Q1 2014 Earnings Conference Call
April 17, 2014 5:00 p.m. ET
Jacquie Ross – VP of IR
John Bishop – Chairman and CEO
Andrew Miller – CFO
Brian Weinstein – William Blair
Dan Leonard – Leerink Swann
Jeff Elliott – Robert W. Baird
Tycho Peterson – JPMorgan
Michael Matson – Needham & Co.
Isaac Ro – Goldman Sachs
Zarak Khurshid – Wedbush Securities
Bill Quirk – Piper Jaffray
Bill Bonello – Craig-Hallum
Derik De Bruin – Bank of America Merrill Lynch
Sung Ji Nam – Cantor Fitzgerald
Eric Criscuolo – Mizuho Securities
Brandon Couillard – Jefferies & Co.
Vijay Kumar – ISI Group
Good day, ladies and gentlemen, and welcome to the Cepheid's First Quarter 2014 Earnings Conference Call.
I would now like to turn the conference over to Ms. Jacquie Ross, Vice President of Investor Relations. Ma'am, you may begin.
Thank you, Sayyid [ph].
Good afternoon everyone and welcome to Cepheid's 2014 first quarter 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 in 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, April 17, 2014, 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.
Good afternoon everyone, and thank you for joining Cepheid for a review of our 2014 first quarter results.
First quarter revenue of $106.9 million reflected growth of 16% from the first quarter of 2013, with a 26% or more than $20 million increase in our clinical business, significantly offsetting the expected $6 million decline in our legacy non-clinical business. Over the same period, Commercial Clinical was up 19%, growing more than $13 million to $82.1 million, and HBDC was up 69%, growing more than $7 million to $18.3 million.
As expected, Commercial Clinical Systems were down in the first quarter after our record-breaking Q4. Nonetheless, Commercial Clinical System revenue of $11.2 million was very strong and in fact set a new record for the strongest first quarter performance in the company's history. Total Commercial Clinical placements were 181 and included seven Infinity systems. This compares to 125 commercial system placements in the first quarter of 2013.
We continued to see particularly strong growth in our International Commercial Clinical business in the first quarter, which grew 47% from the first quarter of 2013. 130 commercial system placements reflected record placements in our direct geographies of Germany, France, the U.K., the Benelux and Italy, in addition to a single large order for 32 GeneXpert systems for commercial TB outside of these markets. The trend toward increasing up-front cash purchases versus reagent rentals was again notable in our direct international operations where more than half of the system placements were cash purchases.
In North America, and as we expected, GeneXpert system placements were down following our record fourth quarter which I'll remind you was 70 systems, including 20 Infinities. First quarter placements in North America were 51, including five Infinity systems and nine systems sold to our LABSCO distributor at the end of the quarter to be used as reagent rentals in the alternate site market. Additionally, and not included in this system count, 16 existing customers added an average of six modules each during the first quarter.
Commercial Clinical reagent revenue of $71 million was a new record and up 18% from the first quarter of 2013 and up 5% from last quarter. Within Commercial Clinical reagents, Xpert test revenue was up 20% from the same quarter last year with strong contributions across the portfolio. GeneXpert system placements are increasingly driven by broad menu adoption. So while we continue to add new HAI customers and test volumes continue to grow, we more often see our HAI tests placed with one or more non-HAI assays, for example, C. diff in combination with CT/NG in flu, or MRSA and C. diff in combination with MTB.
In the first quarter, more than half of our North American system placements were driven in part by C. diff, and with 44% of them driven by CT/NG, 38% driven by MRSA, 26% by flu, and 18% by MTB. As a result of this continuing adoption, Cepheid remains the molecular market leader in MRSA, C. diff and in TB. And according to independent market research from the firm, MDxI, Cepheid is now also number one in molecular flu with respect to the number of labs running our tests. As a result, even though Q1 was a mild flu season, Xpert Flu was a nice growth contributor for Cepheid.
With more than 3,700 commercial GeneXpert systems installed globally, we continue to invest aggressively to deliver the broadest menu of tests, including the highest volume of tests, in molecular diagnostics. 2014 is clearly a pivotal year in that regard and we are off to a strong start with the CE-IVD releases of Xpert HPV and Xpert Norovirus in the last few weeks. Xpert HPV is of course a very exciting addition to our menu outside of the U.S., where the market is moving far more rapidly toward using HPV tests as the primary screen versus cytology. Italy and Spain, for example, have already started using HPV testing as a primary screening test in certain regions. Scotland has already made the move to HPV primary screening and the Netherlands has committed to do so by 2016.
The literature for HPV primary screening is persuasive and we believe this transition will gain momentum. That said, regardless of the pace of change, Xpert HPV is well positioned for testing all algorithms. We believe that we are by far the fastest and easiest to use test on the market with expected clinical utility that is better than the other competitive tests based upon the fact that we are detecting cell-associated HPV.
With Xpert HPV now commercially available outside of the U.S., we are seeing early indications that the breadth of our sexual health portfolio could be quite powerful. In Italy, for example, we are in the process of welcoming a new GeneXpert customer who is transitioning their HPV and CT/NG testing from a Roche COBAS system due to workflow and technical benefits. With the further expansion of the sexual health portfolio to include trichomonas in the months ahead, we believe we will now have a comprehensive offering that significantly enhances our reach into key European markets, including many who have not been traditional Cepheid HAI customers.
Hot on the heels of Xpert HPV, we announced the CE-IVD release of Xpert Norovirus just last week. Norovirus is a highly contagious virus that can spread quickly and is therefore an important addition to our infectious disease portfolio for many of our European customers. While the market is less developed in the U.S., this is an established market in Europe with approximately 1 million tests per year.
Currently, customers are forced to choose between fast but notoriously poor-performing EIA tests or accurate but slow molecular tests. With Xpert Norovirus, customers no longer have to sacrifice performance for speed. We believe that this will be a compelling add-on test for existing GeneXpert customers, as the largest markets are in geographies where we already have direct sales operations and sizable installed bases, notably Germany, the U.K., Italy and France.
And a very recent example, we are working with one potential customer in Germany who has been evaluating our platform's potential for reducing the expensive patient isolation cost. Bear in mind that a majority of patients presumptively isolated will ultimately be found to have been isolated unnecessarily. While the hospital was initially evaluating the impact of MRSA and Xpert C. diff on isolation practices, they quickly recognized that the question was also relevant for Xpert Norovirus.
In combination, the hospital found that adoption of our Xpert portfolio could reduce unnecessary isolation days by 80%, freeing up almost 1,400 bed days per year. This is a good example of how our broadening test portfolio is changing the way customers evaluate their laboratory investments. We firmly believe that the trends are very much in Cepheid's favor, and I look forward to updating you on the early performance of Xpert Norovirus and Xpert HPV in the coming quarters.
Looking ahead, we expect our product release schedule to gain momentum as we progress through the rest of the year. Xpert Trichomonas and Xpert CARBA-R have both completed clinical trials and are targeted for CE-IVD release in late Q2. In the U.S. we expect to file Xpert Trichomonas before the end of the year.
Xpert Norovirus continues to be targeted for commercial release in the U.S. around the end of the year. Xpert Flu RSV continues to be targeted for our global release ahead of the next flu season in late 2014. Our CLIA waived version of the flu RSV will be submitted to the FDA following clearance of the moderate complexity version, and we continue to target this test for 2015.
Xpert HIV quantitative and qualitative and Xpert HCV will shortly be beginning clinical trials and continue to be targeted for CE-IVD release around the end of this year. The only test that we have substantially moved out at this time is our bladder cancer monitor test. The test is progressing through development. However, we no longer expect it to be released this year.
Moving to HBDC, we continued to see strong momentum with 69% growth from the first quarter of 2013. 322 system placements during the first quarter included 160 for Brazil to support the initial phases of a planned national rollout. We now have almost 2,300 systems and 104 HBDCs around the world, and yet we continue to be in the early stages of market adoption. This is notably the case in India and China which report the highest and second highest numbers of TB cases respectively through the World Health Organization or WHO.
In that regard, I am pleased to announce that our Xpert MTB/RIF test was cleared by the Chinese FDA, or CFDA as they’re known, late in the first quarter. With the clearance behind us, we expect to ship more than 700 GeneXpert systems supported by the Global Fund that will be shipped to China during the second quarter.
Combined with the 179 systems already placed in China, this will bring the HBDC installed base in that country to almost 900. To put that in perspective, the HBDC installed base in South Africa at the end of the first quarter was 342, comprised of a combination of GeneXpert IVs, GeneXpert XVIs, Infinity-48s and Infinity-80s.
With regards to the new HBDC systems in Q2, you should be reminded that these programs will take time to ramp, so please apply caution when considering reagent pull-through associated with both the first quarter placements in Brazil and the expected second quarter placements in China. That said, with more than 900,000 cases of TB reported to the WHO in 2012, we are proud to participate in what we believe will be a true game-changer for TB diagnosis and treatment in China. We're also very excited to have this opportunity to introduce our GeneXpert system to the Chinese clinical community more broadly, which on a longer-term basis we believe offers a significant potential for our commercial operations.
Before I hand the call over to Andy, I’d like to briefly thank the Cepheid team for their continued and relentless commitment to establishing the GeneXpert system as the world’s leading molecular diagnostics platform. We have already achieved a number of key milestones for 2014, but there are many more ahead as the pace of our Xpert menu expansion steps up, our sales and marketing infrastructure builds out, and our focus on improving profitability deepens.
With that, I'll hand the call over to Andy. Andy?
Thanks, John, and good afternoon everyone. As always, please note that I'll be discussing non-GAAP results unless otherwise specified.
Total revenue of $106.9 million was up $15 million year over year, driven by growth in both Commercial Clinical and HBDC, and offset as expected by an almost $6 million decline in non-clinical. In total, our clinical business, which encompasses Commercial Clinical and HBDC, grew 26% from the first quarter of 2013. Clinical represented 94% of total revenue and non-clinical and other represented 6% of total revenue.
Commercial Clinical was up 19% from the first quarter of 2013, with $2.7 million growth in Commercial Clinical Systems and $10.7 million growth in Commercial Clinical Reagents. Notably, Commercial Clinical Xpert reagents grew 24% on a normalized basis from the first quarter of 2013.
In total Commercial Clinical revenue declined about $1 million sequentially, as expected, following a very strong close to Commercial Clinical Systems in Q4. Within Commercial Clinical, system revenue declined $4 million from last quarter, but was largely offset by more than $3 million or 5% growth in Commercial Clinical Reagents.
HBDC was up 69% from the first quarter of 2013 and up 3% from last quarter.
Moving to the income statement, non-GAAP gross margin improved modestly from 50.2% last quarter to 50.9%, despite higher HBDC revenue, and GAAP gross margin improved from 46.6% to 50.3%. Excluding HBDC, Commercial non-GAAP gross margin increased slightly but rounds to 60%, the same as last quarter, despite $8 million lower Commercial revenue.
Non-GAAP operating expenses were slightly down from last quarter, with decreases in R&D and collaborative profit-sharing more than offsetting higher G&A expenses, primarily due to some one-time legal expenses in addition to the anticipated step-up in sales and marketing. Non-GAAP other expense increased to roughly $1 million, with approximately $600,000 of cash interest expense on the convertible notes.
GAAP other expense increased to $2.3 million, with approximately $1.8 million of convert-related interest expense, $1.3 million of which is non-cash. Note that cash interest expense is included in both our GAAP and non-GAAP statement of operations while non-cash interest expense is included in GAAP but excluded from non-GAAP. A comprehensive overview of the accounting associated with our convertible notes has been posted to our website.
Overall, non-GAAP net loss for the quarter was $600,000 or $0.01 per share, which includes a $0.01 per share negative impact on other income and expense from the convertible note offering, which was not included in our prior guidance. GAAP net loss was $9.3 million or $0.13 per share, which includes a $0.03 negative impact from the convertible note offering which was not included in our prior guidance. A reconciliation of our non-GAAP results to our GAAP results is available in today's press release.
Moving to the balance sheet, there are a number of convert-related items that you should be aware of. Cash, cash equivalents and investments were $391.3 million, convertible senior notes of $271.2 million. This liability will accrete each quarter towards the $345 million principal owed.
Additional paid-in capital increased to $201 million, reflecting the addition of the value of the conversion feature of $75 million, net of $2 million of related issuance costs, less the $25.1 million paid for the capped call option. In a non-convert related item, inventory stepped up to $119.6 million, primarily due to the build-out of HBDC systems and tests ahead of the expected shipments in Q2.
Moving to guidance. For the full year, we are making no changes except to reflect the impact of the convert on our bottom-line GAAP and non-GAAP guidance. To be clear, convert-related cash interest expense was $0.6 million for the partial quarter in Q1 and will be approximately $1.1 million for each quarter going forward. This is partially offset by the interest income on the cash proceeds. This will be reflected in both GAAP and non-GAAP. The net impact for the full year is estimated to be approximately $3.3 million or about $0.05 per share.
Excluded from non-GAAP but included in GAAP results, convert-related non-cash interest expenses include amortization expense of the debt discount and issuance costs. For the partial quarter in Q1, this was approximately $1.3 million. This non-cash expense will increase over time but will approximate $8.5 million in 2014, representing about $0.12 per share for the full year. Coupled with the cash net interest impact reflected in our non-GAAP results, the total impact on our GAAP results is $11.8 million or $0.17 per share.
Overall there is no change to the revenue outlook we shared in late January. In detail we continue to forecast full year revenue in the range of $446 million to $461 million. We continue to expect Commercial Clinical revenue in the range of $335 million to $346 million, growth of 14% to 18% from 2013.
Within Commercial Clinical, we continue to expect Commercial Clinical Reagents to grow 15% to 20% and Commercial Clinical Systems to grow in the low single digits. And we continue to expect HBDC revenue in the range of $84 million to $88 million and non-clinical revenue to be approximately $27 million.
Moving to gross margin, we continue to target full-year non-GAAP gross margin in the 52% range. Commercial non-GAAP gross margin is expected to be approximately 62% for the full year. HBDC gross margin, which improved modestly from last quarter, is on track to achieve its full-year target non-GAAP gross margin just above the mid-single digits.
On the bottom line and factoring in the impact of the convert on other expenses, we now expect non-GAAP EPS of $0.19 to $0.24, a reduction of $0.05 for the convert and GAAP loss per share of $0.43 to $0.38, a reduction of $0.17 per share for the convert.
For the second quarter we expect total revenue in the range of $113 million to $115 million, growth of 18% to 20% from the second quarter of 2013; Commercial Clinical revenue to grow in the teens relative to Q2 of 2013 but to be down slightly from Q1 which benefitted from very strong placements and the flu season; non-clinical revenue to be down from Q1.
And offsetting these declines, we expect HBDC revenue to step up significantly to $27 million to $28 million due to the large China system order. With higher HBDC revenue, we expect a sequential decline in gross margin.
We expect a modest sequential increase in OpEx due to higher clinical trials, partially offset by lower G&A.
On the bottom line, we expect non-GAAP to range from a loss of $0.01 per share to EPS of $0.02 per share, and GAAP loss per share of $0.16 to $0.14.
I'll now turn the call back to John.
This was a strong start to the year and a positive indicator, I believe, of things to come. Importantly, the strategic importance of our commitment to significant investment in R&D is starting to pay off, with the first in a steady stream of expected Xpert test releases adding to our commercial test menu. We now offer a menu of 16 Xpert tests outside of the U.S. and 14 in the U.S. and fully expect to be adding new tests in the quarters ahead.
Meanwhile, our installed base continues to expand at a rapid pace. Again, Q1 was a record for commercial placements in what was frequently has been a seasonally weaker quarter. In HBDC, we added 322 placements and are poised for a record Q2 with the expected shipment to China. In total, at the end of Q1 we had more than 6,000 GeneXpert systems placed globally.
Partly responsible for that growing installed base, of course, is our growing sales and marketing infrastructure that is extending our reach geographically. We are clearly seeing some good momentum in our international commercial operations and we're excited to see how this business grows on a continuing basis with HPV -- Xpert HPV, Xpert Norovirus, and expected soon, Xpert Trichomonas and Xpert Carba-R added to the international portfolio.
Our current focus here at Cepheid is to continue to deliver on menu execution, thereby enabling platform consolidation with a broad portfolio of tests available for our growing installed base. We firmly believe that we have the most exciting platform in molecular diagnostics and remain committed to establishing Cepheid as the leading company in the space. We are confident that we are up to the challenge, but only thanks to a dedicated Cepheid team that I believe includes some of the brightest in the industry.
Among those, we lost one of our best in early April with the passing of Linda Western, most recently our Executive Director of Technical Compliance. After being hired as Cepheid employee number 11, Linda spent 16 years in critical R&D and regulatory roles, contributing to nearly every one of our Xpert tests. Linda was a special member of the Cepheid family and will be dearly missed.
With that, I'll open the -- ask the operator to begin the Q&A.
Thank you, sir. [Operator Instructions]
Our first question comes from Brian Weinstein from William Blair. Your line is open. Please go ahead.
Brian Weinstein – William Blair
Good afternoon, and thank you for taking the question. I guess I'll start it out just by talking a little bit about the cash and the use of cash now that you've raised the convert money and it's sitting on the balance sheet and it's going to take out about a nickel this year. Can you give any additional color on what you're thinking at this point: product, distribution, expanding manufacturing in the Far East? Any idea at all that -- any color that you can give on kind of how you're thinking about that now that you have it on the balance sheet at this point?
Yeah, certainly. Well, as we had indicated, Brian, I think to a number of folks speaking out with meetings post the transaction, one, the balance sheet that we had at the time was modest and it was certainly opportunistically timely to add to the balance sheet, so we did that, as everyone saw, under extremely favorable terms.
Now that said, one of the comments that I've heard is some level of concern is that, boy, when you have a lot of cash, it's going to burn a hole in your pocket and you'll want to be moving to spend that. And I'll tell you that is not the case. We're going to be very judicious. However, we're looking at things -- generally, we're always looking at things strategically to add into the content on the system because, as we've seen, we're doing extremely well on coming up with menu for consolidation onto the platform. We're now moving aggressively and you'll hear more about that in the future on our oncology program. So certainly, as opportunity arise, it will be better positioned to entertain bringing in incremental content onto the platform.
Now in addition, as we've called out in the prepared remarks, we're adding infrastructure internationally. That is really paying off. I’m particularly delighted with our European operations, at this point in time, they’re functioning extremely well. We’re only in the beginning in some of the other key emerging countries in China, for example, as we called out on this call, but also in India and Brazil.
So as we have an opportunity on a non-dilutive basis to add infrastructure in a number of those areas, we’re going to be entertaining that, but nothing is on the immediate horizon. So, Andy, I don’t know if you have any other comments?
No. No other comments. I think that basically covers it. As you know, we had $85 million of cash before the convert, and as we highlighted on our call last quarter, we expect positive cash flow from operations this year. So it was truly in opportunistic raise [ph].
Thank you. Our next question comes from Dan Leonard from Leerink. Your line is open. Please go ahead.
Dan Leonard – Leerink Swann
Thank you. Trying to better understand the planned sequential decline in Commercial Clinical in Q2. I know flu drops off, but it seems like you have a lot of momentum elsewhere. So can you help me reconcile the two? Thank you.
Q1 benefited from a record Q1 placements, 181 placements. That was very, very strong and a record $11.2 million, which I believe is as high as Q4 of 2012, frankly. So we are, you know, we had 32 placements in a single large order, so we basically have reflected lower system revenue in Q2.
Thank you. Our next question comes from Jeff Elliott from Baird. Your line is open. Please go ahead.
Jeff Elliott – Robert W. Baird
Thanks for the question. My question is on the guidance. I understand you’re not changing the total revenue guidance for the year, but you did have this large HBDC order in China. Was this something that was expected? And then a follow-up on the bladder cancer product, can you give us an update on when that is expected now?
Certainly, yes. So the China order was considered as we gave our guidance. So that we expected to be there.
On the bladder cancer product, as I indicated, that’s progressing through the program there, and we expect that more in the 2015 timeframe at this point in time. So it’s coming together, actually we have some very interesting data there with a number of the markers, but it will be next year sometime.
Thank you. Our next question comes from Tycho Peterson from JPMorgan. Your line is open. Please go ahead.
Tycho Peterson – JPMorgan
Thanks. Two quick ones. As we think about the HBDC opportunity, can you refresh your timeline for adding additional content and how we should be thinking about incremental pull-through? And then separately, with HPV, obviously you're a couple of years off from entering the U.S., but with the potential migration to a primary screen, does that change your emphasis on that program at all?
Okay, certainly. So on the HBDC, actually we're seeing activity already. The products that make immediate sense for HBDC, actually have some interest in CT/NG, it's already out there. But the big movers, a lot of interest right now in HPV, and then even more so in our HIV quantitative and our HIV qualitative.
In fact, there's some tenders coming up in some markets and we're going to be in the HBDC market and we're looking to participate in those tenders with those products. And of course it brings the obvious advantage which is not lost on people in those markets that they're able to run on their already existing install base. So it's an easy add coming in to those markets.
I can tell you that we've done some initial qualification work with the market that we're looking at on the one tender. And the data on our HIV quantitative and qualitative look very good there for the products. So, looking forward to getting those out.
Now on the second question?
U.S -- to HPV primary.
The HPV primary. Right. Yes. So no, our thoughts -- well our thoughts are, going forward, we're going to be sure that as we do our clinicals, that certainly we have everything included so that we can have primary screening claim. So I mean the only thought change would be there. We -- frankly I congratulate Roche. I think that was a very, very good move. I think it's helpful for the industry that they made that move. And as we've said, the data is extremely persuasive out in the market that HPV should be the primary screen.
Now as I called out in our prepared remarks, the interesting aspect of our HPV test is that we do have we believe some significant benefit as we look at clinical relevance, because as I said, we're looking at HPV viral material which is based upon cellular. So it's cellular derived versus extra cellular derived HPV, and we believe that that is much more clinically relevant. So I'm looking forward to getting the product on the market, and yes, we will be targeting a primary screening claim as well.
Thank you. [Operator Instructions]
Your next question comes from Shaun Rodriguez from Cowen & Company. Your line is open. Please go ahead.
Hi. This is Chris [ph] on for Shaun today. Thanks for taking my question.
So just a question on gross margin. Gross margin came in better than expected, and like you said, revenue carried a higher mix of HBDC. So the question is, are you benefiting from the various initiatives to improve commercial gross margin on the manufacturing front or was pricing more favorable than expected?
Actually the operations programs that we initiated last year with our new head of operations are going extremely well and are bearing some very solid fruit in that regard. So that was the driver of the margin improvement, and those initiatives are of course continuing.
Thank you. Our next question comes from Michael Matson with Needham & Company. Your line is open. Please go ahead.
Michael Matson – Needham & Co.
Thanks. I was just wondering if you could comment on the pricing of the Norovirus test in Europe because obviously it sounds like it's superior to the existing tests there, but I'm just wondering, is it going to be competitive from a pricing standpoint to take a significant portion of that 1 million test volume over there.
Well, yes. Specifically the product will carry a list price of EUR38, and then of course it's available at a discount to our distributors over there. Based upon everything we're seeing and the example that we gave you on the isolation release there, we think that the product is going to be well-positioned with the pricing at EUR38 list to do very nicely in the market. Early indicators support that. In fact, I just came back from a trip to Europe meeting with our commercial operations group over there, and they were quite enthusiastic about what they're seeing on the Norovirus as well as the HPV product for that matter, so that looks very good.
Interestingly enough, we also are in the early phases of a pilot program of Norovirus on a cruise ship. And I found that that was particularly interesting because the cruise ship, similar to the hospital, is interesting -- is interested in early release or not keeping their passengers confined in the cabin, and they're looking to use this to allow them out of the cabin sooner. So that's a very interesting aspect and it opens potentially an interesting additional market.
Thank you. Our next question comes from Isaac Ro from Goldman Sachs. Your line is open. Please go ahead.
Isaac Ro – Goldman Sachs
Afternoon, guys. Thanks for taking the question. I was really focused on the R&D spend, it came in a little bit lower than your guidance. I wonder why that was the case and whether we should model the current run rate for the balance of the year, and really if there's any implication to the Honeycomb project, just if you could maybe comment on how that's going in the context of the R&D spend, that would be great.
Thank you. Sure, Isaac. So I'll take the last one first. The Honeycomb program does extremely well. No, this has nothing to do with the Honeycomb program. With that program, we had, you know, we have a number of key feasibility initiatives, and we're meeting those, and that's looking very good, so I'm very enthusiastic about the Honeycomb program. Relative to the rest of the R&D spend, it's – well, it's timing on trials, and Andy has some comments there.
Yeah. There was just a slight movement of a matter of a few weeks on some of the clinical trials out of Q1 into Q2, which is why we expect R&D to be up in the second quarter from the first quarter, which is in our prepared remarks.
Thank you. Our next question comes from Zarak Khurshid from Wedbush Securities. Your line is open. Please go ahead.
Zarak Khurshid – Wedbush Securities
Hi there everybody. Thanks for taking the questions. I was just wondering if you could provide some color on the contribution or the run rates for CT/NGs, C. diff and commercial TB. Thanks.
You know, Zarak, we had growth across the entire portfolio and we're not going to routinely comment on how any particular sets did. But I will share on CT/NG, as John commented, it was 44% of our placements so it continues to be an important placement driver. In addition to that, I'll let John talk about it, big, big success in the U.K., but we also saw us add our highest volume U.S. customer this past quarter. So it's doing very, very well thus far, and essentially we had broad growth across the entire portfolio this quarter.
So yes, you know, I thought, interestingly enough, I think you'll find this quite interesting. So we indicated we have a sexual health clinic that's quite unique in their business model in the U.K., and they literally have a GeneXpert Infinity System operating. It turns out they weren't allowed to put it in the storefront facing the sidewalk, but they have it in a display window, so when you come in to the room. What was very interesting there was their original plan on this particular center is they expected to see about 10,000 patients per year, and at this point in time they're seeing about 1,000 patients per week. And the key driver for that, and this really validates something we've been talking about for a long time, there was a lot of early debate on what's the real benefit, do you really need a CT/NG result very, very quickly? The answer is clearly an overwhelmingly yes.
And the reason why this clinic and their model, they're doing success far beyond even what they thought going in, is they've been able to, from a test to treat basis, reduce it from ten days -- ten days, a big number -- to two days. And so as a result, they're in the process of upping their capacity. But importantly, this model was rolled out recently at a meeting there in the U.K. and there's a lot of interest in applying the model. So I think we're going to see ramifications not only in Europe but I think ultimately ramifications here in the U.S. So I think that area is quite positive and doing very nicely.
Thank you. Our next question comes Bill Quirk from Piper Jaffray. Your line is open. Please go ahead.
Bill Quirk – Piper Jaffray
Yeah. Thanks. Good afternoon everybody. First question for me, or the only question for me I guess, is, you know, just given or rather considering the large China order here, John, the, I guess, the ramping HBDC business in Brazil as well, in order to get, or I should say, stay within your guidance, we have to assume a pretty significant decline in overall utilization. So just help us think a little bit about that. I guess the implication here, is it going to be shipping these instruments, recognizing this revenue, but then they're going to be held or not initially deployed or there's a ramp-up period? Help us think about that a little. Thank you.
Okay. Thank you, Bill. And your observation's a very fair one. If you go back and we model what happened in South Africa, we had a number of additional placements there as well. South Africa started relatively rapidly, but it's a little bit slow. China, on the program there, frankly it's not quite as well developed. We don't have one group like you have in HLS in South Africa driving that. So we're working with the Global Fund. There's a number of tests that are going to go with it, but I think the ramp relative to reaching full utility is going to be slower than what we saw on the South African experience. We're seeing a similar situation in Brazil.
So Brazil has said, you know, they want to -- they're implementing the GeneXpert as a national program on TV. Systems are moving. But as far as getting the whole program so that it's operating smoothly, we're in very early days. So for that reason, I wouldn't anticipate a big ramp in test utilization at least for this year while we get the program really well-organized.
Thank you. Our next question comes from Bill Bonello from Craig-Hallum. Your line is open. Please go ahead.
Bill Bonello – Craig-Hallum
Thanks. Kind of a follow-up to that, can you just talk about the commercial opportunity in China and if there’s any leverage from getting this CFDA approval, if that helps outside of the HBDC market? And then also if the HBDC economics in China are similar to everywhere else?
Certainly. Well, yeah. As we’ve indicated all along, that’s one of the big advantages of our HBDC program. And that is that it’s not only opened the doors but it’s thrown the doors wide open to getting us into markets that would have been much slower for us to get into at this point. So as indicated on the prepared remarks, Bill, it really -- yeah, it’s bringing the system very rapidly into the Chinese clinical community.
Now to your question on economics on these first orders going in, the economics are, yes, the same as HBDC for that. But this is ultimately, it's one of the BRICs countries, and so we’re going to end up going with a combination commercial HBDC, so you’ll get a blended focus there.
Now the other item is we have a number of other products that we’re getting ready, we’ll be filing later this year with the CFDA, and that is our MSRA as a complete product, our flu product, and our C. diff product. Now that said, I’m looking forward as we move into next year or so to ramp up and bring our virology products forward, because needless to say, if you go look at China right now and say, what are your most common molecular tests that are currently being done, it’s more the viral products.
So this will give us a key introduction to China. It’s going to give us a very nice head start. It’s going to educate the community on the full benefits on the GeneXpert. Not only the ease of use, but the fact similar to what we’ve seen in South Africa where I gave you they’re using IVs, XVIs and Infinities, that you get exactly the same result spread and is an extremely high-quality result. So bottom-line answer to your question on China, I think it’s a key door opener and it bodes extremely well for us as we go forward on a commercial basis.
The last comment I’ll give you has been very interesting to me to watch this, as a result of our success with tuberculosis worldwide with the HBDC programs, are now saying a lot of our peers, our competitors in the industry really focused on the HBDC marketplace and trying to come in and emulate what we have already done and we're doing in those markets. So I think it would be a clear understatement to say HBDC has been a drag. If anything, it's a big positive for the company, and others are now trying to do the same thing. So, looking good.
Thank you. Our next question comes from Derik De Bruin from Bank of America Merrill Lynch. Your line is open. Please go ahead.
Derik De Bruin – Bank of America Merrill Lynch
Hi. Good afternoon.
Derik De Bruin – Bank of America Merrill Lynch
Hey. John, can you help me, just remind me about the market opportunities for the HIV viral load and HPV viral load? Just the size of those markets and, you know, sort of I'm trying -- I mean there's obviously a lot of interest in the de-centralization of testing, because most of it seems to be still done in large labs. I'm just curious about sort of the market opportunity, how you are thinking about the size of those markets, the growth, and sort of the share opportunity. You gave us a lot of good information on the CT/NG market and everything else. I'm just curious how you're thinking about the viral market -- virology market, if you could give us a little bit of sense of what you're sort of thinking about the numbers.
Okay. So the key aspect, let me just talk to the key attributes of what we're looking at there, Derik, on the markets, is that, exactly what you're talking about. The markets have been centrally focused. And what we're seeing here with these things, it's going to allow the testing to move on a broadly, more disseminated basis.
We did speak on the last call that in the hospital markets, very few of the existing molecular labs in the hospitals are actually running. I think it was something in the area of like 4% or so, of the HIV viral load products. Going forward, I think those numbers are going to jump up as we look at the one tender that we are looking to participate in right now which goes into an HBDC market, is a tender for 2 million plus tests that are out there. So quite substantial markets.
And as you look at numbers there and you look at the number one utility, it's interesting there because, based upon the MDxI data that we see, as you look at test utilization on the Roche platforms and on the Abbott platforms, that the number one, two products that they're running on those platforms are HIV, HCV. So we see them as quite significant markets but markets that are going to move on a broadly disseminated basis, and we're well-positioned in that regard.
The only other thing I would add is I know from our European marketing teams that the breadth of our menu as we bring virology on it, that you’re basically talking about a next-generation platform against a very somewhat aged platform, and the efficiency that we bring works very well for labs of many different sizes, the ability to run all those tests on a single platform.
Thank you. Our next question comes from Sung Ji Nam from Cantor. Your line is open. Please go ahead.
Sung Ji Nam – Cantor Fitzgerald
Hi. Thanks for the question. I was wondering, you’re continuing to see very strong growth internationally and particularly in some of the direct commercial channels in Europe, and was wondering kind of what the key driver is there? I mean is it still -- is it similar to the trends in the U.S. or is it really still different country by country, or is it the anticipation of the menu, broader menu that’s driving growth in that region?
So, good questions. And yes, it does. You do get variability on a country-by-country basis. Now in Northern Europe, and of course you have the initiative in Germany relative to MRSA. That’s been a key driver for us and we’re doing very well in that market.
Now interestingly enough, in the U.K. where they've had MSRA initiatives now for a couple of years, we did not necessarily see such positive benefit from that. That's starting to turn around, because what they’re looking at right now is, instead of doing all admissions, doing high-risk admissions also in the U.K., and it’s very much running in favor of getting a result substantially sooner and a highly accurate result. So that’s running in favor of molecular. So that is really good.
Now as I’ve indicated before, in Southern Europe, Southern Europe has not really embraced a number of the HAIs. C. diff is starting to move along though, but MSRA not so much. There our menu expansion has been very impactful, CT/NG a primary driver into those markets. So that’s why we’re really excited right now with the HPV coming with the CT/NG and then coming with the Trichomonas. Wwe are hearing comments now in anticipation for a number of these. And then the Norovirus is going to be additive. The other one, just recently, that I heard on the trip to Europe was the Carba-R product, a lot of interest with that one.
And then of course, with the tuberculosis product, particularly as you look at immigration coming into a number of the Western European countries there, people coming in were from areas that do have a high incidence of TB, we’re seeing some good growth as well with the TB products.
So in that regard, I'll share with you, it's interesting, I was talking to our head of Europe, and I was asking the question, you know, it's really impressive that we're selling our systems, as we indicated, more than half of our systems placed on the quarter where we're direct for outright cash purchases, why are we able to pull that off when everybody else is using a reagent rental model? And her answer back on that was that the market is recognizing that we have a very leading-edge but stable platform with a rapidly expanding menu, which justifies their capital investment on the system, and then get a full benefit of solid economics on the test on a go-forward basis.
So for that reason, we're starting to sell the majority of our systems there on an outcast purchases, which then comes back to your question and bodes well on future menu delivery. And I think with this year, as I've indicated, that's really going to be pivotal now coming with the virology products in addition to these really solid products mentioned on the neuro and the Carba-R.
Thank you. Our next question comes from Eric Criscuolo from Mizuho. Your line is open. Please go ahead.
If you have your phone on mute, can you unmute your phone please?
Our next question comes from Brandon Couillard from Jefferies. Your line is open. Please go ahead.
Brandon Couillard – Jefferies & Co.
Thanks. Good afternoon. With respect to the China HBDC system placement activity in the second quarter, will you book all of the revenue for that in the second quarter? Any chance you can quantify that number for us or give us some type of metric whether it's ASP per system to look at?
Sure. Well, as we indicated these are going to be against HBDC economics, so you know what those are out in the field there which was around -- what, 17 --
Seventeen five, so it's about $12 million.
Right, exactly. And no, we fully expect to book all of these during the second quarter.
As you can tell, they're in inventory at the end of the first quarter.
Thank you. And our final question for today comes from Vijay Kumar from ISI Group. Your line's open. Please go ahead.
Vijay Kumar – ISI Group
Hey. Thanks for taking my question. Just really one question. On the commentary on HPV as a primary screening, can you just comment on whether you guys need to do additional clinical trials to get a primary screening status? And as a follow-up, Roche also made a recent acquisition and it looks like they're trying to get into the decentralized testing [ph] space. Can you just comment on the comparative dynamic, how you see it shaping over the next few years? Thank you.
Yeah, certainly. Well, the good news for us on the HPV is we haven't implemented our U.S. clinical trials yet, so that whole program actually was helpful for us. Will we add to the clinical trials? Clearly, because you'll need to do that relative to the primary. So we have already planned that based upon the activity that we saw with the panel hearing there. So that should go along very nicely. And then as I've indicated, I'm very optimistic based upon the construct of our tests and what we're seeing already in the international marketplace.
Relative to the Roche acquisition, you're talking of IQuum. Very interesting, frankly from our perspective, certainly from my perspective, it was another validation of our model that we implemented 12 years ago now, it turns out this month, that I've been here, and I remember in the early days when I was here, that I think Roche was quoted something like, we will never do a unitized test. And now they've purchased a company that's similar or trying to compete with Cepheid, is doing a unitized test.
So the product that they acquired, the good news there for them, and I'm sure that's why they did that, is a real-time PCR product. So that's good. The other aspect about the product, it does do rapid PCR, so it provides a pretty rapid response relative to utility, and utility in that regard should be good.
Is that going to be a platform that's going to be broadly applicable? The answer to that is, don't think so. Reason why, you don't have a universal sample prep capability there, your sputums are going to be difficult to impossible. You're also -- ability to waste [ph] tough cell wall organisms are going to be very, very difficult, and I doubt, robust on the system. And importantly, the sensitivity won't be as good.
One of the items that is often overlooked with the GeneXpert cartridge as we developed that, yes, PCR is very powerful, and yes, you can get a lot of sensitivity due to the amplification of the material. But as you need extended or really highly sensitive, you also need to augment that with an increased amount of specimen. And the IQuum disposable will only accommodate 200 microliters of specimen. That severely limits you, and that, for that reason, on our cartridge, we can take up to 4 milliliters of material and process that down. So we end up getting a multiple boost in sensitivity from the cartridge there via the ability to do that and ultimately the ability to run nested PCR.
So, you know, there again, I think that from a conceptual standpoint, understand why they did it, validates everything we were saying conceptually. Right now I still don't see anything coming on the market. IQuum has been around for a number of years and frankly has not done much in the marketplace, that I don't see anything that really challenges the versatility and the ultimate accuracy of what we see with the GeneXpert cartridge.
Thank you. I would now like to hand the conference over to Ms. Jacquie Ross for closing remarks.
Thank you. Today's webcast will be available for replay on the company's website and the IR application shortly and will remain available for at least 90 days. If you have questions following today's call, please contact Cepheid Investor Relations at 408-400-8329.
Finally, a quick reminder that our annual meeting of shareholder will be held in Sunnyvale, California at 1:00 p.m. Pacific Time on Tuesday, April 22. Additional information is available on our website.
Thank you for your interest in Cepheid and have a great afternoon.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may disconnect and have a wonderful day.
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