Cepheid Management Discusses Q2 2012 Results - Earnings Call Transcript

Cepheid (CPHD)

Q2 2012 Earnings Call

July 19, 2012 5:00 pm ET

Executives

Jacquie Ross

John L. Bishop - Chief Executive Officer, Director and Member of Equity Incentive Committee

Andrew D. Miller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Brian Weinstein - William Blair & Company L.L.C., Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

William R. Quirk - Piper Jaffray Companies, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Vijay Kumar - ISI Group Inc., Research Division

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Vamil Divan - Crédit Suisse AG, Research Division

David Ferreiro - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Cepheid's 2012 Second Quarter Conference Call. My name is Keisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now like to hand the conference over to Ms. Jacquie Ross, Cepheid's Investor Relations. Please proceed.

Jacquie Ross

Thank you, Keisha, and welcome to Cepheid's 2012 Second Quarter Conference Call. On the call today are John Bishop, Chief Executive Officer; and Andrew Miller, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast and the replay of the call will be available later today at www.cepheid.com.

During this call, Cepheid will make forward-looking statements including guidance as to future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statement. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statement can be found in Cepheid's annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the U.S. Securities and Exchange Commission as well as in today's press release.

The forward-looking statements including guidance provided during this call are valid only as of today's date, July 19, 2012, and Cepheid assumes no obligation to publicly update these forward-looking statements.

During the call, Cepheid will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to Cepheid's Chief Executive Officer, John Bishop.

John L. Bishop

Good afternoon, everyone, and thank you for joining us for a review of our second quarter results. The second quarter was characterized by solid growth. In fact, the sixth consecutive quarter of year-over-year growth in excess of 20%, despite increasingly challenging comps and unfavorable impact from FX and lower-than-expected HBDC revenue. I'll go into some detail momentarily, but our achievements in the second quarter included: first, solid system placements, particularly in light of continued economic uncertainty in Europe and renewed concerns in the U.S. regarding the potential impact of Healthcare Reform; second, good progress on our gross margin improvement, up 260 basis points from last quarter, reflecting the benefits of our ongoing diligence and the additional programs implemented in our manufacturing and logistics operations at the end of Q1; third, FDA clearance of our GeneXpert Infinity-80 System, which was exhibited at this week's AACC Meeting along with our new Infinity-48S, the new compact footprint version of our very successful Infinity-48. We expect the Infinity-48S will be available internationally and in the U.S. before the end of the year, while the Infinity-80 System is now globally available. And finally, our Xpert CT/NG test was CE Mark and has been commercially available to European customers since the middle of June. Additionally, the test was submitted to the FDA in early June with a targeted commercial release in the U.S. before the end of this year.

In detail then, total revenue of just over $81 million, was up 21% from a very strong second quarter in 2011 despite FX headwinds of over 200 basis points and up 5% from the first quarter of this year. Clinical revenue of $70 million, grew 22% from the second quarter of last year, again, despite the FX headwinds. On a sequential basis and coming off a particularly strong first quarter, our commercial business was solid with revenue growth in both systems and reagents.

Revenue associated with our HBDC business was roughly flat with last quarter, and in fact, several million dollars less than anticipated for 2 reasons: first, about $1.7 billion of HBDC system revenue could not be recognized despite receipt and acceptance by the customer, due to an additional agreement to transport the system from the customer's warehouse to the customer's lab site for installation; second, UNITAID's enthusiastic but premature announcement regarding the possible significant reduction in price of our HBDC test resulted in many HBDC customers delaying orders. Combined, we believe that these factors negatively impacted total revenue by approximately $3 million in the second quarter.

Moving to Clinical Systems. Revenue of $14 million was modestly up year-over-year, but grew 11% sequentially. Since HBDC system revenue was basically flat from last quarter, sequential growth of $1.4 million was almost entirely associated with our commercial business where we continue to see steady adoption of the Cepheid systems. 133 new commercial placements during the quarter included 54 systems in North America and 79 systems internationally. This was strong performance even under the best of circumstances, but we believe it was particularly solid given ongoing and perhaps deepening economic and political concern on the minds of customers. 7 of the 54 systems placed in North America where our larger Infinity systems, which offer immediate opportunities to realize greater efficiencies in the lab environment. For example, one Infinity System placed in Texas during the quarter was acquired to replace batch-based molecular MRSA and C. diff test. Analysis demonstrated that the Infinity could be expected to free up as many as 5,000 hours of labor in the lab annually, resulting in an overall lower cost per test than the competing methodologies. In addition, to immediate efficiencies customers could also choose the GeneXpert System because of the ease of use, which would take -- they can add incremental modules as testing volumes increase and new test become available. The same Infinity customer in Texas, for example, plans to add Xpert CT/NG when it is commercially available. Our partner, LABSCO, continues to build momentum amongst hospitals with fewer than 150 beds, driven primarily by interest in C. diff and MRSA. Although as a group, LABSCO customers are taking full advantage of almost the entire Xpert test menu.

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