Qiagen NV (QGEN) – Stock Analysis

Introduction:

Qiagen N.V. is a provider of medical sample and assay technologies. The sample technologies collect, stabilize, isolate, and purify biomolecules such as deoxyribonucleic acid (DNA), ribonucleic acid (RNA) and proteins from any biological sample (blood, bone, tissue, etc) while the assay division is responsible for making the isolated bio-molecules (example – DNA of a specific virus) visible for subsequent detection and analysis. Qiagen has an impressive selection of over 500 products in this space, which are distributed as self-contained kits with automated solutions. The primary customers include molecular diagnostics laboratories (including pharmaceutical/biotech research centers), researchers, and applied testing customers (forensics, animal, and food testing). Qiagen’s assay technologies include the Digene HPV Test considered the gold standard in testing for high-risk types of human papillomavirus, the primary cause of cervical cancer. This technology came with the acquisition of Digene in 2007.

Qiagen was founded in 1984 by Dr. Metin Colpan whose doctoral thesis work pioneered the development of a silica resin based anion-exchanger that could separate nucleic acids from cells – this method was faster and safer than traditional chemical methods. Dr. Coplan patented this technology in 1987 after filing for it in 1983. Their effort to mold the technology for use in a myriad of industries at the very onset did not pan out well and the company went through a rough patch. Fortunes shifted in 1993 when Mr. Coplan under the guidance of new CFO, Mr. Peer Schatz narrowed down the company’s focus to the genetics research market. The company went public in 1996 and since then has enjoyed an amazing run posting an overall return of over 900% in the last fourteen years. One significant management change occurred in 2003 when Dr. Metin Colpan stepped down from his CEO position handing control over to Schatz. Dr. Metin Colpan donned the new role as senior technology adviser, which allowed him to focus on technology and science as opposed to management. This was a win-win arrangement for Qiagen – under new leadership, the company prospered by being the provider of the ‘picks and shovels’ of the biotech ‘gold rush’ through a combination of investments in R&D that paid returns in consistent organic growth and acquisitions.

Business Issues:

Qiagen’s business can be divided into four market categories:
  1. Academic Research: Though the roots of the company are ingrained in this area, projected growth is very low at 3%. Last year, a quarter of the overall sales came from this area, which is down from 40% five years ago.
  2. Pharma/Biotech Research: Though this sector is a stable business for the company, projected growth is only a tad better at 6%. Sales from this area came in just below a quarter of the overall sales, which is only slightly down from the 25% range five years ago.
  3. Molecular Diagnostics (MDx): Growth in Molecular Diagnostics accounts for the bulk of the growth over the last few years. It is projected to grow in the 20-odd-percentage range. Growth in the last few years has beaten that estimate so handsomely that sales from this quarter has approached 50% of overall sales well above the 25% mark set five years ago.
  4. Applied Testing: Although projected growth for this segment is the best (mid-20 percent range), in reality the company has struggled to grow in this niche. Percentage of sales wise, the business accounts for only around 5% of overall revenues, which is below the 10% range in 2006.

The company’s growth projections from 2007 are quite different from what they actually achieved. Below is a graph taken from the presentation ‘Qiagen – Sample and Assay Technologies’ that was given by the CEO Mr. Peer M. Schatz at the 2007 Analyst Meeting:



The slide indicates what was actually achieved, taken from last year’s annual report:




A clear disconnect between the two is apparent and it appears as though the company has abandoned the Applied Testing business, in spite of the highest projected growth. Was it too hard a target to achieve or was it a management miscalculation? Either way, a shareholder has the right to question the competency of the management.

To its credit, the management did an excellent job in growing the MDx business at an accelerated pace than that projected, thereby masking the inadequacies in other areas. A lot of that growth came with the acquisition of Digene – its HPV test product accounts for around 30% of total revenue. A related risk that product carries is that most of the revenues from that product comes from a limited number of reference laboratories and losing one or more of them directly impacts the bottom line. At the Analyst Day in 2010 the CEO’s presentation predictably accented growth in their MDx business. The ‘Qiagen’s 4Ps Strategy in MDx’ presentation endorsed its success in expanding their base profiling business into three other areas – Prevention, Personalized Healthcare, and Point of Need. Management projection is at around 15% CAGR for this business in the next 5 years. Organic growth as an outcome from above-average investment in R&D (10-12% of revenue) along with strategic acquisitions is anticipated to account for this growth. Expectation is to continue the success enjoyed in expanding products on platforms. The QIAensemble platform (Prevention) is used for screening Cancer Dx, Infectious Diseases, Vaginosis, etc. besides its core HPV testing. Likewise, the QIAsymphony (Profiling and Personalized Healthcare) platform is used for profiling HIV, HBV, HCV, etc., in the Profiling area and for KRAS, BRAF, EGFR, etc., in the Personalized Healthcare area. Similar expansion is expected for their ESE Tube Scanner platform that they acquired recently for use in Point of Need applications.

Qiagen’s integrated approach to sample and assay technologies is a competitive edge as quality in sample preparation is a prerequisite for reliable molecular assay solutions. Promega, Life Technologies Corporation (from the merger of Invitrogen and Applied Biosciences) and a host of other companies are in the offing to adopt a similar approach in the future. In the HPV testing arena, the company currently has dominance, as it is undisputed that the test when used alone or in conjunction with the Pap test has the ability to enable significant diagnostic capabilities for cervical disease and cancer. The platform-based automation adds to this advantage. The field is however becoming crowded as competitors like Roche Diagnostics, Gen-Probe, and Hologic are developing and/or marketing FDA approved HPV testing suites.

Below is a look at the company’s sales by geographical region:



As shown, sales outside of the Americas, Germany, and Switzerland is showing a rapidly rising trend with Asia in the vanguard. As a percentage of total sales, the figure is less than 20% and profitability is very low in Asia. There is opportunity for growth both in terms of revenue and income in these areas.

Finances:

Below is a table that summarizes Qiagen’s financial position:


Year200720082009
Revenue0.65B0.89B1.01B
Net Earnings50M90M138M
Shares Outstanding176M204M214M
Earnings per Share0.280.440.64
YOY Earnings Growth(39.13)%57.1%45.45%
YOY Revenue Growth39.49%13.48%13.09%
Net Profit Margin7.7210.0313.64


While the financial figures over the last three years show a rising trend, couple of issues worth noting are:
  • Average share counting is increasing and
  • Earnings growth is very modest when one-time items are removed (normalized earnings).
It is only reasonable to ponder on how effective management has been in increasing shareholder value in the recent past.

Quantitative Rating:

Below is a spreadsheet showing our quantitative rating summary of Qiagen (click for an understanding of the ratings on this spreadsheet):


  • Qiagen scores 5.5/10 on its ability to beat inflation: Return on Equity is modest but Free Cash Flow and Net Margin are both well above average. PEG ratio, a measure of valuation is very rich at 1.63.
  • Corporate Abuse rating drags at 0/10 as their executive compensation is egregious: Corporate Abuse rating is 0/10 as their executive compensation is high, although not egregious: The CEO makes around $1.89M, over 50 times the average worker.
  • Income Generation and Liquidity at 6.67/10: The company doesn’t pay a dividend but the stock is optionable and is very liquid. Our income generation and liquidity rating is above average at 6.67/10.
  • Volatility ranking is an almost perfect 9/10: Beta is outstanding while Debt to Equity Ratio and Earnings Growth Consistency are both well above average.
  • Capacity to increase dividends at 6.33/10: As Qiagen is yet to announce a dividend policy but have good earnings, our rating for the capacity to increase dividends comes in above average at 6.33/10.


The overall quantitative rating or ‘the OFB Factor’ came in at 5.5/10 which is average.


Summary:

Qiagen NV with an enterprise value of $4.42B and a forward PE of 18.38 have grown at a healthy clip on a revenue basis over the last three years but earnings growth has been anemic. Going forward, the company has invested through acquisitions and R&D spending in the Molecular Diagnostics (MDx) area with a projected CAGR for that business in the 15% range. While impressive, the shareholder needs to consider that the other half of the business is not projected to grow very much at all.

Sales outside Americas and EU are an area the company can focus on to realize good growth. It is unclear whether it is a priority with the management. Qiagen’s business enjoys good margins and shows a rising trend in the last three years. Assuming, the pace of acquisitions will slow down as the business matures; scope exists for further margin expansion.

The company has a PEG ratio of 1.63, which indicates that the valuation is very high. Our quantitative analysis showed the company as having a marginally ‘Above Average’ rating. As the valuation is high and there are considerable risk factors, we do not recommend purchase of shares of Qiagen NV stock at this time.

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