Cepheid Stays Neutral

We reiterate our Neutral recommendation on Cepheid (CPHD - Analyst Report) as the stock appears to be fairly valued. The company, based in Sunnyvale, California, has a broad portfolio of tests that runs on its GeneXpert system.

Cepheid’s system placements continue to remain robust taking the total number of systems placed globally to 2,487. Excluding HBDC, the company placed 122 GeneXpert systems during the most recent quarter with 44 placements in North America and 78 in the international market.

Notwithstanding traditional seasonality and economic uncertainty, International system placements were strong. The company’s commercial placements also benefited from its High Burden Developing Countries (HBDC) program as its market presence expanded with WHO endorsing the Xpert MTB/RIF test. 

Besides expanding its menu, Cepheid is also intending to spread out its market reach in both the US and international market. Since the company records only 20% of its Clinical revenues from outside the US, it plans to expand its presence overseas.

The company plans to bolster its direct sales force internationally with Germany being the earliest (2012) as it has the largest revenue opportunity in Europe, given its upcoming infection control mandate. Cepheid expects to go directly in Italy in 2013.

Cepheid currently offers 11 tests in the US and 12 outside the US. Although the company is one of the leading players in the HAI segment, it is also looking at expanding in non-HAI markets, which includes critically infectious diseases, women’s health, and oncology and genetics. Additional tests under development in the areas of HIV, HCV and HPV are targeted for release in Europe within 2012-2013.

The company’s gross margin is also on an uptrend based on royalty roll off, favorable mix and higher volumes. During the recent quarter, gross margin increased despite higher contribution from the lower-margined HBDC business.

However, Cepheid continues to remain cautious about the general capital spending environment in both the US and Europe. In fact, the company is less optimistic about the near-term economic environment than ever in the past.

Any further deterioration in the economic scenario could have a negative impact on the company. These factors continue to weigh on the diagnostic industry thereby affecting other players such as Hologic (HOLX - Analyst Report) and Qiagen (QGEN - Snapshot Report) among others.

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