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Cepheid (CPHD - Analyst Report) has entered into agreements with the Bill & Melinda Gates Foundation, the United States President's Emergency Plan for AIDS Relief (PEPFAR), the United States Agency for International Development (USAID) and UNITAID to bring down the price of Xpert MTB/RIF – a tuberculosis diagnostic test.

This was done to drive adoption of the test that received endorsement from the World Health Organization (WHO) in late 2010, to fight against tuberculosis in High Burden Developing Countries (HBDCs).

The Xpert test enjoys certain advantages over traditional methods, which makes its geographical expansion all the more significant. The Xpert test diagnoses tuberculosis based on the recognition of the DNA of the tuberculosis bacillus, which is more reliable than currently used microscopy in most laboratories.

Subsequently, the test will now be available in 145 HBDCs at $9.98 per test from the $16.86, the difference being funded by the collaborators. To make the test available with immediate effect, the Bill & Melinda Gates Foundation is making an initial payment of $3.5 million that will be recognized as revenue by Cepheid. On execution of agreements with other collaborators, the remaining revenue will be recognized over an 18-month period.

This development comes on the heels of a $30 million funding approval from UNITAID in June. This was meant to facilitate access to Xpert MTB/RIF and reduce the cost of use. The funds were supposed to be used to roll out Xpert-based programs in 20 countries and bring down the price of each Xpert MTB/RIF cartridge from $17 to $10.

During the recently reported second quarter 2012, Cepheid’s revenue from the HBDC business was lower-than-expected but roughly at par with the preceding quarter. While revenue from some systems could not be recognized due to a change in customer agreement, many customers delayed orders anticipating possible reduction in the price of the test following the announcement by UNITAID. These factors negatively impacted total revenue by approximately $3 million.

Consequently, Cepheid lowered its 2012 earnings guidance to reflect changes in the company’s outlook for gross margin for the HBDC business and a less favorable currency movement. In addition, a lower-than-targeted gross margin contribution from the Infinity family of systems also led the company to lower its guidance. However, we believe that with the agreements in place, HBDC business should pick up gradually.

We have a Neutral recommendation on Cepheid. The stock retains a Zacks #3 Rank (Hold) in the short term.

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