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01/28/2005 12:00 am EST
With a long-term, visionary focus, George Gilder seeks tomorrow’s leaders in various tech related areas. Here, along with technology analyst Charlie Burger, he looks at Cepheid, which has created a "lab on a chip" for the biothreat and DNA identity markets.
"The early leader in integrated systems
for genetic analysis, Cepheid (CPHD NASADAQ) is our favorite candidate to create
a ‘lab on a chip.’ In an era of terrorism and of the globalization of
highly infectious diseases, many analysts anticipate healthy growth in the
biothreat, life sciences, and clinical genetic assessment markets over the coming
decade. For Cepheid, growth has been nothing short of robust, with fiscal third quarter revenues
up 25% sequentially to $14, and anticipated fiscal 2004 revenues of $49 million, up
163% over 2003.
"Driving the revenue increase is the second-generation product, GeneXpert, which adds automated sampling to the first-generation SmartCycler that enables rapid genetic analysis of a sample. GeneXpert may be the world's only fully-integrated and automated genetic analysis system; it eliminates contamination, enables testing at almost any location, and has a shorter time to result and higher specificity and sensitivity (up to a 1,000x more sensitive) than its known rivals. Though still in the final stages of development, GeneXpert is already being sold to the biothreat market through a Northrop Grumman led consortium developing an anthrax tester for the USPS. ‘Is it anthrax?’ Now postal employees can get the answer in a little over half an hour rather than waiting until the next day.
"Cepheid is increasing spending on R&D and manufacturing to accelerate delivery of clinical products, sacrificing near-term profits for long-term growth; the company projects gross margins well into the 60s in five years with customers clustered across the infection disease and oncology landscape, including operating and emergency rooms, doctors' offices, biothreat sites, labor and delivery rooms, and hospital, research, and public health labs. Today it trades at a lofty enterprise value of 7.6x anticipated 2004 revenues, and investors should plan on holding for at least five years. If revenue ramps at the same rate next year, enterprise value drops to 3x sales at today's market cap with still a long future ahead.
"For investors, the question is how quickly will the biothreat and clinical testing markets grow, and how does Cepheid compare to the competition? Cepheid believes it has a unique product platform that performs more broadly across more markets than competitors. Additionally, GeneXpert has a higher specificity and sensitivity than known rival products. Management expects continued growth in sales to the clinical market, and plans to expand its sales team accordingly. Clinical trials on the GeneXpert System are scheduled to begin this quarter and market launch the first half of next year. Expansion of sales into the life sciences market in China (currently less than 2% of company-wide sales) should be enhanced through a new distributor showing early signs of effectiveness."
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