UBS (NYSE:UBS) is currently hosting its annual Global Life Sciences Conference (registration required). This conference is very well-attended and provides a good source of the current stories behind many public biotechnology companies. For four days, nearly 90 companies a day present themselves before an attending and Web-listening audience, a virtual biotech-a-palooza.
Yesterday I listened to the webcast presentation provided by Cepheid (NASDAQ:CPHD), a molecular diagnostics company looking to make inroads in the promising field of clinical diagnostics. Cepheid makes instrumentation and follow-on consumables to enable genetic testing via polymerase chain reaction (PCR). This is a classic razor/blades business model that could be very successful with adequate market penetration.
I first became aware of Cepheid as the company that contracted with the U.S. government to monitor post offices for anthrax, also by PCR. I was concerned at the time that after the instrument rollout, there would be a high risk of negative public relations if a significant number of false positive results were observed. This has not proved a problem and has provided Cepheid with a demanding real-world test for the robustness of the instrument platform.
The experience has paid off, as the company's PCR test for Group B Streptococcus has recently been categorized by the FDA as "moderate complexity" under the Clinical Laboratory Improvement Amendments (CLIA). Full approval of the test is still pending but should be expected. A moderate complexity PCR test allows for much broader market penetration into the clinical setting, out of highly specialized clinical laboratories and into hospitals, and potentially doctor's offices. The company is also in late-stage development with a test for methicillin resistant S.aureus (MRSA).
The moderate complexity designation also provides Cepheid with an important "first mover" status for what I expect as the eventual broad application of clinical PCR-based genetic testing. Additional tests should have a much lower barrier to approval once the instrumentation is established in the clinical settings. It should also drive collaboration and partnership agreements, as other companies may choose to adopt their patented PCR-based tests to make use of Cepheid potential installation base. There is, however, plenty of competition in the clinical diagnostic area, led by Swiss firm Roche Diagnostics and its strong patent position in PCR. Former high-flyer Celera Genomics (NYSE:CRA) is also looking to leverage the knowledge it obtained in sequencing the human genome to develop PCR-based clinical tests.
Cepheid has a market capitalization of $410 million and is still not a profitable company, posting negative earnings for each of the past three years. Sales growth has been strong and should continue to be so as new products like the Group B Streptococcus test reach the market. The company does have over $100 million cash on hand, which should be adequate for it to survive to profitability. I find Cepheid attractive based on its lead in broadening clinical PCR testing applications, but would still classify it as a high risk holding until it demonstrates profitability and its instruments are widely adopted.
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Fool contributor Ralph Casale owns shares of Celera Genomics and was at one time an employee of their parent company Applera Corporation. He holds no financial position in any other firm mentioned. The Motley Fool has a disclosure policy.
