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Cepheid (CPHD - Analyst Report) reported a net loss of $5.5 million or 8 cents per share in the first quarter of fiscal 2012, in contrast to net income of $0.5 million or earnings per share (“EPS”) of 1 cent in the year-ago quarter. After taking into account certain tax benefits and amortization expense, the adjusted figure came in at a of loss of 10 cents, much wider than the Zacks Consensus Estimate of a loss of 2 cents and worse than adjusted EPS of 2 cents in the first quarter of the previous fiscal.

Revenues during the quarter increased 28% year over year to $77.3 million, in line with the Zacks Consensus Estimate. The upside was driven by 33% growth at the Clinical segment attributable to strong sales of reagents and systems.

Among the different segments, the Clinical segment consisting of Clinical Systems (up 8% year over year to $12.5 million) and Clinical Reagents (up 41% to $54.4 million) contributed about 86.5% of the total sales during the quarter. Cepheid’s Non-Clinical business increased 13% year over year to $8.4 million. Product sales from North America and the international market recorded a respective year-over-year increase of 24% (to $52.4 million) and 49% (to $22.9 million).

Gross margin on product sales dropped to 53% in the reported quarter from 56% in the year-ago period. Operating expenses amounted to $47.7 million, up 46% year over year, driven by higher research and development (62.8% annually to $22.1 million), sales and marketing (26.8% to $14.5 million), and general and administrative expenses (44.8% to $11.1 million). The company reported $7.7 million as loss from operations compared with an income of $1.16 million in the year-ago period.

The performance in the quarter suffered from escalating costs due to a scaling up of manufacturing operations and higher-than-forecast investments for the completion of the CT/NG clinical trial. However, the company is taking the necessary steps to control its cost structure and remains confident of returning to profitability in the second quarter.

Cepheid made a placement of 122 GeneXpert systems in the quarter in its commercial business. The company’s High Burden Developing Country ("HBDC") Program continues to gain traction with 151 system placements (181 in the fourth quarter, 141 in the third quarter and 38 in the second quarter).  Including the HBDC systems, a cumulative 3,079 systems have been placed worldwide as of March 31, 2012.

Outlook

While the revenue outlook for 2012 remained unchanged at $333–$347 million, the EPS guidance was lowered to 12−17 cents from the previous level of 17−24 cents. The current Zacks Consensus Estimate of $341 million in revenues is within the company’s guidance range but the EPS consensus of 22 cents is way above the company estimates.

Recommendation

Rising expenses have marred the top-line gains for Cepheid this quarter. Besides, the competitive landscape is tough with the presence of players such as Myriad Genetics (MYGN - Analyst Report) and Qiagen (QGEN - Snapshot Report), among others. However, with a broad portfolio of tests, Cepheid is one of the leading players in the healthcare associated infection (“HAI”) market. The company is working on test menu expansion to further expand system placements.

We have an Outperform recommendation for Cepheid. The stock retains a Zacks #1 Rank (Strong Buy) in the short term.

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