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Cepheid (CPHD - Analyst Report) recently disclosed that the U.S. Food and Drug Administration (FDA) has granted clearance to market its Xpert CT/NG test. The company had gained European CE Mark approval for the test in May 2012.

Cepheid’s Xpert CT/NG is an innovative qualitative in vitro molecular diagnostic test, based on the GeneXpert Systems, for the detection and differentiation of Chlamydia trachomatis (CT) and Neisseria gonorrhoeae (NG). The clearance ensures that same-day patient consultation and treatment is possible for two of the most common sexually transmitted bacterial infections in the U.S.

The Xpert CT/NG can deliver results within 90 minutes. Gonorrhea and chlamydia can be treated easily in case of early detection and diagnosis. The optimal way to reduce false positive results for gonorrhea is by including more than one genetic target. Hence, Cepheid’s latest offering tests for both CT and NG to improve accuracy of results.

Potential Market

Chlamydia is the most common sexually transmitted bacterial infection in the U.S. Despite widespread prevalence, the market for chlamydia testing remains largely untapped. In 2011, the disease infected more than a million Americans. According to guidelines by the Centre for Disease Control and Prevention (CDC), women aged 25 and under should undergo annual testing for chlamydia. However, statistics suggest that only 38% of sexually active women were tested in 2011.

Gonorrhea is the second most commonly reported bacterial infectious disease in the U.S. Per CDC estimates, more than 700,000 individuals in the U.S. are infected with gonorrhea annually. However, more than 50% of these cases are undiagnosed. While reported cases of gonorrhea decreased during 2007-2011, the figures for chlamydial infections remain alarmingly high.

Considering that women in the U.S. are more prone to these bacterial infections exacerbated by low testing rates, the commercialization of Cepheid’s Xpert CT/NG presents an opportunity to improve reproductive health in the U.S.

Our Take

Cepheid has been consistently working on expanding its portfolio of tests. The FDA clearance underlines the company strategy of portfolio expansion by increasing research and development expenditure. Cepheid has stepped up its investments to support an expanded portfolio which targets 37 tests in the U.S. and 36 ex-U.S. by the end of 2017. The successful commercialization of these tests should expand the addressable market to more than $5.2 billion by 2016-2017 from the current level of less than $1 billion.

Cepheid already has a go-to-market strategy for the Xpert CT/NG test. Moreover, the in vitro diagnostic market under molecular diagnostics is witnessing the highest growth rate.

We currently have a long-term ‘Neutral’ recommendation on the stock which carries a short-term Zacks #2 Rank (Buy). Other medical sector stocks carrying a Zacks #2 Rank are Teleflex (TFX - Snapshot Report) and Cyberonics (CYBX - Analyst Report).

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