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Cepheid (CPHD - Analyst Report) reported EPS of 3 cents during the third quarter of fiscal 2011, scraping a penny past the Zacks Consensus Estimate and much better than the loss of 2 cents in the year-ago period.

Revenues during the quarter increased 25% to $70.2 million, beating the Zacks Consensus Estimate of $68 million. The upside was driven by a 33% growth at the Clinical segment attributable to strong sales of reagents and systems. Cepheid’s higher bottom line owed much to revenue growth.

Among the different segments, the Clinical segment consisting of Clinical Systems (up 20% year over year to $14 million) and Clinical Reagents (up 37% to $45.6 million) contributed about 85% of the total sales during the quarter. Cepheid’s Non-Clinical business dropped 24% year over year to $7.7 million. Product sales from North America and the international market recorded a respective year-over-year increase of 9% (to $49.3 million) and 89% (to $18 million).

Gross margin on product sales improved to 56% compared with 50% in the third quarter of 2010. While product sales improved 23%, cost of products sold increased by only 8.7% leading to the margin expansion.

Cepheid has decided to terminate the remainder of its PCR licenses from Roche as it did not consider the concerned patents under the license to be significant. This will result in a one-time charge of approximately $5.4 million to cost of product sales in the fourth quarter of 2011.

Operating expenses amounted to $37.4 million, up 38.6% year over year, driven by higher research and development (38.6% annually to $15.2 million), sales and marketing (29.2% to $12.9 million), and general and administrative expenses (54.4% to $9.3 million). The company reported $2 million as income from operations compared with an operating loss of $0.6 million in the year-ago period.

Cepheid installed 122 GeneXpert systems in the quarter. In addition, the company placed 141 GeneXpert (38 in the second quarter) systems as part of its High Burden Developing Country (HBDC) Program. Including the HBDC systems, a cumulative 2,487 systems have been placed worldwide as of September 30, 2011. At the end of the reported quarter, cash and cash equivalents were $110.8 million, up from $79.5 million at the end of December 2010.

Revises Outlook

Cepheid raised its revenue outlook for 2011. The company expects to report revenues of $269–$272 million (previous guidance of $265–$270 million). However, due to the estimated $5.4 million (8 cents per share) charge related to the termination of PCR licenses from Roche, the EPS guidance now stands at 0−3 cents (prior estimate: 8–11 cents).

Recommendation

The robust performance during the reported quarter was fired by the strong growth of Clinical reagents. With a broad portfolio of tests, the company is one of the leading players in the healthcare associated infection (HAI) market. The stock retains a Zacks #2 Rank (Buy) in the short term.

However, the company is cautious about the general capital spending environment in both the US and Europe. The competitive landscape is tough with the presence of players such as Laboratory Corporation of America Holdings (LH - Analyst Report) and Quest Diagnostics (DGX - Analyst Report). Longer term, we are Neutral on Cepheid.

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