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Cepheid: Test Menu Expansion Strong, Currency Woes Stay

On Mar 21, 2016, we issued an updated research report on Cepheid CPHD. This California-based molecular diagnostics company develops, manufactures and markets fully integrated systems for clinical and non-clinical market tests.

Cepheid ended year 2015 on a mixed note. Although revenues in the fourth quarter steered ahead of the Zacks Consensus Estimate, the massive slip on the bottom-line front, on a year-over-year basis, was disappointing.

On an encouraging note, Cepheid currently offers 23 Xpert tests overseas and 19 in the domestic market, representing the broadest menu currently available on a single platform. Going forward, by adding more tests to the available menu, the company expects rapid expansion in the addressable molecular diagnostics market.

In order to exploit the opportunity further, Cepheid seeks to expand its international foothold. Evidently, Cepheid placed a record 231 commercial systems overseas, with strong performance in both EMENA (Europe, Middle-East and North Africa) and the emerging markets, in the fourth quarter.

Apart from its quest for expansion overseas, Cepheid’s breakthrough Xpert tests have the potential to extend its shares in the U.S. market as well. The company expects to offer a menu of 41 tests therein, by 2017–18. In the beginning of March 2016, Cepheid won the FDA clearance for marketing its Xpert Carba-R diagnostic test.

Notably, Xpert Carba-R is the first FDA-approved diagnostic assay of its kind that can rapidly detect and differentiate carbapenemase genes in pure bacterial isolates, which were earlier found to remain unaffected by carbapenem antibiotics.

We believe these tests boast a significant growth catalyst for Cepheid and their successful commercialization should expand the company’s addressable market to more than $8 billion by 2020 from the current level of $4 billion.

On the flip side, unfavorable foreign currency continued to hamper the company’s overseas business due to the consistent appreciation of the U.S. dollar. In addition, a sizable portion of its 2015 international revenue was not hedged prior to the strengthening of the dollar, especially for the second half of 2015. As a result, in 2015, Cepheid recognized more than $7 million in hedge gains in the revenue line, which could only partially offset the year’s currency exchange losses.

Highly competitive market challenges as well as adverse regulatory issues continue to hover on the stock. Cepheid’s declining margin scenario is also intimidating. Nevertheless, management’s confidence in the company’s ability to achieve its target of delivering adjusted gross margin of 56–58% by 2017 lends optimism to the stock.

Cepheid currently carries a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some better-ranked medical stocks are Hill-Rom Holdings, Inc. HRC, LeMaitre Vascular, Inc. LMAT and Orthofix International N.V. OFIX. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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CEPHEID INC (CPHD): Free Stock Analysis Report
 
ORTHOFIX INTL (OFIX): Free Stock Analysis Report
 
LEMAITRE VASCLR (LMAT): Free Stock Analysis Report
 
HILL-ROM HLDGS (HRC): Free Stock Analysis Report
 
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