued placement success during a seasonally weak quarter, both of which should facilitate continued top-line momentum, particularly as the theme of consolidation onto a single platform is further entrenched as the test menu expands."

Expanding Menu

During Cepheid's conference call, Bishop provided investors with an update regarding the continued expansion of the GeneXpert test menu.

First, he noted that the company has completed clinical trials for its Xpert CT/NG test, and that it "believes we have met our goal to meet or exceed the performance of the market leader [Roche]. We expect to release a CE-marked product in Europe and submit a 510(k) to the [US Food and Drug Administration] by the end of June. We believe this will be a compelling add-on test for existing [GeneXpert] customers."

In addition, Bishop said that clinical trials supporting an FDA submission for Xpert TB/MTB/RIF are ongoing, and that the company is "encouraged by a recent FDA proposal to lower the risk classification of certain TB tests. We believe this will allow us to submit the test as a de novo 510(k), instead of a [pre-market approval] as previously anticipated." If this downgraded classification occurs, then Cepheid is targeting a submission by the end of 2012, and, assuming FDA approval goes smoothly, a commercial release in the first half of 2013, Bishop said.

Bishop also noted during the call that work on the company's CLIA-waived flu test is "progressing well," and that the company is targeting the 2013-2014 flu season for commercial release; and that Cepheid will begin clinical trials in the US for its revamped Xpert blood culture test. The new test will have "a similar configuration" to the company's test already on the market in Europe, which has not experienced the accuracy issues that its previously marketed US test did (PCR Insider, 1/12/2012).

Lastly, Bishop said that as previously anticipated Cepheid and partner Novartis will move directly to a second version of their BCR-ABL test for the US market. This version of the test will have higher sensitivity and will provide "an incremental benefit in patient management," Bishop said. The first version of this test continues to be available outside the US, but the companies expect a CE-IVD release of the second version in 2013.

Overall, Cepheid has 16 total tests in development, including assays for human papillomavirus, HIV, hepatitis B and C, and vaginitis. All of these tests are "progressing well," Bishop said, adding that the company is targeting international release for most of them in the 2013-2014 timeframe.

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