Exhibit 99.01
CEPHEID
THIRD QUARTER 2006 CONFERENCE
NOVEMBER 2, 2006, 4:30 P.M., ET
Operator Good afternoon, ladies and gentlemen, and welcome to
the Cepheid third quarter 2006 conference call. At
this time, all participants are in a listen-only
mode. Following today's presentation, instructions
will be given for the question and answer session. If
anyone needs operator assistance at any time during
the conference, please press the star followed by
zero. As a reminder, this conference is being
recorded today, Thursday, November 2, 2006.
I would now like to turn the conference over to Lasse
Glassen with the Financial Relations Board. Please go
ahead.
L. Glassen Good afternoon. By now you may have seen our press
release announcing our results of operations for the
third quarter of 2006, which was distributed over the
PR Newswire at 4:00 p.m. Eastern time. For your
convenience, the press release has also been made
available on our website at www.cepheid.com. In
addition, a replay of this conference call will be
made available later today.
During the course of this call, Cepheid will make
forward-looking statements. Because such statements
deal with future events, actual results might 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 2005 Annual
Report on Form 10-K and in the quarterly reports on
Form 10-Q filed with the U.S. Securities and Exchange
Commission and in today's press release. Cepheid
assumes no obligation to update any such
forward-looking statement.
With that, it is now my pleasure to introduce
Cepheid's Chief Executive Officer, John Bishop. John.
J. Bishop Thank you and good afternoon. Joining me on our call
this afternoon is John Sluis, our Senior Vice
President and Chief Financial Officer.
The format for today's call will include an overview
of the third quarter and a review of our financial
performance for the quarter. This will be
subsequently followed with comments on our future
outlook for the remainder of 2006 and following these
comments we will open the discussion to questions.
Reviewing the quarter, our net loss for the third
quarter of 2006 was approximately $4.0 million, or
$0.07 per share compared to a net loss of
approximately $3.3 million, or $0.08 per share for
the third quarter of 2005.
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CEPHEID PAGE 1
As we previously stated, the provisions of SFAS-123R
were implemented during the first quarter which
resulted in stock compensation expense impacting our
operating results for the first time. Accordingly,
included in our Q3 net loss for 2006 was $1.6 million
of stock compensation expense. Therefore, without
stock compensation expense, our non-GAAP Q3 net loss
for 2006 was $2.4 million versus a net loss of $3.3
million in Q3 2005.
Continued strong growth in our clinical product sales
coupled with good Q3 performance in industrial sales
drove a total product sales increase of 18% for the
third quarter over the third quarter of 2005.
As we have discussed on prior occasions, installation
of Biohazard Detection Systems, or BDS, within United
States Post Office, or USPS, processing centers was
completed during the fourth quarter of 2005. As
expected, no sales of additional GeneXpert modules
for the USPS program are planned for 2006. For the
three and nine months ended September 30, 2005 sales
of GeneXpert modules to the USPS were $3.4 million
and $10.0 million, respectively. The program
continues to run well with over 3.6 million tests run
to date with no false positives. We expect the
cartridge utilization rate to be approximately the
same in '07 as that realized in 2005.
The company achieved a significant milestone during
the quarter in the clinical market with the 510(k)
clearance from the U.S. Food & Drug Administration or
FDA to market the Company's Xpert GBS test for Group
B Streptococcus on its GeneXpert system. The
Xpert(TM) GBS test was also categorized by the FDA as
"moderate complexity" under the Clinical Laboratory
Improvement Amendments program. The Xpert GBS test is
the first amplified molecular diagnostic test
utilizing real time PCR to receive the moderate
complexity CLIA categorization. This will allow the
assay to be performed by institutions registered for
CLIA Moderate Complexity in addition to institutions
registered for High Complexity.
Delivery of our GX XVI, our new 16 module GeneXpert
system, was initiated during the quarter and five
systems have been installed in hospital accounts. The
company also recently disclosed development of our
single module system, the GX I, with an integrated
computer, touch screen display and bar code scanner
and announced plans to develop a new high volume
system.
The projected completion of these systems is expected
to position Cepheid to develop a single diagnostic
product line that can be run in a wide range of
laboratory environments, from a doctor's office with
a single module system to a high volume central
laboratories operating in a hospital setting. While
this capability has a number of benefits, a key
benefit will be the elimination of the need to
correlate test results obtained in a doctor's office
or other non-central lab setting to test results
generated in the central lab. This historically has
been a significant problem in the development of
testing in an alternate site setting.
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CEPHEID PAGE 2
During the quarter, the Company also announced the
receipt of a Phase 2 funding from the National
Institute of Allergy and Infectious Disease or NIAID
for their Small Business Technology Transfer Grant
entitled "Sample Processing Cartridges for Rapid PCR
TB Detection". Cepheid's academic partner for this
program is Dr. David Alland of the University of
Medicine and Dentistry of New Jersey. Cepheid and
UMDNJ previously announced a program for development
of an easy-to-use PCR cartridge that detects the
presence of Mycobacterium tuberculosis and also
predicts drug resistance in about one hour.
This program is being funded by FIND, a Geneva-based
non-profit organization partnered with the Bill and
Melinda Gates Foundation. The newly awarded NIAID
funding will complement these efforts by focusing on
development of sample collection devices and on
development of proprietary nucleic acid dyes,
quenchers, interpretive software and other
technologies associated with commercial
implementation of a 6-color GeneXpert system.
The ultimate goal of both programs is to develop a
rapid test with accuracy that is equal to or better
than current methods, thus shifting the burden away
from culture techniques which require weeks to months
to generate the same results.
With the advent of ultra drug resistant TB,
laboratories are seeking non-culture-based methods
for identification because classical methods of
identifying this dangerous organism are a hazard to
laboratory personnel.
Specifically looking at our sales by market for the
third quarter, our clinical sales were up by 135% as
compared to the third quarter of 2005, reaching $5.8
million and represented approximately 26% of our
total product sales as compared to 13% of our product
sales in the third quarter of 2005.
Sales in the Industrial market for the third quarter
were up 28% reaching $4.8 million and represented
approximately 21% of our total product sales as
compared to 19% of total product sales in the third
quarter of 2005.
Biothreat sales for the third quarter were down by 7%
at $12.1 million and represented approximately 53% of
our total product sales. This is compared to 68% of
total products sales in the third quarter of 2005.
The decrease was due to the previously noted
completion of the installation of the USPS BDS units.
Geographically, our product sales for the third
quarter were derived as follows: we had 87% in North
America; 10% in Europe; and 3% in Japan and the rest
of the world. This is compared to 95% in North
America; 3% in Europe; and 2% in Japan and the rest
of the world in the prior year quarter.
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CEPHEID PAGE 3
Our product mix for instruments versus reagents and
disposables for the third quarter was 32% for
instruments and 68% for reagents as compared to 43%
for instruments and 57% for reagents for the prior
year quarter.
We also announced our first acquisition of technology
during the quarter relating to diagnostic markers
with the purchase of Actigenics, a small company in
Toulouse, France. Actigenics is one of the leaders in
the discovery of micro RNAs, a newly identified class
of genetic markers that are closely related to gene
expression and regulation. Actigenics has developed
bioinformatics algorithms that identify proprietary
micro RNA candidates with a high degree of
confidence, leading to one of the world's largest
portfolios of micro RNA diagnostic candidates.
Thousands of additional micro RNA candidates have now
been identified and are being validated in our
discovery pipeline.
Recently published studies indicate that micro
RNA-based cancer markers may potentially provide the
basis for cancer detection, classification,
prediction of tumor aggressiveness and determination
of treatment susceptibility. In addition, we are
pursuing micro RNA-based markers of infection and
inflammation.
Via this acquisition, Cepheid now possesses both
therapeutic and diagnostic rights to approximately
150 validated micro RNAs. We currently plan to
out-license the therapeutic applications of these
micro RNA targets as appropriate. However, we plan on
maintaining the opportunity to develop diagnostic
tests based on all our validated candidates, whether
or not they are linked to such therapeutic
applications.
Moving to our third quarter 2006 financial
performance, John Sluis, our CFO will walk us through
our performance highlights.
J. Sluis Good afternoon. Total product sales for the third
quarter of 2006 increased 18% to approximately $22.6
million from $19.2 million for the third quarter of
last year and year-to-date sales of approximately
$60.8 million represent a 4% increase from the first
nine months of last year.
As John has mentioned, during the third quarter
strong sales growth in the clinical market of 135%
combined with a 28% increase in industrial market
sales offset the planned decrease in Biothreat
product sales due to the cessation in GeneXpert
module sales to the United States Postal Service.
Adjusting for the GeneXpert module sales for the
third quarter and first nine months of 2005 of $3.4
million and $10.0 million, respectively, sales of all
other products increased 43% during the third quarter
and 26% for the first nine months of 2006.
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CEPHEID PAGE 4
Other revenues decreased 5% to approximately $1.1
million for the third quarter of 2006 and decreased
6% to approximately $3.0 million for the first 9
months of this year as compared to $1.2 million in
the third quarter of 2005 and $3.2 million in the
first 9 months of 2005. The decrease in other
revenues for the quarter was driven by a decrease in
grant and government sponsored research revenue.
Gross margin, excluding stock compensation expense,
on product sales for the quarter of 42% compares to
40% for the corresponding prior year quarter. GAAP
reported gross margin of 41% for the quarter includes
$0.2 million of stock compensation expense.
Year-to-date gross margin excluding stock
compensation expense was 41% compared to 42% for the
first 9 months of 2005. GAAP reported gross margin of
40% for the year-to-date includes $0.5 million of
stock compensation expense. The increase in gross
margin for the third quarter was due primarily to a
more favorable product mix compared to the third
quarter of 2005. The decrease in gross margin for the
nine months of 2006 was due to a slightly unfavorable
product mix over the full course of the first nine
months of this year.
Research and development expenses for the quarter
were $5.6 million, which is $0.8 million or 17%
higher, of which $0.6 million is attributed to stock
compensation expense. During the third quarter,
Actigenics acquisition related expenses of $0.2
million were recorded in the quarter with $45,000 of
amortization expense recorded as R&D expense and
$139,000 shown separately as expensing of in-process
technology. R&D expenses for the first nine months
were $17.2 million which is $3.4 million or 25%
higher than the same period last year of which $1.9
million is stock option expense. The remainder of the
increase for the first nine months is due to the
increase in clinical trial expense for the GeneXpert
GBS and Enterovirus assay 510(k) submissions to the
FDA.
SG&A expenses of $6.1 million were $1.6 million or
36% greater than the third quarter of 2005. Out of
this $1.6 million increase, approximately $0.8
million was attributed to stock compensation expense.
Year-to-date SG&A expenses of $19.2 million were $5.1
million or 36% greater for the first nine months of
2005, of which $2.7 million was due to stock
compensation. The remaining increases were primarily
due to an expansion of our direct salesforce,
increased marketing and product support personnel and
promotional costs to support the clinical market.
Also included were increases of course in G&A
expenses.
Collaboration profit sharing expense of $3.8 million
and $11.5 million for the quarter and year-to-date
compared to $2.9 million and $10.1 million for the
same period last year, and represents the sharing of
gross margin on biothreat cartridge sales with
Applied Biosystems in accordance with our
collaboration agreement.
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CEPHEID PAGE 5
As John has mentioned, Net loss excluding stock
compensation expense for the third quarter of 2006
was approximately $2.4 million compared to a net loss
of approximately $3.3 million for the third quarter
of 2005. GAAP reported net loss of $4.0 million
includes $1.6 million of stock compensation expense
and in total results in a net loss of $0.07 per
share. Year-to-date net loss excluding stock
compensation expense of $12.5 million compares to a
net loss of $10.4 million or $0.24 per share for the
first 9 months of 2005. GAAP reported net loss was
$17.7 million or $0.34 per share. Included in the net
loss for the quarter and nine months of 2006 is $0.2
million of Actigenics related acquisition expense.
Turning to the balance sheet, total unrestricted cash
and marketable securities as of September 30, 2006
was $98.4 million.
And now back to John.
J. Bishop Moving to our current outlook for 2006 and beyond,
subsequent to the close of the quarter, the Company
announced the European release of the Xpert MRSA or
Methicillin-resistant Staphylococcus aureus test for
clinical diagnostic use on the GeneXpert System. The
MRSA test was released as a CE IVD Mark product under
the European Directive on In Vitro Diagnostic Medical
Devices. The Xpert MRSA test is designed to rapidly
detect MRSA in patients for surveillance programs to
aid in the reduction of hospital acquired infections
or HAI.
We continue to expect to complete U.S. clinical
trials for the Xpert MRSA test by the end of the year
and to submit a 510(k) application to the FDA during
the first quarter 2007.
We also continue to expect to receive word on our
regulatory submission for enterovirus meningitis on
the GeneXpert System by the end of the year.
The GeneXpert system continues to be well received
and installation of 52 clinical systems representing
234 operating modules have been completed in the U.S.
and Europe.
We continue to expect our 2006 product sales to be in
the range of $83.0 million to $86.0 million based on
anticipated sales from existing and new products and
sales expected from the USPS program. We expect our
2006 net loss to be in the range of $12.0 to $14.0
million or $0.23 to $0.27 per share based on expected
weighted average shares outstanding of 52.3 million
for the year ended December 31, 2006. This is
inclusive of additional interest income to be
generated from the proceeds of our follow-on
offering, but does not include any expenses
associated with the Actigenics acquisition.
I would now like to open the call for your questions.
Operator, do we have any questions at this time?
Operator Thank you. Ladies and gentlemen, at this time we'll
begin the question and answer session. If you have a
question, please press the star key followed by one
on your pushbutton phone. If you would like to
decline from the polling process, press the star
followed by two. You will hear a three-toned prompt
acknowledging your selection. Your questions will be
polled in the order they are received. If you are
using speaker equipment, you will need to lift the
handset before pressing the numbers.
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CEPHEID PAGE 6
Operator Our first question comes from Quintin Lai with Robert
W. Baird. Please go ahead.
Q. Lai Good afternoon. With respect to the installations in
this quarter and then what you just gave with update
on the 52 installations in the U.S. and Europe, so
are those addition installations year-to-date, I
guess inclusive of what's going on in the fourth
quarter?
J. Bishop Those are inclusive of what's going on in the third
quarter, Quintin, as we really didn't get going.
We've been moving somewhat in Europe with the
GeneXpert program. We nearly didn't get going in the
U.S., as you may be aware, until the July timeframe
when the GBS was cleared in the U.S. market so I
would look at those installations as primarily
ramping from the summer timeframe.
Q. Lai Okay. And then for the field installations that you
do have that are now running Group B Strep, what are
the early returns on how the instrument is preforming
and have they been catching Group B Strep?
J. Bishop Well we're early right now because actually as we
look at the institutions on Group B Strep
specifically we have a mixture of accounts that are
running. I mean if you look at Europe you're mixing
in EV, BCR-able as well as the Group B Strep. Right
now in the U.S. specifically on the Group B Strep
situation in the U.S. market, there's about 16
accounts who've elected to initiate testing with
Group B Strep and as you're aware, they go through a
validation process to integrate the test into their
laboratory settings so they're currently in that
validation start up mode.
Now in addition behind that we've got about 54
accounts that are currently past the qualification
stage and they're somewhere in the sales process at
this point.
Q. Lai And of those ones that are in the process of looking
at adopting or putting it in, are they taking
advantage of the moderate complexity label that
GeneXpert has or are they mainly high complexity labs
that are looking at this right now?
J. Bishop The initial ones are mainly high complexity labs. We
haven't had some of the moderate complexity labs
picking up as yet. I would put those in likely a
second tier setting.
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CEPHEID PAGE 7
Q. Lai Okay. And my final question is you did mention that
the guidance excludes the cost of Actigenics. Can you
help us out with what to expect on the cost of
Actigenics in the fourth quarter?
J. Sluis Well from a standpoint of amortization of intangibles
it'll be somewhat minimal, in the neighborhood of 40
or 50. We really are focusing on the third quarter
there as it extends to the full year in which we were
slightly under $0.2 million.
Q. Lai Okay. Thank you.
Operator Our next question comes from Derik de Bruin with UBS
Please go ahead.
D. de Bruin Hi. I was wondering if you could give us an update on
the fiscal '07 Post Office contract. What have you
heard on that and give us some color?
J. Bishop Certainly. We're actually anticipating right now,
we've received an interim bridging purchase order
that we've been shipping against because we completed
the other purchase order for this year in September
so we're currently shipping against the bridging
purchase order and we expect to have the full blown
purchase order covering the remainder of '06-'07
period in virtually any day at this point. Our
current expectation is that the cartridge volume in
the '07 timeframe will be essentially the same as the
cartridge volume as seen in the '06 timeframe.
D. de Bruin Okay, that's very helpful. Now do you have any idea
if they're going to be using ... do you have any
indication right now if there's a potential of them
using the 3 agent test?
J. Bishop I think likely, Derik, that they're going to continue
to be using the anthrax only cartridge, not the 3
agent cartridge going forward. They right now haven't
shown what I would say would be a high level of
interest in expanding much beyond the anthrax
determination.
D. de Bruin Okay. You know you had some nice gross margin
improvement, sequential gross margin improvement. I
guess how do you see the gross margins ramping from
here on out?
J. Sluis Basically what we're looking at of course is an
improvement in the product mix for our clinical
products, basically ones that we have developed and
are self-manufactured. Those will carry higher
margins than our other products.
Secondly, as overall volumes increase, that affects
the cost of all of our products. It'll also help to
improve our margins. So looking forward we see
ourselves basically improving our margins with the
increase in clinical sales as the percentage of our
total product mix and the overall increase in sales
in total.
D. de Bruin Okay. And when you look at the level of SG&A and R&D
spending, do you think you need to ramp significantly
to meet your current expectations in terms of
clinical trials or salesforce in order to get the
GeneXpert launched?
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CEPHEID PAGE 8
J. Sluis The GeneXpert ... first of all on the R&D side
probably the most significant R&D expense impact will
be clinical trial expense and of course we will see
that as we go into clinicals with MRSA that will last
until that process is complete.
In terms of SG&A expenses, probably the most
significant expenses there of course will be in
promoting our new clinical products and we should see
increases in commission expenses and promotional
expenses accordingly.
D. de Bruin Okay. And finally could you update us on the combo
test?
J. Bishop The combo test right now we're putting primary focus
on getting the MRSA test through the clinicals and
into the FDA. Work has been initiated on the combo
test so that'll get more fully up to speed once we
get the single test into the FDA in the first
quarter.
I might as well take advantage as the question there,
Derik, and comment on we had some calls today and
some questions on the new CDC guidelines with regard
to drug resistant detection and prevention in the
hospital setting.
The new guidelines that came out on October 19th
actually are one of about 5 initiatives, various
government initiatives involved in this area. We have
one initiative which is having to do with mandatory
reporting of hospital acquired infections. Right now
there's about 15 states with actual mandatory
reporting requirements. There's 5 with study bills
and about another 15 states with legislative
activities. So a lot of action in this area. As these
things develop we believe that it could have
potential strong impact on the development of the
market.
There's some things I'll talk about in a second with
regard to the CDC guidelines, but then in addition,
there's the Centers for Medicare/Medicaid Services
initiative which actually could be implemented in
October 2008 and this initiative would call for
reductions in Medicare DRG acuity assignments and
payments for hospital acquired infections that
occurred during the patient's stay. So certainly that
could have some substantial impact on the speed of
market adoption rates in this area.
The other item that I would call out to you
specifically is on Page 10 of the CDC guidelines
where they're calling for a 4-phased program to help
control and prevent the infections and those 4 phases
are infection prevention, #1. Number 2, accurate and
prompt diagnosis and treatment. Number 3, prudent use
of antimicrobials, and 4, prevention and
transmission. So as a key thing in there with regard
to the accurate and prompt diagnosis because as one
reads through the guidelines, one of the primary
immediate near term interest and focus is in the ICU
units and there that means that you need to have
immediately available, 24/7 capability to be able to
run these tests. And that means that you really need
to be moving away from batch type of testing and be
able to do testing which really fits very nicely with
the GeneXpert System on being able to do testing as
the requirement arises.
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CEPHEID PAGE 9
So we're looking at an interesting opportunity and
that's why right now we're really focused on getting
the initial MRSA product aggressively on the market
in the U.S. as we already have in Europe.
D. de Bruin Great. Thank you very much. I'll get back in the
queue.
Operator Dan Owezarski with Soliel-Belmont Harbor Capital.
Please go ahead.
D. Owezarski Thanks. Hi, John, hi, John. Can give us an idea in
the industrial area who was buying this quarter or
really for what kind of usage and should we see it
cool off in the next quarter or is it kind of back to
normal now?
J. Bishop Let me answer your question, the last part of your
question first. Frankly we're not unusual in that
regard. I mean if you go talk to any number of the
life sciences companies where that's much more the
full focus of their business, there's a lot of
concern these days about overall government funding
going into the research areas, a lot of concern about
reductions in NIH funding.
So I believe that what you're likely going to see in
the industrial marketplace not only for ourselves,
but for others would be what I call a choppy effect.
I think you're going to see some quarters that may be
down and others that may be up depending upon the ebb
and flow of government funding and specific research
programs that end up getting funded during a quarter
because also with this we've seen shifting in funding
that takes place.
So on a similar vein in our last third quarter we've
seen they're similar as we have in the past. The
sales went into a number of research based programs
as well as government surveillance programs.
D. Owezarski Can you give us any insight as to any specific areas
that there was purchasing going on in that industrial
area?
J. Bishop Not that I would comment on for you right now because
it was actually a pretty broad application. We had
everything ranging from water testing environmental
areas to basic research and looking at other types of
environmental tests.
D. Owezarski Okay. And then to switch to MRSA and the FDA review,
do you expect to get any benefit? Could that be
shorter now that you have Group B Strep through the
pipeline and under your belt? Do you get any benefit
from this being kind of your second, third submission
to the FDA as far as shortening these timetables for
review?
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CEPHEID PAGE 10
J. Bishop The short answer to that would be yes that would be
the expectation. We took longer, our actual time post
the date of log-in from the FDA on the Group B Strep
was 146 days there, but that was a first in class and
they had to establish a whole new classification
which has now been done for amplified moderate
complexity molecular tests.
So I would expect that we should get the benefit of
the classification that's already been established as
we go forward with the MRSA. Now I should also
comment looking at the EV, I mean we've now been
there 199 days since the initial log-in date to the
FDA, but this is another example of a first in class
type of determination in the viral area.
D. Owezarski Okay. And then to move to the GX-1, do you have a
timetable as to development, product launch or even
just rough guideline there?
J. Bishop Rough guideline on that one would be that we would
expect to be delivering the product around the fourth
quarter of next year '07.
D. Owezarski And then for John Sluis just one last one. On SG&A it
looked like it was down pretty well on a sequential
basis dramatically. Was there a one time charge?
Could you refresh our memories in the second quarter
of why is the difference sequentially down here?
J. Sluis For SG&A I'm taking a look at that. I think from the
standpoint of we probably were looking at some
increased expenses in two areas. First would be legal
expenses as we pursue resolution of a couple of items
and secondly in the financial area, we did extensive
work in accounting for purposes of documentation for
S-Ox 404 requirements and both of those combined can
add significant cost. And also selling was a strong
push in the second quarter and as a result a little
bit of a bulge there, yes.
D. Owezarski Okay. And then how should we think about it just
going forward the next couple quarters? More like
this quarter?
J. Sluis That's what we anticipate at this point, correct.
D. Owezarski Great. Thank you.
Operator Our next question comes from Jason Weiss with Robert
W. Baird. Please go ahead.
J. Weiss Good afternoon. Earlier today BD was talking about a
pilot program they're doing with the VA hospitals
where they're working right now with 18, but
potentially 170 or so by the end of '07 for
eradicating MRSA. Could you help us, let us know how
to think about how you might be participating in that
and what it could mean for you?
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CEPHEID PAGE 11
J. Bishop Certainly, Jason. First off one needs to understand
the overall market dynamics. On the program that BD
was evidently talking about of course right now that
would be specific to them on utilizing the
SmartCycler based batch approach, going into
screening on that program. The problem once they're
running there then as you look at need for immediate
diagnosis ,that means you need to be running 24/7.
Now to walk you through how we see the market
developing there. Primarily if one were to focus just
on ICU patients, which is a key focus for the CDC,
that's about 5.3 million test opportunities annually.
As we would see the market potential there around
$180 million. Then if you looked at all high risk
patients, which would include those coming in for
surgical procedures, that's about 10.5 million or
$357 million. Now if you moved, and there's right now
probably only about 2 or 3 accounts that are doing
testing screening of all patients coming into the
hospital, one of which is Evanston Northwestern which
is actually using the BD product. A second one is
Mayo Clinic has actually decided to go with culturing
techniques. And an all admissions program would bring
the market U.S. only to about just short of $1.2
billion opportunity.
Now as we look at Europe, the actual number of
admissions into institutions in Europe are actually a
little greater than in the U.S. market. So the
European market could potentially be in this case
larger than the U.S. market opportunity and that
would put the market just between the U.S. and Europe
at something a little over a $2 billion market
opportunity.
So our view there is we are positioned to very
effectively compete and take part in what is a
rapidly developing market.
The key thing there with the GeneXpert and that's one
of the beauties of it is that uniquely as one moves
to implement testing within the hospital setting,
there's a need to potentially run centralized lab
testing. There's a need to potentially disseminate
and get a test capability out and get it right in a
stat lab or an ICU type of a setting situation. And
that's perfect for the GeneXpert because it gives the
institution the ability to take the same exact test,
use it in all of those settings, not have any
problems in correlating the overall results to get
that benefit.
So we're looking right now at ... the GX-16 is well
positioned already to meet those market needs because
if you look at the admission rates for high volume
hospitals, I mean some of the largest hospitals in
the country you're admitting about 165 patients a
day. In that setting we're looking at the 16 being
able to easily handle that volume and then
subsequently we'll be coming with the GX-HV.
So we view all this and frankly any time you're
developing a new market opportunity, two companies
moving rapidly to help develop the market are going
to be more effective versus just one.
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CEPHEID PAGE 12
J. Weiss Great. And then just as a follow on to that actually
kind of what you're going at at the end of your last
comment. Do you see that the education in the
marketplace among hospitals with the new CDC
guidelines may give you some momentum coming into the
beginning of 2007 when the MRSA approval is expected?
J. Bishop I would say that the answer to that is yes and don't
forget I mentioned that the new CDC guidelines are
only the latest of what are like 5 different
guidelines. So right now you've got the legislative
activity that's underway that we're already talking
about. You've got the CDC we just talked about now.
Then you also have the SHEA guidelines which is the
Society for Healthcare Epidemiology of America. They
have some similar guidelines somewhat to the CDC. And
then you have the APIC initiative on MRSA. And then
finally, the CMS initiative on the Medicare/Medicaid
reimbursement which would then be not fully covered
for patients contracting the hospital acquired
infection while they're there.
So I think all of these initiatives are helping to
much more rapidly educate the market as to the need
and the benefits of initiating testing.
I think it was also interesting that when you look at
again the CDC guidelines also on Page 11 where
they're giving the actual results, where they call
out the results in The Netherlands, Belgium and
Denmark, where in those counties they actually don't
even admit patients into the general population. They
put them in quarantine until they get the results by
culture and then put them into the general
population. As a result, you get a very low incidence
of MRSA in those countries.
This is where right now we see the GeneXpert as
having a good opportunity over there because that's
obviously an immediate market opportunity we're going
to be focused on. They're already doing that,
incurring the cost of waiting on cultures and we can
get those results now substantially faster with the
GeneXpert program.
Also thought it was interesting that they've called
out in a study that was done here in the U.S. on VRE
a reduction in prevalence in participating
institutions from 2.2% in 1997 to 0.5% in 1999 which
clearly shows the efficacy and the benefit of these
programs and that's going to translate into
substantial savings for the hospital institutions.
J. Weiss Great. Well thank you for taking my questions and
congratulations on a great quarter.
J. Bishop Thank you.
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CEPHEID PAGE 13
Operator Our next question Zarak Khurshid with Caris and
Company. Please go ahead.
Z. Khurshid Hi, John, hi, John. Congratulations on a nice
quarter.
Management Thank you.
Z. Khurshid You spoke a little bit about the EV review, currently
199 days. Can you maybe give us some more color on
why you think it's taking a little longer than GBS?
J. Bishop Yes. As I mentioned there, this is another first in
class vis-a-vis a viral detection. A number of people
have actually looked at EV historically and this is
going to be one of the first ones to go through the
FDA via the regulatory pathway for EV. Most of the
testing that's done in fact out there today is all
home brew so given that it's going to be one of the
first and as we've seen with the GBS, it's taking a
little longer.
Z. Khurshid Okay. And then with respect to the GeneXpert clinical
placements, to what extent do you think customers are
waiting for the EV test and the expanded menu before
they invest in the instrument?
J. Bishop I think that we have actually a number of them right
now I think from what we're seeing, the EV while it's
a smaller overall market opportunity, something in
the $40-$50 million range, it's extremely medically
valuable. So we have a number of institutions that
are actually very interested in getting the GeneXpert
as soon as that EV test is available. And then I
think where you're going, and we would agree, would
be the obvious. Once you have the system already
placed then it's going to be a lot easier to pull
through other tests. So if you have an institution
who is interested in GBS, but not enough to go ahead
and make the acquisition, they make it for the EV
then it may pull through the GBS testing after the
fact.
Z. Khurshid Right. And then with regards to it sounds like MSRA
is on track. Any thoughts to the next test in line
beyond?
J. Bishop Well yeah, actually when we come in February with our
'07 guidance expectation, I'd like to give you a
better view of that. We're right now in the midst of
our '07 operating plan, but I mean we've already
indicated we're going to be going back immediately
and working on the multiplex MRSA.
This would be the one that would be the combo
MRSA/MSSA, along with the MEC determination. The
other thing that we want to do, and those will likely
be in the nasal area.
The other thing that there's a big demand upcoming
for wounds, both in the hospital,but frankly more
specifically with community acquired. There's a real
need, rapidly developing need for being able to test
almost in an emergency room setting and potentially
moving even to a doc's office scenario where we're
seeing development of fourth generation antibiotics
and these antibiotics are only going to be utilized
with a direct correlation to a test.
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CEPHEID PAGE 14
So I think what we're going to be seeing here is a
true pharmacogenomic utility as well going forward so
that's squarely in our sights at this point in time.
Other things that we're going to be working on will
be following up in the hospital acquired infection
area, certainly looking at VRE and C. difficile.
Z. Khurshid Great. Then lastly, John, I missed the breakout of
the stock options expense. Could you just quickly
break that out?
J. Sluis Yeah. For the quarter it was roughly 1.6 million and
for the year-to-date it's 5.2.
Z. Khurshid And then within the operating lines?
J. Sluis Okay. Gross margin we had approximately $0.2 million
for stock option expense for the quarter and for the
year-to-date it's $0.5. In R&D we have $0.6 million
of R&D expense and for the year-to-date we're looking
at $1.9. Total SG&A is $6.1. We have $0.8 million of
stock compensation expense for the quarter and I'm
looking here ...
Z. Khurshid That's fine. Thanks for taking the call, guys.
J. Sluis And $2.7 for the 9 months by the way.
Operator Management, at this time there are no further
questions. I would like to turn the conference back
over to you for any additional comments.
J. Bishop Thank you. We certainly appreciate your participation
in the call today. Lasse, are you going to cover the
call-in logistics for replay?
L. Glassen Yes, sir. We would like to thank you. As a reminder,
this call will be made available for replay after
7:30 p.m. Eastern time by calling 1-800-405-2236 for
domestic callers or 303-590-3000 for international
callers. The replay pass code is 11073987. This will
be available until November 9, 2006. The call will
also be available on our website at www.cepheid.com
through November 2, 2007.
Thank you very much for joining us today.
Operator Ladies and gentlemen, this concludes today's
teleconference. Thank you for participating. You may
now disconnect.
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