Cepheid (CPHD): The 'next generation' of diagnostics

"I still love Cepheid (NASDAQ: CPHD)," says biotechnology sector expert Michael Shulman in his always-fascinating ChangeWave Biotech Investor.

The advisor explains, "Cepheid does genetic testing of the things that can make us sick or kill us. The company is at the forefront of the next generation of diagnostics testing, and has real products already on the market." Here is his review.

"Cepheid has had outrageous sales success in the past few quarters and, therefore, has excellent profits looming. However, the true value for the company is its long-term potential.

"CPHD broke out about a year ago with a new test for the killer staph infection, MRSA, and the test is an order-of-magnitude better than any the competition has.

"A combination of tremendous public pressure and a CDC report that said MRSA kills at least 17,000 people per annum (and consumes billions of dollars, already), have hospitals everywhere putting in MRSA screening and prevention programs. And nine out of 10 of those hospitals are buying CPHD's equipment and tests.

"And that's part of the beauty and wisdom of CPHD. It sells a hardware platform, GeneXpert, which runs the MRSA test and will eventually run many other tests. It's the razor and blades business model: low margins on the hardware, big margins on the tests.

"And soon Cepheid will have more tests, including one for a very common and hard-to-treat hospital bug called C. difficile. The company is also working on getting FDA approval for its equipment to use in smaller offices, medical practices and labs -- and this will greatly expand the company's reach and sales.

"What does the future hold? It's at work on something called microRNA, which is thought to be a key mechanism in determining how your body manages protein production related to specific diseases.

"Cepheid is first-in-the-field to identify microRNA, and holds patents related to them and believes it could be 'the' technology platform for a new generation of tests.

"Here's the reasoning: MicroRNAs manage a specific disease by creating proteins and, if the proteins can be found and measured, they would be clear signs (or biomarkers) of the presence of a disease long before symptoms show up.

"I believe MRSA screening will become mandatory for all new patients entering a hospital within four years, which will provide even larger revenue and profits for Cepheid.

"I also believe in the potential of biomarker-based tests for cancer protected by patents on Cepheid's microRNA technology. It is an intellectual property and has been used to discover specific types of microRNA that could also be useful in diagnosing solid-tumor cancers.

"Millions of Americans over the age of 50 could end up being tested for solid-tumor cancer -- and these tests would cost far more than the $36 MRSA test. That makes the microRNA tests a multi-billion dollar opportunity for Cepheid, independent of the revenue from hardware sales.

"I'm looking five years out for this test, but there are few companies that are growing as fast as CPHD and that already have such a strong competitive advantage. Cepheid also has so much more potential growth on the horizon.

"Finally, the potential for microRNA tests are not yet factored into the stock price, nor do I believe mandatory MRSA testing is in the stock price, either, should that come to fruition. Cepheid is still not well followed or covered by analysts. Buy the stock now; it should perform well for a very long time."