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Cepheid's Q3 Revenues Rise, but Clinical Systems Sales, Cartridge Issue Hit Top Line

NEW YORK (GenomeWeb News) – Cepheid reported after the close of the market Thursday that its third-quarter revenues increased 15 percent and were in line with a pre-announcement the firm made regarding the quarter late last month.

The Sunnyvale, Calif.-based molecular diagnostics firm reported total revenues of $80.5 million for the three months ended Sept. 30, up from $70.2 million for the third quarter of 2011. Wall Street analysts, on average, expected revenues of $81 million.

Last month Cepheid said that it would report third-quarter revenues of between $79 million and $81 million, below its own target range and Wall Street's average estimate of $83.8 million. The shortfall was due to "intermittent interruptions in the supply of Xpert cartridge parts," Cepheid said that the time.

In a statement today accompanying the results, Cepheid CEO John Bishop said, "Our third-quarter revenues were consistent with our preliminary announcement, although the backorder level for clinical reagents was higher than expected at almost $7 million, reflecting increasing test demand … In the first few weeks of October, we have already shipped substantially more than the $6.7 million in backorders from the third quarter.

"We believe that we have a firm handle on the situation and expect it may take us through the first few weeks of November before all products are no longer on allocation, and we can fulfill customer demand with immediate shipments," he added.

However, Bishop said on a conference call following the release of the financial results that "the impact of the back order situation went beyond pushing revenue from Q3 into Q4 but also impacted new business development. Notably, the US sales team ended up spending significant time supporting customers through the allocation situation, which impacted new revenue generation in the closing phase of the quarter."

The firm's clinical reagents sales for the quarter were up 19 percent to $54.5 million from $45.6 million year over year, while clinical systems sales declined 6 percent to $13 million from $14 million. Non-clinical product sales increased 38 percent to $10.6 million from $7.7 million.

Cepheid installed a total of 115 GeneXpert systems in its commercial clinical business and 149 GeneXpert systems as part of its High Burden Developing Country program. The firm recently signed agreements with the US Agency for International Development and the Bill and Melinda Gates Foundation to make its Xpert MTB/RIF test available to eligible nations at a discounted price.

The HBDC program generated revenues of $11.3 million, of which $4.7 million came from systems placements and $6.6 million came from test cartridges. There are now a total of 849 GeneXpert systems placed as part of the HBDC program in 80 countries, said Bishop.

He added that total system placements were "impacted by a tighter capital spending environment in the US," adding that "the trend we're seeing is not a loss of system placements due to competitor platforms."

"The revenue breakdown did surprise us as clinical system sales were light and balanced out by strong (but ultimately less meaningful) non-clinical sales," Credit Suisse analyst Vamil Divan said in a research note published Friday morning. He noted that the 115 clinical systems place in the quarter represented the lowest quarterly number since Q2 2010.

Cepheid posted a net loss of $21.3 million, or $.32 per share, compared to a profit of $1.9 million, or $.03 per share, for Q3 2011. On a non-GAAP basis, which excluded a legal settlement, employee stock-based compensation, and amortization of purchased intangible assets, Cepheid said it had net income of $900,000, or $.01 per share.

The firm took a $15.1 million charge to settle litigation with Abaxis during the quarter. That litigation expense equaled $.23 per share. Excluding that item, the firm's GAAP loss per share was $.09 and missed Wall Street's estimate of $.06.

Its R&D spending in the quarter rose 7 percent to $16.2 million from $15.2 million, and its SG&A spending jumped 25 percent to $27.7 million from $22.2 million.

Cepheid finished the quarter with $103.5 million in cash and cash equivalents.

For full-year 2012 Cepheid expects to report revenues of around $333 million, at the low end of its previous guidance, and a net loss per share of between $.40 and $.42. It expects non-GAAP EPS to be between $.21 and $.23.

The firm continues to target US Food and Drug Administration clearance of its Xpert CT/NG test by the end of this year and clearance of its TB test in the first half of 2013. The CT/NG test was launched earlier this year in Europe, and Bishop said that it is off to "a promising start" with more than 50 customers adopting the test in the third quarter.

Cepheid has 14 tests in active development for a variety of applications including human papillomavirus, vaginitis, Norovirus, and bladder monitoring, among others.

In early Friday trade on the Nasdaq, shares of Cepheid were down a little more than 1 percent at $32.57.

"The reality is that the company did have to deal with another manufacturing issue in the quarter, and we get the sense that the confusion around this, along with the accounting around the HBDC product and the weaker capital spending environment, has caused investors to struggle with interpreting what it all means," William Blair analyst Brian Weinstein wrote in a research note published Friday morning. "We believe that despite good underlying trends it will now take a couple of quarters for the market to get comfortable that all of the noise is in the rearview mirror."

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