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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 000-30755
 
CEPHEID
(Exact name of Registrant as Specified in its Charter)
 
California
 
77-0441625
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation or Organization)
 
Identification Number)
 
 
904 Caribbean Drive, Sunnyvale, California
 
94089-1189
(Address of Principal Executive Office)
 
(Zip Code)
(408) 541-4191
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-accelerated Filer
 
¨  (Do not check if a Smaller Reporting Company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $4.4 billion based on the closing sale price for the registrant’s common stock on The NASDAQ Global Select Market on that date of $61.15 per share. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of February 18, 2016 there were 72,647,648 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Description
  
10-K Part
Portions of the Proxy Statement for the Annual Meeting of Shareholders (the “Proxy Statement”) to be held on April 26, 2016, and to be filed pursuant to Regulation 14A within 120 days after registrant’s fiscal year ended December 31, 2015 are incorporated by reference into Part III of this Report.
  
III



2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cepheid® , the Cepheid logo, GeneXpert®, Xpert® and SmartCycler are trademarks of Cepheid.




FORWARD-LOOKING STATEMENTS
The following discussion of our business, and other parts of this report, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “intend”, “potential”, “project” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including, but not limited to, the following: consistency of product availability and delivery; the effectiveness of our sales personnel and our ability to successfully expand and effectively manage increased sales and marketing operations, including expansion of our direct sales force to address the smaller hospital market and the independent reference laboratory market and expansion of our United States sales organization; sales organization productivity and the productivity and effectiveness of our distributors; speed and extent of test menu expansion and utilization; improving gross margins; execution of manufacturing operations; our reliance on a single contract manufacturer; our success in increasing product sales under the High Burden Developing Country (“HBDC”) program; the relative mix of commercial and HBDC sales and the relative mix of instrument and test sales; our success in commercial test and commercial system sales; our ability to sell directly to the smaller hospital market and the independent reference laboratory market; the performance and market acceptance of our new products, including our new point-of-care system; manufacturing costs associated with the ramp up of new products; test performance in the field; testing volumes for our products; unforeseen supply, development and manufacturing problems; our ability to manage our inventory levels; our ability to scale up manufacturing; our research and development budget; the potential need for intellectual property licenses for tests and other products and the terms of such licenses; the environment for capital spending by hospitals and other customers for our diagnostic systems; lengthy sales cycles in certain markets, including the HBDC program and the smaller hospital market; variability in systems placements and reagent pull-through in our HBDC program and the smaller hospital market; the impact of competitive products and pricing; sufficient customer demand; customer confidence in product availability and available customer budgets; the level of testing at clinical customer sites, including for healthcare-associated infections; our ability to consolidate customer demand through volume pricing; our ability to develop new products and complete clinical trials successfully in a timely manner for new products; our ability to obtain regulatory approvals for new products; uncertainties related to FDA regulatory and international regulatory processes; our ability to respond to changing laws and regulations affecting our industry and changing enforcement practices related thereto; our reliance on distributors in some regions to market, sell and support our products in certain geographic locations; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; costs of litigation, including settlement costs; our ability to manage geographically-dispersed operations; the scope and timing of actual United States Postal Service (“USPS”) funding of the Biohazard Detection System (“BDS”) in its current configuration; the rate of environmental testing using the BDS conducted by the USPS, which will affect the amount of consumable products sold; underlying market conditions worldwide; the impact of foreign currency exchange; protection of our intellectual property and proprietary information; and the other risks set forth under “Risk Factors” and elsewhere in this report. We neither undertake, nor assume any obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.

PART I
 
ITEM 1.     BUSINESS
OVERVIEW
We are a molecular diagnostics company that develops, manufactures and markets fully-integrated systems for testing in the Clinical and Non-Clinical markets. Our systems enable fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Molecular testing historically has involved a number of complicated and time-intensive steps, including sample preparation, DNA amplification and detection. Our easy-to-use systems integrate these steps and analyze complex biological samples in our proprietary test cartridges. We were first to the U.S. market with a Clinical Laboratory Improvement Amendments (“CLIA”) moderate complexity categorization for an amplified molecular test and the majority of our products are moderately complex, expanding our market opportunity beyond high complexity laboratories.

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Our primary offering is the GeneXpert system, which integrates sample preparation in addition to DNA amplification and detection. The GeneXpert system is designed for a broad range of user types ranging from reference laboratories and hospital central laboratories to satellite testing locations, such as emergency departments and intensive care units within hospitals as well as physician offices and other alternate site laboratories. The GeneXpert System is available in one, two, four, and 16-module configurations and we also offer the fully automated Infinity 48 and 80-module systems, with the 80-module system enabling more than 2,000 tests to be run during a 24-hour period, depending on test selection. The GeneXpert Xpress System is a customized GeneXpert System comprised of a single module and a tablet computer with an ATM-like interface specifically for the CLIA-waived environment. Leveraging existing cartridge technology, our GeneXpert Omni, which we expect to launch in 2016, will allow for accurate clinical molecular diagnostic testing in locations around the world that demand portability, connectivity and ease-of-use, ranging from resource-limited settings to a neighborhood specialty clinic. We also offer the SmartCycler system, which integrates DNA amplification and detection to allow fast analysis of a sample.
The GeneXpert system, including the Infinity systems and the Omni, represents a paradigm shift in molecular diagnostics in terms of ease-of-use, flexibility and scalability, producing accurate results in a timely manner with minimal risk of contamination. Our Xpert tests for use on the GeneXpert system are unique in that they typically require less than two minutes of hands-on time for unprecedented ease of use, fast results, in most cases approximately one hour, and the ability to do testing in any workflow environment: full random access; on-demand; or traditional batch testing.
The paradigm shift represented by the GeneXpert system includes: 1) the ability to perform multiple, highly accurate and short time-to-result molecular diagnostic tests, at any time, even if the system is simultaneously performing other tests, either in a batch or on-demand mode; 2) the system’s ease-of-use, which enables it to be operated without the need for highly-trained laboratory technologists; and 3) the scalability of the instrument, currently from one to 80 modules, enabling it to serve high volume testing requirements as well as lower volume requirements for smaller institutions or for testing at the point of patient care. Our GeneXpert system can provide fast results with frequently superior test sensitivity and specificity over comparable systems on the market today that are integrated but have open architectures. Our GeneXpert system operates with an entirely closed cartridge, reducing the likelihood of human error and contamination. As a result, the system is particularly well suited to perform “nested” PCR, a detection method that can provide an enhanced level of sensitivity and specificity, but that has historically been discouraged because of the high risk of cross-contamination during processing in an open lab environment. This method performs an additional amplification of the target sequence after the first PCR amplification.
We currently have available a broad and expanding menu of tests for use on our systems, spanning healthcare-associated infections, critical infectious disease, sexual health, virology, oncology and genetics. Our reagents and tests are marketed along with our systems on a worldwide basis.
OUR STRATEGY
Our objective is to become the leading supplier of integrated systems and tests for molecular diagnostics. Key elements of our strategy to achieve this objective include:
Provide a fully-integrated molecular testing solution to the Clinical market. We are focusing our investments on selling our systems and tests to the Clinical market and we believe our GeneXpert system will continue to significantly expand our presence in the Clinical market due to its ability to deliver accurate and fast results, ease of use, flexibility and scalability. Features of the GeneXpert system and Xpert tests include:
an approach by which the reagents are typically prepackaged in a single vessel (the test cartridge) into which the specimen is added;
no further user intervention once the Xpert cartridge is loaded into the GeneXpert system;
all three phases of PCR: 1) sample preparation, 2) amplification and 3) detection, are performed within the single sealed test cartridge automatically;
primarily moderate complexity CLIA categorized, amplified molecular tests, which means the GeneXpert system can be operated without the need for highly-trained laboratory technologists. Additionally, we are entering the CLIA-waived market, which will enable certain of our tests to be run in point-of-care environments. For example, in December 2015, the FDA granted a CLIA waiver for our Xpert Flu+RSV Xpress test for use on our GeneXpert System, and we are targeting additional CLIA-waived tests beginning in late 2016. The Xpert Flu+RSV Xpress is the first PCR panel test to achieve a CLIA waiver, and the first in a series of reference-quality molecular tests that we intend to deliver to the point-of-care market over the next several years;

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commercial availability in a variety of configurations ranging from one to 80 individual test modules, which enables testing in environments ranging from low volume testing to high volume, near-patient, core or central lab testing, and system capacity that can be expanded in support of growing test volumes by adding additional modules;
notably, to our knowledge, the only truly scalable real-time PCR system that operates entirely within a closed system architecture, reducing hands-on time, reducing the likelihood of human error and contamination, and enabling nested PCR capability, a proven process for maximizing real-time PCR sensitivity and specificity; and
full random access whereby different tests for different targets may be run simultaneously in different modules in the same GeneXpert system, which increases potential utilization and throughput of the system and also enables on-demand or “STAT” testing, whereby the user can add a new test to the system at any time without regard to the stage of processing of any other test on the system.
Continue to develop and market new tests. We plan to capitalize on our strengths in nucleic acid chemistry and molecular biology to continue to develop new tests for our systems and offer our customers the broadest menu of Xpert tests designed to address many of the highest volume molecular test opportunities. Our strategy is to offer a portfolio of Xpert tests spanning healthcare-associated infections, critical infectious disease, sexual health, virology, oncology and genetics. For example, Xpert HPV, Xpert Carba-R, Xpert Norovirus, Xpert Flu/RSV XC, and Xpert Trichomonas were all made commercially available in all markets that recognize the CE Mark during 2014 and Xpert HIV-1 Viral Load achieved CE Mark in December 2014. In 2015, Xpert Trichomonas received FDA clearance, our Xpert Flu+RSV Xpress received a CLIA waiver from the FDA, and Xpert Ebola received Emergency Use Authorization from the FDA and was listed as eligible for procurement to Ebola-affected countries by the World Health Organization. Our Xpert Ebola test, Xpert HIV-1 Qualitative, Xpert, HCV Viral Load, and Xpert BCR-ABL Ultra also achieved CE Mark during 2015. Additionally, in February 2015, we received clearance from the FDA for expanded claims on our Xpert MTB/RIF test. Our cumulative menu now stands at 23 tests that have achieved CE mark available internationally and 19 tests FDA cleared in the United States.
Obtain additional target rights. We expect to continue to expand our collaborations with academic institutions and commercial organizations to develop and obtain target rights to various critical infectious disease and oncology targets. In addition, we expect to focus key business development activities on identifying critical infectious disease and oncology targets held by academic institutions or commercial organizations for potential license or acquisition.
Extend geographic reach. Our European sales and marketing operations are headquartered in France. As of December 31, 2015, we had direct sales forces in Australia, the Benelux region, France, Germany, Hong Kong, Italy, South Africa and the United Kingdom, and we have offices in Brazil, China, India, Japan and the United Arab Emirates. We expect to continue to expand our international commercial operations capability on both a direct and distributor basis in 2016 and future years.
Extend High Burden Developing Countries sales programs. We expect to continue to expand our presence in HBDCs following the World Health Organization’s endorsement of the Xpert MTB/RIF test in late 2010 to deliver GeneXpert systems and Xpert tests, including virology and Ebola, to HBDCs at a discount to our standard commercial prices. We believe that participation in the HBDC program considerably broadens the geographic reach of our products and increases recognition of the Cepheid brand and product portfolio.
PRODUCTS
Our product portfolio consists of tests, reagents and systems for the Clinical and Non-Clinical markets. Our main system is the GeneXpert system, including the Infinity systems, which incorporates sample preparation, nucleic acid extraction and purification, DNA amplification, and detection into a small, self-contained cartridge, enabling fast molecular testing 24 hours a day, 7 days a week, offering medically relevant results when and where they are needed most. We also offer our first generation system, the SmartCycler, which integrates DNA amplification and detection for fast batch or random access analysis in “real-time.”

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In the Clinical market, we offer tests for the GeneXpert system in the areas of healthcare-associated infections, critical infectious disease, sexual health, virology, oncology and genetics. These tests include U.S. Food and Drug Administration (“FDA”) cleared products, such as IVD medical devices, CE Marked products (“CE IVD”) and Research Use Only (“RUO”) tests. As of December 31, 2015, our Xpert menu includes the following FDA and CE IVD approved tests: 
l Xpert BCR-ABL Monitor and BCR-ABL Ultra (CE IVD only)
l Xpert Factor II and Factor V Leiden
l Xpert Carba-R (CE-IVD Only)
l Xpert GBS for Group B Streptococcus
l Xpert C. difficile
l Xpert GBS for Lim broth (FDA only)
l Xpert C. difficile/epi (FDA only)
l Xpert HIV-1 Viral Load (CE-IVD Only)
l Xpert CT/NG
l Xpert HIV-1 Qualitative (CE-IVD Only)
l Xpert CT (CE-IVD Only)
l Xpert HCV Viral Load (CE-IVD Only)
l Xpert EV for Enterovirus
l  Xpert HPV (CE-IVD Only)
l Xpert Flu
l Xpert Norovirus
l Xpert Flu/RSV XC
l Xpert Nasal Complete
l Xpert Flu+RSV (CLIA Waived, FDA Only)
l Xpert MRSA
l Xpert MRSA/SA-BC for Blood Culture
l Xpert Ebola
l Xpert MRSA/SA-SSTI for Skin and Soft Tissue
l Xpert Trichomonas
l Xpert MTB/RIF
l Xpert vanA for vancomycin resistant enterococci (FDA only)
l Xpert vanA/vanB (CE IVD only)
 
In the Non-Clinical market, the GeneXpert modules have been integrated into the BDS purchased by the USPS, utilizing our Bacillus anthracis test.
We also sell our SmartCycler system along with general use PCR reagents and reaction tubes.
RESEARCH AND DEVELOPMENT
The principal objective of our research and development program is to develop high-value clinical diagnostic products for the GeneXpert system. We focus our efforts on three main areas: 1) assay development efforts to design, optimize and produce specific tests that leverage the systems and chemistry we have developed and extend our product offering to customers; 2) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays and 3) engineering efforts to extend the capabilities of our systems. Total research and development expense was $115.8 million, $96.9 million and $80.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
SALES
We sell our products through both a direct salesforce and indirect distribution channels worldwide. Clinical market sales in the United States, Australia, France, the Benelux region, Germany, Hong Kong, Italy, South Africa, and the United Kingdom are handled primarily through our direct sales force, while sales in all other markets are handled primarily through distributors. In October 2014, we re-acquired certain product distribution rights and customer relationships from a former distributor that served hospitals with fewer than 150 beds in the United States. We continue to expand our direct sales capabilities, including in the international markets. Some of our customers in the United States are members of Group Purchasing Organizations (“GPOs”) and purchase products under GPO contracts. Sales to end customers who are part of GPOs represented 30%, 36%, and 41% of total sales for the years ended December 31, 2015, 2014 and 2013, respectively. There were no direct customers that accounted for 10% or more of the total sales for the years ended December 31, 2015, 2014 and 2013.
Distribution and collaboration arrangements
Life Technology Corporation. We are party to a collaboration agreement with Life Technologies Corporation previously known as Applied Biosystems Group (“LIFE”), to develop reagents for use in the USPS BDS program, which was developed by the consortium led by Northrop Grumman Corporation. Under the agreement, reagents are manufactured by LIFE for packaging by us into our GeneXpert test cartridges and sold by us for use in the BDS.

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USPS BDS Program. We are part of a consortium led by Northrop Grumman to develop the BDS for the USPS. This consortium was awarded a production contract, and installations were completed at the end of 2005. We have entered into multiple contracts with Northrop Grumman for the purchase of anthrax test cartridges and associated materials used in BDS, which began in 2007 and will last through September 30, 2016. In the fourth quarter of 2012, we entered into an agreement directly with the USPS to sell the anthrax test cartridges and associated materials used in BDS directly to USPS through the period ending September 30, 2016. We are currently in negotiations to extend the agreement.
Foundation for Innovative New Diagnostics. We are party to an agreement with Foundation for Innovative New Diagnostics ("FIND") to develop a simple, fast test that can detect mycobacterium tuberculosis and associated rifampin resistance from human sputum samples. Under the agreement, we were responsible for the development of a 6-color GeneXpert instrument to accomplish such a test and the development of an enhanced manufacturing line for the manufacture of test cartridges used in the test. The original supply term of the agreement is for 12 years, unless terminated by either party in accordance with relevant provisions of the agreement. In July 2009, the supply term of the agreement was extended for another year for further specified enhancements. In January 2011, the supply term of the agreement was extended for another year, now set to expire in 2020, and a new agreement was signed for the development of our Xpert HIV-1 Viral Load test. In December 2014, the Xpert HIV-1 Viral Load achieved CE-IVD status under the European Directive on In Vitro Diagnostic Medical Devices which was the final milestone of the agreement. Under the Xpert HIV agreement, FIND funded $5.1 million in development costs during the term of the two-year contract. In October 2014, we announced a collaboration to develop Xpert MTB/RIF Ultra with FIND and Rutgers New Jersey Medical School to develop a next-generation test for Mycobacterium tuberculosis (TB) with increased sensitivity to aid in detection of patients with smear-negative TB, which is often associated with HIV co-infection. Xpert MTB/RIF Ultra will run on our existing 6-color GeneXpert Systems. FIND agreed to fund up to $3.0 million in development costs throughout the two-year contract. In December 2015, we announced an extension of our collaboration with FIND to bring point-of-care tuberculosis diagnosis to all levels of the health system in low and middle-income countries. The work under the collaboration will focus on evaluating and implementing our new GeneXpert Omni system, which we expect to launch in 2016, and Xpert MTB/RIF Ultra test, in addition to assessing the system's cloud-based connectivity.
MTB/RIF Buy-Down Program for the HBDC Market. Beginning in August 2012, we announced the first in a series of agreements with the Bill & Melinda Gates Foundation (“BMGF”), the United States President’s Emergency Plan for AIDS Relief (PEPFAR), the United States Agency for International Development (USAID) and UNITAID to buy-down the price of the Xpert MTB/RIF test in an effort to drive adoption of the technology as a critical tool in interrupting the transmission cycle of tuberculosis in HBDCs. The purpose of the buy-down program was to decrease the price per test of Xpert MTB/RIF for HBDC customers to $9.98. Under the agreements, BMGF funded $3.5 million, USAID/PEPFAR funded $3.5 million and UNITAID funded $3.2 million.
Xpert Ebola. In November 2014, we announced a grant award of up to $3.4 million co-financed by the Paul G. Allen Family Foundation and the BMGF to develop Xpert Ebola, a fast Ebola test to be run on our GeneXpert Systems.
Henry Schein. In January 2016, we entered a non-exclusive distribution agreement with Henry Schein to sell our GeneXpert System and menu of 18 Xpert tests spanning healthcare associated infections, critical infectious disease, and sexual health into non-acute laboratories in the United States. Henry Schein will also distribute Cepheid’s future CLIA-waived products when they become available, including the GeneXpert Omni and the CLIA-waived Xpert Flu+RSV assay that is available today.
MANUFACTURING
In our manufacturing facilities, we produce reagents and tests for use on our GeneXpert and SmartCycler systems. Our cartridge manufacturing operation is largely vertically integrated, from plastics and chemistries, through cartridge assembly and completion. We assemble our disposable reaction tubes and cartridges on custom, automated assembly lines, which can be systematically replicated as we expand our production capacity. Our primary manufacturing locations for reagents and tests are in Sunnyvale, California and Stockholm, Sweden.
For manufacturing of our GeneXpert systems, we use a single contract manufacturer. This outsourced manufacturing approach, which was implemented in fiscal 2015, allows us to focus our resources on the design, sales and marketing of our products.
We depend on suppliers for various components used in the manufacture of the GeneXpert and SmartCycler systems, and our disposable reaction tubes and cartridges, some of which are our sole source for such components.

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Our facilities and manufacturing processes are designed to comply with the quality standard set by the International Organization for Standardization and the FDA’s Quality System Regulations, enabling us to market our systems in the Clinical and Non-Clinical markets worldwide.
BACKLOG
Our aggregate backlog totaled $30.7 million and $31.7 million as of December 31, 2015 and 2014, respectively. Our backlog is comprised of firm orders, all of which are expected to be converted into sales in 2016. Some of our customers may cancel or reschedule orders without substantial penalty. We do not believe that aggregate backlog as of any particular date is indicative of future revenue.
COMPETITION
We face intense competition from a number of companies that offer products in our target markets, some of which have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do. These competitors include:
companies developing and marketing sequence detection systems for production of laboratory-developed tests;
diagnostic companies; and
companies developing or offering biothreat detection technologies.
Several companies provide systems and reagents for DNA amplification or detection. Life Technologies Corporation (acquired by Thermo Fisher Scientific) and F. Hoffmann-La Roche Ltd. (“Roche”) sell systems integrating DNA amplification and detection to the commercial market. Roche, Abbott Laboratories (“Abbott”), Becton Dickinson and Company, Qiagen N.V., Hologic Inc., Luminex Corporation, Meridian Bioscience, Inc., bioMerieux SA, and Quidel Corporation sell nucleic acid detection systems, some with separate robotic batch DNA purification systems, and sell reagents to the Clinical market. Other companies, such as Nanosphere Inc., Alere Inc. (which announced an agreement to be acquired by Abbott in February 2016), and GenMark Diagnostics, Inc., offer molecular tests. Additionally, we anticipate that in the future, additional competitors will emerge that offer a broad range of competing products.
In many instances, particularly in the clinical genetics assessment area, our competitors have substantially greater financial, technical, research and other resources, and larger, more established marketing, sales, distribution and service organizations. Moreover, these competitors may offer broader product lines and tactical discounts and have greater name recognition. If we fail to compete effectively against these and other competitors, we could lose sales, and our business will be harmed.
We believe that the principal competitive factors affecting sales of molecular diagnostic systems include the test accuracy, ease of use, total cost ownership, price, breadth of test menu, and reliability. We believe our products better integrate the various processes associated with DNA and RNA analysis than other currently available equipment, and that the speed, portability, flexibility, reliability and ease of use of our products are competitive.
GOVERNMENT REGULATION
In the Clinical market, our products are regulated as medical device products by the FDA and comparable agencies of other countries. For more information about government regulation, see "Risk Factors - The regulatory processes applicable to our products and operations are expensive, time-consuming and uncertain, and may prevent us from obtaining required approvals for the commercialization of some of our products" in Item 1A of this Form 10-K.
INTELLECTUAL PROPERTY
We integrate capabilities in system design, development, production and DNA amplification technologies, along with design, development and manufacture of primers, probes, dyes, quenchers and other individual reagent components. We have and are continuing to develop our own proprietary intellectual property along with licensing specific third-party technologies.
Our competitive success will be affected in part by our continued ability to obtain and maintain patent protection for our inventions, technologies and discoveries, including intellectual property that includes technologies that we license. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements, licenses and other contractual provisions and technical measures to maintain and develop our competitive position with respect to intellectual property. For more information about our ability to maintain and develop our competitive position with respect to intellectual property, see "Risk Factors - If we fail to maintain and protect our intellectual property rights, our competitors could use our technology to develop competing products and our business will suffer" in Item 1A of this Form 10-K.

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We could be subject to third-party claims that we require additional licenses for our products, and such claims would interfere with our business. From time to time, third parties have contacted us regarding their intellectual property, whether to license intellectual property, or in some instances, alleging potential infringement. If our products infringe the intellectual property rights of others, we could face costly litigation, which could cause us to pay substantial damages and limit our ability to sell some or all of our products. Even if our products were determined not to infringe the intellectual property rights of others, we could incur substantial costs in defending any such claims. Please refer to Part I, Item 3 “Legal Proceedings” for a discussion of current litigation surrounding intellectual property rights.
We hold an exclusive license to key technologies from Lawrence Livermore National Laboratory (“LLNL”) related to thermal cycling with integrated optical detection. This license is limited to the fields of nucleic acid analysis and ligand binding tests and contains diligence and U.S. preference provisions. The LLNL technologies are the basis of our I-CORE module and encompass the key I-CORE features.
In January 2007, we entered into a sublicense agreement with bioMerieux SA, pursuant to which bioMerieux SA granted us a non-exclusive, worldwide, irrevocable sublicense to certain patents that relate to the diagnosis of MRSA. The patents are owned by Kainos Laboratories Inc. and Professor Keiichi Hiramatsu and have been exclusively licensed to bioMerieux SA with the right for bioMerieux SA to sublicense. Under the sublicense agreement, and subject to certain limitations set forth therein, we are able to use the licensed rights to develop and sell products for use with our GeneXpert and SmartCycler systems.
In February 2013, we entered into exclusive license agreements with Oregon Health and Science University ("OHSU") related to breast and prostate cancer detection. We also entered into exclusive license agreements with Johns Hopkins University ("JHU") related to breast and pancreatic cancer detection in July 2015. Under these license agreements, we will be able to make, use, distribute and sell products incorporating patented technology from both OHSU and JHU for use with our GeneXpert system.
We intend to actively pursue acquisitions of additional molecular markers and/or complementary products, technologies or companies in the fields of oncology, critical infectious diseases and other fields appropriate for molecular diagnostics.
ACQUISITIONS
In October 2014 we re-acquired certain product distribution rights and acquired customer relationship assets from a former distributor for $21.0 million, of which $18.0 million and $3.0 million was paid in fiscal 2014 and 2015, respectively. In 2013, we acquired local distributors’ businesses and assets in foreign markets for total consideration of $3.7 million, net of cash received.
EMPLOYEES
As of December 31, 2015, we had approximately 1,700 full-time equivalent employees worldwide. At December 31, 2015, none of our U.S. employees were represented by a labor union. Many of our employees in Sweden are represented by labor unions and employed under a collective bargaining agreement. We consider our employee relations to be good.
SEASONALITY
Our sales may be subject to seasonal fluctuations driven primarily by the timing and severity of seasonal illnesses such as influenza, respiratory syncytial virus, enteroviruses, and norovirus which are most prevalent in the first and fourth calendar quarters of the year.


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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and discussion set forth certain information with regard to our current executive officers as of February 25, 2016:
Name
 
Age
 
Position
John L. Bishop
 
71
 
Chairman and Chief Executive Officer
Warren Kocmond
 
56
 
President and Chief Operating Officer
Daniel E. Madden
 
48
 
Executive Vice President, Chief Financial Officer
Michael Fitzgerald
 
56
 
Executive Vice President, Global Human Resources
Scott A. Campbell, Ph.D.
 
46
 
Corporate Vice President and Chief Regulatory Officer
David H. Persing, M.D., Ph.D.
 
60
 
Executive Vice President, Chief Medical and Technology Officer, and Director
Peter Farrell
 
51
 
Executive Vice President of Worldwide Commercial Operations
William E. Murray
 
62
 
Executive Vice President, General Counsel and Chief Privacy Officer
John L. Bishop. Mr. Bishop joined us as Chief Executive Officer and as a director in April 2002 and became the Chairman of the Board of Directors in February 2013. Mr. Bishop served as President and a director of Vysis, Inc., a genomic disease management company that was acquired by Abbott, from 1993 to 2002 and as Chief Executive Officer from 1996 to 2002. From 1991 until 1993, Mr. Bishop was Chairman and Chief Executive Officer of MicroProbe Corporation, a biotechnology company, and, from 1987 until 1991, of Source Scientific Systems, a biomedical instrument manufacturing company. From 1984 to 1986, Mr. Bishop was President and Chief Operating Officer of Gen-Probe From 1968 to 1984, Mr. Bishop held various management positions with American Hospital Supply Company and its affiliates, including a three-year assignment in Japan as an Executive Vice President and Chief Executive Officer of International Reagents Corp., a joint venture between American Hospital Supply Company and Green Cross Corporation. Mr. Bishop served as a director of Conceptus, Inc. and a member of its compensation committee until its acquisition by Bayer HealthCare LLC in June 2013. In addition, he has been a member of the AdvaMed Dx Board, since 2010, was elected Chairman of the Board in December 2013, and has served as a director of Veracyte, Inc., since November 2014.
Warren Kocmond. Mr. Kocmond joined us as Executive Vice President, Global Operations in May 2013 and was promoted to Executive Vice President and Chief Operating Officer in October 2014 and was promoted to President and Chief Operating Officer in February 2016. Prior to joining us, Mr. Kocmond served as Vice President of Global Operations at Lam Research Corporation, a wafer fabrication equipment and services supplier, from February 2012 until April 2013, where he was responsible for globally dispersed operations including a multi-billion dollar supply chain. From August 2009 until October 2011, Mr. Kocmond served as Executive Vice President, Memory Products Group and Global Operations at Verigy, Ltd., now a wholly owned subsidiary of Advantest Corp., a provider of semiconductor automatic test equipment. Mr. Kocmond served as the Chief Operating Officer of Electroglas, Inc., a supplier of semiconductor manufacturing equipment and software, from May 2008 until February 2009 when he was promoted to Chief Executive Officer and served in that role until July 2009. Prior to that, from May 2007 until May 2008, Mr. Kocmond served as the Senior Vice President of Global Operations for Affymetrix, Inc., a manufacturer of DNA microarrays.
Daniel E. Madden. Mr. Madden was promoted to Executive Vice President, Chief Financial Officer in August 2015 after serving as Vice President and Corporate Controller since June 2014. Additionally, from February 2015 through April 2015, he also served as our Acting Chief Financial Officer. Prior to joining us, from November 2012 through January 2014, Mr. Madden served as Vice President Finance and Corporate Controller of Symmetricom, Inc., a timekeeping technology developer, manufacturer and supplier, which was acquired by Microsemi Corporation in November 2013. From March 2008 through November 2012, Mr. Madden served as Vice President, Finance and Investor Relations of Symmetricom, Inc. From September 2005 through March 2008, Mr. Madden served as Vice President and Corporate Controller of Sonic Solutions, a computer software company. Mr. Madden began his career with Ernst & Young.
Michael Fitzgerald. Mr. Fitzgerald was promoted to Executive Vice President, Global Human Resources in January 2014, after serving as our Senior Vice President, Human Resources from January 2012 until January 2014. Prior to joining us, Mr. Fitzgerald was Senior Vice President of Human Resources at Verigy, Ltd (now a part of Advantest Corp.) from 2010 to 2012. Prior to Verigy, Mr. Fitzgerald was Vice President of Human Resources at Varian, Inc. (acquired by Agilent Technologies) from 2007 to 2010, and prior to that, he held various HR roles culminating in becoming the Global Director of HR Strategy and Planning for Vodafone Group, PLC from 1995 to 2006. He earned a bachelor’s degree in Political Science from the University of California, Berkeley, a master’s degree in Industrial Relations and Personnel Management from the University of London’s London School of Economics and Political Science, and a master's degree in management at McGill University in Montreal, Canada as part of the International Masters in Practicing Management Program. He is a current participant in the postgraduate diploma in applied social studies program at Trinity College, Dublin.

10


Scott A. Campbell, Ph.D. Dr. Campbell joined our Clinical Affairs group in 2010 and has held several positions of increasing responsibility prior to his appointment as our Chief Regulatory Officer in August 2015 and Corporate Vice President in September 2015. Prior to joining us, Dr. Campbell was Director of Clinical Affairs, and earlier, Director of Marketing for Nucleic Acids at Nanosphere from 2006-2010.  From 2003-2006, Dr. Campbell was the Executive Director of Marketing at Third Wave Technologies (now a part of Hologic, Inc.), and from 2001 to 2003, Dr. Campbell held various technical support, marketing, and strategic product development roles at Vysis, Inc. (now a part of Abbott Molecular).
David H. Persing, M.D., Ph.D. Dr. Persing first joined us as a director in May 2004, and became our Executive Vice President and Chief Medical and Technology Officer in August 2005. From 1999 to 2005, Dr. Persing was a research executive and Chief Scientific Officer at Corixa Corporation, a Seattle-based biotechnology company, until its acquisition by GlaxoSmithKline. From 1990 to 1999 he was a member of the Clinical and Research Faculty of the Mayo Clinic in Rochester, Minnesota where he conducted research on hepatitis viruses, tick-borne infections and molecular diagnostics. In 1992 he founded and directed the Molecular Microbiology Laboratory at Mayo Clinic. He has authored over 270 peer-reviewed articles and has served as Editor in Chief for four textbooks on Molecular Diagnostics, the most recent of which was published by ASM press in 2011.
Peter Farrell. Mr. Farrell first joined us as Executive Vice President, International Commercial Operations in June 2014. In October 2014, he was promoted to Executive Vice President, Worldwide Commercial Operations. Prior to joining us, Mr. Farrell served as Divisional Vice President and General Manager at Abbott Point of Care, a division of Abbott Laboratories and a developer of handheld point of care testing products, from January 2012 until January 2014. From June 2006 until December 2011, Mr. Farrell served as the Divisional Vice President, Commercial Operations, managing numerous departments of Abbott Point of Care.
William E. Murray. Mr. Murray was promoted to Executive Vice President, General Counsel and Chief Privacy Officer in January, 2016. He joined us in 2010 as Vice President, IP - Oncology, responsible for Cepheid's cancer diagnostics business development. He assumed responsibility for worldwide commercial legal support in October 2011 and was appointed Chief Privacy Officer in October 2013. From 2002 to 2010, Mr. Murray was Division Counsel, Abbott Laboratories, responsible at various times for non-litigation patent matters for Abbott Diagnostics, Abbott Molecular and Abbott Point of Care.  Prior to Abbott, Mr. Murray served as Vice President, General Counsel and Secretary of Vysis, Inc. from 1994 to 2001.  Mr. Murray began his legal career with Amoco Corporation in 1983.

AVAILABLE INFORMATION
Our website is located at www.cepheid.com. We make available free of charge on our web site our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Information contained on our web site is not part of this Annual Report on Form 10-K or our other filings with the SEC. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The charters of our Audit Committee, our Compensation and Organizational Development Committee and our Nominating and Governance Committee, are available on the Investor Relations section of our website under “Corporate Governance”. Also available on that section of our website is our Code of Business Conduct and Ethics, which we expect every employee, officer, director, staffing agency worker and consultant to read, understand and abide by. This information is also available by writing to us at the address on the cover of this Annual Report on Form 10-K.

ITEM 1A.    RISK FACTORS
You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

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We have a history of operating losses and may not achieve profitability again.
We incurred operating losses in each annual fiscal year since our inception, except for 2011. For 2015 and 2014, we experienced a net loss of $48.5 million and $50.1 million, respectively. As of December 31, 2015, we had an accumulated deficit of approximately $342.2 million. We do not expect to be profitable for fiscal 2016 and our ability to be profitable in the future will depend on our ability to continue to increase our revenue, which is subject to a number of factors including our ability to continue to successfully penetrate the Clinical market, our ability to successfully market the GeneXpert system and develop and market additional GeneXpert tests, our ability to successfully expand our United States sales organization and international commercial operations and the success of our sales organization in selling our systems and tests, the success of GeneXpert Omni, our new point-of-care diagnostic platform, the success of our distributor relationships, particularly in expanding our offerings into non-acute care laboratory customers, including moderately complex physician office labs, our ability to secure regulatory approval of additional GeneXpert tests, our ability to gain FDA regulatory and international regulatory clearance for our new products, our ability to continue to grow sales of GeneXpert tests, our ability to compete effectively against current and future competitors, the increasing number of competitors in our market that could reduce the average selling price of our products, the development of our HBDC program, the amount of products sold through the HBDC program and the extent of global funding for such program, our ability to penetrate new geographic markets, global economic and political conditions and our ability to increase manufacturing throughput. Our ability to be profitable also depends on our expense levels and product gross margin, which are also influenced by a number of factors, including: the mix of revenue from Clinical reagent sales and GeneXpert system sales as opposed to GeneXpert Infinity system sales and sales under our HBDC program, both of which have lower gross margins; the resources we devote to developing and supporting our products; increases in manufacturing costs associated with our operations, including those associated with ramp-up of new products; increases in costs related to our distributor relationships; our ability to improve manufacturing efficiencies; our ability to manage our inventory levels; third-party freight costs; the resources we devote to our research and development of, and compliance with regulatory processes for, potential products; license fees or royalties we may be required to pay; the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses; the impact of foreign currency exchange rates; and the prices at which we are able to sell our GeneXpert systems and tests. Our manufacturing expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue to offset higher expenses. These expenses or a reduction in the prices at which we are able to sell our products, among other things, may cause our net income and working capital to decrease. For example, our gross margin for the third quarter of 2015 was lower than expected due primarily to a higher proportion of lower-margin HBDC business and less commercial business as well as higher than expected manufacturing expenses associated with the ramp-up to volume of our newest virology tests. If we fail to grow our revenue, manage our expenses and improve our gross margin, we may never achieve profitability again. If we fail to do so, the market price of our common stock will likely decline.


12


Our operating results may fluctuate significantly, our customers’ future purchases are difficult to predict and any failure to meet financial expectations may result in a decline in our stock price.
Our quarterly operating results may fluctuate in the future as a result of many factors, such as those described elsewhere in this section, many of which are beyond our control. Because our revenue and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a good indicator of our future performance. Our operating results may be affected by the inability of some of our customers to consummate anticipated purchases of our products, whether due to adverse economic conditions, changes in internal priorities or, in the case of governmental customers, problems with the appropriations process, concerns over future United States federal government budgetary negotiations, variability and timing of orders and delays in our customer billing, and the impact of foreign currency exchange rates. Additionally, we have experienced, and expect to continue to experience, meaningful variability in connection with our commercial system placements and system placements and reagent pull-through in our HBDC program. This variability may cause our revenue and operating results to fluctuate significantly from quarter to quarter. Additionally, because of the limited visibility into the actual timing of future system placements, our operating results are difficult to forecast from quarter to quarter. Additionally, we expect moderate fluctuations from quarter to quarter in gross margin depending on product, geography and channel mix, including the relative mix of instrument and test sales, as well as the revenue contribution from our HBDC program, which has a lower gross margin than our commercial sales. If revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions and unexpected costs or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. However, if we have an unexpected increase in costs and expenses in a quarter, our quarterly operating results will be affected. For example, for the year ended December 31, 2013, we incurred certain costs and inventory reserve provisions related to our manufacturing scale up and restructuring activities. Additionally, in July 2014, we began to self-insure for a portion of employee health insurance coverage and we estimate the liabilities associated with the risks retained by us, in part, by considering actuarial assumptions which, by their nature, are subject to a high degree of variability. If the number or severity of claims for which we are self-insured increases, or if we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessments, our operating results may be affected. Additionally, we had higher than expected operating expenses and lower than expected gross margin for the third quarter of 2015, which were primarily driven by a higher proportion of lower-margin HBDC business and less commercial business and higher than expected manufacturing costs associated with the ramp-up to volume of our newest virology tests. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly.
If we are unable to manufacture our products in sufficient quantities and in a timely manner, our operating results will be harmed, our ability to generate revenue could be diminished, and our gross margin may be negatively impacted.
Our revenue and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. In the past, we have experienced lower than expected revenue due to intermittent interruptions in our supply chain, which also negatively impacted the efficiency of our manufacturing operations and our resulting gross margin. In addition, we may incur unexpected expenses in connection with the manufacturing scale-up of new products, which could negatively impact our gross margin. For example, in the third quarter of 2015, higher than expected manufacturing costs associated with new test ramp-up contributed to lower than expected gross margin.
We recently expanded our existing relationship with a contract manufacturer, which was previously responsible for the manufacture of a significant portion of our GeneXpert systems to now include the complete manufacturing, assembly, and testing of our GeneXpert systems. This outsourced manufacturing approach was fully in place as of the end of fiscal 2015. We create estimates in order to schedule production runs with this contract manufacturer. To the extent system orders materially vary from our estimates, we may experience constraints in our systems production and delivery capacity.
Any future interruptions we or our contract manufacturer experience in the manufacturing or shipping of our products in sufficient quantities and on a timely basis could delay our ability to recognize revenue and adversely affect our operating results in a particular quarter, could adversely affect our relationships with our customers, and could erode customer confidence in our product availability. Manufacturing problems can and do arise, as evidenced by our higher than expected manufacturing costs associated with new test ramp-up in the third quarter of 2015, and as demand for our products increases, any such problems could have an increasingly significant impact on our operating results. In the past, we have experienced problems and delays in production that have impacted our product yield and the efficiency of our manufacturing operations and caused delays in our ability to ship finished products, and we, or our contract manufacturer, may experience such delays in the future. We may not be able to react quickly enough to ship products and recognize anticipated revenue for a given period if we experience significant delays in the manufacturing process. In addition, we must maintain sufficient production capacity and inventory in order to minimize such delays, which carry fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins.

13


We have a limited number of suppliers for critical product components, and a contract manufacturer for the manufacture and assembly of our systems, and our reliance on such suppliers and contract manufacturer exposes us to increased risks associated with quality control, production delays and costs.
We depend on a limited number of suppliers for some of the components used in the manufacture of our systems and our disposable reaction tubes and cartridges. We also depend on a contract manufacturer for the manufacture and assembly of our systems and we recently expanded our existing relationship with this contract manufacturer, which was previously responsible for the manufacture of a substantial portion of our systems, to cover the manufacture and final assembly of all of our systems. During the fourth quarter, we completed our transition to having a contract manufacturer wholly responsible for the manufacture and final assembly of the entire line of GeneXpert systems. Strategic purchases of components are necessary for our business, but our reliance on a limited number of suppliers and a single contract manufacturer could expose us to reduced control over product quality and product availability, which could lead to product reliability issues and/or lower revenue and product shortages as a result of manufacturing capacity issues at our contract suppliers or manufacturer, or failure to adequately forecast demand for our components or systems. In addition, we cannot be certain that our suppliers or contract manufacturer will continue to be willing and able to meet our requirements according to existing terms or at all. If alternative suppliers or contract manufacturers are not immediately available, we will have to identify and qualify alternative suppliers or contract manufacturers and we could experience production delays and additional costs. We may not be able to find adequate alternative suppliers or contract manufacturers in a reasonable time period or on commercially acceptable terms, if at all. Shipments of affected products have been limited or delayed as a result of such problems in the past, and similar problems could occur in the future. For example, in the past, we have experienced intermittent interruptions in the supply of Xpert cartridge parts, which negatively impacted our product sales. In addition, some companies continue to experience financial difficulties, partially resulting from continued economic uncertainty. We cannot be assured that our suppliers or contract manufacturer will not be adversely affected by this uncertainty or that they will be able to continue to provide us with the components we need or to manufacture and assemble our systems. If we are unable to obtain the key source supplies for the manufacture of our products or we experience interruptions in the manufacture and assembly of our systems, product shipments may be delayed, which could harm customer relationships and our distributor relationships or force us to curtail operations or temporarily cease production of our products.
If our direct selling efforts for our products fail, our business expansion plans could suffer and our ability to generate sales will be diminished.
We have a relatively small sales force compared to some of our competitors. Further, we recently consolidated our global commercial operations under a single executive to emphasize end-to-end accountability, eliminate duplication and clarify decision responsibilities, and reduce organizational complexity. Our former Executive Vice President, International Commercial Operations, who joined us in June 2014, transitioned into the new role of Executive Vice President, Worldwide Commercial Operations in October 2014, where he is responsible for his prior duties and for our North American commercial operations, including the on-going expansion of our United States sales organization. Over the past 12 months, we have significantly increased the size of our United States sales force and redesigned our sales territories, both of which were substantially more disruptive on our sales than we had anticipated. It has also taken us more time than expected to recruit and train new hires for our sales team.
Additionally, in 2014 and 2015, we significantly restructured our marketing organization. We appointed the head of our marketing organization in mid-2014 and hired several new leaders in specific market segments during 2015. However, our marketing team has only worked together for a short period of time.
If we are unable to successfully scale our sales operations, successfully manage the increase in sales force and the related territory realignment and our marketing organization is unable to support our sales, our ability to expand our business and grow sales could be harmed and our expenses could increase. If the size of our sales force, recent changes to the organization of our sales force or other issues cause our direct selling efforts to fail, our business expansion plans could suffer and our ability to generate sales could be diminished, which would harm our business.
Our sales cycle can be lengthy, which can cause variability and unpredictability in our operating results.
The sales cycles for our systems can be lengthy, particularly during times of uncertain economic and political conditions, which makes it more difficult for us to accurately forecast revenue in a given period, and may cause revenue and operating results to vary significantly from period to period. For example, sales of our products often involve purchasing decisions by large public and private institutions where any purchases can require many levels of approval. Additionally, participants in our HBDC program may be dependent on funding from governmental agencies and/or non-governmental organizations; as a result, such customers’ purchase decisions may not be within their direct control and may be subject to lengthy administrative processes. Accordingly, the sales cycle in our HBDC program is lengthy and unpredictable. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions on the schedule anticipated.

14


If we cannot successfully commercialize our products, our business could be harmed.
If our tests for use on our systems do not continue to gain market acceptance or the launch of our GeneXpert Omni, our new point-of-care diagnostic platform, is not successful, we will be unable to generate significant sales growth, which may prevent us from achieving profitability. While we have received FDA clearance for a number of tests, these products may not experience increased sales. Many factors may affect the market acceptance and commercial success of our products, including:
our ability to fulfill orders;
the results of clinical trials needed to support any regulatory approvals of our tests;
our ability to obtain requisite FDA or other regulatory clearances or approvals for tests under development;
the timing of market entry for various tests for the GeneXpert systems and our new point-of-care diagnostic platform;
our ability to convince our potential customers of the advantages and economic value of our systems and tests over competing technologies and products;
the breadth of our test menu relative to competitors;
changes to policies, procedures or what are considered best practices in clinical diagnostics, including practices for detecting and preventing healthcare-associated infections;
the extent and success of our marketing and sales efforts;
the effectiveness of our distribution agreements, particularly in expanding our offerings into non-acute care laboratory customers, including moderately complex physician office labs;
the functionality of new products that address market requirements and customer demands;
the pricing of our products;
the level of reimbursement for our products by third-party payers; and
the publicity concerning our systems and tests.
In particular, we believe that the success of our business will depend in large part on our ability to continue to increase sales of our Xpert tests and our ability to introduce additional tests for the Clinical market and the successful launch of GeneXpert Omni, our new point-of-care diagnostic platform. We believe that successfully expanding our business in the Clinical market is critical to our long-term goals and success. We have limited ability to forecast future demand for our products in this market.

15


The regulatory processes applicable to our products and operations are expensive, time-consuming and uncertain, and may prevent us from obtaining required approvals for the commercialization of some of our products.
In the Clinical market, our products are regulated as medical device products by the FDA and comparable agencies of other countries. In particular, FDA regulations govern activities such as product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Some of our products, depending on their intended use, will require premarket approval from the FDA prior to marketing. In general, there are two types of FDA review processes applicable to our products: a premarket approval (“PMA”) and a 510(k) clearance. The PMA review process is much more costly, lengthy and uncertain, and generally takes from six months to one year or longer from submission, depending on whether an FDA advisory panel meeting is necessary. The 510(k) review process usually takes approximately 90 days from submission, although the process can take longer. Clinical studies are generally required to support both PMA and 510(k) submissions. Certain of our products for use on our GeneXpert and SmartCycler systems, when used for clinical purposes in the United States, may require PMA, and all such tests will most likely, at a minimum, require 510(k) clearance. Products intended for use in point-of-care settings, such as those intended to be used outside of the typical hospital laboratory environment (e.g., a physician office laboratory), require supplemental human factors clinical studies and an additional regulatory submission known as a CLIA waiver application. CLIA waiver applications may be submitted concurrently with a PMA or 510(k), or sequentially after a PMA or 510(k) review has been completed. Concurrent review of a CLIA waiver application with a PMA or 510(k) takes approximately 210 days from submission. Sequential review of a CLIA waiver application after a PMA approval or 510(k) clearance takes approximately 180 days from submission. Clinical trials are expensive and time-consuming, as are human factors studies required for a CLIA waiver. In addition, the commencement or completion of any clinical trials may be delayed or halted for any number of reasons, including product performance, changes in intended use, changes in medical practice and the opinion of evaluator Institutional Review Boards. Additionally, since 2009, the FDA has significantly increased the scrutiny applied to its oversight of companies subject to its regulations, including 510(k) submissions, by hiring new investigators and increasing inspections of manufacturing facilities. We continue to monitor the FDA Office of In Vitro Diagnostics and Radiological Health's ("OIR") implementation of its plan of action and analyze how its decisions will impact the approval or clearance of our products and our ability to improve our systems and tests. The OIR also deferred action on several other initiatives, including the creation of a new class of devices that would be subject to heightened review processes, following an Institute of Medicine report on the 510(k) regulatory process that was released in late July 2011. Many of the actions proposed by the OIR could result in significant changes to the 510(k) process, which could complicate the product approval process, although we cannot predict the effect of such changes and cannot ascertain if such changes will have a substantive impact on the approval of our products. If we fail to adequately respond to the increased scrutiny and streamlined 510(k) submission process, our business may be adversely impacted. In 2014, the FDA issued several important guidance documents on assessing risks and benefits associated with use of a 510(k) approach for PMA products, pre- and post-market balance, expedited PMA, and on oversight of laboratory developed tests. While the overall goal of these guidance documents was to streamline the regulatory process by applying a risk-based approach to the requirements for data collection in the pre- and post-market periods, it is uncertain how the guidance documents will actually be implemented. Likewise, the oversight of laboratory developed tests would require laboratories that compete with high risk (PMA) tests to go through FDA review. It is unclear if this guidance will be finalized. If it is, competition for PMA tests from laboratories would be reduced.
Further, our manufacturing facilities located in Sunnyvale and Lodi, California, Seattle, Washington and Stockholm, Sweden, where we assemble and produce cartridges and other molecular diagnostic kits and reagents, are subject to periodic regulatory inspections by the FDA and other federal and state and foreign regulatory agencies, as are the manufacturing facilities of our contract manufacturer. For example, these facilities are subject to Quality System Regulations (“QSR”) of the FDA and are subject to annual inspection and licensing by the States of California and Washington and European regulatory agencies. If we, or our contract manufacturer, fail to maintain these facilities in accordance with the QSR requirements, international quality standards or other regulatory requirements, the manufacture of our systems and tests could be suspended or terminated, and, in the case of a failure by our contract manufacturer, we could be required to find a suitable replacement for the manufacture and supply of our systems, which would prevent us from being able to provide products to our customers in a timely fashion, or at all, and therefore harm our business.

16


Failure to comply with the applicable regulatory requirements can result in, among other things, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant PMA for devices, withdrawal of marketing clearances or approvals, or criminal prosecution. For example, on July 27, 2015 Cepheid received a warning letter from the FDA regarding the Xpert Norovirus test describing deficiencies in the production quality system at Cepheid’s Stockholm, Sweden manufacturing facility. We are working with the FDA on resolution of the deficiencies. The Xpert Norovirus test manufactured in Sweden is not sold or distributed in the United States. As a result, it is our expectation that routine production and sale of the Xpert Norovirus test in the United States will not be affected. International sales of this test are not subject to FDA regulation. Until we successfully resolve the issues raised in the warning letter, the FDA will not approve any Cepheid Class III product. Cepheid has some Class III products currently in development but these are not currently expected to be available until 2017.
With regard to future products for which we seek 510(k) clearance, PMA, and/or a CLIA waiver (as appropriate) from the FDA, any failure or material delay to obtain such clearance or approval could harm our business. In addition, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may adversely affect our ability to obtain or maintain approval of our products and could harm our business.
Recently enacted healthcare legislation reforming the United States healthcare system, as well as future reforms, may have a material adverse effect on our financial condition and results of operations.
In 2010, the United States President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”), which makes changes that are expected to significantly impact the pharmaceutical and medical device industries, including a requirement that medical device manufacturers pay an excise tax (or sales tax) of 2.3% of certain United States medical device revenue. Following additional legislation, the medical device excise tax will apply beginning on January 1, 2018. This excise tax will apply to all or most of our products sold within the United States and may result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations
Legislative changes have been proposed and adopted since the PPACA was enacted. For example, on August 2, 2011, the United States President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, which could mean that such providers have less available funds to purchase our products.
The Protecting Access to Medicare Act of 2014 (“PAMA”) will require applicable laboratories to report all private payor reimbursement rates and the volumes for each test it performs. Although a final rule has yet to be published, the statute requires that Medicare establish reimbursement rates based on the weighted median of private insurance reimbursement rates effective January 1, 2017. The new Medicare rates would be subject to a maximum reduction of 10% a year for the initial three year period and a maximum of 15% a year for the subsequent three year period. There is no limit on the amount of potential rate increases. As a result, some of our customers in the United States may experience lower Medicare reimbursement rates for our products, which may adversely affect our business, financial condition and results of operations.
We expect that additional state and federal health care reform measures may be adopted in the future, any of which could have a material adverse effect on our industry generally and our ability to successfully commercialize our products. For example, the United States government has in the past considered, is currently considering and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. Further, state and local governments, as well as a number of foreign governments, are also considering or have adopted similar types of policies. Future significant changes in the healthcare systems in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business may be proposed or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.

17


Our HBDC program exposes us to increased risks of variability and unpredictable operating results.
Our HBDC program exposes us to risks that are additional and different from the risks associated with our commercial operations, including among other things:
the participants in our HBDC program are located in less developed countries, exposing us to customers in countries that may have less political, social or economic stability and less developed infrastructure and legal systems;
the sales cycle in our HBDC program is lengthy and unpredictable, as HBDC program participants are frequently dependent upon governmental agencies and/or non-governmental organizations with additional administrative processes, causing variability and unpredictability in our operating results and timing of cash collection;
our HBDC program has lower gross margins and, therefore, growth in our HBDC program as a percentage of total revenue negatively impacts our gross margins as a whole; and
our collaborative partners and other supporters, such as FIND, BMGF, USAID, UNITAID and the World Health Organization, may cease to devote financial resources to or otherwise cease to support our HBDC program, which may result in excess capacity and higher production costs.
Continued unpredictable sales cycles and lower gross margins and/or an adverse development relating to one or more of these risks could negatively impact our business, results of operations and financial condition. Additionally, our HBDC program facilitates the expansion of our commercial operations into additional geographic locations and, to the extent that our HBDC program is ineffective as a result of one or more of these risks, the international expansion of our commercial operations could suffer.
We may face risks associated with acquisitions of companies, products and technologies and our business could be harmed if we are unable to address these risks.
In order to remain competitive, obtain key competencies, consolidate our supply chain or sales force, acquire complementary products or technologies, or for other reasons, we may seek to acquire additional businesses, products or technologies. Even if we identify an appropriate acquisition or are presented with appropriate opportunities to acquire or make other investments, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, consummating the acquisition or effectively integrating the acquired business, product or technology into our existing business and operations. For example, in 2012, we acquired one of our plastic molders; in 2013, we acquired distributors in two of our international locations; and in 2014, we re-acquired certain product distribution rights and acquired customer relationship assets from a former distributor in the United States. We have limited experience in successfully acquiring and integrating businesses, products and technologies, and even if we are able to consummate an acquisition or other investment, we may not realize the anticipated benefits of such acquisitions or investments, including our recent acquisitions. We may face risks, uncertainties and disruptions, including difficulties in the integration of the operations and services of these acquisitions or any other acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future acquisitions are not as successful as we originally anticipate. If we fail to successfully integrate companies, assets, products or technologies that we acquire or if we fail to successfully exploit acquired product distribution rights and maintain acquired relationships with customers, our business could be harmed. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments or issue shares of common stock as consideration in the acquisition, the issuance of which could be dilutive to our existing shareholders. In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets. Furthermore, identifying, contemplating, negotiating or completing an acquisition and integrating an acquired business, product or technology could significantly divert management and employee time and resources.

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The current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters and makes it more likely that our actual results could differ materially from expectations.
Our operations and performance depend on global economic conditions, which have been adversely impacted by continued global economic uncertainty, political instability and military hostilities in multiple geographies, the recent strengthening of the United States dollar compared to foreign currencies, the volatility of the capital markets in the United States and abroad, and monetary and international financial uncertainties. These conditions have and may continue to make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and have caused our customers and potential customers to slow or reduce spending, particularly for systems. Furthermore, during economic uncertainty, our customers have experienced and may continue to experience issues gaining timely access to sufficient credit, which could result in their unwillingness to purchase products or an impairment of their ability to make timely payments to us. If that were to continue to occur, we might experience decreased sales, be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. Even with improved global economic conditions, it may take time for our customers to establish new budgets and return to normal purchasing patterns. We cannot predict the recurrence or worsening of any economic slowdown or the sustainability of improved economic conditions, worldwide, in the United States or in our industry. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
If certain of our products fail to obtain an adequate level of reimbursement from third-party payers, our ability to sell products in the Clinical market would be harmed.
Our ability to sell our products in the Clinical market will depend in part on the extent to which reimbursement for tests using our products will be available from government health administration authorities, private health coverage insurers, managed care organizations and other organizations. There are efforts by governmental and third-party payers to contain or reduce the costs of healthcare through various means and the continuous growth of managed care, together with efforts to reform the healthcare delivery system in the United States and Europe, has increased pressure on healthcare providers and participants in the healthcare industry to reduce costs. Consolidation among healthcare providers and other participants in the healthcare industry has resulted in fewer, more powerful healthcare groups, whose purchasing power gives them cost containment leverage. Additionally, third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products and whether adequate third-party coverage will be available.
The life sciences industry is highly competitive and subject to rapid technological change, if our competitors and potential competitors develop superior products and technologies, our competitive position and results of operations would suffer.
We face intense competition from a number of companies that offer products in our target markets, some of which have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Moreover, these competitors may offer broader product lines and tactical discounts and have greater name recognition. These competitors include:
companies developing and marketing sequence detection systems for production of laboratory-developed tests;
diagnostic companies; and
companies developing or offering biothreat detection technologies.
Several companies provide systems and reagents for DNA amplification or detection. Life Technologies Corporation (acquired by Thermo Fisher Scientific) and Roche sell systems integrating DNA amplification and detection to the commercial market. Roche, Abbott, Becton Dickinson and Company, Qiagen N.V., Hologic Inc., Luminex Corporation, Meridian Bioscience, Inc., bioMerieux SA, and Quidel Corporation sell nucleic acid detection systems, some with separate robotic batch DNA purification systems, and sell reagents to the Clinical market. Other companies, such as Nanosphere Inc., Alere Inc. (which announced an agreement to be acquired by Abbott in February 2016), and GenMark Diagnostics, Inc., offer molecular tests. Additionally, we anticipate that in the future, additional competitors will emerge that offer a broad range of competing products.
In addition, consolidation trends in the pharmaceutical and biotechnology industries, such as Abbott’s announced acquisition of Alere, have served to create fewer customer accounts and to concentrate purchasing decisions for some customers. Moreover, customers may believe that consolidated businesses are better able to compete as sole source vendors and therefore, prefer to purchase from such businesses.

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The life sciences industry is characterized by rapid and continuous technological innovation. We may need to develop new technologies for our products to remain competitive. One or more of our current or future competitors could render our present or future products technologically obsolete or uneconomical by reducing the prices of their competing products. In addition, the introduction or announcement of new products by us or others could result in a delay of or decrease in sales of existing products, as we await regulatory approvals and as customers evaluate these new products. We may also encounter other problems in the process of delivering new products to the marketplace such as problems related to design, development or manufacturing of such products or problems related to our distribution agreements or the effectiveness of our sales team, and as a result we may be unsuccessful in selling such products. Our future success depends on our ability to compete effectively against current technologies, as well as to respond effectively to technological advances by developing and marketing products that are competitive in the continually changing technological landscape. If we fail to compete effectively, we could lose sales, and our business will be harmed.
If our products do not perform as expected or the reliability of the technology on which our products are based is questioned, we could experience lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.
Our success depends on the market’s confidence that we can provide reliable, high-quality molecular test systems. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation and the public image of our products or technologies may be impaired if our products fail to perform as expected or our products are perceived as difficult to use. Despite testing, defects or errors could occur in our products or technologies. Furthermore, with respect to the USPS BDS program, our products are incorporated into larger systems that are built and delivered by others and we cannot control many aspects of the final system.
In the future, if our products experience a material defect or error, this could result in loss or delay of revenue, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Such defects or errors could also prompt us to amend certain warning labels or narrow the scope of the use of our products, either of which could hinder our success in the market. Furthermore, any product failure in the overall USPS BDS program, even if it is unrelated to our products, could harm our business. Even after any underlying concerns or problems are resolved, any widespread concerns regarding our technology or any manufacturing defects or performance errors in our products could result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs and claims against us.

If product liability lawsuits are successfully brought against us, we may face reduced demand for our products and incur significant liabilities.
We face an inherent risk of exposure to product liability claims if our technologies or systems are alleged to have caused harm or do not perform in accordance with specifications, in part because our products are used for sensitive applications. We cannot be certain that we would be able to successfully defend any product liability lawsuit brought against us. Regardless of merit or eventual outcome, product liability claims may result in:
decreased demand for our products;
injury to our reputation;
increased product liability insurance costs;
costs of related litigation; and
substantial monetary awards to plaintiffs.
Although we carry product liability insurance, if we become the subject of a successful product liability lawsuit, our insurance may not cover all substantial liabilities, which could harm our business.

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If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will be adversely affected.
We depend on relationships with distributors for the marketing and sales of our products in the Clinical and Non-Clinical markets in various geographic regions, and we have a limited ability to influence their efforts. We expect to continue to rely substantially on our distributor relationships for sales into other markets or geographic regions, which are key to our long-term growth strategy. For example, we recently entered into a significant, non-exclusive agreement with a distribution partner offering our GeneXpert Systems to its non-acute care laboratory customers in the United States and intend to enter into additional distribution agreements to penetrate this market. Relying on distributors for our sales and marketing could harm our business for various reasons, including:
agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners;
we may not be able to renew existing distributor agreements on acceptable terms;
our distributors may not devote sufficient resources to the sale of our products;
our distributors may be unsuccessful in marketing our products; and
our existing relationships with distributors may preclude us from entering into additional future arrangements with other distributors.
If any of our distribution agreements are terminated or if we elect to distribute products directly, as occurred in October 2014 when we terminated our distribution agreement with the Laboratory Supply Company and transitioned the smaller hospital market from a distributor sales model to a direct sales model, we may incur one-time costs related to such termination. Additionally, we will have to invest in alternative distribution agreements or additional sales personnel, which would increase future selling expenses and result in transition risks, such as difficulties maintaining relationships with specific customers and hiring appropriately trained personnel, any of which could result in lower revenue than we previously received from our distributor in that market. Further, if we elect to distribute new products directly in other markets or in new geographic regions, then we would be exposed to similar risks.
As we seek to enter into other distribution arrangements, we may not be able to enter into new distribution agreements on satisfactory terms, or at all. For example, we may desire to distribute our new point-of-care diagnostic platform through distributors and may not be able to enter into agreements relating to such distribution on satisfactory terms, or at all. If we fail to enter into acceptable distribution agreements or fail to successfully market our products, including our new point-of-care diagnostic platform, our product sales may decrease or we may be unable to successfully launch our new point-of-care diagnostic platform.
We rely on licenses of key technology from third parties and may require additional licenses for many of our new product candidates.
We rely on third-party licenses to be able to sell many of our products, and we could lose these third-party licenses for a number of reasons, including, for example, early terminations of such agreements due to breaches or alleged breaches by either party to the agreement. If we are unable to enter into a new agreement for licensed technologies, either on terms that are acceptable to us or at all, we may be unable to sell some of our products or access some geographic or industry markets. We also need to introduce new products and product features in order to market our products to a broader customer base and grow our revenue, and many new products and product features could require us to obtain additional licenses and pay additional license fees and royalties. Furthermore, for some markets, we intend to manufacture reagents and tests for use on our systems. We believe that manufacturing reagents and developing tests for our systems is important to our business and growth prospects but may require additional licenses, which may not be available on commercially reasonable terms or at all. Our ability to develop, manufacture and sell products, and our strategic plans and growth, could be impaired if we are unable to obtain these licenses or if these licenses are terminated or expire and cannot be renewed. We may not be able to obtain or renew licenses for a given product or product feature or for some reagents on commercially reasonable terms, if at all. Furthermore, some of our competitors have rights to technologies and reagents that we do not have, which may put us at a competitive disadvantage in certain circumstances and could adversely affect our performance.

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We may be subject to third-party claims that require additional licenses for our products and we could face costly litigation, which could cause us to pay substantial damages and limit our ability to sell some or all of our products.
Our industry is characterized by a large number of patents, claims of which appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. Moreover, from time to time, we are subject to patent litigation and receive correspondence and other communications from companies that ask us to evaluate the need for a license of patents they hold, and indicating or suggesting that we need a license to their patents in order to offer our products and services or to conduct our business operations. For example, we are currently engaged in litigation as further described in Part I, Item 3 “Legal Proceedings.” At this point in time we believe that it is probable that the Roche arbitration proceeding disclosed in Part I, Item 3 “Legal Proceedings” could result in a material loss. Accordingly, we recorded an estimated charge of $20 million as our best estimate of the potential loss as of December 31, 2014, which was included in our consolidated balance sheet. This continues to be our best estimate for this potential loss as of December 31, 2015. Further, if we were to incur a loss in the arbitration proceeding, depending on the ruling, we could also be responsible for certain attorney’s fees and interest. Given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that we may incur additional material losses but an estimate of such a charge cannot be made at this time. Additionally, in September 2012, we entered into an agreement with Abaxis pursuant to which, in exchange for a one-time payment by us to Abaxis of $17.3 million, all present and future litigation relating to the alleged infringement of certain Abaxis patents by us and our counterclaims against Abaxis were resolved. Even if we are successful in defending against any current or future patent claims, we would likely incur substantial costs in doing so. Any litigation related to existing claims and others that may arise in the future would likely consume our resources and could lead to significant damages, royalty payments or an injunction on the sale of certain products. Any additional licenses to patented technology could obligate us to pay substantial additional royalties, which could adversely impact our product costs and harm our business.
If we fail to maintain and protect our intellectual property rights, our competitors could use our technology to develop competing products and our business will suffer.
Our competitive success will be affected in part by our continued ability to obtain and maintain patent protection for our inventions, technologies and discoveries, including our intellectual property that includes technologies that we license. Our ability to do so will depend on, among other things, complex legal and factual questions. We have patents related to some of our technology and have licensed some of our technology under patents of others. Our patents and licenses may not successfully preclude others from using our technology. Our pending patent applications may lack priority over applications submitted by third parties or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented.

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In addition, there are numerous recent changes to the patent laws and proposed changes to the rules of the United States Patent and Trademark Office (the "USPTO"), which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, in September 2011, the United States enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act, including changes that would transition the United States from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements, licenses and other contractual provisions and technical measures to maintain and develop our competitive position with respect to intellectual property. Nevertheless, these measures may not be adequate to safeguard the technology underlying our products. For example, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property or otherwise act improperly in relation to our proprietary information, and we may not have adequate remedies for the breach or improper actions. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the United States. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. Furthermore, any efforts to enforce our proprietary rights could result in disputes and legal proceedings that could be costly and divert attention from our business. For example, the America Invents Act enacted proceedings involving various forms of post-issuance patent review proceedings, such as IPR and covered business method review. These proceedings are conducted before the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office. Each has different eligibility criteria and different types of challenges that can be raised. The IPR process permits any person (except a party who has been litigating the patent for more than a year) to challenge the validity of a patent on the grounds that it was known from the prior art. Recently, entities associated with hedge funds have begun challenging valuable pharmaceutical patents through IPR proceedings. The filing of such proceedings or the issuance of an adverse decision in such proceedings could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Data breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.
In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property and proprietary or confidential information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. Companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to state-sponsored attacks. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past year, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data privacy or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. For example, in the second quarter of 2015, an individual, whose association with us has since been terminated, accessed our system and downloaded material in an unauthorized manner. Such data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose other confidential information and sensitive business information. Cyber-attacks could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. There can be no assurance that our systems and data protection efforts will prevent future business interruptions or loss or corruption of data.

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The United States Government has certain rights to use and disclose some of the intellectual property that we license and could exclusively license it to a third party if we fail to achieve practical application of the intellectual property.
Aspects of the technology licensed by us under agreements with third party licensors may be subject to certain government rights. Government rights in inventions conceived or reduced to practice under a government-funded program may include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the United States federal government has the right to require us or our licensors (as applicable) to grant licenses which would be exclusive under any of such inventions to a third party if they determine that: (1) adequate steps have not been taken to commercialize such inventions in a particular field of use; (2) such action is necessary to meet public health or safety needs; or (3) such action is necessary to meet requirements for public use under federal regulations. Further, the government rights include the right to use and disclose, without limitation, technical data relating to licensed technology that was developed in whole or in part at government expense. At least one of our technology license agreements contains a provision recognizing these government rights.
We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some, if not all, of our intellectual property rights and thereby impair our ability to compete.
We rely on patents to protect a large part of our intellectual property. To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would also put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. We may also provoke these third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We cannot be assured that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Any public announcements related to such patent suits could cause our stock price to decline.
Our international operations subject us to additional risks and costs.
We conduct operations on a global basis. These operations are subject to a number of difficulties and special costs, including:
compliance with multiple, conflicting and changing governmental laws and regulations, including United States laws such as the Foreign Corrupt Practices Act and local laws that prohibit bribes and certain payments to governmental officials such as the UK Bribery Act 2010, data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, governmental rebate requirements and export requirements;
increased regulatory risk, including additional regulatory requirements different or more stringent than those in the United States;
laws and business practices favoring local competitors;
foreign exchange and currency risks;
exposure to risks associated with sovereign debt uncertainties in Europe and other foreign countries;
difficulties in collecting accounts receivable or longer payment cycles;
bank guarantee requirements;
import and export restrictions and tariffs;
difficulties staffing and managing foreign operations;
reliance on partners with local expertise and resources (for example, our relationship with a partner in India related to delivery, installation and acceptance of certain of our systems in India);
difficulties and expense in enforcing intellectual property rights;
business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions;
multiple conflicting tax laws and regulations;
timing and uncertainty of system orders; and
political and economic instability and outbreak of military hostilities.

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In addition, foreign court judgments or regulatory actions could impact our ability to transfer, process and receive transnational data, including data relating to customers or partners outside the United States. Such judgments or actions could affect the manner in which we operate or adversely affect our financial results.
We intend to expand our international sales and marketing activities, including through our direct sales operations and through relationships with additional international distribution partners. We may not be able to attract international distribution partners that will be able to market our products effectively or may have trouble entering geographic markets that are less receptive to sales from foreign entities. Our reliance on international distribution partners may subject us to increased financial and operational risk, as our revenue and costs will be impacted by how successfully such distribution partners sell our products in international markets.
Additionally, our continued expansion into less developed countries in connection with our HBDC program, which may have less political, social or economic stability and less developed infrastructure and legal systems, heightens the exposure of the risks set forth above. An adverse development relating to one or more of these risks, or any other risks associated with our operations in less developed countries, could adversely affect our ability to conduct and expand our business, which could negatively impact our business, results of operations and financial condition.
Our international operations could also increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services, require mandatory rebates to the government, or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business.
Further, as we continue to expand our operations worldwide and potentially sell our products and services to governmental institutions, compliance with Foreign Corrupt Practices Act and local laws that also prohibit corrupt payments to governmental officials such as the UK Bribery Act 2010 will become increasingly more important and we will need to continue to enhance our internal controls to ensure compliance with applicable laws and regulations.
We intend to expand our business into new geographic markets, and this expansion may be costly and may not be successful.
We plan to make substantial investments of both time and money as part of our continued and existing expansion into new geographic markets. For example, we expect to expand our operations in China and Japan in 2016. When we expand into new geographic markets, we incur set up costs for new personnel, facilities, travel, inventory and related expenses in advance of securing new customer contracts. We may face challenges operating in new business climates with which we are unfamiliar, including facing difficulties in staffing and managing our new operations, fluctuations in currency exchange rates, exposure to additional regulatory requirements including additional regulatory filing and approval requirements for our products, changes in political and economic conditions, and exposure to additional and potentially adverse tax regimes. Our success in any new markets will depend, in part, on our ability to anticipate and effectively manage these and other risks. It is also possible that we will face increased competition in any new markets as other companies attempt to take advantage of the new market opportunities, and any such competitors could have substantially more resources than we do and may have better relationships and a greater understanding of the region. If we fail to manage the risks inherent in our geographic expansion, we could incur substantial capital and operating costs without any related increase in revenue, which would harm our operating results. Further, even if our geographic expansion is successful, failure to effectively manage our growth in a cost-effective manner could result in declines in customer satisfaction, increased costs or disruption of our operations.
A significant portion of our sales are denominated in foreign currencies and currency fluctuations and hedging expenses may cause our revenue and earnings to fluctuate and our foreign currency hedging program may not adequately offset foreign currency exposure.
A significant percentage of our product sales are denominated in foreign currencies, primarily the Euro. When the United States dollar strengthens against these foreign currencies, as it has recently, the relative value of sales made in the respective foreign currency decreases. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker United States dollar and are adversely affected by a stronger United States dollar relative to those foreign currencies in which we transact significant amounts of business.

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We use foreign currency exchange forward contracts to hedge a portion of our forecasted revenue. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. We cannot predict future fluctuations in the foreign currency exchange rate. If the United States dollar appreciates significantly against certain currencies and our hedging program does not sufficiently offset the effects of such appreciation, our results of operations will be adversely affected and our stock price may decline. For example, the impact of foreign currency exchange contributed to lower than expected revenue and gross margin for fiscal 2015.
Additionally, the expenses that we recognize in relation to our hedging activities can cause our earnings to fluctuate. The changes in interest rate spreads between the foreign currencies that we hedge and the United States dollar impact the level of hedging expenses that we recognize in a particular period.

The nature of some of our products may also subject us to export control regulation by the United States Department of State and the Department of Commerce. Violations of these regulations can result in monetary penalties and denial of export privileges.
Our sales to customers outside the United States are subject to government export regulations that require us to obtain licenses to export such products. If the United States government was to amend its export control regulations, such amendments could create uncertainty in our industry, result in increased costs of compliance, and further restrict our ability to sell our products abroad. In particular, we are required to obtain a new license for each purchase order of our biothreat products that are exported outside the United States. Delays or denial of the grant of any required license, or changes to the regulations that make such delays or denials more likely or frequent, could make it difficult to make sales to foreign customers and could adversely affect our revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.
If we fail to retain key members of our staff, our ability to conduct and expand our business would be impaired.
We are highly dependent on the principal members of our management, scientific, and engineering staff and on the development of adequate succession plans for such employees. If we lose the services of any of these persons and we are unable to find a suitable replacement in a timely manner, we may be challenged to effectively manage our business and execute our strategy, which could seriously harm our product development and commercialization efforts. In addition, we require skilled personnel in areas such as microbiology, clinical, sales, marketing and finance. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. Attracting, retaining, developing and training personnel, including management, with the requisite skills remains challenging, particularly in the Silicon Valley, where our main office is located. For example, our former Chief Financial Officer ("CFO"), who had served as CFO since April 2008, left Cepheid in February 2015, and his successor, who was appointed in April 2015, left Cepheid in August 2015. Following his departure, we announced the appointment of our new CFO in August 2015. The effectiveness of the new leader in this role and any further transition as a result of this change, could have a negative impact on our results of operations. Additionally, if at any point we are unable to hire, train, develop and retain a sufficient number of qualified employees to support our growth, our ability to conduct and expand our business could be seriously reduced.

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We may face issues in connection with our recent implementation of an ERP system.
In order to support our growth, we recently implemented a new ERP system that became operational at the beginning of the first quarter of 2015. This process has been and continues to be complex and time-consuming and we expect to incur additional expenses as we continue to make enhancements to our integrated financial and supply chain management systems. For example, since implementation we have experienced delays in our customer billing and collection processes. Our ERP system implementation and additional enhancements to our financial and supply chain management systems may further disrupt our operations and may not result in improvements that outweigh its costs. Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business. Additionally, our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired while we are making further enhancements to our financial and supply chain management systems. Significant disruptions or operational impacts could have a material adverse impact on our results of operation.
If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.
Our research and development processes involve the controlled storage, use and disposal of hazardous materials, including biological hazardous materials. We are subject to foreign, federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. We may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration (“OSHA”) and the Environmental Protection Agency (“EPA”), and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act in the United States OSHA or the EPA may adopt regulations that may affect our research and development programs. We are unable to predict whether any agency will adopt any regulations that would have a material adverse effect on our operations.
The risk of accidental contamination or injury from hazardous materials cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our workers’ compensation insurance. We may not be able to maintain insurance on acceptable terms, if at all.
If a catastrophe strikes our manufacturing or warehousing facilities, we may be unable to manufacture or distribute our products for a substantial amount of time and we may experience inventory shortfalls, which would cause us to experience lost revenue.
Our manufacturing facilities are located in Sunnyvale and Lodi, California, Seattle, Washington, and Stockholm, Sweden. Although we have business interruption insurance, our facilities and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time. Various types of disasters, including earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities or the manufacturing facilities of our contract manufacturer. Earthquakes are of particular significance since our primary manufacturing facilities in California are located in an earthquake-prone area. In the event our existing manufacturing facilities or equipment, or the manufacturing facilities or equipment of our key contract manufacturer, are affected by man-made or natural disasters, we may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or ceased, it would seriously harm our business.
We might require additional capital to respond to business challenges or acquisitions, and such capital might not be available.
Though we completed a sale of $345 million of convertible senior notes in February 2014, we may in the future need to obtain additional equity or debt financing to respond to business challenges or acquire complementary businesses and technologies. Any additional equity or debt financing, however, might not be available when needed or, if available, might not be available on terms satisfactory to us. In addition, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our shareholders. In addition, these securities may be sold at a discount from the market price of our common stock and may include rights, preferences or privileges senior to those of our common stock. If additional equity or debt financing is needed and we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

27


We rely on relationships with collaborative partners and other third parties for development, supply and marketing of certain products and potential products, and such collaborative partners or other third parties could fail to perform sufficiently.
We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain collaborative relationships with other companies. Relying on collaborative relationships is risky to our future success for our products because, among other things:
our collaborative partners may not devote sufficient resources to the success of our collaborations;
our collaborative partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;
our collaborative partners may be acquired by other companies and decide to terminate our collaborative partnership or become insolvent;
our collaborative partners may develop technologies or components competitive with our products;
components developed by collaborators could fail to meet specifications, possibly causing us to lose potential projects and subjecting us to liability;
disagreements with collaborators could result in the termination of the relationship or litigation;
collaborators may not have sufficient capital resources;
collaborators may pursue tests or other products that will not generate significant volume for us, but may consume significant research and development and manufacturing resources;
we may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms; and
our collaboration may not result in the development of products that achieve commercial success or these collaborations could be terminated prior to developing any products.
Because these and other factors may be beyond our control, the development or commercialization of our products involved in collaborative partnerships may be delayed or otherwise adversely affected.
If we or any of our collaborative partners terminate a collaborative arrangement, we may be required to devote additional resources to product development and commercialization or we may need to cancel some development programs, which could adversely affect our product pipeline and business.
We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation.
We maintain our cash assets at commercial banks in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000. In the event of the commercial banks failing, we may lose the amount of our deposits over any federally-insured amount, which could have a material adverse effect on our financial conditions and our results of operations.
Our participation in the USPS BDS program may not result in predictable revenue in the future.
Our participation in the USPS BDS program involves significant uncertainties related to governmental decision-making and timing of purchases and is highly sensitive to changes in national priorities and budgets. The USPS continued to report significant losses for the 2015, 2014 and 2013 fiscal years. Budgetary pressures may result in reduced allocations to projects such as the BDS program, sometimes without advance notice. We cannot be certain that actual funding and operating parameters, or product purchases, will occur at currently expected levels or in the currently expected timeframe.

28


Compliance with laws and regulations governing public company corporate governance and reporting is complex and expensive.
We are subject to laws and regulations affecting our domestic and international operations in a number of areas. Many laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act of 2002 by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act and The NASDAQ Stock Market, impose obligations on public companies, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. Compliance with these laws, regulations and similar requirements can be onerous and inconsistent from jurisdiction to jurisdiction, which has required and will continue to require substantial management time and oversight and requires us to incur significant additional accounting, legal and compliance costs. Any such costs that may arise in the future as a result of changes in these laws and regulations or in their interpretation could individually or in the aggregate make our products and services more expensive to our customers, delay the introduction of new products in one or more regions or cause us to change or limit our business practices. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
Additionally, changes to existing accounting rules and standards and the implementation of new accounting rules or standards, such as the new lease accounting or revenue recognition rules, may adversely impact our reported financial results and business, and may further require us to incur greater accounting fees.
Our operating results could be materially affected by unanticipated changes in our tax provisions or exposure to additional income tax liabilities.
Our determination of our tax liability (like any company’s determination of its tax liability) is subject to review by applicable tax authorities. Any adverse outcome of such a review could have an adverse effect on our operating results and financial condition. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment, including our determination of whether a valuation allowance against deferred tax assets is appropriate. We expect to maintain such valuation allowance as long as there is insufficient evidence that we will be able to realize the benefit of our deferred tax assets. We reassess the realizability of the deferred tax assets as facts and circumstances dictate. If after future assessments of the realizability of the deferred tax assets, we determine that a lesser or greater allowance is required, or that no such allowance is appropriate, we will record a corresponding change to the income tax expense and the valuation allowance in the period of such determination. The uncertainty surrounding the future realization of our net deferred tax assets could adversely impact our results of operations. Although we believe our estimates and judgments are reasonable, including those related to our valuation allowance, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, convertible debt, business combinations and intangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.

29


The “conflict minerals” rule of the Securities and Exchange Commission, or SEC, has caused us to incur additional expenses, could limit the supply and increase the cost of certain metals used in manufacturing our products, and could make us less competitive in our target markets.
On August 22, 2012, the SEC adopted a rule requiring disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to obtain sourcing data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. The rule could limit our ability to source at competitive prices and to secure sufficient quantities of certain minerals used in the manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. We may incur material costs associated with complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products. We continue to investigate the presence of conflict materials within our supply chain.
We have indebtedness in the form of convertible senior notes.
In February 2014, we completed an offering of $345 million of convertible senior notes due in 2021 (the “Notes”).
As a result of the issuance of the Notes, we incurred $345 million principal amount of indebtedness, the principal amount of which we may be required to pay at maturity in 2021, or upon the occurrence of a make-whole fundamental change (as defined in the applicable indenture). There can be no assurance that we will be able to repay this indebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all. In addition, this indebtedness could, among other things:
make it difficult for us to pay other obligations;
make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow available for other purposes; and
limit our flexibility in planning for and reacting to changes in our business.
Conversion of the Notes may affect the price of our common stock.
The conversion of some or all of our Notes may dilute the ownership interest of existing shareholders to the extent we deliver shares of common stock upon conversion. Holders of the outstanding Notes will be able to convert them only upon the satisfaction of certain conditions prior to August 1, 2020. Upon conversion, holders of the Notes will receive cash, shares of common stock or a combination of cash and shares of common stock, at our election. Any sales in the public market of shares of common stock issued upon conversion of such notes could adversely affect the trading price of our common stock.

We have broad discretion in the use of the net proceeds from the issuance of our Notes and may not use them effectively.
We have broad discretion in the application of the net proceeds that we received from the issuance of the Notes, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our investors disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. We may invest the net proceeds from our Notes in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors, and may negatively impact the price of our securities.

30


Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt obligations and make necessary capital expenditures. If we are unable to generate the necessary cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may not have the ability to raise the funds necessary to settle conversions of the Notes or to repurchase the Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefor or Notes being converted. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions of the Notes as required by the indenture governing the Notes would constitute a default under the indenture governing the Notes. A default under the indenture governing the Notes or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the future indebtedness were to be accelerated after any applicable notice or grace periods, we might not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.
The Notes contain a conditional conversion feature, which, if triggered, may adversely affect our financial condition and operating results.
The Notes contain a conditional conversion feature. If such feature is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than non-current liability, which would result in a material reduction of our net working capital.
Our stock price is highly volatile and investing in our stock involves a high degree of risk, which could result in substantial losses for investors.
The market price of our common stock, like the securities of many other medical product companies, fluctuates over a wide range, and is likely to continue to be highly volatile in the future. During fiscal year 2015, the closing sale price of our common stock on The NASDAQ Global Select Market ranged from $30.02 to $63.52 per share. Because our stock price has been volatile, investing in our common stock is risky. Furthermore, volatility in the stock price of other companies has often led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management’s attention and resources, which could seriously harm our business, financial condition and results of operations.

31


Our charter documents may impede or discourage a takeover, which could reduce the market price of our common stock.
Our board of directors or a committee thereof has the power, without shareholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors or a committee thereof to create and issue a new series of preferred stock and certain provisions of our articles of incorporation and bylaws, including, without limitation, a classified board, advance notice requirements for shareholder proposals and nominations, and no cumulative voting, could impede a merger, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
Our headquarters are located in Sunnyvale, California. As of January 31, 2016, we owned or leased approximately 800,000 square feet of building space, primarily in the United States, of which approximately 83,000 square feet relates to a new headquarters building in Sunnyvale, California that we have not yet occupied. We own a building in Toulouse, France, and the remaining building space we occupy is pursuant to leases expiring through May 2029. Our manufacturing sites are located in the United States and Sweden. In February 2016, we finalized an agreement to purchase an additional 74,000 square feet of building space located in Lodi, California.
We believe our existing facilities and equipment are in good operating condition and are suitable for the conduct of its business.

ITEM 3.    LEGAL PROCEEDINGS
In May 2005, we entered into a license agreement with F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc. (“Roche”) that provided us with rights under a broad range of Roche patents, including patents relating to the PCR process, reverse transcription-based methods, nucleic acid quantification methods, real-time PCR detection process and composition, and patents relating to methods for detection of viral and cancer targets. A number of the licensed patents expired in the United States prior to the end of August of 2010 and in Europe prior to the end of August of 2011. In August 2010, we terminated our license to United States Patent No. 5,804,375 (the “375 Patent”) and ceased paying United States-related royalties. We terminated the entire license agreement in the fourth quarter of 2011. In August 2011, Roche initiated an arbitration proceeding against us in the International Chamber of Commerce pursuant to the terms of the terminated agreement. We filed an answer challenging arbitral jurisdiction over the issues submitted by Roche and denying that we violated any provision of the agreement. A three-member panel was convened to address these issues in confidential proceedings. On July 30, 2013, the panel determined that it had jurisdiction to decide the claims, a determination that we appealed to the Swiss Federal Supreme Court. On October 2, 2013, the arbitration panel determined that it would proceed with the arbitration while this appeal was pending. On February 27, 2014 the Swiss Federal Supreme Court upheld the jurisdiction of the arbitration panel to hear the case, and the case is continuing. We believe that we have not violated any provision of the agreement and that the asserted claim of the 375 Patent is expired, invalid, unenforceable and not infringed.

Based on our ongoing evaluation of the facts and circumstances of the case, we believe that it is probable that this arbitration proceeding could result in a material loss to Cepheid. Accordingly, we recorded an estimated charge of $20 million as our best estimate of the potential loss as of December 31, 2014, which was included in accrued and other liabilities in our consolidated balance sheet and this continues to be our best estimate for this potential loss as of December 31, 2015. If we were to incur a loss in the arbitration proceeding, depending on the ruling of the arbitrators, we could also be responsible for certain attorneys’ fees and interest; however, at this time, we are unable to estimate these potential amounts. Given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that we may incur an additional material charge, but an estimate of such charge cannot be made at this time. We continue to strongly dispute Roche’s claims and intend to vigorously defend against them.
On August 21, 2012, we filed a lawsuit against Roche in the United States District Court for the Northern District of California (“the Court”), for a declaratory judgment of (a) invalidity, expiration, and non-infringement of the 375 Patent; and (b) invalidity, unenforceability, expiration and non-infringement of United States Patent No. 6,127,155 (the “155 Patent”). On January 17, 2013, the Court issued an order granting a motion by Roche to stay the suit with respect to the 375 Patent pending resolution of the above noted arbitration proceeding. In the same order, the Court dismissed our suit with respect to the 155 Patent for lack of subject matter jurisdiction, without considering or ruling on the merits of our case. The Court left open the possibility that we could re-file our case against the 155 Patent in the future. We believe that the possibility that these legal proceedings will result in a material adverse effect on our business is remote.

32


On July 16, 2014, Roche filed a lawsuit in the Court, alleging that our Xpert MTB-RIF product infringes United States Patent No. 5,643,723 (the “723 Patent”), which expired on July 1, 2014. On September 15, 2014, we filed our answer and counterclaims denying Roche’s allegations of infringement and asking the Court to find the 723 Patent invalid, unenforceable and not infringed. On November 10, 2014, we filed a petition for inter partes review (“IPR”) of the 723 Patent in the USPTO and we filed a motion with the Court to stay this lawsuit pending the outcome of the IPR. On January 7, 2015, the Court issued an order staying the lawsuit pending the outcome of the IPR. On March 16, 2015, we filed a second petition for IPR of an additional claim of the 723 Patent. On June 11, 2015, the USPTO issued a decision declining to institute the first requested IPR. On July 13, 2015, we filed a request for reconsideration of the first petition for IPR with respect to certain challenged claims. On September 16, 2015, the USPTO denied the request for reconsideration. On September 17, 2015, the USPTO decided to institute our second petition for IPR. We believe that the possibility that these legal proceedings will result in a material loss is remote.
We may be subject to various additional claims, complaints and legal actions that arise from time to time in the normal course of business. Other than as described above, we do not believe we are party to any currently pending legal proceedings that will result in a material adverse effect on our business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

ITEM 4.    MINE SAFETY DISCLOSURES
Not Applicable.

33


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF THE EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock trades on The NASDAQ Global Select Market under the symbol “CPHD.” The high and low prices for our common stock for each quarter of our two most recent fiscal years, as reported on The NASDAQ Global Select Market, were as follows:
 
High
 
Low
Fiscal year ended December 31, 2015
 
 
 
First Quarter
$
59.62

 
$
52.19

Second Quarter
61.15

 
53.14

Third Quarter
63.52

 
44.17

Fourth Quarter
45.75

 
30.02

Fiscal year ended December 31, 2014
 
 
 
First Quarter
$
55.89

 
$
44.20

Second Quarter
54.51

 
40.15

Third Quarter
50.46

 
36.94

Fourth Quarter
56.47

 
42.26


On February 18, 2016, the last reported sale price of our common stock on The NASDAQ Global Select Market was $28.40 per share. On February 18, 2016, there were approximately 103 holders of record of our common stock. The actual number of shareholders is greater than the number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. The number of holders of record also does not include shareholders whose shares may be held in trust by other entities.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial condition.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about our equity compensation plans as of December 31, 2015. All outstanding awards relate to our common stock.
Plan Category
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuances under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders (1)(2)(3)
6,237,434

 
$
39.38

 
8,756,000

Equity compensation plans not approved by security holders (4)
203,566

 
$
41.79

 

Total
6,441,000

 
$
39.46

 
8,756,000

 

34


(1)
The number of securities remaining available for future issuance in column (c) includes (1) 2,495,000 shares of common stock authorized and available for issuance under our 2012 Employee Stock Purchase Plan (“2012 ESPP”) and (2) 6,261,000 shares of common stock authorized and available for issuance under our 2015 Equity Incentive Plan ("2015 Plan"). The number of shares authorized for issuance under the 2012 ESPP is subject to an annual increase equal to the lesser of (i) 500,000 shares or (ii) an amount determined by the Compensation and Organizational Development Committee of our Board of Directors. The number of securities to be issued to participants in column (a) does not include shares of common stock to be issued to participants in consideration of aggregate participant contributions under the 2012 ESPP as of December 31, 2015.
(2)
We issued securities under our 2015 Plan and 2006 Equity Incentive Plan (the "2006 Plan") in forms other than options, warrants or rights. In the future, we may issue stock awards, including but not limited to restricted stock awards, restricted stock units, stock bonus awards, stock appreciation rights and performance share awards. Under the terms of our 2015 Plan, each award other than a stock option or stock appreciation right will reduce the number of shares remaining available for future issuance in column (c) by 2.17 shares for each share subject to such award.
(3)
We have made awards of restricted stock and restricted stock units under our 2015 Plan and 2006 Plan that do not require a payment by the recipient to us at the time of exercise or vesting. Accordingly, the weighted average exercise price in column (b) does not take these awards into consideration.
(4)
Includes 56,625 shares of common stock issuable to Michael Fitzgerald, an executive officer, 40,625 shares of common stock issuable to Warren Kocmond, an executive officer, and 106,316 shares of common stock issuable to Peter Farrell, an executive officer, each made as non-plan inducement grants pursuant to Section 5635(c)(4) of The NASDAQ Stock Market Rules.


35


STOCK PRICE PERFORMANCE GRAPH
The following graph compares the cumulative 5-year total shareholder return on Cepheid’s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Biotechnology index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2010 and its relative performance is tracked through December 31, 2015.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cepheid, the NASDAQ Composite Index, and the NASDAQ Biotechnology Index
 * $100 invested on 12/31/10 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
Cepheid
100.00

 
151.25

 
148.84

 
205.15

 
237.98

 
160.57

NASDAQ Composite
100.00

 
100.53

 
116.92

 
166.19

 
188.78

 
199.95

NASDAQ Biotechnology
100.00

 
113.92

 
153.97

 
263.29

 
348.49

 
369.06

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

36


ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from our audited consolidated financial statements. The information below is not necessarily indicative of the results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below.
 
Fiscal Year
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share data)
Operating Results
 
 
 
 
 
 
 
 
 
Revenue
$
538,576

 
$
470,141

 
$
401,292

 
$
331,212

 
$
277,575

Cost of sales
269,864

 
229,327

 
207,933

 
153,365

 
122,840

Gross profit on revenue
268,712

 
240,814

 
193,359

 
177,847

 
154,735

Income (loss) from operations
(30,862
)
 
(34,086
)
 
(16,010
)
 
(21,324
)
 
3,815

Net income (loss)
(48,530
)
 
(50,149
)
 
(17,965
)
 
(20,043
)
 
2,627

Per Share Data
 
 
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
(0.67
)
 
$
(0.72
)
 
$
(0.27
)
 
$
(0.30
)
 
$
0.04

Diluted net income (loss) per common share
(0.67
)
 
(0.72
)
 
(0.27
)
 
(0.30
)
 
0.04

Shares used in computing basic net income (loss) per share
71,928

 
70,069

 
67,485

 
65,812

 
62,735

Shares used in computing diluted net income (loss) per share
71,928

 
70,069

 
67,485

 
65,812

 
66,750

Balance Sheet Information
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, short-term investments
$
322,715

 
$
293,392

 
$
74,909

 
$
95,779

 
$
115,008

Total assets
821,647

 
793,574

 
394,604

 
331,544

 
286,670

Short-term obligations:
 
 
 
 
 
 
 
 
 
Current portion of note payable
173

 
175

 
194

 
183

 

Current portion of deferred revenue
12,778

 
13,447

 
8,183

 
9,599

 
8,176

Long-term obligations:
 
 
 
 
 
 
 
 
 
Note payable, less current portion
820

 
1,073

 
1,479

 
1,685

 

Convertible senior notes, net
287,863

 
278,213

 

 

 

Accumulated deficit
(342,242
)
 
(293,712
)
 
(243,563
)
 
(225,598
)
 
(205,555
)
Total shareholders’ equity
369,983

 
354,215

 
285,240

 
247,542

 
211,833

Other Data
 
 
 
 
 
 
 
 
 
Working capital
$
413,986

 
$
381,264

 
$
148,528

 
$
147,090

 
$
148,153

 



37


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STRATEGY
We are a molecular diagnostics company that develops, manufactures and markets fully-integrated systems for testing in the Clinical and Non-Clinical markets. Our systems enable fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Our objective is to become the leading supplier of integrated systems and tests for molecular diagnostics. Key elements of our strategy to achieve this objective include:
Provide a fully-integrated molecular testing solution to the Clinical market. We are focusing our investments on selling our systems and tests to the Clinical market and we believe our GeneXpert system will continue to significantly expand our presence in the Clinical market due to its ability to deliver accurate and fast results, ease of use, flexibility and scalability. Features of the GeneXpert system and Xpert tests include:
an approach by which the reagents are typically prepackaged in a single vessel (the test cartridge) into which the specimen is added;
no further user intervention once the Xpert cartridge is loaded into the GeneXpert system;
all three phases of PCR: 1) sample preparation, 2) amplification and 3) detection, are performed within the single sealed test cartridge automatically;
primarily moderate complexity CLIA categorized, amplified molecular tests, which means the GeneXpert system can be operated without the need for highly-trained laboratory technologists. Additionally, we are entering the CLIA-waived market, which will enable certain of our tests to be run in point-of-care environments. For example, in December 2015, the FDA granted CLIA waiver for our Xpert Flu+RSV Xpress test for use on our GeneXpert System. The Xpert Flu+RSV Xpress is the first PCR panel tests to achieve CLIA waiver, and the first in a series of reference-quality molecular tests that we intend to deliver to the point-of-care market over the next several years;
commercial availability in a variety of configurations ranging from one to 80 individual test modules, which enables testing in environments ranging from low volume testing to high volume, near-patient, core or central lab testing, and system capacity that can be expanded in support of growing test volumes by adding additional modules;
notably, to our knowledge, the only truly scalable real-time PCR system that operates entirely within a closed system architecture, reducing hands-on time, reducing the likelihood of human error and contamination, and enabling nested PCR capability, a proven process for maximizing real-time PCR sensitivity and specificity; and
full random access whereby different tests for different targets may be run simultaneously in different modules in the same GeneXpert system, which increases potential utilization and throughput of the system and also enables on-demand or “STAT” testing, whereby the user can add a new test to the system at any time without regard to the stage of processing of any other test on the system.
Continue to develop and market new tests. We plan to capitalize on our strengths in nucleic acid chemistry and molecular biology to continue to develop new tests for our systems and offer our customers the broadest menu of Xpert tests designed to address many of the highest volume molecular test opportunities. Our strategy is to offer a portfolio of Xpert tests spanning healthcare-associated infections, critical infectious disease, sexual health, virology, oncology and genetics. For example, Xpert HPV, Xpert Carba-R, Xpert Norovirus, Xpert Flu/RSV XC, and Xpert Trichomonas were all made commercially available in all markets that recognize the CE Mark during 2014 and Xpert HIV-1 Viral Load achieved CE Mark in December 2014. In 2015, Xpert Trichomonas received FDA clearance, our Xpert Flu+RSV Xpress received a CLIA waiver from the FDA, and Xpert Ebola received Emergency Use Authorization from the FDA and was listed as eligible for procurement to Ebola-affected countries by the World Health Organization. Our Xpert Ebola test, Xpert HIV-1 Qualitative, Xpert HCV Viral Load, and Xpert BCR-ABL Ultra also achieved CE Mark during 2015. Additionally, in February 2015, we received clearance from the FDA for expanded claims on our Xpert MTB/RIF test. Our cumulative menu now stands at 23 tests that have achieved CE mark available internationally and 19 tests FDA cleared in the United States.
Obtain additional target rights. We expect to continue to expand our collaborations with academic institutions and commercial organizations to develop and obtain target rights to various critical infectious disease and oncology targets. In addition, we expect to focus key business development activities on identifying critical infectious disease and oncology targets held by academic institutions or commercial organizations for potential license or acquisition.

38


Extend geographic reach. Our European sales and marketing operations are headquartered in France. As of December 31, 2015, we had direct sales forces in Australia, the Benelux region, France, Germany, Hong Kong, Italy, South Africa and the United Kingdom, and we have offices in Brazil, China, India, Japan and the United Arab Emirates. We expect to continue to expand our international commercial operations capability on both a direct and distributor basis in 2016 and future years.
Extend High Burden Developing Countries sales programs. We expect to continue to expand our presence in HBDCs following the World Health Organization’s endorsement of the Xpert MTB/RIF test in late 2010 to deliver GeneXpert systems and Xpert tests, including virology and Ebola, to HBDCs at a discount to our standard commercial prices. We believe that participation in the HBDC program considerably broadens the geographic reach of our products and increases recognition of the Cepheid brand and product portfolio.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
We consider our accounting policies related to revenue recognition, impairment of long-lived assets, classification and impairment of our cash, cash equivalents, short -term and non-current investments, litigation settlement, inventory and warranty provisions, stock-based compensation, income taxes, and foreign currency hedging to be critical accounting policies. A number of significant estimates, assumptions and judgments are inherent in our determination of when to recognize revenue, how to evaluate our long-lived-assets, the calculation of our inventory valuation and warranty provisions, settlements related to litigation, valuation of our foreign currency hedges and stock-based compensation expense. We base our estimates and judgments on historical experience and various other assumptions we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.
Recent Accounting Pronouncements
Please refer to Note 1 of our Consolidated Financial Statements, “Organization and Summary of Significant Account Policies—Recent Accounting Pronouncements,” for a discussion of new and recently adopted accounting guidance.
Revenue Recognition
We recognize revenue from sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. No right of return exists for our products except in the case of damaged goods. We have not experienced any significant returns of our products. Shipping and handling costs are expensed as incurred and included in cost of sales. In those cases where we bill shipping and handling costs to customers, the amounts billed are classified as revenue.
When we enter into revenue arrangements that may consist of multiple deliverables of our products and services, we recognize revenue as each separate element is delivered. We sell service contracts for which revenue is deferred and recognized ratably over the contract period.
We may place an instrument at a customer site under a reagent rental agreement (“reagent rental”). Under a reagent rental, we retain title to the instrument and earn revenue for the usage of the instrument and related maintenance services through the amount charged for reagents and other disposables. Under a reagent rental agreement, a customer may commit to purchasing minimum quantities of reagents at stated prices over a defined contract term, which is typically between three and five years. Revenue is recognized over the term of a reagent rental as reagents and other disposables are shipped and all other revenue recognition criteria have been met.
For multiple element arrangements, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on: (1) vendor specific objective evidence (“VSOE”), if available; (2) third party evidence of selling price if VSOE is not available; or (3) an estimated selling price, if neither VSOE nor third party evidence is available. Estimated selling price is our best estimate of the selling price of an element in a transaction. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.
Revenue includes fees for research and development services earned under grants and collaboration agreements, which are recognized on a contract-specific basis. Revenue and profit under cost-plus service contracts is recognized as costs are incurred plus negotiated fees. For certain contracts, we utilize the proportional performance method of revenue recognition which requires that we estimate the total amount of costs to be expended for a project and recognize revenue equal to the portion of costs incurred to date. We exercise judgment when estimating the level of effort required to complete a project. The estimated total costs to complete a project are subject to revision from time-to-time.

39


Intangible Assets and Goodwill
Intangible assets related to licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to 15 years. Amortization of intangible assets is primarily included in cost of sales, research and development and sales and marketing in the Consolidated Statements of Operations.
We review our intangible assets for impairment and conduct the impairment review when events or circumstances indicate that the carrying value of a long-lived asset may be impaired by first estimating the future undiscounted cash flows to be derived from the intangible asset to assess whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, an impairment value is calculated as the excess of the carrying value of the intangible asset over its estimated fair market value. Events or circumstances which could trigger an impairment review include a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in our use of acquired assets, our overall business strategy, or significant negative industry or economic trends. We did not recognize any significant impairment charges in 2015 or 2014. In 2013, we recorded an impairment charge of $1.3 million to cost of sales primarily related to acquired technology for one of our legacy products.
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually during the fourth fiscal quarter, or as circumstances indicate their value may no longer be recoverable. Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets. We continue to operate in one segment, which is also considered to be our sole reporting unit and therefore, goodwill was tested for impairment at the enterprise level. As of December 31, 2015, there has been no impairment of goodwill. We do not have intangible assets with indefinite useful lives other than goodwill.
Cash, Cash Equivalents, Short-Term Investments, and Non-Current Investments
Cash and cash equivalents consist of cash on deposit with banks and money market instruments. Our marketable debt securities have been classified and accounted for as available-for-sale. We determine the appropriate classification of our investments at the time of purchase and re-evaluate the designations at each balance sheet date. We classify our marketable debt securities as cash equivalents, short-term investments or non-current investments based on each instrument’s underlying effective maturity date. All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities with effective maturities of 12 months or less are classified as short-term, and marketable debt securities with effective maturities greater than 12 months are classified as non-current. Our marketable debt securities are carried at fair value, with the unrealized gains and losses reported as a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method. Interest and other income, net includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities.
We assess whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market conditions. With respect to our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and whether or not we expect to recover the entire amortized cost basis of the security (that is, a credit loss exists).

Litigation
We are involved in certain legal proceedings, as discussed in Note 9 of our Consolidated Financial Statements, “Commitments, Debt obligations, Contingencies and Legal Matters”. We regularly assess the probability and range of possible loss based on the developments in these matters. If we determine that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated, we record a liability in the financial statements. If a reasonable estimate of a probable loss cannot be made, but we are able to estimate the potential range of probable loss, we record a liability based on the low-end of the estimated range of loss. If a loss is not probable but is reasonably possible and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. We expense legal fees as incurred.
Inventory and Warranty Provisions
Inventory is stated at the lower of standard cost (which approximates actual cost) or market value, with cost determined on the first-in-first-out method. Allocation of fixed production overheads to conversion costs is based on normal capacity of production. Abnormal amounts of idle facility expense, freight, handling costs, and spoilage are expensed as incurred, and not included in overhead. We maintain provisions for excess and obsolete inventory based on our estimates of forecasted demand and, where applicable, product expiration.

40


We warrant our systems to be free from defects generally for a period of 12 to 24 months from the date of sale and for our disposable products, to be free from defects, when handled according to product specifications, for the stated life of such products. Accordingly, a provision for the estimated cost of warranty repair or replacement is recorded at the time revenue is recognized. Our estimated warranty provision is based on our estimate of future failure rates and the related estimated cost of repair or replacement. Significant increases in the failure rates of our products could lead to increased warranty costs and require us to increase our warranty provision.
Stock-Based Compensation
We account for stock-based compensation cost in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718-25. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We recognize the fair value of our stock option awards as compensation expense over the requisite service period of each award, which is generally four years.
In determining fair value of the stock-based compensation payments, we use the Black–Scholes model and a single option award approach, which requires the input of subjective assumptions. These assumptions include: estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term (expected volatility), the risk-free interest rate (interest rate), expected dividends and the number of shares subject to options that will ultimately not complete their vesting requirements (forfeitures). Changes in the following assumptions can materially affect the estimate of fair value of stock–based compensation.
Expected term is determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.
Expected volatility is based on the blend of historical volatility of the past period equal to our expected term and the current implied volatility.
Risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.
Expected dividend is based on our expectation of issuing a dividend over the expected term. We have never issued dividends.
Estimated forfeitures are based on voluntary termination behavior as well as analysis of actual option forfeitures.
Income Taxes
We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets.
We recognize interest and penalties related to uncertain tax positions in income tax expense. We accrued penalties and interest of $0.3 million during 2015 and in total, as of December 31, 2015, has recognized a liability for penalties and interest of $0.4 million. During 2014 and 2013, we did not recognize any significant interest or penalties related to uncertain tax positions. As of December 31, 2014 and 2013, we had accrued no significant interest or penalties.
Foreign Currency Hedging
We use forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted net revenue, cost of sales and operating expenses denominated in currencies other than the United States dollar. We also enter into non-qualifying foreign currency forward contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and is recognized into earnings within the same financial statement line item as the hedged item in the period during which the hedged transaction is realized. Gains and losses on the derivative financial instruments representing either hedge ineffectiveness or discontinued cash flow hedges, if any, are recognized in current earnings. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results. Our foreign currency cash flow hedges generally mature within twelve months.

41



Results of Operations
Comparison of Years Ended December 31, 2015, 2014 and 2013
Revenue
The following table illustrates the components of revenue (in thousands):
 
Years Ended December 31,
 
Years Ended December 31,
 
2015
 
2014
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
Revenue by market:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clinical Systems
$
82,999

 
$
84,695

 
$
(1,696
)
 
(2
)%
 
$
84,695

 
$
66,980

 
$
17,715

 
26
 %
Clinical Reagents
426,914

 
356,427

 
70,487

 
20
 %
 
356,427

 
292,941

 
63,486

 
22
 %
    Total Clinical
$
509,913

 
$
441,122

 
$
68,791

 
16
 %
 
$
441,122

 
$
359,921

 
$
81,201

 
23
 %
Non-Clinical
28,663

 
29,019

 
$
(356
)
 
(1
)%
 
29,019

 
41,371

 
(12,352
)
 
(30
)%
Total revenue
$
538,576

 
$
470,141

 
$
68,435

 
15
 %
 
$
470,141

 
$
401,292

 
$
68,849

 
17
 %
Total Clinical revenue increased $68.8 million, or 16%, in 2015 as compared to 2014. Clinical Reagents revenue grew $70.5 million or 20% due to our growing installed base of GeneXpert instruments and our expanding menu of Xpert tests. Clinical Systems revenue decreased $1.7 million, or 2%, primarily driven by lower system sales to customers participating in our HBDC program.
Total Clinical revenue increased $81.2 million, or 23%, in 2014 as compared to 2013. Clinical Systems revenue increased $17.7 million, or 26%, driven by higher system shipments to commercial and HBDC customers, including a large HBDC system sale in China. Clinical Reagents revenue grew $63.5 million or 22% due to our growing installed base of GeneXpert instruments and our expanding menu of Xpert tests.
Non-Clinical revenue in 2015 was comparable to 2014. Non-Clinical revenue decreased $12.4 million, or 30% in 2014 compared to 2013, primarily driven by decreased revenue from anthrax test cartridges sold under the USPS BDS program and decreases in contract, grant and research revenue.
We expect our Clinical revenue to continue to increase in 2016 with the growth of our installed base of GeneXpert systems, the continued expansion of our test menu, and the adoption of additional tests within our customer base. We expect that Non-Clinical market revenue will decline in 2016 compared to 2015.
The following table provides a breakdown of our revenue by geographic regions (in thousands):
 
Years Ended December 31,
 
Years Ended December 31,
 
2015
 
2014
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
Geographic revenue information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clinical
$
290,374

 
$
247,120

 
$
43,254

 
18
 %
 
$
247,120

 
$
212,362

 
$
34,758

 
16
 %
Non-Clinical
27,635

 
24,905

 
2,730

 
11
 %
 
24,905

 
36,998

 
(12,093
)
 
(33
)%
Total North America
$
318,009

 
$
272,025

 
$
45,984

 
17
 %
 
$
272,025

 
$
249,360

 
$
22,665

 
9
 %
International
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Clinical
$
219,539

 
$
194,002

 
$
25,537

 
13
 %
 
$
194,002

 
$
147,559

 
$
46,443

 
31
 %
Non-Clinical
1,028

 
4,114

 
(3,086
)
 
(75
)%
 
4,114

 
4,373

 
(259
)
 
(6
)%
Total International
$
220,567

 
$
198,116

 
$
22,451

 
11
 %
 
$
198,116

 
$
151,932

 
$
46,184

 
30
 %
Total revenue
$
538,576

 
$
470,141

 
$
68,435

 
15
 %
 
$
470,141

 
$
401,292

 
$
68,849

 
17
 %

42


North American Clinical revenue increased $43.3 million, or 18%, in 2015 as compared to 2014. The increase in North American Clinical revenue in 2015 was driven by higher sales of Xpert tests and higher sales from the GeneXpert instruments. North American Non-Clinical revenue increased $2.7 million, or 11%, primarily due to increased grant and collaboration revenue. North American Clinical revenue increased $34.8 million, or 16%, in 2014 as compared to 2013. The increase in North American Clinical revenue in 2014 was driven by higher revenue of Xpert tests and higher systems revenue. North American Non-Clinical revenue decreased $12.1 million, or 33%, due to decreased revenue from anthrax test cartridges under the USPS BDS program and decreases in contract, grant and research revenue.
International revenue increased $22.5 million, or 11%, in 2015 as compared to 2014 primarily driven by higher sales of Clinical reagents partially offset by lower sales of GeneXpert instruments to customers participating in our HBDC program and a significant reduction in Non-Clinical revenue after a disposition of certain distributions rights related to non-Cepheid products in early 2015. International revenue increased $46.2 million, or 30%, in 2014 as compared to 2013. This increase was primarily driven by higher revenue from GeneXpert systems and Clinical reagents to both commercial and HBDC customers.
The recent strengthening of the United States dollar has impacted the relative value of sales transactions that are denominated in foreign currencies. On a constant currency basis, we estimate our revenue would have increased 17% in 2015 compared to 2014. We use foreign currency exchange forward contracts to hedge a portion of our forecasted revenue. We estimate the foreign currency movements relative to the United States dollar negatively impacted 2015 net revenue by approximately $10.1 million, inclusive of net hedge gains of approximately $7.4 million, which were recorded as revenue.
We expect foreign currency rates will continue to negatively impact our international revenue. The majority of our foreign currency exchange forward contracts for estimated 2016 revenue were placed after the strengthening of the United States dollar. Therefore, we do not expect to recognize similar hedging gains in revenue in 2016.
Costs and Operating Expenses
The following table illustrates the changes in our operating expenses for the years ended December 31, 2015, 2014 and 2013 (in thousands):
 
Years Ended December 31,
 
Years Ended December 31,
 
2015
 
2014
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
Costs and operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
$
269,864

 
$
229,327

 
$
40,537

 
18
 %
 
$
229,327

 
$
207,933

 
$
21,394

 
10
 %
Collaboration profit sharing
5,826

 
5,154

 
672

 
13
 %
 
5,154

 
7,512

 
(2,358
)
 
(31
)%
Research and development
115,756

 
96,851

 
18,905

 
20
 %
 
96,851

 
80,197

 
16,654

 
21
 %
Sales and marketing
115,368

 
97,848

 
17,520

 
18
 %
 
97,848

 
79,941

 
17,907

 
22
 %
General and administrative
62,624

 
55,047

 
7,577

 
14
 %
 
55,047

 
41,719

 
13,328

 
32
 %
Litigation contingencies and settlement

 
20,000

 
(20,000
)
 
(100
)%
 
20,000

 

 
20,000

 
100
 %
Total costs and operating expenses
$
569,438

 
$
504,227

 
$
65,211

 
13
 %
 
$
504,227

 
$
417,302

 
$
86,925

 
21
 %
Cost of Sales
Cost of sales consists of raw materials, direct labor and stock-based compensation expense, manufacturing overhead, facility costs and warranty costs. Cost of sales also includes product royalties, amortization of intangible assets related to technology licenses, and intangibles assets acquired in business combinations.
Cost of sales increased $40.5 million, or 18%, in 2015 as compared to 2014. The increase was primarily attributable to increased shipments of our Clinical Reagent products. Cost of sales increased $21.4 million, or 10%, in 2014 as compared to 2013. The increase was primarily attributable to increased shipments of our Clinical System and Clinical Reagent products, partially offset by reduced manufacturing costs.

43


Our gross margin percentage decreased to 50% in 2015 as compared to 51% in 2014. The decrease was primarily attributable to the product mix, with higher HBDC sales and higher sales of some of our newer commercial products, both of which currently have lower margins.
Our gross margin percentage increased to 51% in 2014 as compared to 48% in 2013. The increase was primarily attributable to reduced manufacturing costs, partially offset by higher sales under our HBDC program which have lower margins.
We currently expect that our gross margin will remain the same or slightly increase in 2016 primarily driven by manufacturing cost improvements and the suspension of the medical device excise tax, offset by a shift in customer mix. If sales to customers participating in our HBDC program are higher than anticipated, gross margin may be negatively impacted.
Collaboration Profit Sharing
Collaboration profit sharing represents the amount that we pay to LIFE under our collaboration agreement to develop and manufacture reagents for use in the USPS BDS program. Under the agreement, computed gross margin on anthrax cartridge sales are shared equally between the two parties. The increase in collaboration profit sharing in 2015 is attributable to higher anthrax cartridge sales under the USPS BDS program. The decrease in collaboration profit sharing in 2014 is attributable to reduced anthrax cartridge sales under the USPS BDS program. We currently expect our 2016 collaboration profit sharing expenses to be comparable to 2015.
Research and Development Expenses
Research and development expenses consist of salaries and employee-related expenses, including stock-based compensation, clinical trials, research and development materials, facility costs, depreciation, amortization of certain intangible assets, license fees, and milestone payments related to in-licensed products if it is determined that they have no alternative future use. Research and development expenses increased $18.9 million, or 20%, in 2015 as compared to 2014. This increase is primarily due to an increase in clinical trial costs, increased headcount and engineering costs related primarily to our high-level multiplexing initiative and the development of our GeneXpert Omni for the point-of-care market.
Research and development expenses increased $16.7 million, or 21%, in 2014 as compared to 2013. This increase is primarily due to an increase in our clinical trial costs for products released in 2014 and currently under development, increased headcount and an increase in engineering costs related primarily to our high-level multiplexing initiative.
We currently expect our research and development expenses, as a percentage of revenue, in 2016 to be comparable or slightly down from 2015. On a dollar basis, we expect research and development expenses to increase in 2016 compared to 2015 driven primarily by a significant increase in our clinical trial costs and engineering costs related to our high-level multiplexing initiative and the development of our GeneXpert Omni for the point-of-care market.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and employee-related expenses, including commissions and stock-based compensation, travel, facility-related costs and marketing and promotion expenses. Sales and marketing expenses increased $17.5 million, or 18%, in 2015 as compared to 2014. The increase is primarily due to increased headcount, travel, and higher commissions driven by an increase in revenue and the expansion of our sales force, and sales and marketing program costs.
Sales and marketing expenses increased $17.9 million, or 22%, in 2014 as compared to 2013. The increase is primarily due to increased headcount, increased travel, and higher commissions driven by increase in revenue and sales and marketing program costs.
We currently expect our sales and marketing expenses, as a percentage of revenue, in 2016 to be comparable to 2015.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee-related expenses, which include stock-based compensation, travel, facility costs and legal, accounting and other professional fees. General and administrative expenses increased $7.6 million, or 14%, in 2015 as compared to 2014, which was primarily due to increased headcount, expenses related to executive separation agreements, increased stock-based compensation, and higher consulting fees.
General and administrative expenses increased $13.3 million, or 32%, in 2014 as compared to 2013. The increase was primarily due to increased headcount and higher legal fees.

44


We currently expect our general and administrative expenses to decrease modestly as a percentage of revenue in 2016.
Legal contingencies
As further described in Part I, Item 3 “Legal Proceedings”, in fiscal 2014, based on an evaluation of the facts and circumstances of our on-going arbitration with Roche we believed that it was probable that the arbitration proceeding could result in a material loss to Cepheid. Accordingly, we recorded an estimated charge of $20 million as our best estimate of such potential loss as of December 31, 2014, which was included in Accrued and other liabilities in our consolidated balance sheet. This continues to be our best estimate for this potential loss as of December 31, 2015, however, given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that we may incur an additional material charge, but an estimate of such a charge cannot be made at this time. We continue to strongly dispute Roche’s claims and intend to vigorously defend against them. The legal contingencies are explained further in Note 9 of these Consolidated Financial Statements.
Other Income (Expense)
The following table illustrates the changes in our other expense, net for the years ended December 31, 2015, 2014 and 2013 (in thousands):
 
2015
 
2014
 
$ Change
 
% Change
 
2014
 
2013
 
$ Change
 
% Change
Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
1,898

 
$
1,119

 
$
779

 
70
%
 
$
1,119

 
$
45

 
$
1,074

 
2,387
%
Interest expense
(14,659
)
 
(12,609
)
 
(2,050
)
 
16
%
 
(12,609
)
 
(137
)
 
(12,472
)
 
9,104
%
Foreign currency exchange loss and other, net
(3,644
)
 
(2,016
)
 
(1,628
)
 
81
%
 
(2,016
)
 
(715
)
 
(1,301
)
 
182
%
Total other expense, net
$
(16,405
)
 
$
(13,506
)
 
$
(2,899
)
 
21
%
 
$
(13,506
)
 
$
(807
)
 
$
(12,699
)
 
1,574
%
Other income (expense) primarily consists of interest income earned from our cash, cash equivalents, and investment balances, interest expense related to senior convertible notes, loans, or notes payable balances outstanding during the period and the net effect of foreign currency exchange transactions, including the net effect of non-qualifying derivative activities. Interest income increased by $0.8 million in 2015 as compared to 2014, which was primarily a result of an increase in average asset balances in our investment portfolio as a result of the issuance of our senior convertible notes in February 2014. Interest expense increased by $2.1 million in 2015 as compared to 2014, primarily due to increased accretion of the convertible note discount into interest expense from the issuance of senior convertible notes in February 2014. Foreign currency exchange loss and other, net increased $1.6 million in 2015 as compared to 2014, primarily due to the strengthening of the United States dollar.
Interest income increased by $1.1 million in 2014 as compared to 2013, which was primarily a result of increased cash, cash equivalent and investments resulting from the issuance of the senior convertible notes in February 2014. Interest expense increased by $12.5 million in 2014 as compared to 2013, primarily driven by the interest expense from the issuance of senior convertible notes. Foreign currency exchange loss and other, net increased $1.3 million in 2014 as compared to 2013, primarily due to the strengthening of the United States dollar.
LIQUIDITY AND CAPITAL RESOURCES
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Net cash provided by operating activities
$
31,070

 
$
9,194

 
$
15,012

Net cash used in investing activities
(39,878
)
 
(325,725
)
 
(70,981
)
Net cash provided by financing activities
27,549

 
349,208

 
26,638

Cash Flows from Operating Activities
Our largest source of operating cash flows is cash collections from customers and our primary cash outflows are purchases of inventory and personnel-related expenses. Net cash provided by operating activities during fiscal 2015 increased $21.9 million compared with fiscal 2014, primarily due to the following:
an increase of $16.9 million in cash flows provided by operations adjusted for the impact of non-cash items in 2015 compared to 2014;

45


a favorable impact of a $2.3 million net reduction in the accounts receivable balance in 2015, compared to an unfavorable impact of a $16.6 million net increase in the accounts receivable balance in 2014. This favorable change was primarily due to improved collections and timing of cash receipts; and
a reduction of the rate of increase of the net inventory balance, which contributed to a net $14.2 million favorable change in our operating cash flow primarily due to reduced volume and timing of purchases; partially offset by
no charge in accrued expense for estimated legal contingency in 2015 compared to 2014 when we recorded an estimated charge of $20 million.
Net cash provided by operating activities during fiscal 2014 decreased $5.8 million compared with fiscal 2013, primarily due to the following:
a decrease of $17.4 million in cash flows provided by operations adjusted for the impact of non-cash in 2014 compared to 2013;
a $9.6 million unfavorable impact from the net increase of the accounts receivable balance driven by the impact of increased revenue and timing of collections; and
a net $13.9 million unfavorable impact related to accounts payable and other current and non-current liabilities primarily due to timing of payments; partially offset by
a favorable impact from a of $20 million increase in accrued expense for estimated legal contingency due to the estimated charge of $20 million that was recorded during fiscal 2014 with having no corresponding accrual in 2013;
a favorable impact from an increase in accrued compensation of $6.3 million primarily driven by the increase in headcount in fiscal 2014 compared with fiscal 2013; and
a favorable impact from an increase in deferred revenue of $5.5 million primarily due to the timing of product shipments and contracts.
Cash Flows used in Investing Activities
Our cash flows from investing activities are primarily for capital expenditures and purchases of marketable securities net of proceeds from sales and maturities of marketable securities and proceeds from sale of equipment and intangible assets. Net cash used in investing activities during fiscal 2015 decreased $285.8 million compared with fiscal 2014. Fiscal 2014 investment purchases were higher due to the initial investment purchases made after the issuance of the senior convertible notes in February, 2014, partially offset by lower cash outflow for acquisitions by $15.0 million.
Net cash used in investing activities during fiscal 2014 increased $254.7 million compared with fiscal 2013, primarily due to a $240.2 million increase in purchases of marketable securities, net of proceeds from sales or maturities during fiscal 2014 compared with fiscal 2013 and a net increase of $14.3 million cash outflows for acquisitions in 2014 compared to 2013.
At December 31, 2015, prepaid expense and other current assets included $2.7 million of restricted cash and other non-current assets included $2.1 million of restricted cash, both held as security for bank guarantees provided to a foreign customer contract. We are required to maintain such guarantees until its contractual obligations are satisfied under the contract. At December 31, 2014, restricted cash of $1.9 million was included in prepaid expense and other current assets and consisted of cash contractually restricted for use to develop the Xpert Ebola test in accordance with our agreement with BMGF.
Cash Flows from Financing Activities
Net cash provided by financing activities during fiscal 2015 decreased $321.7 million compared with fiscal 2014, primarily due to the net proceeds of $310.7 million from the issuance of our convertible senior notes, net of purchase of a related capped call transaction during fiscal 2014, and a decrease in net proceeds from issuance of common stock of $11.0 million in 2015 compared to 2014.
Net cash provided by financing activities during fiscal 2014 increased $322.6 million compared with fiscal 2013, primarily due to the net proceeds of $310.7 million from the issuance of our convertible senior notes net of purchase of a related capped call transaction during fiscal 2014, and an increase in net proceeds from issuance of common stock of $11.1 million in 2014 compared to 2013.

46


Lease, Purchase and Minimum Royalty Commitments and Debt Obligations
The following table summarizes our lease, purchase and minimum royalty commitments and debt obligations at December 31, 2015 (in thousands): 
 
Payments Due by Period
 
Total
 
Less
Than 1
Year
 
1-3
Years
 
3-5
Years
 
More
Than 5
Years
Operating leases
$
107,504

 
$
13,711

 
$
30,834

 
$
23,045

 
$
39,914

Purchase obligations
50,421

 
50,421

 

 

 

Minimum royalties
11,354

 
635

 
975

 
940

 
8,804

Debt obligations
368,719

 
4,313

 
8,625

 
8,625

 
347,156

 
$
537,998

 
$
69,080

 
$
40,434

 
$
32,610

 
$
395,874

Lease Commitments
We lease office space under arrangements expiring through 2029. Certain of these lease arrangements contain escalation clauses whereby monthly rent increases over time. Rent expense is recognized on a straight-line basis over the lease period net of lease incentives. Net rent expense for all operating leases for the years ended December 31, 2015, 2014 and 2013 was $10.9 million, $11.6 million and $10.2 million, respectively.

Purchase Obligations
Purchase commitments include non-cancellable purchase orders or contracts for the purchase of raw materials used to manufacture our systems and reagents.
Minimum Royalty Commitments
Some of our licensing arrangements provide for a minimum royalty commitment. Royalty expense is generally based on a fee per unit shipped or a percent of revenue received for the products containing the licensed technology.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid could vary in some circumstances depending on the timing of the receipt of goods or services or changes to agreed-upon amounts for some obligations.
Debt Obligations
Debt obligations include the principal amount of our convertible senior notes due 2021, as well as interest payments to be made under the notes. Although these notes mature in 2021, they can be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayments of the principal amounts sooner than the scheduled repayments as indicated in the table. Please see Note 8 (“Convertible Senior Notes and Notes Payable”) of our Consolidated Financial Statements for further discussion of the terms of the convertible senior notes.
Off-Balance-Sheet Arrangements
As of December 31, 2015, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1933, as amended.
Financial Condition Outlook
We plan to continue to make expenditures to expand our manufacturing capacity and to support our activities in sales and marketing and research and development. These expenditures may vary from quarter to quarter. We plan to continue to support our working capital needs and anticipate that our existing cash resources will enable us to maintain currently planned operations. Based on past performance and current expectations, we believe that our current available sources of funds will be adequate to finance our operations for at least the next year. This expectation is based on our current and long-term operating plan and may change as a result of many factors, including our future capital requirements and our ability to increase revenue and reduce expenses, which depend on a number of factors outside our control, including general global economic conditions. For example, our future cash use will depend on, among other things, market acceptance of our new products, the resources we devote to developing and supporting our products, continued progress of our research and development of potential products, our ability to gain FDA clearance for our new products, the need to acquire licenses to new technology or to use our technology in new markets, expansion through acquisitions and the availability of other financing.

47


In the future, we may seek additional funds to support our strategic business needs and may seek to raise such additional funds through private or public sales of securities, strategic relationships, bank debt, lease financing arrangements, or other available means. If additional funds are raised through the issuance of equity or equity-related securities, shareholders may experience additional dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If adequate funds are not available or are not available on acceptable terms to meet our business needs, our business may be harmed.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Sensitivity
Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would change the fair value of our interest sensitive financial instruments by approximately $1.4 million. In addition, if a 100 basis point change in overall interest rates were to occur in 2016, our interest income would not change significantly in relation to amounts we would expect to earn, based on our cash, cash equivalents, and investments as of December 31, 2015.
Changes in interest rates may also impact gains or losses from the conversion of our outstanding convertible senior notes. In February 2014, we issued $345 million in aggregate principal amount of our 1.25% convertible senior notes due 2021. At our election, the notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock in each case under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock reaches a price for a sustained period at 130% above the conversion price of $65.10, the notes will become convertible. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished depends on our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of operations during the period in which the notes are converted. The implicit interest rate for the notes is 5.0%. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of $100 million aggregate principal amount of the notes would result in a loss of approximately $4.7 million.
Foreign currency risk
We operate primarily in the United States and a majority of our revenue, cost, expense and capital purchasing activities for the year ended December 31, 2015 were transacted in United States dollars. As a corporation with international and domestic operations, we are exposed to changes in foreign exchange rates. Our international revenue is predominantly in European countries and South Africa and is denominated in a number of currencies, primarily the Euro, United States dollar, British Pound, South African Rand, and Australian dollar. In our international operations, we pay payroll and other expenses in local currencies. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.
We expect to continue to hedge our foreign currency exposure in the future and may use currency forward contracts, currency options, and/or other common derivative financial instruments to reduce foreign currency risk. We have performed a sensitivity analysis as of December 31, 2015 based on a model that measures the impact of a hypothetical 10% adverse change in foreign exchange rates to the United States dollar (with all other variables held constant) on our underlying estimated major foreign currency exposures, net of derivative financial instruments. The foreign exchange rates used in the model were based on the spot rates in effect as of December 31, 2015. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign exchange rates would have an unfavorable impact on the underlying cash flow exposure, net of our foreign exchange derivative financial instruments, of $5.0 million as of December 31, 2015.


48


ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and the related notes thereto, of Cepheid and the Reports of Independent Registered Public Accounting Firm, Ernst and Young LLP, are filed as a part of this Form 10-K.

49


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on our evaluation under the framework in Internal Control – Integrated Framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2015. Ernst & Young LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the our internal control over financial reporting.
February 25, 2016
 
/S/ JOHN L. BISHOP
 
/S/ DANIEL E. MADDEN
John L. Bishop
 
Daniel E. Madden
Chairman and Chief Executive Officer
 
Executive Vice President, Chief Financial Officer


50


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cepheid
We have audited Cepheid’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Cepheid’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cepheid maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cepheid as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015 of Cepheid and our report dated February 25, 2016 expressed an unqualified opinion thereon.

 
/s/ Ernst & Young LLP
San Jose, California
February 25, 2016

51


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cepheid
We have audited the accompanying consolidated balance sheets of Cepheid as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Part IV Item 15(b). These financial statements and schedule are the responsibility of Cepheid’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cepheid at December 31, 2015 and 2014, and the consolidated results of its operations, comprehensive loss and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cepheid’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2016 expressed an unqualified opinion thereon.
 
 
/s/ Ernst & Young LLP
San Jose, California
February 25, 2016

52



CEPHEID
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
2015
 
2014
 
(In thousands, except share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
112,568

 
$
96,663

Short-term investments
210,147

 
196,729

Accounts receivable, less allowance for doubtful accounts of $383 and $237 as of December 31, 2015 and 2014, respectively
66,550

 
68,809

Inventory, net
148,690

 
132,635

Prepaid expenses and other current assets
18,515

 
24,274

Total current assets
556,470

 
519,110

Property and equipment, net
127,639

 
115,765

Investments
62,175

 
79,731

Other non-current assets
10,441

 
7,847

Intangible assets, net
25,241

 
31,440

Goodwill
39,681

 
39,681

Total assets
$
821,647

 
$
793,574

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
57,771

 
$
50,435

Accrued compensation
39,015

 
33,760

Accrued royalties
5,469

 
5,443

Accrued and other liabilities
27,451

 
34,761

Current portion of deferred revenue
12,778

 
13,447

Total current liabilities
142,484

 
137,846

Long-term portion of deferred revenue
5,538

 
4,532

Convertible senior notes, net
287,863

 
278,213

Other liabilities
15,779

 
18,768

Total liabilities
451,664

 
439,359

Commitments and contingencies (Note 9)

 

Shareholders’ equity:
 
 
 
Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding

 

Common stock, no par value; 150,000,000 shares authorized, 72,415,317 and 70,904,388 shares issued and outstanding at December 31, 2015 and 2014, respectively
449,704

 
422,151

Additional paid-in capital
263,429

 
225,529

Accumulated other comprehensive income (loss), net
(908
)
 
247

Accumulated deficit
(342,242
)
 
(293,712
)
Total shareholders’ equity
369,983

 
354,215

Total liabilities and shareholders’ equity
$
821,647

 
$
793,574

The accompanying notes are an integral part of these consolidated financial statements.

53


CEPHEID
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands, except per share data)
Revenue
$
538,576

 
$
470,141

 
$
401,292

Costs and operating expenses:
 
 
 
 
 
Cost of sales
269,864

 
229,327

 
207,933

Collaboration profit sharing
5,826

 
5,154

 
7,512

Research and development
115,756

 
96,851

 
80,197

Sales and marketing
115,368

 
97,848

 
79,941

General and administrative
62,624

 
55,047

 
41,719

Legal contingencies

 
20,000

 

Total costs and operating expenses
569,438

 
504,227

 
417,302

Loss from operations
(30,862
)
 
(34,086
)
 
(16,010
)
Other income (expense):
 
 
 
 
 
Interest income
1,898

 
1,119

 
45

Interest expense
(14,659
)
 
(12,609
)
 
(137
)
Foreign currency exchange loss and other, net
(3,644
)
 
(2,016
)
 
(715
)
Other expense, net
(16,405
)
 
(13,506
)
 
(807
)
Loss before income taxes
(47,267
)
 
(47,592
)
 
(16,817
)
Provision for income taxes
(1,263
)
 
(2,557
)
 
(1,148
)
Net loss
$
(48,530
)
 
$
(50,149
)
 
$
(17,965
)
Basic net loss per share
$
(0.67
)
 
$
(0.72
)
 
$
(0.27
)
Diluted net loss per share
$
(0.67
)
 
$
(0.72
)
 
$
(0.27
)
Shares used in computing basic net loss per share
71,928

 
70,069

 
67,485

Shares used in computing diluted net loss per share
71,928

 
70,069

 
67,485

The accompanying notes are an integral part of these consolidated financial statements.

54


CEPHEID
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
 
2015
 
2014
 
2013
 
(In thousands)
Net loss
$
(48,530
)
 
$
(50,149
)
 
$
(17,965
)
Other comprehensive loss, before tax:
 
 
 
 
 
Change in unrealized gains and losses related to cash flow hedges:
 
 
 
 
 
Gain (loss) recognized in other comprehensive loss, net
(1,303
)
 
146

 
(118
)
(Gain) loss reclassified from accumulated comprehensive loss to the statement of operations, net
665

 
735

 
(427
)
Change in unrealized gains and losses related to available-for-sale investments, net:
 
 
 
 
 
Gain (loss) recognized in other comprehensive loss, net
(391
)
 
(159
)
 
15

Gain reclassified from accumulated comprehensive loss to the statement of operations, net
(26
)
 
(36
)
 
(2
)
Other comprehensive loss, before tax
(49,585
)
 
(49,463
)
 
(18,497
)
Income tax expense related to items of accumulated other comprehensive income (loss), net
(100
)
 

 

Comprehensive loss
$
(49,685
)
 
$
(49,463
)
 
$
(18,497
)
The accompanying notes are an integral part of these consolidated financial statements.

55


CEPHEID
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 
 
Common Stock
 
 
 
 
 
 
 
 
(In thousands)
Shares
 
Amount
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total 
Shareholders’ Equity
Balance at December 31, 2012
66,604

 
$
355,867

 
$
117,217

 
$
56

 
$
(225,598
)
 
$
247,542

Net loss
 
 
 
 
 
 
 
 
(17,965
)
 
(17,965
)
Unrealized loss related to cash flow hedging, net


 


 


 
(545
)
 


 
(545
)
Unrealized gain related to available-for-sale investments, net


 


 


 
13

 


 
13

Issuance of shares of common stock under employee and director option plans
1,740

 
22,159

 


 


 


 
22,159

Stock-based compensation related to stock options and awards and employee stock purchase plans


 


 
28,683

 


 


 
28,683

Issuance of shares of common stock under employee stock purchase plans
212

 
5,353

 


 


 


 
5,353

Balance at December 31, 2013
68,556

 
383,379

 
145,900

 
(476
)
 
(243,563
)
 
285,240

Net loss
 
 
 
 
 
 
 
 
(50,149
)
 
(50,149
)
Unrealized gain related to cash flow hedging, net


 


 


 
881

 


 
881

Unrealized loss related to available-for-sale investments, net


 


 


 
(158
)
 


 
(158
)
Issuance of shares of common stock under employee and director option plans
2,144

 
32,733

 


 


 


 
32,733

Stock-based compensation related to stock options and awards and employee stock purchase plans


 


 
31,632

 


 


 
31,632

Equity component of convertible senior notes


 


 
73,013

 


 


 
73,013

Purchase of convertible note capped call hedge


 


 
(25,082
)
 


 


 
(25,082
)
Excess tax benefits from stock-based compensation


 


 
66

 


 


 
66

Issuance of shares of common stock under employee stock purchase plans
204

 
6,039

 


 


 


 
6,039

Balance at December 31, 2014
70,904

 
422,151

 
225,529

 
247

 
(293,712
)
 
354,215

Net loss
 
 
 
 
 
 
 
 
(48,530
)
 
(48,530
)
Unrealized loss related to cash flow hedging, net


 


 


 
(638
)
 


 
(638
)
Unrealized loss related to available-for-sale investments, net


 


 


 
(417
)
 


 
(417
)
Income tax expense related to items of accumulated other comprehensive income (loss), net
 
 
 
 
 
 
(100
)
 
 
 
(100
)
Issuance of shares of common stock under employee and director option plans
1,296

 
20,623

 


 


 


 
20,623

Stock-based compensation related to stock options and awards and employee stock purchase plans