We accompanied Cepheid CEO John Bishop, on a multiday swing through Europe that included meetings with several investors as well as a visit to a very high throughput (about 50,000 tests per year) sexual health clinic in London. The overall conclusion from our trip is that though there was little to no discussion on current-quarter dynamics (which was not unexpected given the longer-term focus of most European investors), the confidence that we saw for the long-term outlook was clear and convincing. In addition, seeing the GeneXpert being used in a high-volume and point of care setting was very powerful and opened our eyes to new opportunities for the business.
We continue to recommend this name at current levels, and while nothing is ever linear with Cepheid, we believe this is a name that growth investors should be exposed to given the myriad opportunities in front of it along with the scarcity value that exists for these types of quality, pure-play assets in the molecular marketplace.
We had several conclusions from this experience (some of which we expand on below):
Management is keen to inform the marketplace (both clinical and financial) that the Xpert system is well suited for high-throughput situations, both in terms of cost as well as throughput. Management believes the combination of being the highest throughput, the most flexible, and easiest-to-use platform allows it to compete in the independent lab marketplace (high-volume reference labs or sexual health clinics, for example). This represents a market opportunity for which we believe there is no value in Cepheid stock.
We witnessed firsthand the GeneXpert Infiniti being used as a point of care instrument in an ultra-high-volume setting as we visited the largest sexual health clinic in England (doing about 50,000 tests per year). After seeing the combination of the instrument and IT infrastructure that was on display at this lab, we believe similar labs can readily copy this model. In addition, it was noteworthy that this customer was clamoring for additional menu items for the system.
The launch of the virology assays and commercialization of HPV in the United States will put Cepheid in full competition with Roche and Abbott (ABT $39.54; Outperform), and with limitations on these other systems, management believes share gains here will vault the company into the clear No. 2 overall position in the molecular diagnostics market.
Expansion into new geographies is being enabled by the HBDC program, which should see improving margins in the next couple of years to the mid- to high teens on a gross basis and low to midteens on an operating basis. We expect HBDC to be lumped into a new emerging markets category going forward, but timing on this was unclear.
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