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Cepheid (NASDAQ:CPHD)

Q4 2008 Earnings Call

February 05, 2009, 5:00 pm ET

Executives

Jacquie Ross - Senior Director, IR

John Bishop - CEO

Andy Miller - SVP and CFO

Rob Koska - SVP, Worldwide Commercial Operations

Analysts

Brian Weinstein - William Blair

Bill Quirk - Piper Jaffray

Sameer Harish

Matthew Nutoriani - Robert W. Baird

Zarak Khurshid - Caris & Company

Bruce Crena - Leerink Swan

Scott Gleason - Stephens Incorporated

Operator

Good day ladies and gentlemen and welcome to the Cepheid's Fourth Quarter and Full Year 2008 Conference Call. My name is Frenzine, and I will be coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today, Ms. Jacquie Ross, Senior Director of Investor Relations. Please proceed, Ma’am.

Jacquie Ross

Thank you Frenzine, and welcome to Cepheid's fourth quarter and full year 2008 conference call. On the call today are John Bishop, Chief Executive Officer, and Andrew Miller, Chief Financial Officer.

In addition joining for the Q&A portion of the call are Dr. David Persing, Chief Medical and Technology Officer and Rob Koska, Senior Vice President of Worldwide Commercial Operations.

Today's conference call is being broadcast live through an audio webcast and a replay of the call will be available later today at www.cepheid.com.

During this call Cepheid will make forward-looking statements including guidance of the future operating results. Because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements can be found in Cepheid's annual report on Form 10-K, Form 10-Q and other filings with the US Securities and Exchange Commission in addition to today's press release. The forward-looking statements including guidance provided during this call are valid only as of today's date February '05, 2009 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 again at www.cepheid.com.

Finally, and as a reminder this conference call is being recorded.

With that I would like to turn the call over to Cepheid’s Chief Executive Officer, John Bishop.

John Bishop

Thank you and good afternoon everyone, appreciate your joining us. Even with a volatile and uncertain hospital spending environment in the fourth quarter and a finish to the year that did not meet our expectations, 2008 marked a year of impressive growth for Cepheid. Total revenue grew 31% to $170 million from $130 million in 2007.

And total product sales grew 37% to $159 million from $117 million in 2007. At $92 million 2008 core clinical sales increased 112% over 2007. This business which includes sales of our GeneXpert systems and Xpert family of test.

Represented almost 58% of our total product sales in 2008. Which compares to 37% in 2007, and highlights the strategic shift of our business over the last several years.

Globally we placed 458 GeneXpert systems and 2518 modules during 2008 of which 200 systems and 1744 modules were in North America. The GeneXpert system optimizes the needs and demands of the molecular diagnostics market. And it is a testament to this fact that almost 950 systems have been placed in a little over two years despite a limited test menu.

We look forward to shipping our 1000 GeneXpert in 2009. And are excited to be entering the year with our broadest test menu to date. For the full year 2008 sales for our Xpert MRSA test were approximately $47 million.

Which is a 420% increase from approximately $9 million in 2007, it should be noted that with this significant achievement in sales growth Cepheid has become the leader and they are developing healthcare associated infection, or (HAI) market.

The company also reached another growth inflection point in the market introduction of its first diagnostic products for the HAI market complementing our Xpert MRSA surveillance test product.

Specifically, we delivered four HAI products to the market as follows; first we expanded our US Staphylococcus aureus menu of test to include diagnostic products were blood culture detection of MRSA and staph aureus in suspect patients. And a first in class test or detection and identification of MRSA and Staph aureus and skin and soft tissue infections.

Additionally, we expanded our European test menu with the introduction of our vanA, vanB test for detection of vancomycin-resistant enterococous and our C diff test for detection of Clostridium difficile and differentiated identification of the more virulent 027 strain from the more generally occurring strain.

These product introductions exemplify, the current productivity and integration of our US and international R&D teams, which we believe are the most capable, in the molecular diagnostics market executing on product pipeline delivery.

And moving back to the quarter, the fourth quarter exhibited a tough operating environment as the economy deteriorated rapidly. In reaction to these conditions hospitals encountered declining admissions and move to control expenses and capital investments.

Despite the tough environment we placed 45 GeneXpert systems in North America and 54 internationally highlighting the compelling benefits that this system is brining to the market.

Total revenue of $38 million was down 6% from the fourth quarter of last year. Total product sales up $36 million were 2% from the fourth quarter of last year. However, this was in large part due to the previously discussed anticipated declines and our biothreat and non-core clinical businesses.

Core clinical sales of $25 million were up, 53% are almost $9 million from the same quarter a year ago, but down 12% from the third quarter 2008, primarily driven by fewer GeneXpert system placements.

Xpert MRSA test sales were approximately $14 million which was lower than anticipated relative to our implied guidance of $16 million to $18 million. But it nonetheless represented growth of 211% from the same quarter a year ago.

We believe that our less than expected test sales were due to customer operating expense constrains, that may have delayed the expansion of existing testing programs beyond high risk patients.

In addition to the slowing introduction of new MRSA surveillance programs. Further lower admission rates also likely affected testing volumes at various institutions.

We do not believe that existing MRSA testing policies were impacted. Although we believe that customers may have worked to reduce inventory levels in order to contribute to cost sayings initiatives.

Given the expanding breadth of our clinical product line, which includes a number of significant new products going forward. We will not give specific guidance or sales for the Xpert MRSA test product on the standalone basis. That said, our expectations are that sales for this product will continue to grow as the surveillance testing market further develops.

Our long-term strategic objective is for GeneXpert System to become molecular platform of choice for customers of all sizes. As stated, we have already placed 947 GeneXpert Systems in the clinical market worldwide which included more than 5000 modules.

And we further expect to extend the reach of GeneXpert platform with the introduction of our Infinity-48 system. This system has been designed to provide the ultimate in random access including staph testing.

At the same time, however, it is also capable of substantially improving the operating efficiency of a laboratory which is a critical consideration in the current challenging economic environment.

We currently have beta units under field and expect to begin to ship production units late in the first half of this year.

Separately, while others are focused on developing their new platforms for 2010 or 2011 introduction, we intend to focus on developing of the test menu expansion along with test utilization within our existing installed base.

We currently have five FDA clear products available in the US. Our MRSA surveillance product and our diagnostic products or MRSA and staph aureus for skin and soft tissue infections and blood culture along with our Group B Strep and Enterovirus products.

As previously discussed we expect to submit our Clostridium Difficile or C.Diff and our vanA or vanB which was previously referred to as VRE test to the FDA in the first half of 2009 targeting US market release in the second half of 2009.

Other products expected for 2009 release in the US include HemosIL Factor II and V test which is currently at the FDA and our MRSA Staph aureus nasal test for pre-surgical testing.

With this test portfolio we expect to extend our leadership in the HAI market and enter the genetics testing market. We're pleased with the early traction of our MRSA/SA skin and soft tissue infection and blood culture products which were released in the fourth quarter of 2008.

The blood culture product in particular has been very well received exceeding our expectations for the quarter with customers recognizing the value of our rapid test to aid in the [management of sepsis patients].

With the intention of leveraging our expanded test menu our US sales force was reorganized in January into two groups: with one group focused on GeneXpert system sales and the other team focused on driving Xpert test menu and adoption and utilization.

As planned this new organization will position the company to leverage use of our existing install base without loosing focus on the continued growth of our installed base within the market.

Now moving to an update on federal and state legislation. Well legislation is only one of the many drivers responsible for the fast growing HAI opportunity. It is one of the most visible and therefore I will take a few minutes to update you on 2009 activities to date.

First the Federal Government is become more active in addressing the HAI problem. Last month HHS released an action plan to prevent HAI, establishing national goals and outlining key actions for coordinated agency efforts to reduce and prevent HAI.

Additionally, Congress earmarked $150 million in their proposed 2009 economic recovery bill to fund HAI prevention activities. This demonstrates that HAIs are receiving more attentions at the federal level.

At the state level five states including Hawaii, Indiana, Kentucky, New York, and Washington have introduced legislation to control and prevent MRSA infections including a provision for mandated surveillance testing.

In addition, of the five states with currently active mandated surveillance testing.

Illinois and New Jersey have legislation to extend testing to include medical and other facilities specifically in Illinois the bill will extend testing to include the state operated correctional, juvenile and residential facilities.

New Jersey's bill would extend testing to include nursing homes and rehabilitation hospitals and will add testing for VRE in addition to MRSA. A number of other states have also introduced bills focused on HAI reporting and prevention programs.

And while 2009 promises to be an exciting year for Cepheid in terms of menu expansion and general growth within our core clinical business. We have taken a very pragmatic view of the appropriate cost structure that will enable profitability improvement in the current environment without sacrificing sort of critical strategic value.

Andy will take you through the details but we have taken specific steps to reduce our expenses including a reduction in force that occurred earlier today impacting a total of 47 positions within the company. This number includes existing positions, replacement positions and contract employees.

In addition, we have slowed development of certain projects. These decisions were particularly difficult for a company that is experiencing such strong growth in the clinical market. However, given the ongoing economic uncertainty, we consider these prudent measures that will better enable us to move toward profitably and reduce our cash burn.

Let me be clear, in that regard that would approximately $35 million in cash and investments net of related debt at the end of 2008, we do not expect to need to raise cash for operating purposes.

In addition to narrowing our losses, we will be tenaciously focused on management of working capital.

With that I will hand the call over to Andy for a detail discussion of our financial results and guidance for 2009. Andy?

Andrew Miller

Thank you John, as always please note that I will be discussing our non-GAAP results unless I indicate otherwise. Fourth quarter revenue of $37.8 million, was down 16% sequentially and down 6% year-over-year. Of total revenue product sales comprised $36.1 million and other revenue consisting of contracts, grants and research was $1.7 million.

Core clinical sales of $24.7 million grew 53% year-over-year and declined 12% sequentially, due to severe operating and capital budget constraints among our customers towards the end of the year.

Core clinical which primarily comprises our GeneXpert system and Xpert menu and tests represented 68% of total product sales for the fourth quarter of 2008 which compares to 44% for Q4 '07.

As expected clinical partner sales of $2.3 million for the quarter declined 62% from $6.1 million in Q4 '07.

Biothreat sales of $5.2 million were in line with our expectations for the quarter and declined 54% from $11.4 million in Q4 '07. As previously disclosed we expect an annual testing volume of approximately 1 million tests for the USPS’s fiscal year ending September 30th, 2009.

Test volume is not spread evenly throughout the year however and we expect sales for the next three quarters to be approximately $7.5 million in Q1 '09, $7.5 million in Q2 '09 and $3.5 million in Q3 '09.

Biothreat sales represented 14% of total product sales in the fourth quarter which compares to 31% in the same quarter a year ago.

At $3.9 million were 11% of total product sales, our industrial business was basically flat this last quarter and up modestly from last year. As a reminder this business comprises SmartCycler Systems, tubes and other reagents for the industrial market.

Moving to the income statement fourth quarter non-GAAP gross margin on product sales improved 340 basis points year-over-year to 46.5% due to favorable mix associated with higher Xpert test sales, lower material costs from volume purchase arrangement has manufacturing efficiencies.

GAAP gross margin improved to 45.8% and represented 400 basis points in Q4 '07. All operating expenses declined on a sequential basis as we targeted improved profitability based on the anticipated flat to slightly down revenue that we got it for on our Q3 earnings conference call.

In addition, in the fourth quarter we reversed management bonuses that were accrued earlier in the year, benefiting Q4 operating expenses. Based upon our financial performance during the year, such bonuses will not be paid. During the quarter we recorded a settlement benefit of $1.5 million associated with the unexpected cancellation of a binding contract in the second quarter of 2008.

Non-GAAP operating loss for the quarter was $2.3 million and GAAP operating loss was $5.8 million. Other expense net of $215,000 was in large part offset by tax benefit of $161,000, resulting in a non-GAAP net loss of $2.3 million or $0.04 per share. On a GAAP basis net loss was $5.9 million or $0.10 per share.

Touching on our full-year results briefly. Total revenue of $169.6 million was up 31% from $129.5 million in 2007. Total product sales of $159.4 million grew 37% from 2007 with 33% of product sales from systems and 67% from reagents and disposables.

On a GAAP basis, net loss of $21.7 million or $0.38 per share was essentially flat with $21.4 million or $0.39 per share in 2007. On a non-GAAP basis, net loss of $6.5 million or $0.11 per share improved from a net loss of $9.3 million or $0.17 per share in 2007.

Moving to the balance sheet, cash, cash equivalents, restricted cash in investments, net of associated debt was $34.9 million as of December 31, 2008. Cash, cash equivalence and restricted cash was $25 million.

Investments of $24.5 million reflect the fair market value of our $25 million par value auction rate securities. In addition, to the fair market value of the auction, which enables us to put the [AR assets] to UBS at par value, starting in June 2010. You will note that subsequent to the transaction with UBS, there are no longer recording a temporary impairment under accumulated other comprehensive income.

You will also note that during the quarter, we borrowed $14.6 million from UBS related to our auction rate securities settlement agreement.

I would like to walk you through our cash flow in some detail.

Proceeds from our settlement agreement with UBS was $14.6 million, but were offset by negative cash flow from operations of $8.9 million. Our acquisition of Stretton for $2.2 million and our capital expenditure of $2.6 million.

Cash flow from operations, which was positive during the first three quarters of 2008 was negatively impacted by the revenue shortfall and higher operating loss then expected along with unfavorable working capital management. Inventory increased $2.9 million associated with the lower than anticipated sales and delay of commercial shipments of Infinity.

Accounts receivable increased $0.9 million due to the timing of shipments to the US Post Office. And we have contrast we collected all third quarter USPS revenue during the third quarter, in Q4 one of the two shipments was later in the quarter. So, the case was not collected until Q1 '09.

In addition, accounts payable and other current liabilities decreased $6.1 million due primarily to the timing of our biothreat cost of good sold payments to ABI and to the timing of royalty payments. In fact, working capital management alone accounted for about $10 million of cash used in operations during the fourth quarter and you can certainly expect that we will be intently focused on firmer working capital management control for 2009. Overall, we believe that we have sufficient cash to fund operations to 2009 and beyond.

I will now move to our plans for driving towards improved profitability in the midst to the second uncertainty. We have taken a series of very deliberate actions to control costs without detriment to our key strategic comparatives. First, we have today reduced our headcount by 47 physicians, reflecting a combination of permanent contract and replace physician that we have eliminated.

Other costs saving initiatives implemented for 2009 include a hiring fees, a suspension of annual salary increases, a postponement of clinical trials for our VA MRSA test until 2010. Postponement at certain plant facility expansions and travel restrictions. We have also carefully reviewed our capital expenditure plans for 2009, delay in plans on several projects. As a result, we expect our CapEx to be up to one-third lower in 2009 than 2008.

Taking together these cost control initiatives have reduced our total expected 2009 spending at approximately $10 million.

Moving to guidance, for the fiscal year ending December 31, 2009 Cepheid expects total revenue to be in the range of $164 million and $174 million. This guidance assumes no further deterioration in the broader economy and we do reserve the option to update this guidance as we progressed throughout the year in order to reflect new developments.

During 2009, we expect to continue to drive adoption of our GeneXpert System although it would be anticipation of ongoing capital constraints. We expect the average number of systems per quarter and instrument revenue overall will be lower than 2008.

For 2009, we believe that test utilization and menu adoption are the key growth drivers for our core clinical business. As previously disused we will be breaking out our core clinical test and instrument sales going forward, so that you can track our progress by quarter.

With the reorganization of our sales force and dedicated sales personnel now focusing on test utilization and adoption, we expect that the ratio of core clinical test sales to instrument sales will increase.

Overall, you will note that we anticipate the bulk of new product releases in the second half of the year suggesting a stronger second half in terms of product sales.

Moving to the other parts of the business, we expect biothreat revenue to total approximately $24 million in fiscal 2009 which compares to $36 million in fiscal 2008. This is largely due to a decrease in test consumption to approximately 1 million tests per year. Additionally, we expect non-core clinical partner revenue to decline by approximately $13 million from $16.5 million in fiscal 2008.

In the full-year, we expect GAAP loss per share in the range of $0.42 to $0.47. Excluding stock compensation expense of approximately $16 million, amortization of acquired intangibles approximately $1 million and restructuring expense of approximately $0.8 million. We expect non-GAAP loss per share in the range of $0.11 to $0.17.

I will now turn the call back to John.

John Bishop

Thanks Andy. Looking forward I would like to summarize with you what we expect from Cepheid in 2009.

First subject to FDA clearance, we expect to continue to expand our test menu in the US with the introduction of the HemosIL Factor II and V test in the first half of the year followed by our products for C-diff, Le-RA and our MRSA SA nasal product in the second half of the year.

Second, we expect to launch our pre-surgical MRSA SA nasal and multi drug resistant tuberculosis products in Europe during the first half of the year. Further, we expect the NHS mending or MRSA surveillance of elective admissions in England to become effective April 1st. Expected sales benefits resulting from these initiatives were more likely be seen in the second half of the year.

Third, in the US we expect to see the increasing benefit of our sales force reorganization in the second half of the year. In order to better follow our general progress in this area, we will breakout sales for systems versus test in our core clinical business in the North American and International markets.

Four, we expect to initiate shipment of production units of our Infinity 48 system late in the first half of the year. And finally, you can expect tightened cost control and cash management as we target improved profitability and working capital management in a troubled economic environment.

In short, 2009 will be a key year for Cepheid as we make progress against our strategic objectives including expansion of our business base and extending our leadership position in the HAI market.

I would now like to ask the operator to begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Brian Weinstein of William Blair. Please proceed.

Brian Weinstein - William Blair

Hi, good afternoon. Maybe you guys can discuss a bit how you go about building up to your revenue guidance given the lack of visibility, how we can get comfort a bit this revenue guidance is something that is achievable?

John Bishop

Certainly. As we have indicated we talked about what happened with the hospitals in the fourth quarter, that data comes directly from the American Hospital Association information that gives some specific parameters on hospital cost constraints and reductions with regard to the admissions. That data along with information directly coming from our field regional management about their existing experience in the field is fully taken into consideration and reflected in the guidance that we are talking about.

Now as you will with the guidance we have specifically indicated that system placements as you would expect in the current economic environment will be lower in 2009 versus what we saw in 2008.

On the other hand, offsetting this we expect significant growth in our test sales and that will stem from one, leveraging the install-base; two, activity with the sales force focused on test sales only versus just on system sales; and thirdly brand new products coming into the market in the second-half of the year not the least of which is the C-diff product which is now receiving as much or more [variety] versus MRSA.

Lastly, the initiatives that we have seen com in frankly, I think are an additional positive relative to the National Legislation and these things were put in even in the face of the economic environment. And as I have indicated at a Federal level looking at the activity focused on healthcare, HAI is going to figure prominently in those particular areas.

So, as we in summary look at overall expansion of the initiatives, expansion on our product portfolio in addition to the initiation of the initiative for NHS in England, that’s the basis of which we have derived our guidance that we see for the year driving the $164 million to $174 million in overall revenue.

Operator

Our next question comes from the line of Bill Quirk of Piper Jaffray. Please proceed.

Bill Quirk - Piper Jaffray

Great thanks. Good afternoon. John two question, first I just wanted to pick up on your comments concerning some of the legislative activity. Last session we saw actually quite bit of activity across candidly a number of it. Eventually a number of these builds obviously saw by the rate size. So now flash forward a year, there is a lot more states that are quite a bit in some cases financial pressure. So, how should we think about that as compared to obviously a number of state centers and house members and such wanting to [tighten up traction control].

Andy Miller

Well I think you raised very good point, Bill. Frankly, we are a little bit surprised to see in our view such aggressive activity at the state level and in the face of the economic conditions that are out there. It's clear that in introducing the legislation and getting it out the other end of the door is often problematic, but I think that this year even with the economy where it is, that you are seeing some balancing activities. I mean as I mentioned which is what we haven't seen quite as prominently in the past is the focus on HAIs at a national level. I think that sends a message relative to what will be happening at some of these other states.

I think it's also interesting to look at the initiative in Illinois and New Jersey, where they are looking in the face of already mandated surveillance to further expand that surveillance in these other institutions. So, yes, clearly there is going to be increased concern relative to the economy and implementation of the testing on the flip side is widely recognized that the incidence of HAI infections is a major cost addition to overall healthcare delivery. And the net effective is likely as it will bring expense down by implementing these procedures versus not implementing the procedures going forward.

One other item that you touched on in the call and we are getting some interesting comment coming from the field on use of the GeneXpert system. And that further heightens the desirability of the GeneXpert system is the economy environment and the overall efficiency of operation that the GeneXpert provides as you look at the required cost of labor and then of course, that elevates the availability of labor going forward.

So, we think and we are already seeing that, that is going to continue to add to the interest and GeneXpert system placements.

Operator

Our next question comes from the line of [Sameer Harish]. Please proceed.

Sameer Harish

Thank you for taking my question. Just wanted to follow-up, few weeks ago you talked about some market weakness coming from the broader economic conditions. Do you have any update, are you seeing anything that would be worse or better than what you were seeing at that time?

John Bishop

At this point in time based upon our field checks we are seeing conditions right now about the same as what we saw at the end of the fourth quarter in that regard.

Operator

Our next question comes from the line of [Matthew Nutoriani] of Baird. Please proceed.

Matthew Nutoriani - Robert W. Baird

Thanks for taking my question guys. Just really quick, in terms of cash usage expectations for 2009 can you help us out in terms of [pacing] and how the changes that you made today and throughout '09 will shake out and then I just have one follow-up.

John Bishop

Yeah. So, first of all let me help you put it in a perspective. Right now, with $35 million of cash and investments and that of the UBS [debt], as we said in the call, we absolutely don’t expect that we have to raise cash for operating purposes in FY '09. So putting in perspective in FY '08 where we had a non-GAAP loss of $0.11, our cash burn was $9 million and that included the $2 million Stretton acquisition, and frankly very unfavorable working capital management at the end of the year.

But with all that together, it was a $9 million cash burn. If you look at our guidance for FY '09, our FY '09 non-GAAP earnings guidance is about the same as our FY '08 actual. However, we have indicated we are going to cut our CapEx by about a third or about $5 million from what we did last year. So, I think as you try to model this from cash point you can see that there is we are not even close to having an issue with the liquidity during our FY '09 based upon our current view of the world and our expectations.

The actions that we took were taken today. So, you are seeing the cost savings. They are basically out of the business at this point moving forward. So, there are not coming later in the year. You will see them pretty linear.

Matthew Nutoriani - Robert W. Baird

Thanks for that. And then just one follow-up with more of a house keeping. Could you guys predicate the module and system numbers for North America and rest of the world?

Andy Miller

So in the fourth quarter, the international units were about, there were 54 systems, 45 in North American.

Jacquie Ross

And that’s (Inaudible) modules were 172 for international and 426 for US.

Matthew Nutoriani - Robert W. Baird

Thank you.

Operator

Our next question comes from the line of Zarak Khurshid of Caris & Company. Please proceed.

Zarak Khurshid - Caris & Company

Could you give us a little more color on the headcount reduction with respect to this split between R&D sales and marketing and general personnel and have a follow-up question as well?

John Bishop

Well, generally Zarak we had headcount went across a number of the areas actually as we indicated in the release we actually have some hiring positions that we are going to be adding in sales and marketing and the manufacturing area. So, what we have done with all of this as I mentioned is the restructuring of the sales force with the systems and the test people. We have also added some direct sales people in Europe along with some marketing personnel. So, better way to think of this overall as we did bring numbers down but we are also doing some organizational sculpting relative to where we are.

With regard to R&D while we had some heads come out of R&D, the key items that we wanted their items, that we wanted to focus was not to impact any of our significant near-term projects and certainly that would go through 2010 project as well. We really looked at our project that we are going to impact the outline years of our current five-year plan and we have slowed those down. So, looking at the nearer term projects those drive potentially very high level of returns and overall we think the return on investment with the reduction will be a good one.

Zarak Khurshid - Caris & Company

Sounds good. Then I understand that some customers reduce cartridge inventory levels for the fourth quarter. Can you comment on the average levels currently, is it for three or two weeks or something else and is there room for customers to reduce that further as surprising as maybe in 2009? And what is the absolute lowest level the customers could trim inventory to?

John Bishop

So as you would expect it, it's hard to get really absolute finite. Is general rule some certain healthiest time to my experience in the business is that it's normal for accounts to carry at least around 30 days worth of inventory. Could they trim that back a little bit, that yes, they could trim that back a little bit but not I would say extremely large amount. The good news is we have Fedex drop shipping capability to get that in there.

So I would not necessarily look for a real large necessary reduction in that. The big thing that we are looking at going forward this year and it's a big change from where we were even last year, I mean, sales are primarily driven by the MRSA surveillance product. That's going to continue to be a very, very significant product for us, but we are going to be adding significantly we believe to the overall test utilization and demand with all of these new products that we have spoken about coming into the marketplace.

So I think that’s going to have even in the place of what could be a trimmed back inventory. There is some potential for that in the market that we expect to offset it with additional testament on these other products.

Zarak Khurshid - Caris & Company

Okay. Then lastly on the legal settlement, was that related to the prior Roche related business. Could you just remind us in which we expect that or a similar benefit to continue going forward or is it done?

John Bishop

So the answer was yes that was related to that, to the Roche discussion. That was a one time event so you should not expect anything along those lines relative to future activity.

Zarak Khurshid - Caris & Company

Okay, thank you.

Operator

Our next question comes from the line of Bill Quirk of Piper Jaffray. Please proceed.

Bill Quirk - Piper Jaffray

Yeah thanks John, just much about the follow-up, this one I guess is to John or Andy for could jump into it but just thinking abut the plans you guys put in place, I think it was, I think you were out there in the third quarter but generally I suspect you guys plan size in going in the fourth quarter. What I am talking about is sales leases and you think a third party to help on half of terms, the cash flow management.

Can you talk about whether or not we've seen more interest in your customers from a leasing perspective and then just may be follow-up just give us little color on, the number of companies you are working with availability of capital et cetera?

John Bishop

Okay so yeah Bill I will actually ask Rob Koska to give you some of the details or color on the interest that you are seeing in the market. Those are the programs that the team did get put in place and we just had our national, international sales menu where primarily this is US focus. So that initiative is now underway on a true operating lease if you will that would make reagent rental. So we have multiple ways for institutions to acquire GeneXpert systems at this point and their effectively putting it on the balance sheet or not putting it on the balance sheet as the case may be and at the desire of the institution. Rob, do you want to talk about your interest at this point.

Rob Koska

Interest is very good and now reflecting back in 2008 the only thing that we offered the marketplace from a leasing perspective was a capital lease and approximately 10% of all our placements in the US were via that modality.

Moving into 2009 because of the capital constrains a lot of our customers wanted to be able to move into operating lease standpoint. We worked with US Bancorp to be able to put together a program that was FASB 13 compliant. And it is meaning with favorable reaction with the marketplace and anticipate that it will enable us to be able to close number of units. But it's new program that was launched the second week in January of this year.

Bill Quirk - Piper Jaffray

If I could just jump out with a follow up Rob, you mentioned operating lease and John you mentioned in the balance sheet. So just to be clear here guys. From an accounting standpoint FASB as sales leases in other words booking 100% of the revenue and 100% of cost to good to instrument I know you are not referring it's over typically five year contract?

Rob Koska

Okay. So, I want to be clear on couple of areas Bill, one relative to impact on Cepheid. What we wanted to do is give the institution, the opportunity that could deal at least either putting it typically on a balance sheet or not okay that option. In both instances the product is purchased by the bank and is provided to the institutions. So we booked the revenue immediately on the transaction and then there is no impact on us in that regard. And we are working with one banking institution on the program.

Bill Quirk - Piper Jaffray

Very good. Thank you.

John Bishop

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of [Bruce Crena] of Leerink Swan Please proceed.

Bruce Crena - Leerink Swan

Thank you good afternoon everyone. I guess my first question just I apologize if I missed this of the 54 systems in the US in the quarter did you mention what number of those were to the VA?

John Bishop

Actually we did not. The actual number of systems in the US in the quarter was 45 and we did not break out the BA number. And we can't give you that number it was what.

Andy Miller

3

John Bishop

3 unit.

Andy Miller

In Q4.

John Bishop

So 3 out of 45 worked for the BA.

Bruce Crena - Leerink Swan

3 out of 45, okay and then lastly John, I know in the last call you were talking about the a little bit on the backlog with Infinity. I'm curious do you have sense whatever that backlog was and I know you don’t want to get into the details but any sense maybe that slipping a little bit and you have got customers that you thought whatsoever in the backlog position that you are getting cold feet at this point?

John Bishop

Actually it’s interesting and I did mention that on the call that we had some that were looking at potentially getting cold feet in that regard and certainly understandable in this environment however at this point we do have orders in-house for the Infinity and the list of accounts that are interested in the Infinity is growing.

Bruce Crena - Leerink Swan

Great thank you

John Bishop

Thank you

Operator

And the next question comes from the line of Scott Gleason of Stephens Incorporated. Please proceed.

Jacquie Ross

Is Scott there?

Scott Gleason - Stephens Incorporated

Yeah Hello

Jacquie Ross

Hi Scott

Scott Gleason - Stephens Incorporated

Can you hear me?

Jacquie Ross

Yes we can.

Scott Gleason - Stephens Incorporated

Okay, I just wanted if you could pass on your expectation for C.Diff relative to your 2009 guide.

John Bishop

Well as we had indicated Scott we are going to given the breadth of the menu we are not going to be giving any guidance specific to any individual products any more it's not really going to be appropriate. What I will say is that we've take an a very conservative view of that because we are getting the product into the FDA and then anticipating clearance in the second half of the year. So it's not a large factor relative to the guidance.

Scott Gleason - Stephens Incorporated

But it is in the guidance. Correct?

John Bishop

Yeah it is. So there are sales in the guidance of C.Diff as well as the VRE product that we refer to now as van A/van B.

Scott Gleason - Stephens Incorporated

Okay thank you.

John Bishop

Thank you.

Operator

We’ve no further questions. I would like to turn the call over to Ms. Jacquie Ross

Jacquie Ross

Thank you this concludes today's call. As a reminder a telephone replay of the call will be available for seven days beginning at about 6:30 Eastern Time today. The webcast of today’s call we also be available on company’s website at www.cephied.com for at least 90 days. Please refer to today's press release for details access on replay. Thanks again for joining us.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Cepheid, Q4 2008 Earnings Call Transcript
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