This Tuesday, the U.S. President’s Emergency Plan for AIDS Relief (PEPFAR) announced an additional $11 million commitment to providing continued access to rapid TB testing in 14 high‐burden developing countries (HBDC) countries. The funds are committed to purchase 150 Xpert MTB/RIF instruments and 450,000 tests in sub‐Saharan Africa and Burma and are totally separate from the funding used for the buy‐down of cartridge pricing.
PEPFAR announced on Tuesday its commitment to provide an additional $11 million to accelerate the availability of Xpert MTB/RIF testing in 14 HBDCs. The funds will be used to purchase 150 Xpert systems and 450,000 cartridges, as well as support the training of health workers and organizations to incorporate the Xpert MTB/RIF in laboratory testing programs. The funding announcement follows the November 29 release of the PEPFAR Blueprint for an AIDS‐free generation, which supports the continued deployment of Xpert MTB/RIF in the developing world. This funding is separate from the August announcement in which funding was provided to reduce the cost of the test from $16.86 to $9.98. As a result, we believe this is additional evidence of the commitment that charitable organizations and governments have to roll out this technology.
The time frame of the funding and when it will show up in Cepheid revenues was not made clear, and we will not change our estimates for this. But it gives us even more confidence in our 2013 revenue target of $398 million, of which $50 million is modeled to come from the HBDC initiative. Based on the recent ramp for the HBDC program, we believe this could prove to be meaningfully conservative if funding continues to be made available at the individual country level (always a caveat with these kinds of programs). Much has been made of the profitability of these revenues, and while we would prefer these revenues carry margins equivalent to the commercial business, our view continues to be that these sales are not only profitable and absorb fixed overhead, but that they also represent a seeding of the market for the company to eventually sell additional products
through (HIV is the next on the list). Therefore, we view the HBDC program as a legitimate and important source of growth for the business.
Our thesis on the stock remains unchanged and consists of three simple points:
1) Cepheid is a unique asset in the molecular diagnostics space, which most people agree is one the fastest‐growing areas in all of healthcare and where there is a dearth of places to invest,
2) Cepheid has the unique opportunity to capitalize on one of the largest installed bases in North America (over 1,200 units) through an unmatched anticipated menu that cuts across infectious disease, virology, and eventually oncology, and
3) by the nature of its technology, the company has the unique ability to move away from areas where we see competition emerging and instead focus on higher‐value tests and expanding their installed base to the thousands of smaller institutions or physician’s offices that competitors cannot access, due to technology limitations.