This article has been updated from a previous version to include additional details on the Cepheid-FIND collaboration.
By Ben Butkus
On the heels of a 19 percent spike in fourth-quarter revenues and a quarterly profit, Cepheid disclosed last week that it will receive $5 million from the Foundation for Innovative New Diagnostics to help accelerate development of a molecular test for HIV viral load.
In addition, the company provided investors with an update regarding the planned expansion of the test menu for its GeneXpert molecular diagnostics platform, and warned of an anticipated spike in R&D spending in 2011 as it shepherds new tests through clinical trials.
Cepheid also disclosed that it will delay the planned commercial release of its combined molecular test for chlamydia and gonorrhea from the end of this year to 2012 in an effort to optimize the assay's performance.
Cepheid CEO John Bishop touched on these and other business items during a conference call on Thursday after the close of market discussing the company's Q4 and full-year 2010 financial results.
Bishop began by discussing the success of the company's Xpert MTB/RIF test for tuberculosis and rifampicin, which, despite launching in April 2009, is already the company's third-largest molecular test in terms of revenue behind Xpert tests for methicillin-resistant Staphylococcus aureus and Clostridium difficile.
The rapid adoption of the test thus far is in part due to the September publication of a research study in the New England Journal of Medicine supporting the performance of the test in remote and resource-poor regions of the world (PCR Insider, 9/2/10); followed in December by an endorsement of the test by the World Health Organization.
Bishop noted that the WHO endorsement in particular "clearly opened a sizeable opportunity" for Cepheid in terms of selling the test with compassionate pricing in the developing world; but also because "it has opened doors for commercial discussions that may not have happened otherwise."
Underscoring that notion, Bishop disclosed to investors that the Foundation for Innovative New Diagnostics, which helped Cepheid develop the Xpert MTB/RIF test, has agreed to contribute $5 million to the company to help accelerate development of its Xpert HIV viral load test, which will be commercialized as a companion test to Xpert MTB/RIF.
In a statement this week, Cepheid provided additional details regarding its arrangement with FIND. Under the terms of the agreement, FIND will provide $5 million in development costs for the Xpert HIV test. The investment is spread across the life of the project, with the first payment in the first quarter of 2011, and the last payment expected in the first quarter of 2013, Cepheid said.
When commercially available, FIND will gain rights to the test, allowing Cepheid's Xpert HIV viral load test and the Xpert Chlamydia and Gonorrhea test, currently under development at the company, to be sold at reduced prices to the public and not-for-profit sector in many countries, Cepheid said.
"Given the particular challenges presented by HIV and TB co-infection, we believe that the Xpert HIV viral load test will be an excellent complement to Xpert MTB/RIF, dramatically improving endemic countries' capacity to diagnose and manage these infections," FIND CEO Giorgio Roscigno said in a statement. "This new collaboration confirms the possibility of creating diagnostic platforms for several diseases, thus extending the reach of scarce resources intended to combat them."
During Cepheid's financial results conference call, Bishop also noted that the company plans to begin clinical trials in the US this year for Xpert MTB/RIF in order to support an application for regulatory approval from the US Food and Drug Administration. Bishop also said that since the company expects MTB/RIF to follow a pre-market approval path in the US, it believes the test could "face a longer review period at FDA" and would not likely be commercially available until 2013.
During the conference call's Q&A session, an investor asked Bishop what Cepheid's motivation was for commercializing Xpert MTB/RIF in the US, noting that the approval process "seems like a big undertaking."
According to Bishop, Cepheid's market research revealed that commercializing such a test in the US would in fact justify the effort.
"While the incidence of TB in the US is very low, we do have a high rate of incidence of various respiratory illnesses in the US," Bishop said, adding that TB is always among the panel of tests that needs to be performed on patients with general respiratory illness.
"We're seeing a very high level of interest in the US … particularly in light of accurate data," Bishop said. "In addition, there is a very big and real concern about potential spread of drug-resistant TB, so we see a lot of interest from [the US Centers for Disease Control] and US public health organizations in potentially being able to use our TB test [to help them] identify drug-resistant TB coming into the US. We have looked at ROI, and the market size does warrant it."
Both the development of an Xpert HIV viral load test and US-based Xpert MTB/RIF test are part of Cepheid's ongoing strategy to rapidly expand the test menu for the GeneXpert system in order to drive future growth.
The prudence of this strategy is supported by the fact that Cepheid has established a sizeable footprint for GeneXpert system placements both in the US and abroad, and as such expects future growth to "disproportionately" derive from new test sales, Bishop said.
"Looking at the growth of our clinical testing area, there has been a substantial increase," Bishop said. "We expect that to continue, [but we] already have a large footprint and expect it to grow, but expect primary growth to come out of test utilization."
As such, Cepheid has in the pipeline an Xpert test for multiple influenza strains, submitted to FDA in late December and currently under review; an "extension" of its Xpert C. difficile test to differentiate important strains of the bacteria, also recently submitted to FDA for review; and a CLIA-waived S. aureus test, targeted for a 2012 commercial release and clinical trials in the middle of this year.
In fact, Cepheid expects to initiate clinical trials for a number of new Xpert tests this year, and thus told investors that it expects its non-GAAP R&D spending "to grow to approximately 20 percent of total revenues as we invest in expansion of our product portfolio," CFO Andrew Miller said during the call. Miller noted that Cepheid expects simultaneous trials for Xpert CT/NG, CLIA-waived S. aureus, and TB primarily in Q2 through Q4 2011, with the overall cost of clinical trials expected to be $6 million higher in 2011 than 2010.
However, on the topic of Xpert CT/NG, the company's under-development molecular test for chlamydia and gonorrhea, Bishop told investors that Cepheid has recently chosen to delay its commercial launch.
"We have been targeting commercial release of our CT/NG product in the US at end of 2011 … with first substantive revenue contributions from the product in 2012," Bishop said. However, the company "decided to delay commercialization as we further optimize product performance. Currently, we expect clinical trials to commence mid-year 2011, with targeted commercial release in US during 2012." Bishop also said that Cepheid expects to release the product as a CE IVD marked test prior to that.
During the Q&A session, Bishop further defended the company's decision to delay the CT/NG product, telling investors that as Cepheid develops new tests, its objective is to maintain a "track record" of superior performance. "Without providing extra detail, we're trying to optimize that level of performance [for CT/NG]," he said. "We could go forward with a test without superior performance, but we continue to want to be best in class."
Longer term, Bishop said that human papillomavirus, hepatitis C virus, and HIV molecular test development "remain active" at the company, and that Cepheid is targeting a CE IVD release for all three products "in the 2012 to 2013 time frame."
For the three months ended Dec. 31, Cepheid logged total revenues of $58.7 million, compared to revenues of $49.2 million for the fourth quarter of 2009. Analysts, on average, had expected $56.1 million.
Cepheid's system sales declined 21 percent for the quarter to $13.2 million from $15.5 million, but its reagent and disposables sales rose sharply to $43 million from $32.7 million, up 31 percent. Its clinical sales were up 30 percent year over year to $46.4 million from $35.6 million.
Cepheid said that it placed 130 GeneXpert systems and 793 modules in Q4.
Cepheid posted net income of $1.3 million, or $.02 per share, compared to a net loss in last year's Q4 of $4.2 million, or $.07 per share. On a non-GAAP basis, Cepheid had Q4 EPS of $.09 versus EPS of $.03 for the comparable period of 2009. Wall Street expected the firm to post a loss of $.02 per share.
The firm's R&D expenses increased 18 percent to $11.7 million from $9.9 million, and its SG&A spending rose around 28 percent to $17.6 million from $13.8 million.
For the full year, Cepheid's revenues rose 24 percent to $212.5 million from $170.6 million in 2009. Full-year system sales increased to $46.4 million from $43 million, while sales of reagents and other disposables rose to $160.5 million from $122.2 million and clinical sales increased to $162.5 million from $115.9 million.
The firm placed a total of 485 GeneXpert systems and 2,614 modules in 2010.
The company narrowed its full-year net loss to $5.9 million, or $.10 per share, from $22.5 million, or $.39 per share, for 2009.
Full-year R&D expenses rose to $42.5 million from $39.3 million, and SG&A spending increased to $63.4 million from $50.4 million.
Cepheid ended the year with $79.5 million in cash and cash equivalents.
The firm is projecting a revenue increase of between 15 percent and 20 percent for 2011, forecasting a range of between $245 million and $255 million. It projects full-year net income ranging from a loss of $.01 per share to a profit of $.04 per share.
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