Cepeid Margin Expansion Unlikely To Morgan Stanley, Stays On Sidelines

Morgan Stanley's Steve Beuchaw initiated Cepheid CPHD at Equal-Weight with a $30.00 price target.

Beuchaw was especially worried about low margin expectations and future extensive spending. "CPHD is a share gainer in a healthy molecular diagnostics market, but we see limited upside to margin expectations, and new point-of-care/test menu initiatives will require incremental spending," said the analyst.

Positives

• The company has grown revenue at 2.3x the 9 percent molecular diagnostics market rate and now holds 8–9 percent of the market.
• Cepheid's GeneXpert "brings unmatched ease-of-use and a broad test menu" and has only penetrated 20 percent of the 5,000 smaller-sized hospitals in the United States.
• GeneXpert's current Virology and Sexual health tests are in their early stages of market penetration and the analyst saw a "significant runway" for the drug in this sector.
• Cepheid's solutions are a "solid fit for emerging markets testing as well, driving scale and a foothold in growth markets for the infectious disease MDx as governments/humanitarian organizations implement routine disease testing."
• Cepheid now has "distribution partnerships driving access to the physician office market, an incremental 10,000 lab opportunity," according to the analyst.

Due to these opportunities and signs of strength, Beuchaw forecasts a 15 percent revenue '15–‘17E CAGR, in-line with CPHD's ~ 14–19 percent medium-term plan.

Related Link: Cepheid Reports WHO Prequalification Of Xpert HIV 1 Qualitative Test

Negatives

• Healthcare-acquired infections (HAI) "were critical to growth over the last 5 years, but market penetration is materially above 50 percent in these categories and HAI growth has slowed to below 10 percent from ~15 percent in '10–'15."
• Focus growth areas were more difficult to capture as international markets were more cost-sensitive. Additionally, this was due to Point-of-care markets being more competitive, and a lack of visibility in penetration.
• U.S. structural change produces risk "to category growth as hospital labs transition from functioning as profit centers to cost centers" said the analyst.

Cepheid closed Wednesday trading at $28.66, up 2.07 percent on the day. However, shortly after the closing bell, the stock slipped 0.91 percent at time of writing.