Cepheid Back to Neutral - Analyst Blog

By Zacks Equity Research,

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Cepheid ( CPHD ) reported robust growth in revenues in the first quarter of fiscal 2012, which were in line with the Zacks Consensus Estimate. However, the company reported adjusted loss per share of 10 cents, much wider than the Zacks Consensus Estimate of a loss of 2 cents and worse than adjusted earnings of 2 cents per share in the corresponding year-ago period.

Cepheid's bottom line was adversely affected by escalating costs due to a scaling up of manufacturing operations (in Sweden and Sunnyvale), higher Group Purchasing Organization fees and higher-than-expected freight costs, especially in the international market. Consequently, gross margin of 54% was well behind the 57% guidance and the year-ago quarter's 58%.

The company is implementing certain additional processes (with regard to scaling up of operations), which could impact gross margin in the second quarter by 100 basis points. Besides, R&D expenses were higher due to completion of the CT/NG trial ahead of schedule. Accounting for the challenges of the first quarter and the anticipated follow-on impact in the second quarter, the earnings per share guidance for the fiscal was lowered to 12−17 cents from the previous band of 17−24 cents while the revenue outlook remained unchanged. Consequently, we prefer to go back to our Neutral recommendation for Cepheid. 

Though the near-term margin scenario is a cause of legitimate concern, sales of reagents were strong during the first quarter on the back of a growing installed base of GeneXpert systems and an expanded test menu. The company placed 122 GeneXpert systems in the first quarter in its commercial business (within the company's targeted range) and 151 systems as part of the HBDC (High Burden Developing Countries) program. This is well below the 175 placements made in the fourth quarter of the previous year. The first quarter is generally weak as far as system placements are concerned. The company is also working on launching tests in the areas of critical infectious diseases, women's health, virology and oncology and genetics. This is significant as the competitive landscape becomes tough with the presence of players such as Myriad Genetics ( MYGN ) and Genomic Health ( GHDX ), among others.

Besides extending its menu, Cepheid is also looking towards expanding its market reach both in the U.S. and internationally. Since the company records only 20% of its clinical revenues from outside the US, it has a sizeable, untapped market potential overseas.  The company has already acquired distributors in South Africa and Germany. Germany presents the largest revenue opportunity in Europe, given its upcoming infection control mandate. The company has established its operation in China and Japan and is working on securing regulatory approval for certain Xpert products there, with scheduled launch by the year end.

Our Neutral recommendation is backed by a Zacks #3 Rank (hold) in the short term.

CEPHEID INC (CPHD): Free Stock Analysis Report
GENOMIC HEALTH (GHDX): Free Stock Analysis Report
MYRIAD GENETICS (MYGN): 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 Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: CPHD , GHDX , MYGN

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