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Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

For Cepheid, the Diagnosis Is Disappointing by Bill Alpert

Summary: Biosite's (BSTE) buyout generated enough Cepheid (NASDAQ:CPHD) buyout rumors to launch CPHD shares from March's $7.40 to Friday's $12.19. This gives CPHD a $650 million valuation or a 5.5 P/E for 2007 revenues-- the same as Biosite's buyout P/E. CPHD may be overvalued for a buyout: 2006 losses of $26 million or $0.50/share are double 2005 losses, revenues grew just 3% to $87 million. The 58% of total revenues that bioterrorism products like Anthrax screening for the U.S. Postal Service provides is down 17% from 2005, and the U.S.P.S. is delaying renewing CPHD's contract. Cepheid's other hope-- staph infection tests currently being tested at Veteran's Administration hospitals-- are easy-to-use, quick and highly accurate. CEO John L. Bishop projects a $357m-$1.25 billion market for the tests in all U.S. hospitals, and a $7b market for CPHD's other molecular tests. But the VA may go for less expensive staph-fighting methods, and competitor Becton Dickinson (NYSE:BDX) has cheaper staph tests available. Daniel Owczarski of Belmont Harbor Research sees just 40 VA hospital ICU's buying staph tests, adding $1m to CPHD sales. Optimist Bishop says profits will show by Q4'07, but he isn't counting options expenses and other charges.

CPHD 1-yr. chart:

CPHD Investment

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Source: Cepheid's Buyout Attractions are Overrated - Barron's