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Nov. 18, 2002 — In general, the federal government has been good to Cepheid Inc. In 1996, the U.S. Department of Defense awarded Cepheid its first contract, a $1.8 million deal to develop DNA-based techniques for detecting biothreats. In 2002, the U.S. Postal Service (USPS) gave Cepheid and its partners $3.7 million to design a prototype anthrax monitoring system for its mail sorting facilities.
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Now the team led by Northrop Grumman Corp. is poised to receive the multimillion-dollar contract to outfit postal sorting facilities with systems that include Cepheid’s automated GeneXpert DNA testing devices. In a conference call announcing the biotech company’s third quarter earnings, Cepheid Chief Executive Officer John Bishop declared it “the system under consideration.”
But Cepheid aspires to be more than a government contractor. It already made inroads in the life sciences market with its Smart Cycler, with nearly 1,000 systems sold since its launch in 2000. It joined Northrop’s partnership in part because the USPS project complements efforts to develop and validate the GeneXpert, said Bishop and Cepheid co-founder and President Kurt Petersen. The automated DNA system is scheduled to be marketed commercially to the diagnostics market in 2003.
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“The company was very focused on government issues and bringing those programs forward,” Bishop said, talking about Cepheid’s early strategies and changes he helped implement since assuming his post in April. “We still have those programs. The difference is we’re going to leverage those programs. Those are not the long-term key strategic focus.”
In 1995, Petersen recognized he could design a fast, portable instrument for detecting traces of pathogens in blood, urine or air samples based on a miniaturized thermal cycler developed at Lawrence Livermore National Laboratory. Cepheid uses the cycler to perform a technique for replicating DNA called polymerase chain reaction (PCR).
PCR is accurate, but getting results can take a day or two because the process requires a skilled technician who must prepare and analyze the sample in a lab. The Smart Cycler cuts that time to 30 minutes, and the GeneXpert automates the process, removing the need for specialists and the possibility of human error.
Elemer Piros, senior biotechnology analyst with the investment and banking firm Rodman & Renshaw Inc., said automating the process should extend Cepheid’s market reach. “Without complete automation, you don’t get to the point of care,” Piros said.
Bishop wants to position the company as a leader in diagnostics and life sciences and look for strategic partnerships for applications where it lacks market expertise such as agriculture and food analysis. In that way, Cepheid should reap the most profits from its versatile technology.
“What we’ve done is move the company right up next to the market, so we will be directly involved with the market and we will realize the higher level of value from those markets,” he said. “That translates to a healthier bottom line and a more controllable bottom line.”
The postal contract, once awarded, will boost Cepheid’s already growing revenues and help reduce losses, Bishop said. Cepheid posted a 51 percent increase in product sales for the first nine months of 2002 compared to 2001 and an increase in revenues of 22 percent. Bishop credited a larger sales force for the gains.
But increased investment in research and development for the GeneXpert and restructuring costs widened the loss for the nine-month period. The company is also plagued with a sluggish stock price, which was around $4 in early November.
The postal contract will bring Cepheid recognition and an opportunity to prove the worth of its technologies, Piros said. “They will have a certificate of endorsement from the most respected bodies — the USPS and other government labs,” he said.
Cepheid’s Smart Cycler and GeneXpert systems use patented disposable cartridges that can be priced according to the application. The postal service, for example, will perform tests periodically in 292 facilities that may hold several of systems, providing a revenue stream beyond the initial sale of the equipment. Piros calculates Cepheid may realize a $7 return per cartridge. Bishop’s strategy is to apply the GeneXpert toward markets that will bear much higher costs.
The postal contract was scheduled to be awarded in September, but hit snarls over liability issues. The logjam will remain until the government approves indemnification of contractors, including Cepheid. The Northrop system is considered the USPS’s top choice. “It’s not an ‘if,’ but a ‘when,'” Piros said.
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Company file: Cepheid Inc.
(last updated Nov. 18, 2002)
Company
Cepheid Inc.
Ticker symbol
Nasdaq: CPHD
Headquarters
904 Caribbean Drive
Sunnyvale, Calif., 94089
History
Co-founded in 1995 (incorporated March 1996) by Kurt Petersen, Thomas Gutshall, William McMillan.
Industry
Biotech research
Employees
143 (as of the end of 2001)
Revenues
$11.4 million for year ending December 2001
Small tech-related products and services
The company develops DNA-based detection and diagnostics devices used for agent detection and genetic profiling. Cepheid’s flagship product, the Smart Cycler, offers speedy and detailed DNA analysis. GeneXpert is an automated system that extracts and tests DNA taken from blood, spores and other substances. The heart of all the devices is the I-CORE, a module about the size of a deck of cards that quickly replicates DNA and optically measures the results. It uses microfluidic, optical and microelectronic components
Selected strategic partners and customers
Investment history
Cepheid received approximately $2.5 million in first-round funding during 1997. During the following year, the company garnered a total of over $11 million in two tranches. Shortly after a $19 million third funding round in March 2000, Cepheid took a $30 million June IPO. Key Cepheid investors have included: Advanced Technology Ventures, Medtronic Inc. and Invemed Associates.
Barriers to market
Diagnostics equipment can face an extensive regulations and approval process. Additionally, Cepheid may need to license further technologies in order to develop other products.
Competitors
Biological agent detection and diagnostics is an increasingly cluttered niche. Key players include:
Goals
Short-term: Obtain the U.S. Postal Service program; use that to ramp up revenues, decrease losses and drive the company to profitability. On the products side, introduce the GeneXpert and reagents for life science market. Make inroads into the clinical diagnostics market and cancer detection markets. Long-term: Establish Cepheid in the genetic assessment market arena; get the company operating on a profit with a global presence and have some level of infrastructure in place in Europe.
What keeps them up at night
“The big issues are getting the product on the market, market adoption rates and driving the company to profitability,” says CEO John Bishop. “The markets are not accepting pie-in-the-sky promises. We’re back to basics. What are the markets, what are the products and what are the profits coming forward? So basically we’re looking at a business that is going to need to be profitable and generating solid profits on an ongoing basis.”
Selected patents
Recent news and publications
Small Times magazine business leader of the year
Cepheid reports sales, revenue increases
Contact
— Research by Gretchen McNeely