A Challenging 3Q for Cepheid - Analyst Blog

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Cepheid ( CPHD ) reported net loss of $21.3 million or 32 cents per share in the third quarter of 2012, a disappointment from net income of $1.9 million or 3 cents per share in the year-ago quarter. After adjusting for amortization expense and litigation settlement with Abaxis ( ABAX ), the company reported loss per share of 8 cents, better than the Zacks Consensus Estimate of loss of 5 cents per share. The company reported earnings of 4 cents per share in the corresponding quarter last year.

Revenues during the quarter increased 15% year over year to $80.5 million. As per the preliminary results reported last month, the company expected revenues to be in the range of $79−$81 million, lower than the then Zacks Consensus Estimate of $84 million. Currency had an adverse impact of 300 basis points on revenue growth.

Cepheid was adversely affected due to delay in the supply of certain Xpert cartridge parts thereby preventing it from fulfilling its orders. The order backlog, however, was higher than expected at $6.7 million ($5 million as per preliminary result) including $1.9 million in HBDC reagents and $4.8 million in commercial clinical reagents (primarily MRSA surveillance and C. difficile tests). Since the beginning of October, the company has shipped more than $6.7 million of order backlogs and expects to clear the rest by mid-to-late November.

Among the segments, the Clinical segment consisting of Clinical Systems (down 6% year over year to $13 million) and Clinical Reagents (up 19% to $54.5 million) contributed about 84% of the total sales during the quarter. Cepheid's Non-Clinical business increased 38% year over year to $10.6 million. Product sales from North America and the international market recorded a respective year-over-year increase of 5% (to $51.9 million) and 46% (to $26.2 million).

Placements of GeneXpert systems were lower during the reported quarter with 115 systems (122 in the year-ago quarter) while placements as part of the High Burden Developing Country ('HBDC') program were higher at 149 (141). Including the HBDC systems, a cumulative 3,614 systems have been placed worldwide as of September 30, 2012.

Due to the manufacturing challenges, gross margin on product sales was 49% in the reported quarter, down from 56% in the year-ago period. Operating expenses amounted to $43.9 million, up 17.4% year over year, driven by higher research and development (6.1% annually to $16.2 million), sales and marketing (24.2% to $15.9 million), and general and administrative (26.3% to $11.8 million) expenses. The company reported $5.7 million as loss from operations (after taking into account litigation settlement) compared with income of $2.1 million in the year-ago period.

Outlook

Cepheid revised its outlook for 2012 and now expects revenue of $333 million, at the lower end of the previous range of $333-$347 million. The company now expects to report adjusted net loss per share in the range of 18−16 cents, a huge disappointment from the previous earnings outlook of 1-5 cents per share. The current Zacks Consensus Estimate stands at $333 million of revenues and 5 cents as net loss per share for 2012.

Recommendation

Cepheid has been struggling with the issue of supply disruption that adversely affected the reported quarter. This will not only shift revenues from the third to fourth quarter but also have an adverse impact on new business development. As the US sales team was focusing on supporting customers through this situation, new revenue generation was hampered. Adding to its woes, capital spending environment also remains challenging. We were also disappointed with the lowering of outlook for 2012.

However, with a broad portfolio of tests, Cepheid is one of the leading players in the healthcare associated infection ("HAI") market. The company is adopting several strategies including portfolio expansion to revive its top line.

We have a Neutral recommendation for Cepheid over the long term. The stock carries a Zacks #3 Rank (Hold) in the short term.



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CEPHEID INC (CPHD): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ABAX , CPHD

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