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Cepheid (NASDAQ:CPHD)

Lazard Healthcare Conference

November 14, 2012 01:00 p.m. ET

Executives

Andrew Miller – EVP & CFO

Jacquie Ross – Investor relations

Steve Unger

Hello, everybody. Thank you. We’re actually on the clock for the next presentation. So, I’m hoping that you folks would like to come up closer to the front so maybe we can clean off the front of the room first. But our next presentation is in the life science tools and diagnostics space. It is the first diagnostics company that I picked up here at Lazard a couple of years ago, Cepheid.

And we have with us the Chief Financial Officer in Andrew Miller. Jacquie Ross is also in the audience as well. As far as Cepheid is concerned, I mean, everyone – you obviously should know is really the first platform to grasp a firm position in the hospital base as far as molecular goes and is clearly the fastest-growing platform out there.

And with that, so things have died down a little bit, I will hand it over to Andy. Thanks.

Andrew Miller

Thank you, Steve. It’s a pleasure to be here today. Let me begin by reminding you I’ll be making forward-looking statements, and if I make any comments where I’m referring to guidance or view of the economic environment or the CapEx environment, I’m not updating those statements. I’m simply referring back to the comments we made on our earnings call back in October.

So Cepheid has established itself as really one of leaders in molecular diagnostics and clearly the highest-growth company in molecular diagnostics, frankly growing four to five times faster than most of the other players in the market. What’s really driving that growth?

Number one is our technology. We believe that our technology is fully one to two generations ahead of anything on the market today or anything our competitors have announced. And at our Analyst Day back in September, we extended that technology further with a number of very important announcements that we made there.

Secondly, we are doing quite well on menu execution. We have 11 tests available in the US today. We have our chlamydia/gonorrhea test that’s in the FDA, and we expect clearance on that test before the end of this year, and we have 13 tests available outside the US.

Importantly, we’re also entering an important product cycle for Cepheid where over the next couple of years, all of the highest-volume tests will be available on the Cepheid platform. So you’ll be able to – so labs and hospitals will be able to bring in-house a lot of testing they send off to reference labs today as well as consolidate their testing on a single platform.

Third key thing about Cepheid is we lead the highest-growth market or segment of molecular diagnostics. That’s the Healthcare Associated Infections segment. We have about a two-thirds market share. We continue to outgrow the competition there. And that market, which frankly molecular HAIs, or Healthcare Associated Infections, didn’t really even exist as a market until 2007 and it’s now well over a $200 million market, and we have more than two-thirds market share in that space. So you put all those factors together, the menu execution, the technology lead, the lead in the highest-growth segment of molecular, it should be no surprise that we by far are the highest-growth company in molecular diagnostics.

Now when you look at the overall molecular diagnostics market, it is the highest growth segment of the $40 billion IVD market. Most analysts expect it to grow in the mid-teens. Now, the portion of that market that Cepheid has a menu that addresses that, our addressable market is one that currently is about $900 million. We have tests addressing that size of the market. Today, most of our tests though are in the HAI segment. As our menu expands, you can see that over the next five-year horizon our total available market expands to more than $5 billion. So all of those high-volume tests that typically hospitals send them out, those tests are tests that will be available on our platform, growing our TAM by more than five times.

If you look at the highest-growth segments in molecular diagnostics, you’ll see infectious disease continues to be the largest segment and one of the highest growth and the growth being driven by what’s often referred to as acute care or HAIs, flu, those are products in the high-growth portion of infectious disease. But the other very large segment, $1 billion segment of molecular diagnostics that will soon have a test addressing is the virology segment.

So to give you some perspective at how rapidly Cepheid has grown and reached commercial traction in the clinical diagnostics market, you can see that, you go back to 2006, and we had just over $20 million of clinical diagnostics revenue. And by 2011, we had more than 10 times that as far as clinical diagnostics revenue grows, a 61% growth CAGR over that timeframe, 36% growth in our clinical business in 2011, and our guidance for 2012 assumes a low 20s growth in clinical revenues.

The other thing that’s key is to look at the rate of placement of our platform. We placed over 3,800 systems over this period of time, broadest placement rate, most rapid adoption of a single molecular system that you have seen, and that simply shows you how ready the market has been for a technology solution that enables them to bring molecular in-house without the requirements of special rooms, special equipment, and highly-skilled labor. By democratizing, taking all those barriers to offering molecular within their labs, we’ve been able to rapidly gain traction in the hospital market globally.

So the key really to Cepheid’s strategy is to democratize molecular diagnostics. Again, molecular brought great benefits given its accuracy and the fact it has the promise of a more rapid time to result. And of course, a diagnostic test is more valuable the more accurate it is and the earlier you have it because it guides the treatment of the patient. It guides how you manage the patient effectively. So that is what makes it valuable. Cepheid’s tests are the most accurate, the fastest time to result, and by far the easiest to use in the market, and that’s what’s enabling this democratization.

Previously, molecular was relegated only to those labs that could afford the investments in the people and the expensive equipment and have the high volumes to justify that investment. So it was really the investment that relegated it to a specialty lab.

With Cepheid by eliminating the requirement for highly-skilled labor, by eliminating the need for special rooms, by having a scalable platform so you can buy the size instrument you need for the volume of test you’re running, we’ve been able to democratize molecular.

Now what’s interesting in an analysis by an independent consulting firm of the US Cap Surveys, which is a survey that labs fill out in the US, every single year, from 2010 to 2011 there was a 31% increase in the number of labs offering molecular infectious disease testing. Most of that testing was driven by labs offering moderate complexity testing, so that’s where they started.

Secondly, most of that testing began with HAIs. Those are two areas where Cepheid leads. That is moderate complexity testing, all but one of our tests are moderately complex, and HAIs. So, you can see how Cepheid is truly the democratizer in this particular market.

So what is unique about our technology that it’s enabling people who could have never dreamed of doing molecular to begin offering these tests in their hospital labs? The first aspect of it is our cartridge. Every test is in the cartridge like the one I have here. What this does, it eliminates all of the complex pipetting steps with fluidic steps in the sample preparation part of molecular diagnostics testing, all of those hours that people used to spend pipetting to actually extract the DNA or the RNA from the sample so you could amplify it and then detect it. Instead for us it’s pretty much, you put the sample in the hole, in the top of the cartridge, and close the lid and you’re done. It’s about a minute to two minutes of hands-on sample prep time.

Our tests are moderate complexity. The lowest-level person, the administrative person in the lab can run our Cepheid test. It doesn’t take the high-complexity med techs to run the test. So while it’s easy to use though, it’s actually quite sophisticated technology. We’ve universal sample prep. So regardless of the type of sample, you can run the test in our cartridge whether it’s a difficult C. difficile spore, whether it’s tissue for an oncology test, whether it’s a blood culture model, or simply urine, which has a lot of inhibitors in it, all of those tests run in the same cartridge.

Secondly, we have the ability to do what’s called nested PCR, which enables you to get a more accurate test result. We use that for our tuberculosis test that was endorsed by the World Health Organization. It was endorsed because it had a level of accuracy for TB detection, never seen for a molecular test before and because of the ease of use of the platform. We also use that on our BCR-ABL test where we’re going for a second version of the test, more sensitive than anything seen in the market, something that eventually could show a test of cure for that particular test.

Many unique aspects of the test, we don’t make our customers sacrifice accuracy for that ease of use or the rapid time to result. The second unique aspect of our technology is our instrument. It’s a scalable instrument. So you can buy the size instrument you need to handle the volumes that you have today and frankly expand that as your volumes increase over time. Each of those doors you see in those instruments on that slide are an independent PCR module.

And so what we do is you place the cartridge inside one of those modules and that’s where the PCR takes place. So you can buy anything from a GeneXpert I which does one test at a time up to the Infinity-80 that can handle over 2,000 tests in a 24-hour period, and what’s unique is you can handle all of our tests at the same time independently, complete random access. There is no need to batch your tests with Cepheid. So if we had 30 tests available on the market like you see in that 2016, 2017 timeframe, you could be running all of those tests at the same time, unique in the molecular diagnostics market, so a scalable instrument.

And by the way you can buy any one of these platforms partially configurated. So you can buy a GeneXpert 80, for example, with as few as 24 modules and add more modules later as you ramp your volumes.

So what does this really mean for the lab? If you went into a molecular diagnostics lab today, you’d see that clearly the market is highly fragmented, that there is a different instrument, pretty much from a different vendor, for every unique type of test. One of the reasons for that is that there are different amplification technologies that might work on certain tests, but not as well on other types of tests. Others, they simply found that certain vendors had more automation which worked better for a certain test or a certain sample type worked more effectively.

Cepheid has the promise of enabling labs to bring all those tests on to a single platform. This is literally a picture of one of our customers in the Bay Area in California, a university based hospital lab. This is all the molecular equipment that they have inside their lab today. This is what they need to be able to provide their clinicians with the testing that they demand.

You can tell by looking at that, that’s a very expensive way to operate your molecular lab. You have different service contracts with every one of those instruments. You’ve got different regulatory requirements, training requirements. Frankly different lab techs work different instruments at each point in time. They all have to be connected to the LIS System, the Lab Information System. It’s quite expensive.

What Cepheid offers to the lab is to move from this to this, where all the tests run in the same cartridge, on the same instrument, a much more efficient way for the lab to operate. So Cepheid doesn’t just bring benefits inside the lab from an efficiency and an effectiveness perspective, but because we’re selling into the hospital, we also really amplify what the benefits are to those outside of the hospital lab in the pharmacy or in infection control.

Frankly, I’m sure all of you realize that the earlier you have an accurate diagnostic result and you’re using that to manage the patient, the more effective that management of the patient is and clearly the more efficient the management of that patient is.

One way that we help hospitals understand this, understand our value proposition, is our sales force or members of our marketing team called systems and solutions specialists, they will help a hospital understand the costs they have throughout their institution driven by their current diagnostic testing platforms. This is an example of a value stream for one of our customers who was using culture and they were considering moving from a very inexpensive culture test to a molecular test with Cepheid that was quite a bit more expensive.

So to help them to understand the economics of this, we helped them understand what their value stream was today. What you see here is there was about 40 steps in this MRSA value stream that took approximately two days before they actually had a test result.

Why are there 40 steps, because until the 47 hours have passed, they don’t actually know whether that patient is colonized with MRSA or not, they are guessing. And because they are guessing, they have a number of steps they put in place to mitigate the impact of an incorrect guess. Those steps are meant to mitigate the impact of guessing wrong. All of those steps cost time, and cost money.

With the Cepheid solution we show them that you move from those 40 steps over two days to 11 steps over about an hour. Look at the difference in the value stream. It’s the little thing on the left as opposed to the thing that took the entire slide.

Intuitively you know eliminating 29 steps over a 47-hour period eliminates cost, and that’s what we show to our customers. An example in the MRSA market this market in 2010, according to that same survey I quoted earlier, analyzing all of the CAP Surveys for 2010 and 2011, this survey showed that in 2010, 32% of the MRSA market was molecular and 68% was culture. In 2011, that had moved eight points more to molecular. So 40% of the MRSA market was molecular and 60% was now culture in one year. Interestingly, what they identified was that all eight points of market share there went to Cepheid, none to any of our molecular competitors because of the strength of that one-hour test result, which only we can offer because only we offer a random access solution for our customers.

To take a quick look at the pipeline, I mentioned that we’re entering an interesting product cycle. Clearly, we have our CT/NG test in the FDA today. We expect to clear it before the end of the year. That’s about a $350 million US market that we will have access to. That’s a market that has about 30 million tests per year. About third of those actually flow through the hospital labs today. It’s a market that we believe is right for dissemination.

As we move forward in 2013, we have a very productive year from an R&D perspective. We also expect in the US to release our CLIA-waived flu test. We do believe that we will be successful in being the first to have an amplified molecular test that is CLIA-waived. We were the first to have a moderate complexity molecular test that was amplified. We expect to be the first to have a CLIA-waived test and then expand that menu over time.

We also plan to bring our TB test to market in the US, the TB test that I mentioned have been endorsed by the World Health Organization. As we move outside the US, importantly we also expect to have HPV on the market, vaginitis on the market. Vaginitis, we expect available in the US as well as outside the US as well as Norovirus outside the US and MDRO or multi drug resistant organisms.

As you move to 2014 and 2015, you’ll notice that our virology test menu comes to market. HIV, HCV, and HPV. That is the largest segment from a revenue perspective of the molecular diagnostics market, over $1 billion segment. Primarily tests are sent off to reference labs today. We believe that that market, like CT/NG, is ripe for dissemination, that the hospital labs will compete effectively with the reference labs for that testing with their physician office practices that they serve today, and they’ll bring that testing in-house. Very large market that we’ll have access to.

We also have the beginnings of our oncology test which is Phase II of Cepheid. And then in 2016, 2017 we further expand into oncology, other genetic testing, and importantly you see our CLIA-waived menu there on the right hand side.

Now today there are about 2,000 labs in the US that can do high-complexity molecular testing. There are about 20,000 labs that can do moderate-complexity testing, including the largest physician office practices, the largest OB/GYN practices which is clearly a target for us with our women’s health menu coming to market.

In addition, you have in total about 150,000 CLIA-waived labs in the US. Those are principally physician office labs, urgent care clinics, walk-in clinics, things like the Walmarts, and urgent care clinics in Walmarts and things of that nature.

We are bringing a menu of tests that we believe can bring molecular testing and all the benefits of molecular that we brought from the reference lab to the hospital market. We believe we’ll be able to bring that closer to the patients still into physician office practices and urgent care clinics. Again bringing the testing closer to the customer as our technology eliminates the barriers that have kept them from the benefits of molecular all this time. The first CLIA-waived test we intend to bring to the market is our flu test which we expect to have in trials during 2013, during the flu season we’re about to enter, and next year’s flu season so we have it on the market for the 2013, 2014 flu season right around the end of next year.

I want to talk a little bit about the chlamydia and gonorrhea market so you understand what our go-to-market is today. Again, I highlighted that that’s a highly centralized market. The testing is principally done in high-volume reference labs and public health where Gen-Probe with their TIGRIS instrument is the market leader. In the US, they have more than 50%, close to 60% market share with a very good solution for that high-volume testing market. And essentially everybody else, all the doctor’s offices, all the hospitals, all the sexually transmitted disease clinics, send their tests off to one of those reference labs and get a result three, four, five days later, sometimes even longer if it happens to be over a weekend when those labs aren’t running their tests.

So, for us, we’re going after the hospital market. We’re going after the customers of LabCorp and Quest as opposed to going directly after LabCorp or Quest. So today, two-thirds of hospitals don’t have molecular capability. They send their tests out. They are a great target for us. One-third of hospital labs do have molecular capability. It tends to be moderate complexity capability, tends to be our platform, perfect target for us. Most of them send those tests out. The price to send the test out is greater than what we intend to charge for the test. The time it takes to prepare the sample to send it out is greater than the time it takes, hands on time, to run our test.

The accuracy, we expect to be equivalent to better than the market-leading tests on the market. And then in addition to that rather than waiting three or four days or more to get a test result, especially a confirmed test result, you’ll have a result in about an hour-and-a-half. That’s our value proposition to the hospital lab to bring the tests in-house on our platform.

Now in addition, you do have some of the largest hospital labs that are doing their own CT/NG testing. However, they tend to use very dated platforms. They tend to – many are using platforms that are more than 10 years old, platforms ripe for an upgrade. The testing isn’t as accurate and that solutions are not very automated, a great prospect for us. So, we’re going after those as well, and we see great interest in our sales funnel among those higher-volume hospital labs that are looking for a more current and up-to-date solution to run their CT/NG testing on.

So we believe we have a great market to go after initially, but long term we believe this market will be disseminated. Remember, this really is a commodity test. There are no special markers here. There’s no reason why this test is being sent off to a specialty lab. The test should be done closer to the patient, and with our technology it can be done closer to the patient. And I don’t think in 10 years, we’ll be thinking of this as a test that needs to be sent off to a reference lab.

Finally, our guidance for the year, which we updated at the end of last quarter is for revenue of $333 million, that’s full-year growth of 20%, clinical revenue growth of 22%, a non-GAAP EPS of $0.21 to $0.23, and we’ll provide guidance for next year on our Q4 call.

And with that we are out of time. Thank you very much.

Steve Unger

Thank you very much. Thanks, Andrew.

Question-and-Answer Session

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Source: Cepheid's Management Presents at the Lazard Capital Markets 9th Annual Healthcare Conference (Transcript)
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