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Cepheid(CPHD - Analyst Report) reported adjusted loss of 8 cents per share in the fourth quarter of 2013, a substantial decrease from year-ago adjusted income of 11 cents a share. The Zacks Consensus Estimate of 10 cents remains below the quarter’s adjusted figure. The adjustments include restructuring expense including impairment of certain assets and amortization of acquired intangible assets (we have considered stock-based compensation as regular expense).

For full year 2013, adjusted net loss was 15 cents per share, up by 11 cents, from the adjusted net loss figure in 2012. It remains ahead of the Zacks Consensus Estimate of 17 cents.

Reported fourth-quarter net loss was 10.3 million or loss of 15 cents per share. For full year 2013, reported net loss was $18 million or loss of 27 cents per share.

 Revenue in Detail

Revenues improved 22.6% year over year to $113.3 million in the fourth quarter, surpassing the Zacks Consensus Estimate of $102 million.

For the full year, revenues increased 21.2% year over year to $401.3 million, surpassing the Zacks Consensus Estimate of $390 million.

This increase came on the back of strong market adoption of GeneXpert Systems and broadening reach of the Xpert test portfolio. Growth was also driven by strong business in High Burden Developing Countries (HBDC) and improved performance in the commercial clinical business.

Segments in Detail

The Clinical segment (up 22.9% year over year to $101 million) contributed about 89.1% to total revenue in the reported quarter. The Clinical segment comprises Clinical Systems (up 50.7% year over year to $20.2 million) and Clinical Reagents (up 17.4% year over year to $80.8 million).  Commercial Clinical also showcased record sequential performance in terms of dollar growth in the company’s history. It recorded sequential growth of 16%.

On the other hand, Cepheid’s Non-Clinical & Other business revenues rose 20.6% year over year to $12.3 million.

On a geographic basis, product sales from the mainstay North American market grew 10.5% year over year to $69.7 million. The overseas market recorded a 48.8% year-over-year growth to $43.6 million in the reported quarter.

During the reported quarter, Cepheid placed 205 GeneXpert systems in its commercial Clinical business.  Moreover, it placed additional 178 GeneXpert systems as part of its HBDC program. Including the HBDC systems, a cumulative total of 5509 systems have been placed worldwide as of Dec 31, 2013.

Operational Update

Cepheid’s adjusted gross margin (considering stock-based compensation as regular expense) was 49.2% in the reported quarter, down 610 basis points (bps) year over year. The margin contraction was on account of unfavorable mix toward the lower margin HBDC business. Adjusted COGS during the quarter spiked 39.2% to $57.5 million.

In the reported quarter, adjusted operating expenses amounted to $57.8 million, up 36.3% year over year. Accordingly, adjusted operating loss was $2 million in the quarter, down from adjusted operating income of $8.7 million in the year-ago quarter.

Financial Update

Cepheid exited the quarter with cash and cash equivalents and short-term investment of $74.9 million compared with $95.8 million at the end of the same quarter previous year.

In 2013, Cepheid generated $15 million in cash flow from operations, compared to $2.9 million in the year-ago period. Capital expenditure increased 104.7% year over year to $47.5 million.

Guidance

The company declared its business outlook for 2014. It expects total revenue to be in the range of $446–$461 million. The Zacks Consensus Estimate falls at the lower-end of the guidance range. Further, it anticipates adjusted net income in the range of 24–29 cents per share. The current Zacks Consensus Estimate is pegged at 7 cents per share of net income.

Our Take

Cepheid is a leading molecular diagnostics company that is dedicated to bring about healthcare improvement by developing, manufacturing and marketing accurate yet easy-to-use molecular systems and tests.
 
The non-performance of the Non-clinical business in 2013 remains a concern for the company. However, with growing adoption of high throughput Infinity system, expanding molecular diagnostics test menu and strategies to expand in emerging markets like India and China, we believe that the company holds the potential to do well in 2014.

Currently, Cepheid carries a Zacks Rank #2 (Buy). Other stocks worth considering in the broader healthcare sector are Natus Medical Inc. (BABY - Snapshot Report), AngioDynamics Inc. (ANGO - Analyst Report) and DexCom, Inc. (DXCM - Analyst Report). Natus Medical sports a Zacks Rank #1 (Strong Buy) while AngioDynamics and DexCom carry the same rank as Cepheid.

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