Cepheid Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.30.14 | About: CEPHEID (CPHD)

Cepheid (NASDAQ:CPHD)

Q4 2013 Earnings Call

January 30, 2014 5:00 pm ET

Executives

Jacquie Ross

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

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

Analysts

William R. Quirk - Piper Jaffray Companies, Research Division

Rafael Tejada - BofA Merrill Lynch, Research Division

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Michael Matson - Needham & Company, LLC, Research Division

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

Jeffrey Frelick - Canaccord Genuity, Research Division

Nicholas Nohling

Zarak Khurshid - Wedbush Securities Inc., Research Division

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Katherine Blanton - Jefferies LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Justin Bowers - Leerink Swann LLC, Research Division

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Vijay Kumar - ISI Group Inc., Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Cepheid Q4 2013 Earnings Call. [Operator Instructions] I would like to turn the call over to your host, Jacquie Ross. Please go ahead.

Jacquie Ross

Thank you, Patrick. Good afternoon, everyone, and welcome to Cepheid's 2013 Fourth Quarter and Full Year Conference Call. On the call today are John Bishop, Chairman and Chief Executive Officer; and Andrew Miller, Chief Financial Officer. 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 as to 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 on 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, January 30, 2013, 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 Chairman and Chief Executive Officer, John Bishop.

John L. Bishop

Good afternoon, everyone, and thank you for joining us for a review of our 2013 fourth quarter and full year results. Record revenue of $113.3 million for the fourth quarter grew 23% from last year, reflecting strong growth in both our Commercial Clinical and HBDC businesses. Commercial Clinical demonstrated the strongest sequential performance in terms of dollar growth in the company's history. The fourth quarter revenue growing $11.7 million, or 16% from the third quarter.

Commercial Clinical reagents performed very well, up 9% sequentially and growth was also driven by a record 205 commercial GeneXpert System placements during the quarter. This was clearly a very strong finish to what proved to be a year of recovery for Cepheid, and we enter 2014 with confidence that our performance should not be impeded by product back orders and the associated sales force distraction, as was the case in late 2012 and the first half of 2013.

For 2013 and full, we saw revenue growth, 21%, to $401.3 million, reflecting, first, impressive growth in the most strategic areas of our business. Notably, 22% growth in Commercial Clinical Xpert reagents and 84% growth in HBDC. Although these were offset, in part, by an 8% decline in our legacy non-Clinical business.

Second, we achieved a record 619 commercial GeneXpert System placements globally, compared to 523 systems in 2012. Importantly, we shipped a record 50 Infinity Systems, which compares to 31 Infinitys in 2012. Third, we meaningfully extended our U.S. test portfolio to include Xpert CT/NG, and Xpert MTB/RIF, while at the same time, making good progress on many of our other test menu expansion initiatives. Fourth, our international Commercial Clinical business grew 37%, driven by 44% growth in Xpert Commercial Clinical reagents.

And finally, we continued to see rapid adoption of Xpert MTB/RIF in HBDC geographies, resulting in an impressive 1,055 GeneXpert System placements in 2013. This was more than double the 506 HBDC placements achieved in 2012. We believe the strong global performance in system placements was driven by a number of factors. 383 international placements for the year, including 135 in the fourth quarter, reflected record numbers of GeneXpert Systems in both Europe and Rest of the World or RoW, which represents our emerging markets' Commercial Clinical opportunity.

In Europe, system placements are increasingly benefiting from our direct sales operations. Recall, we've gone direct in Germany and Italy within the last 2 years. And our sales organizations are gaining momentum just as our test portfolio is expanding.

In RoW, commercial system placements have accelerated, reflecting growing awareness of our Xpert portfolio, notably the MTB/RIF. As we have discussed, the HBDC business has proven to be a valuable door opener as demonstrated in RoW, where we placed over 100 systems in 2013. This was earlier and faster than we could have hoped pre-HBDC.

In North America, we also saw a step-up in system placements with 70 placements in the fourth quarter, bringing the full year North America total to 236, a 16% increase over 2012. We believe that our North America sales force productivity is back on track and it's clear that our market leadership position in HAIs and our broadening menu, particularly the addition of CT/NG and MTB/RIF in 2013 is increasingly compelling to labs of all sizes. In fact, we shipped a record 20 Infinity Systems to North American customers during the quarter. A few examples: one East Coast 300-bed hospital added a partially configured Infinity in Q4. We have been in discussions with this particular account for several years and, finally, we welcomed them as a Cepheid customer due to the availability of our molecular MRSA, C. diff and CT/NG on a single platform.

As a reminder, Cepheid is the only company to offer all 3 of these moderately complex molecular tests on a single platform, an advantage we expect to retain for some time. This customer is transitioning to Xpert from Culture, Lumigen and AMPLICOR, respectively. One West Coast 400-bed hospital added a fully configured Infinity-48 in the fourth quarter, following a detailed analysis of a single platform workflow for as many as 8 Xpert tests. Adding the Infinity is expected to result in more than $500,000 in annual savings for the hospital, mostly from lower labor, service and send-out costs.

To give just a few examples, this customer's transitioning MRSA from Roche, and moving C. diff testing from 4 Lumigen platforms to the GeneXpert. Incidentally, this account is also adding Xpert MTB/RIF. One Midwest 350-bed hospital added a partially configured Infinity due to a broad menu availability. Initially, this customer was looking only at MRSA pre-surgical testing and we were evaluated against the BD MAX. The customer found our broad test menu and consolidation potential compelling and will be phasing in up to 8 tests over the next several quarters.

Among the 8 tests the customer is bringing CT/NG in-house, transitioning C. diff from Lumigen and adding molecular GBS for the first time. These are just 3 of the 20 Infinity's shipped to North America customers in the fourth quarter, but there are some clear themes emerging from our experience in the field. First, the availability of a broad molecular test menu, most notably, the moderately complex MRSA, C. diff, CT/NG and flu combination is enabling consolidation that was impossible before the GeneXpert System. This matters to customers, particularly, as they grapple with accountable care initiatives and is driving placements in accounts we may not have won with just a handful of tests.

Second, we believe the GeneXpert System fully addresses the pain points, not only faced by labs today, but the institution as a whole as they strive to improve clinical outcomes and patient satisfaction. Elements of these points are: the shortage of skilled labor, the constant requirement to do more with less, and the expectation of rapid turnaround times so that test can have maximum impact on appropriate patient pathways. Only the GeneXpert System offers the accuracy, speed, flexibility, ease of use and scalability necessary to meet these requirements.

The system enables labs to add or increase molecular tests' capacity without additional headcount. Labs can extend the outreach programs, improving profit contribution to the hospital without incremental capital investment. Labs can deliver more rapid results without sacrificing accuracy, improving patient management and providing the institution greater leverage in bed management. This not only optimizes the value of the lab's diagnostic testing, but enables the institution, as a whole, to more successfully function in today's accountable care environment. And we believe that the GeneXpert System enables labs and the institution to do all of this more cost-effectively than any other molecular diagnostic platform on the market.

Moving to reagents. Full year Commercial Clinical reagent growth was 20%, or more than $41 million, and the fourth quarter grew 9% sequentially over Q3. Commercial Xpert Clinical reagents grew 22% for the year, with the largest dollar increases from HAIs, CT/NG and MTB/RIF, in that order. Bear in mind that the utilization of our strategic pricing model muddies the year-over-year revenue comparisons somewhat, but it should be clear that the test volume growth was meaningfully higher than the revenue growth rates discussed here. And even with the broader utilization of our pricing model in North America, Xpert test revenue grew 16% for the year.

As a reminder, we do not routinely disclose our reagent revenue by test, but I will share a few notable highlights. First, our commercial TB test performed well in its first quarter of clinical availability in the U.S., with Xpert MTB/RIF shipping to more than 10% of our North American installed base.

In other words, more than 150 customers have adopted or are in the process of adopting the test. Of these, only about 1/3 were fully ramped at the end of Q4, many of whom were previous RUO users. So this product was not a significant contributor to U.S. dollar growth in the fourth quarter. That said, Commercial MTB/RIF growth grew more than 60% in 2013 globally, driven by Europe and RoW. Based on Q4, Commercial Xpert MTB/RIF is now annualized as a $20 million business for Cepheid, with significant runway ahead given the potential commercial market opportunity, is well over $100 million.

Second, Xpert CT/NG continued to ramp well in North America and based on Q4, is now an annualized $16 million global business for Cepheid. As you heard from the system placement wins earlier, this test is central to the platform consolidation thesis. We believe that the broad adoption of this test since it was launched in the U.S. confirms that the GeneXpert System is increasingly viewed as a consolidator with broad-based test menu across HAIs, sexual health and critical infectious disease testing.

Third, I'll share an update on C. difficile since we recognize that some questions had been raised recently on growth in this market from another market participant. Our C. diff test revenue grew 4% sequentially from Q3. And the test continues to be represented in the vast majority of our new placement wins in North America, many of which have been competitive takeaways. Overall, more than 1/3 of our North American customers are now using 4 or more Xpert tests and 60% are using 3 or more Xpert tests, highlighting the importance of broad test menus. Moving to HBDC briefly, Xpert MTB/RIF clearly continues to gain a foothold in tuberculosis programs around the world.

As previously stated, a very impressive 1,055 GeneXpert Systems were placed in HBDC geographies in 2013. This was more than twice the number of systems placed in 2012 and yet, we remained in the very early stages of adoption in many of the geographies most challenged by tuberculosis. In total, there are now 1,972 GeneXpert Systems in HBDC programs globally. We delivered more than 3 million cartridges in 2013, well over double the number we shipped in 2012. Overall, our HBDC business grew 84%.

Moving then to an update on our menu expansion initiatives. Xpert Flu RSV is currently in clinical trials, targeted for global release ahead of next year's flu season in late 2014. We continue to target the CLIA-waived Flu RSV test within a few months of the moderately complex version. Xpert HIV quantitative and qualitative and Xpert HCV are progressing well and are targeted for CE-IVD release around the end of this year. Xpert Norovirus and trich are targeted for CE-IVD release in the second quarter and, in the U.S., before the end of the year. Xpert MDRO continues to be targeted for CE-IVD release in 2014.

Finally, impressive initial international data for our Xpert HPV test was presented during the American Molecular Pathology or AMP Meeting in November. We are currently targeting to release the CE-IVD marked product in early Q2 this year. As a reminder, Xpert HPV detects 14 high-risk types of HPV with 1 call-out for Type 16, another combined call-out for Types 18 and 45 and a third combined call-out for the remaining 11 high-risk types.

As reviewed at AMP in November, we are confident that the performance of the test is at least comparable to the market-leading tests. Our key differentiation is providing uncompromised accuracy, with an ease of use that is unmatched in the HPV market today. And we look forward to updating you on this test in the future quarters.

With that, I'll hand the call over to Andy.

Andrew D. Miller

Thank you, John. As always, please note that I will be discussing our non-GAAP results unless I indicate otherwise. Fourth quarter total revenue of $113.3 million was up 23% year-over-year. Clinical sales of $101 million grew 23% year-over-year and 10% sequentially, and represented 89% of total sales. Within Clinical, Commercial Clinical revenue was $83.2 million, up 16% from last quarter.

The year-over-year comparison is not meaningful as Q4 last year includes the shipment of back orders from Q3. HBDC revenue was $17.8 million, down as expected from last quarter, but up 81% from the same quarter last year. Our nonclinical business delivered fourth quarter revenue of $12.3 million. For the full year, total revenue was $401.3 million, up 21% from 2012. Clinical sales of $359.9 million were up 26% or more than $73 million, driven by 22% growth in Commercial Clinical Xpert test and 84% growth in HBDC.

Moving to the quarterly income statement, non-GAAP gross margin of 50.2% compared to 49.2% last quarter. Despite the higher number of Infinity System, 21 in the fourth quarter versus 12 last quarter, Commercial non-GAAP gross margin improved over 100 basis points from 59% last quarter to just above 60%. On a GAAP basis, gross margin was 46.6%, which compares to 48.4% last quarter and to 53.6% in the same quarter a year ago. GAAP gross margin was impacted by approximately $2.7 million of restructuring-related items.

In conjunction with the completion of our 2014 operating plan, we assess our operations and investment priorities including a comprehensive review of all of our manufacturing operations. Following this assessment, we recorded a nonrecurring restructuring charge of $4.4 million, which includes severances for a small international research team acquired in 2006; the elimination of a non-GeneXpert clinical product line acquired in 2007, including the write-off of approximately $200,000 of related inventory; the impairment of the acquisition intangibles for these 2 items totaling $1.3 million; and the write-off of certain manufacturing capital assets totaling approximately $1.3 million that we have concluded will not be utilized and, therefore, have no future realizable value.

GAAP R&D of $25.3 million included approximately $1.7 million of restructuring charge associated with this exercise. Non-GAAP R&D of $21.2 million, or 19% of revenue increased in part due to clinical trials as expected and R&D materials. Non-GAAP sales and marketing of $19.9 million increased as we expected primarily due to hiring and higher commission.

Finally, non-GAAP G&A increased to about $10 million due to higher legal fees and bonuses. Non-GAAP operating income for the fourth quarter was $3 million or about 3% of revenue. Non-GAAP net income for the fourth quarter was $2.3 million or $0.03 per diluted share. Reflecting stock compensation expense, amortization of acquired intangibles and the restructuring activities noted above, GAAP net loss was $10.3 million or $0.15 per share. The restructuring represented $0.06 per share.

Moving to the balance sheet. Cash and cash equivalents were $84.7 million, as of December 31, 2013, flat from last quarter. Before I discuss our 2014 guidance, I will remind you of the general considerations that are factored in. First, we remain cautious about the capital spending environment and the global economy in general.

Second, there's an underlying variability inherent in 2 distinct elements of our business: commercial system placement, which tend to vary significantly from quarter-to-quarter; and the HBDC business, where we have seen variability in both system placements and quarterly reagent revenues.

And third, we are always cautious with respect to how much revenue we include in our guidance for flu and any product in its initial quarters of availability. With those caveats in mind, Cepheid currently expects total revenue in the range of $446 million to $461 million for the full year ending December 31, 2014.

Included in our full year guidance, we expect Commercial Clinical revenue of $335 million to $346 million, driven by 15% to 20% growth in Commercial Clinical reagents and low single-digit growth in Commercial Clinical systems.

Overall, we expect 14% to 18% growth in Commercial Clinical revenue. We expect HBDC revenue between $84 million and $88 million for the full year. This represents growth of between 28% and 34% over 2013. We expect our legacy non-Clinical business to decline around $14 million for the full year and, therefore, expect full year 2014 revenue of approximately $27 million. We expect this to be split roughly evenly across the year, although the second quarter is currently expected to be lower than the others given the anticipated timing of Biothreat shipments.

We expect non-GAAP gross margin to improve to approximately 52%, a 200 basis point increase from 2013. This is expected to be driven by a steady improvement in commercial gross margins throughout the year to approximately 62% for the full year, although, as always, the number of Infinity placements in any particular quarter can impact this. We continue to target non-GAAP commercial gross margin in the high 60s for the full year 2017. For HBDC, we have identified a number of factors that we expect will enable us to make steady and substantive improvements in our HBDC gross margin as we progress to 2014, although we do not expect to achieve our target gross margin in the 16% to 17% range by the end of the year.

For the full year, we expect HBDC non-GAAP gross margin just above the mid single digits. Consistent with the opportunity ahead of us, we will continue to invest aggressively in R&D and sales and marketing in 2014.

For the full year, we expect operating expenses to increase approximately $35 million with a little more than half of the incremental investment in R&D due to higher clinical trial costs of more than $10 million as compared to 2013, as well as significant investments in engineering for our high multi-testing GeneXpert initiatives. The remaining incremental investment is in sales and marketing, primarily to support the ongoing expansion of our global commercial operations.

Moving to the bottom line, we expect non-GAAP EPS of $0.24 to $0.29. We expect GAAP loss per share of $0.26 to $0.21. Non-GAAP results exclude approximately $33 million related to stock compensation expense and $3 million associated with the amortization of purchased intangible assets, which total approximately $0.50 per share.

Looking at the first quarter of 2014, and after our record-breaking fourth quarter, we expect total first quarter revenue to range from $103 million to $105 million. We expect Commercial Clinical to be down sequentially several million dollars in total, with the decline in Commercial Clinical systems offsetting continued growth in Commercial Clinical reagents. We expect HBDC to be flat to slightly up from the fourth quarter.

And finally, we expect a significant step down in non-Clinical, from $12 million last quarter to around $7 million in the first quarter. Commercial Clinical gross margin is expected to increase modestly from Q4. Operating expenses are expected to increase sequentially by about $4 million, with a $3 million increase in both R&D and sales and marketing, partially offset by a decline in G&A and collaborative profit-sharing.

With lower revenue and higher expenses, we expect a first quarter loss per share of between $0.07 and $0.09 on a non-GAAP basis, and between $0.19 and $0.21 on a GAAP basis. We expect a fully diluted share count in the first quarter of approximately 69 million shares given the loss.

I'll now turn the call back to John.

John L. Bishop

Thanks, Andy. I'd like to close with just a few data points and reminders. First, we placed an extraordinary 1,674 GeneXpert Systems in 2013 alone. To look at this differently, of the approximately 5,500 GeneXpert Systems placed in the last 8 years, more than 30% of them were placed in 2013.

Second, in 2013, our Commercial Clinical reagent revenue grew 20%, with Xpert reagents growing 22% for the full year. This, even considering the impact of our matrix pricing model, which will start to ease out of the year-over-year comparables in the coming quarters. And of course, we are looking forward to both our existing test menu and our targeted test additions as growth drivers in the quarters and years ahead.

Third, while we have systems in 98 HBDC countries globally, almost 90% of our current HBDC test revenue is coming from just 20 countries. Of course, the scale of programs will vary enormously, but it's clear that HBDC is just getting started and we expect 2014 to be a year where we make further substantive progress in both China and India.

Fourth, we have the right management team with the necessary skills and experience to grow Cepheid well beyond $400 million a year. In 2013, we significantly strengthened our bench in both international and North American commercial operations, in addition to global operations. These leaders are invigorating teams across the country -- the company. And I think we have yet to experience the full and positive impact of these important changes.

In summary, Cepheid enters 2014 with a renewed sense of confidence in our ability to execute the sizable opportunity ahead of us. We have taken majority share in molecular HAIs and certain areas within Critical Infectious Disease. We have established a firm foothold in sexual health and, now, we look forward to entering virology within the next 12 months. It's the most exciting time to be part of the Cepheid story, and I look forward to sharing this journey with you in the quarters ahead.

With that, I'll ask the operator to begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bill Quirk with Piper Jaffray.

William R. Quirk - Piper Jaffray Companies, Research Division

So, John, it's pretty clear that you guys are taking some nice share, really across HAI portfolio and certainly our survey work backs it up as well. A quick question though, certainly one thing that's emerged here in 2013 is some of these GI panels and we expect to see a few of them -- more of them hit the market in 2014. And how do you think about that with your C. diff franchisee? And we do have a little diligence that suggest there's some interest in using a panel rather than a standalone test. Obviously, reimbursement here is a swing factor, but I love to hear your comments on that.

John L. Bishop

Certainly. Well, I think the syndromic panels are important and as I've discussed, I think some previously. These are the type of panels that we've actually looked at years ago and, now, they're starting to come into their own. So I think, clearly, they're going to be additive. The important part to remember, and particularly, with the accountable care market initiatives is that the market is really going to be focused on appropriate testing at the right time and looking at total outcomes. Looking at reimbursement and running broad panel testing, just focused on reimbursement, is kind of really be looked at negatively and not something that we really would encourage because it really starts to bring in to question appropriate diagnostic testing. Now that being said, there are a number of instances where the panel does make sense and we do see it being utilized. That said, I think that a significant part of the market will continue with a standalone C. diff test as we look at the value there. But even as we look at our own menu rollout, of course, we have a GI panel in the future, but what I would say is I think it's going to depend upon the circumstances that the clinician is faced with as to where it makes more sense to use a standalone versus a syndromic panel.

Andrew D. Miller

The only other thing I would add, Bill, is that as you recall, a positive for us on our C. diff test, which can of course be run stack, comes up in as little as 30 minutes. So you could easily run a very cost-effective Cepheid C. diff test first, and only if negative would you need run a panel.

Operator

Our next question comes from Derik De Bruin with Bank of America Merrill Lynch.

Rafael Tejada - BofA Merrill Lynch, Research Division

It's Rafael, thank you for taking the call, the questions. And so basically I just wanted to hone in a bit more on, John, on your comment that you made earlier about some of the mixed signals that we've been getting in terms of C. diff utilization. I guess I just wanted to get your sense, especially for the 24 outlook of what your assumptions are for utilization for different hospitals. I'm not sure if you're seeing the difference in the larger hospital beds or the smaller hospitals. So if you could just discuss those trends that you're seeing.

John L. Bishop

Certainly. Well, we've done some third-party checking just basically within the clinical community as you would expect there. And based upon the data right now, we are, of course, seeing the benefit of more effective rapid diagnostics. And -- but that has not brought down as yet the incidence rate. So far as C. diff outbreaks, we're not seeing that really changing right now. As you do look at test volumes, as we moved to 1 and done, remember previously, with the immunoassay, you were doing 3 different C. diff tests there. As we now realized more the benefits of molecular, those numbers clearly are going to drop back, instead of running 3, we're going to be running, I would say at this point, a little over 1. But we've -- to a large extent, they're running pretty much along those lines anyway. And as I would see, as far as the outlook for molecular is that the market is not 100% converted yet to molecular from the immunoassay programs. So we have that remainder to go. I don't think we're going to see a significant drop vis-a-vis incidents rates within the hospital utilization. It's a disease outbreak scenario at this point in time. So I think right now, we're looking for incremental growth as we go into 2014 for C. diff with general market expansion on conversion from immunoassay.

Operator

Our next question comes from Shaun Rodriguez with Cowen and Company.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Looking at the o U.S. commercial business, clearly, really strong momentum there for several quarters and growth acceleration in 2013. So when you look at the market opportunity there, the recent trends, your positioning with menu and a more developed commercial infrastructure, is there any reason why you can't continue to grow in 2014 at least close to the levels that we saw in 2013?

John L. Bishop

Well, certainly, we expect to continue to develop our momentum internationally. Your points are well taken and that's exactly the basis we were -- we've been talking about in prior quarters. And yes, we're particularly excited about international this year as we look at the broader menu. I'm really looking forward to getting the virology products on to the market, albeit though we're not going to see the real big benefit this year. That's going to be really a 2015 impact because those are coming on to market later in the year, although we expect the HPV earlier. So yes, I expect us to continue to see strong momentum coming internationally and developing momentum in the emerging markets.

Operator

Our next question comes from Mike Matson, Needham & Company.

Michael Matson - Needham & Company, LLC, Research Division

I guess I just wanted to ask about your gross margins. So just -- how do we think about the impact of launching new tests and new test cartridges on your gross margins because I would assume that in the early days, those have lower margins. I guess, in other words, what am saying is there parts commonality across the cartridges so that as you scale up 1 test, that'll benefit the cost of the other tests as well, or is it -- are the parts pretty unique?

John L. Bishop

No. You hit it. Your last point you made is exactly on target. The parts across most all of our products are exactly the same. The only variability within a cartridge -- we have 2 types and that's an A-valve body and a C-valve body. And so as these volumes build on the new products coming out, they're going to get the full benefit of broader utilization of the parts and absorption also of the facility and of the automated lines. So we expect to see quite a bit of leverage in that regard. And one of the things that we've been working on, as you know, in particular with the new operations team. They're making very, very good progress in getting further improvements in the utilization rates coming out of the systems and the overall throughput on the systems. So as a result, the primary variability that you'll see is yes, as volumes build, you'll get some additional overhead absorption relative to new products, but your primary difference there is really going to be just the cost of the probes, primers, enzyme constituents for an individual test, one versus the other.

Operator

Our next question comes from Brian Weinstein with William Blair.

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

You guys have obviously made great progress on the top line and I understand the spending increases around R&D and sales and marketing and some of the gross margin challenges that you guys have had, I'm curious when you guys expect to see meaningful EPS growth start to develop for the business. Is that, obviously, not full year '14, but is that at some point in '14, is that more of a 2015 when we can start to see something -- some sort of leverage from the top line down to the EPS line.

John L. Bishop

So I'll make some general comments. And I'm sure Andy is going to have some comments, Brian, on that. I mean, we're starting to see some this year. The operations, as we've indicated, are continuing to get very positive results there. We're expecting to see positive movement in the margins. The balancing act, clearly, that we're doing is as we indicated before, we're entering a 2-year period here in 2014 and '15 where we have a very significant menu of tests coming out in very rapid order. And as a result, you have all the clinical trial associated cost going on with that. So we're going to have this bubble effect, if you will, for 2014, '15 on R&D expense going through. That said, I would expect to see leverage coming out of the margins of the products and start to see some improvement in the bottom line. Andy?

Andrew D. Miller

Yes. The only thing I would add, Brian, is that I think the key thing to focus on as an investor is that we're making progress on our Commercial Clinical gross margin because that's more structural in nature. What we spent on OpEx is a deliberate investment decision to go after the opportunity that we do believe is out there and the long-term growth that we believe we can sustainably achieve. So we have made deliberate investment decisions, as you know, to expand that menu, as John pointed out, as well as to continue to drive this growth internationally by investing in our goal of commercial operations at this point and, frankly, to extend our lead against any competitors that might emerge in a few years.

Operator

Our next question comes from Jeff Frelick of Canaccord.

Jeffrey Frelick - Canaccord Genuity, Research Division

Yes. My question is really on the virology test. As you start commercializing the assays, when most of your customers with GeneXperts, are they sending out the virology tests currently or they're running them on competitive platforms?

John L. Bishop

Well, I have some interesting data. Let me flip to some of that, with some of the -- basically, I have that handy. Some of the virology tested, so yes, a number of them, in fact, to your point, HPV and what we saw was a lot of excitement on our HPV data and the reason for the excitement on the HPV data was that we're getting very, very good accuracy. I mean, you have some good products that are on the market at this point in time from the other market participants. And the data that we presented is right there, same, same with those, but with an unparalleled ease-of-use. So what we're seeing is increasing interest of hospitals to do and get into HPV testing. And that positions as very well out into the end of the marketplace.

Now relative to some of the other products there on HIV, HCV, I mean, specifically, there's a public database that's available, which is the EMMS database, so your question there right now, out of their survey on 1,000 accounts, on the HCV viral load, only 13% of the laboratories are actually running the HCV test that is out there right now. So I think -- and yet, we see I think substantial opportunity, particularly as we look for treatments with HCV for the laboratories to look at demand and we get into that business. So that said, the opportunity for us, we believe, is going to be very, very good because as you get out and you democratize, I think we're going to see an increasing interest in the HCV testing.

Now on the same vein, the same database indicates that on a HIV viral load that only 14% out of 1,000-lab survey are actually running HIV at this point in time. But yet, we see interest there and, in fact, you'll see a similar vein interest on HIV for the HBDC market where they are already looking at the leverage stability to immediately run the HIV, both qualitative and quantitative on the installed base that they already have and we're seeing interest on HPV. So in general, to your comment, is yes. A lot of the labs, as you would infer, are looking at the database. In fact, are sending, testing out. We're going to be positioned to be able to allow them to bring that rapidly in-house, further consolidating the menu and getting the leverage for the overall institutions.

Operator

Our next question comes from Amit Bhalla with Citigroup.

Nicholas Nohling

This is Nick, actually in for Amit, this evening. Maybe, first, just on an overall standpoint, I mean, you've mentioned the capital spending environment still cautious and things. But going into next year, do you see any incremental change in that in the capital spending environment or in just the overall utilization environment.

John L. Bishop

Well, I think, generally, the capital environment, as Andy has indicated there with the guidance, we're just being -- we're being cautious that we see any significant change, the answer to that is no. On the utilization environment, we see that continuing. I think clearly, what we're going to be seeing, and there's another broader initiative that I'll talk about right now, and that we made -- I made comments too in the prepared remarks, and that's the whole accountable care initiative. And that basically goes right into our unique positioning.

And we're feeling very positive about that because as you look at the accountable care initiative, and you look at it from a health care provider standpoint, there's 3 primary factors that they are really being focused on. One of which is clinical -- overall clinical utility, whether looking at better outcomes, quality of care and patient satisfaction. Another one is operational efficiency. And they're looking to get their overall operation substantially more efficient with better, again, outcomes coming in and then, of course, the last one that goes with all of that is overall financial performance.

So as we look at utilization rates, we're looking for those to continue or frankly increase because we're well positioned with our platform to address all 3 of those initiatives in a very unique manner where they can get clinical results accurate, but very fast so that they can serve the needs of what they're looking for, for outcomes. They have systems which are of the easiest to use and yet very scalable as they look at the efficiency within the overall institution. And then on a financial performance basis, basically, and that's where right now, we get a lot of -- the majority of our systems are all purchased because these systems are set up to give a much better return on invested capital versus any other system out there, in that you can use these systems 24/7.

One of the other initiatives, by the way, coming in for the hospitals, you're going to be hearing more about, I think, during 2014 is continuity of care. And that's where the institution needs to be supplying a really good high-quality continuity of care 24 hours a day, 7 days a week. And that's again where our unique system capability comes right in there. And then the last item, from an institution standpoint, and it's really an interesting analogy, but for a number of or for all of the institutions, it's almost the analogy, it's like a restaurant. And as you go to a restaurant, what really makes or break a restaurant there, because you're working on tight margins, is table turnover.

Same thing in the hospitals and, particularly, now as you're looking at bundled payments coming in, where they get one charge. And therefore, as they turn those beds, they need to turn the beds much more efficiently. They're going to get a charge for that bed, so it's important that the bed is not held up. And their costs, they're going up and they're missing incremental revenue opportunities. So it's going to be really important to get, increase that turnover and the systems provide a very unique leverage capability in that regard. So as you can tell, frankly, we are and I am very enthusiastic by what I see coming with the markets in 2014 and our unique capability to address these needs.

Operator

Our next question comes from Zarak Khurshid with Wedbush.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Impressive Infinity sales. I was wondering if you could provide some color on the evolution of utilization of those systems, how is that keeping up. And are the sales there sort of based more on the promise of menu years out, or are people actually looking to use the capacity for kind of the existing line-up of tests?

John L. Bishop

So you still see a mixed bag. You see some people purchasing ahead, Zarak, in that regard. On the other hand, a couple of the examples that we provided to you on the prepared remarks were very interesting because those were 2 accounts that we're starting with a menu of 8 tests, recognizing that we have 14 right now in the market, in the U.S. So clearly, the breadth of the menu is really resonating and we're starting to see much broader utilization of the menu, starting up with these accounts and all of that is, of course, obviously, very, very positive. So what we're seeing is continuing solid funnel on the affinities with a growing menu of utilization across the board. And of course as we come now with the virology products, that's going to be even more positive.

Andrew D. Miller

And Zarak, the only thing I'd add is we're seeing that more of the Infinitys are right now with more modules than previously because the minimum configuration is only 16. So that trends in the right direction. We also saw -- last year, we commented that we had a number of customers adding modules and upgrading. This quarter was even more.

Operator

Our next question comes from Bill Bonello with Craig-Hallum.

William B. Bonello - Craig-Hallum Capital Group LLC, Research Division

Yes. I just want to delve into something that doesn't get asked about much, but can you just sort of talk about your outlook next year on the CapEx and sort of total cash burn in front and how we should think about that. You used to have a pretty good war chest, but it's moving down a bit.

Andrew D. Miller

Yes, we expect CapEx in the mid $30 million range next year, so down substantially from this year. We are -- when, of course, we made significant investments in our manufacturing operations. So about $35 million would be our expectation. And you can run your own test for a model.

Operator

Our next question comes from Brandon Couillard with Jefferies.

Katherine Blanton - Jefferies LLC, Research Division

This is Kate, in for Brandon. Can you just provide any further color on the overall mix of new CT/NG customers coming from competitive wins versus those converting from send-outs, and maybe how you expect that dynamic to turn next year?

John L. Bishop

So as you saw again with some of the examples that we gave there, somewhere competitive pickups in over AMPLICOR. And that one particular example and others. We continue to proceed with a mix of picking up the send-out market opportunity as well as the competitive activity there. So I would say right now, it's a solid blended mix of both types of instances occurring. And then of course, with that is the broader menu utilization that we're talking about, where you have the CT/NG coming in some cases being a primary then pulling through the rest of the menu.

Operator

Our next question comes from Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

I want to talk a little bit about few issues in the capital. You guys have always said, it's not almost success running the business and growing in installed base is pretty significant. And I was wondering at what point you start to make sense, you think about exploring tuck-in M&A opportunities for technology, things that could really help you build the platform, enhance it or maybe even kind of build rates in the future. Just trying to think about how you guys look at this capital for technology?

John L. Bishop

Certainly, Isaac, those are things that we do have an eye out for and we do have an interest in. There would be, I would say, from my perspective, 2 primary areas. One, items where I think we have done some small acquisition vis-a-vis distributors that would leverage our sales and marketing infrastructure and reach, such that we can further accelerate growth there, particularly on the international markets opportunity. And two, where it may make sense to put content onto the GeneXpert on a platform basis. And that'll be particularly true as we look at moving more aggressively into the oncology market.

Operator

Our next question comes from Dan Leonard with Leerink.

Justin Bowers - Leerink Swann LLC, Research Division

This is Justin, on for Dan. And just wanted to give you a sense of what the commercial customer placements look like internationally over these new competitors, competitive wins, kind of isolated to any specific geography. And then, did you see any difference in the sales cadence during the quarter internationally? Or was it business as usual, just kind of acknowledging that Q4 is always a bigger quarter for you guys?

John L. Bishop

Well, actually, the -- from the cadence question, we're seeing continuing momentum build internationally with the breadth of the menu, 1. 2, all of the areas where we've gone direct, all of those operations are doing extremely well. The acquisitions that we called out there, Germany is doing very well for us. Actually, Italy is doing very well, which was a new one for 2013. We're doing well in a number of our other direct markets. U.K. is picking up CT/NG, a very nice add there with a fair amount of interest in that regard. So as you saw, we had strong system placements commercially. For internationally, strong in Europe. And we're seeing good growth as well with the emerging markets area. And so, in part -- we're also doing quite well in the Middle East. So I would say, right now, is it's growing momentum internationally and the breadth of menu's that's on the horizon should be very helpful in that regard.

Operator

Our next question comes from Sung Ji Nam of Cantor.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

I think going back to Zarak's earlier question, I was kind of curious as to capacity utilization among your customers. I'm just trying to get a sense of with this, such a strong Infinity system placement and recognizing that would be lumpy on a quarterly -- a quarter-to-quarter basis, but I was curious if there's a -- you were seeing an inflection point of some sort here?

John L. Bishop

Not yet. I think the question, that's a good one that we always get so far is what is the capacity of a particular placement and then how are we doing and utilizing all of that capacity up. I would say right now, the systems are being placed. A number of them, as we come in right now, are not fully live. And in part, one of the things that's going to be unique there as you look at the capacity utilization that we're still going to have a lot of capacity in front of us versus the utilization aspect of that is going to be coming a little bit down the road. Part of that is the fact that I am calling out here where we have like 8 tests being brought on simultaneously with an individual laboratory.

And one of the things we're seeing now is what's the capacity of the lab. They're bringing on 8, but what's the capacity of the lab to validate because they must validate when they bring in a new test. Every one of those and their capacity generally to do at a time is about 2 or 3. So that means that it's going to stretch out a bit of the time to utilize the entire capacity of that lab coming on with 8 tests that, that's going to spread out probably over a couple of quarters.

Operator

Our next question comes from Peter Lawson with Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

John, what worries you the most about the business over the next 2 years? Is it reinvestment, is it utilization rates, or you're going to have in Asia?

John L. Bishop

Well, yes, I would say that the number one, Peter, I worry is look at is just our own execution. But frankly, we had huge momentum going into 2012. We stumbled a bit with the operations. We corrected all that. We're now on course. We have the momentum back and we're moving aggressively. So we just -- number one, need to continue to execute. We need to deliver on the R&D side for the business. That's looking very good at this point in time.

And then, commercially, we've made some changes with the U.S. commercial operations, with a new individual, Jim Post, joining the company. He brings a very solid background of expansion. So looking forward there to do some of the new items. One, penetrating further the U.S. hospital market. But now, really starting to move more aggressively into the, what I'd refer to as the alternate site market, which will be the group practice laboratory points-of-care. And then the third one, which was new for us and being -- the doors being opened in the large part because of the TB testing, there's a lot more interest on the system from the independent laboratory market.

So a key initiative, it doesn't worry me, but it's something that we need to do is to improve the perception or understanding in the market of the power of the Infinity. Now you see that as growing at this point. We see it in the pipeline and the funnel with the Infinity. But at the same time, we still see surveys coming in, where a number of you will do your own independent survey and you'll talk to some of the people from large labs and then go, "Oh, well for high volume, I need a different system, not the GeneXpert." So it's imperative that we correct their perception and have them understand that the fact is that the highest volume throughput, most efficient system in the industry today, is in fact, the Infinity System. And I don't see that changing even with the new systems that are on the horizon from some of the major competitors coming on to the marketplace.

So in a nutshell, primarily, it's just continue on our own execution. I think you always need to be wary of the external parameters. But as I indicated, I think we're very well positioned to deal with the accountable care initiatives. In fact, that plays to our strong suite in the U.S. market and we're doing very well in the European market. As you see, where they are already dealing with the reimbursement, strong focus on reimbursement initiatives in those markets. So I'm feeling quite optimistic based upon where things are stacking up at this point in time.

Operator

Our next question comes from Vijay Kumar with ISI Group.

Vijay Kumar - ISI Group Inc., Research Division

I think one point that you mentioned was within the quarter, the largest dollar increase was HAI CT/GC, followed by MTB/RIF. As you look at -- into 2014, do you think the same or was that in, or do you feel like CT/GC would probably overtake HAI in terms of dollar increases?

Andrew D. Miller

We're not going to give product-by-product guidance, but we do see all of them significantly contributing to our growth. And we expect HAI to probably still lead that.

John L. Bishop

But to answer that, I'll give you a slightly different slant because we do get these questions, now and again, and that is how much runway is left in the HAI market. And again, there's quite a bit of runway left in the HAI market. And if I may -- if I look at molecular MRSA alone, again, I'd refer you to this database that I was just talking about because that EMMS database there, what's interesting is that of 1,000 accounts on the molecular side, they're only showing about 47% of those accounts in their database that are active with molecular testing. While in the same database, they had 64% of the accounts active with culture testing. So as we look at the focus on the accountable care initiative from the institutional standpoint on patient satisfaction, efficiency of operation, that really is favoring a lot more rapid short time to result that you get from molecular testing. So there's quite a bit of runway left in our view, certainly in my opinion on the HAI marketplace.

We had some comments earlier on C. diff, where there's fair amount of runway left with that one. So a lot of runway left there with that. Clearly, good point on CT/NG. We're early in the market. We are making a dent in the market already. We do have some notable market share in the marketplace as you look at the third-party databases, but we're only in the beginning stages of that. As you look at TB, the overall TB market as we've indicated in the U.S. from test volume is about 500,000 tests per year.

And again, we're very early days with that and we'll also see some shift, I mean, a lot of interest in the public health market segment. Now interest is bringing it into the hospital market, but a lot of interest on the independent lab market. And then relative to TB, we're seeing a lot of commercial growth internationally. So the HBDC market as we've indicated is really doing the job on opening the doors and, now we're seeing positive movement on the commercial side with the tuberculosis testing.

Operator

Our next question comes from [indiscernible] with JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

It's actually Tycho here. Just following up on the last one. 2 quick ones. First, can you talk to a degree to what's TB is driving GeneXpert System placements in new account. And then a follow-up on HBDC, obviously, a lot of focus in China and India, can you maybe just talk about the strategy beyond those countries, and also to the degree to which maybe some of the slowdown could temper growth in the first half this year?

John L. Bishop

Okay. So on the TB products there, as I indicated there, it is driving placements in the U.S.. We had accounts that where we had not penetrated those accounts and now they do have solid interest and, in the fact, bringing in good Xpert system because of TB. So it's definitely a door opener. Indicated also where we've had some interest in independent laboratories, so i.e. reference laboratories. That's been a door opener and we're basically looking at getting placements into those marketplaces. Now relative to the HBDC, we don't have a big impact for China on the numbers. We're still working on getting the Chinese FDA clearance. I do expect that to happen this year and then things to get underway in China. But we're very early there relative to the volumes.

India is building some momentum. That one was small volumes as we got into last year. I think you're going to see a step-up in activity in India this year, but certainly not clearly full stride. The other one that we haven't spoken about there of course is Brazil. And we're starting, again, very early, but just starting to see the momentum in Brazil. Now that said, there are a number of other countries, I think, we said we were active right now and about -- was it 98 of the 145 HBDC countries. And we're seeing increasing activity of some interesting volumes of systems being placed in smaller countries around the world for HBDC. So the HBDC, I would say, general momentum continues to build.

The other item that's contributing to that momentum building is the very positive experience coming out of the early adopters, in particular, South Africa, where they're seeing a lot of publication, a lot of commentary on the benefits that this system has provided into those marketplace. And as a result, now, what we're starting to see is adoption momentum building in a number of the smaller countries around the world. Of course, all of this will have a net cumulative impact.

Operator

Our last question comes from Nicholas Jansen with Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

I know a lot had been discussed, but on that latter point on HBDC, just wondering if the placement success that you've seen in 2013, is there any of those placements kind focusing on maybe when HIV launched in the fourth quarter of 2014? Or is it solely just focused on TB right now? I just want to gauge how many of your current placements are already kind of looking forward to the HIV test launch.

John L. Bishop

Right. So no surprise there, all of these are really focused on TB. At this point in time, the early focus on HIV comes again from South Africa, where they are already looking at and anticipating the HIV, both on a quantitative and qualitative level.

Operator

This ends our question-and-answer session. I'll turn it back to Jacquie Ross for closing remarks.

Jacquie Ross

Thank you. If you have questions following today's call, please contact Cepheid's Investor Relations at (408) 400-8329. As a reminder, the archived webcast will be available on the company's website for at least 90 days. Thank you for your interest in Cepheid, and have a great afternoon.

Operator

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

CEPHEID (CPHD): Q4 EPS of $0.03 beats by $0.02. Revenue of $113.3M (+22.6% Y/Y) beats by $11.13M. Shares +10.1%.