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TMFHelical (99.05)

Ending my affair with Cepheid

Recs

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February 09, 2008 – Comments (1)

I recently closed my CAPS pick on Cepheid (CPHD).  It was tough to do as CPHD was my best scorer to date with a +303 compared to the S&P, and drove me to winning the prize-free 2007 edition of the stock picking contest on the biotech board.  I was the second score leader in the stock itself. 

In reality, I'm a believer in letting winners run, though perhaps trimming profits if they get over-allocated and I'm not bullish on the immediate future (depends, in a taxable account I would just let them run). In the long term, I'm still quite bullish on Cepheid over the long haul.  I like how they are bringing PCR to clinical applications, and nearer to the bedside with their moderate complexity CLIA tests for MRSA and type B Strep. This is a great way to approach the clinical diagnostics industry, via infectious disease. In the future this may be with personalized genetic analysis where appropriate.

But this is CAPS, not reality and as an analyst, I'm downgrading CPHD from a buy to a hold.  I'm not quite inclined to give a thumbs down over the short term, but near to it.  To the watch list with it.

The reason is that an awful lot of future growth is priced into the stock, and this growth is likely further out than I'd hoped.  The existing tests look great, and MRSA is all over the press of late, a clear clinical need for analysis.  But this test is nearly a year old, and I'm still waiting for more tests on the platform to see approval.  The pipeline has a couple, including hepatitis, but the add-on tests for the already approved platform should be coming more frequently than they are.  I know it isn't quite so simple, but it seems to be lagging in my opinion.

Cepheid isn't alone in PCR bases MRSA testing either.  Becton Dickinson has a test approved as well.   Each test has pros and cons, though both are much faster than older culture methods.  The driver for each is high throughput, and the consideration that MRSA testing be required upon hospital admittance (likely coming) could make both winners.

Cepheid - Pro

Moderate complexity CLIA labs, Simple, Faster

Cepheid - Com

Expense, Requires capital outlay of Cepheid equipment

Baxter Pro

Cheaper, Runs on any PCR equipment, More information

Baxter - Con

Slower (2 vs. 1 hour, plus getting samples to the lab), High complexity CLIA lab

While MRSA testing is growing and will likely continue to, competition i.e. more entrants with tests should further increase. 

A look at why I think Cepheid is due for a pullback can be explained via comparison to related companies.  Genpro is a medical diagnostic company using primarily FSH based hybridization technologies.  I like them but have always considered them over priced.  Inverness Medical is also in medical diagnostics, but has been growing primarily via acquisition.  I've been bearish on Inverness as well (serial acquirer syndrome).  And Becton-Dickinson, which has the competing test, but is a larger more diversified competitor.  Since Cepheid and Inverness are not profitable, I'll look to price to sales, sales growth, and margins.


                P/S    Proj Sales   Sales Growth 07  Sales Growth 06    GM (ttm)     P/E

CPHD      14.3     39.1%        14.5%                  2.7%                  53.4%          NA

GPRO      7.64    13.3%         13.6%                 15.9%                 74.1%          37

IMA          3.61    55.7%         44.3%                 35.0%                54.5%          NA

BDX          3.33    8.2%           9.7%                   8.9%                  50.9%          23

Cepheid is richest on a price to sales ratio, but is experiencing the highest current organic sales growth.  Inverness has high sales growth, but this is primarily via acquisition.  Genepro is also richly priced, but superior margins argue for some justification of this.  Becton-Dickinson looks like the value play of the bunch, more modest growth, but very good profitability.  I would note that of the four, Cepheid is the only company with a recent past of missing analyst's earnings expectations.

In CAPS it is likely best to let your winners run, even if the short-term prospects may be hazy.  Score accumulates much faster from a higher perch.  Still, the analyst in me sees Cepheid as a hold. So the pick is closed, revisit at , $25/share.   If I'm right, I should get that score leader title on this pick, for awhile anyway.

 

Ralph (Zz) 

1 Comments – Post Your Own

#1) On February 09, 2008 at 8:11 PM, GS751 (27.50) wrote:

great post I stay away from biotech because it is outside my circle of competence.

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