TMO - Qiagen Offers Growth And Margin Leverage Beyond The Pandemic Deceleration

Summary

• Qiagen is seeing a pandemic-driven hangover in its financial results, but underlying double-digit revenue growth was ahead of expectations.
• The pandemic meaningfully accelerated system placements for its sample prep, diagnostics, and PCR businesses, and now management can shift to driving more utilization of higher-margin consumables.
• Between further menu expansion in diagnostics and healthy research lab budgets, I'm looking for mid-to-high single-digit revenue growth over the next few years, with mid-30%'s EBITDA margins.
• Qiagen looks undervalued as a high-quality consumables-driven life sciences and diagnostics company.

As is the case with most diagnostics and life science companies, Qiagen ( QGEN ) is going to be working off a bit of a hangover as COVID-19-related revenue decelerates further. On the other side of that process, though, is a company with strong footprints in life sciences (sample prep, PCR, and genomics) and diagnostics and the opportunity to not only build upon existing businesses, but make value-added bolt-on deals while also producing margin and free cash flow leverage.

You don’t go looking for conventional bargains in the life sciences and diagnostics space, particularly among companies that don’t have operational or competitive issues, and Qiagen is no exception. Even so, I believe low double-digit FCF growth and mid-30%’s EBITDA margins, combined with opportunities to profitably grow its base businesses, drive worthwhile potential from here.

Fourth Quarter Results Show Ongoing Pandemic Headwinds, But Core Results Were Fine

Qiagen’s fourth quarter results weren’t thesis-changing, but that’s fine as the company is in a good position to continue growing the business in 2023 and beyond. Academic and government research lab funding is solid, diagnostic reimbursement is fine, and the normalization of health care system volumes should be supportive for the business.

Revenue declined 9% in constant currency terms, beating by 2%, as pandemic-related sales declined 64% (to 13% of the total) and non-pandemic revenue rose 15% (beating by 4%). While as-reported consumables sales declined 11% and instrument sales rose 6%, both were up double-digits adjusted for pandemic-driven sales.

Sample Technologies posted a 16% revenue decline (a 3% beat) as reported, with non-pandemic sales up high single-digits. Diagnostic Solutions revenue was up 4% (a 3% beat), with good growth in QuantiFERON (up 15%) and QIAstat (up 21%) offset by a 21% decline in NeuMoDx driven by COVID-19. I don’t believe management quantified ex-pandemic sales for NeuMoDx beyond “higher”. The PCR and Nucleic Acid Amplification business saw a 22% revenue decline (an 8% miss), with non-pandemic sales up 20%, and Genomics sales up 2% (inline).

Adjusted gross margin declined 60bp to 67%. Adjusted operating income declined 31%, with margin down 710bp to 27.1%; operating income beat expectations by 1.5%, though the margin was about 20bp short.

Shifting Back To The Base Business, Including Menu Expansion

The pandemic generated unprecedented opportunities for many life science and diagnostics companies, but at the price of significant operational disruption. Companies were scrambling to produce and distribute tests and testing equipment as quickly as possible, and that led to some comparative neglect toward other parts of the business.

With the world getting back to normal, I look for Qiagen to concentrate on building upon its already-strong footprints across its major addressed markets.

Helped by the pandemic, Qiagen saw a significant increase in diagnostic testing system placements, with QIAstat-Dx placements up 21% (to over 3,500) and NeuMoDx placements up 36% to over 300. Now the company is moving back to focusing on expanding the test menu for these systems. For QIAstat-Dx, management is looking for a new GI panel in the back half of the year, as well as the submission of a new meningitis panel, while NeuMoDx will see new transplant (CMV and EBV 2.0) and sexual health (CT/NG) tests in 2023, as well as additional tests (GBS, HBV/HCV/HIV, and TV/MG) in 2024 and 2025.

I also expect improved results from the QuantiFERON platform. Qiagen already has commanding share in latent tuberculosis testing (with IGRA tests), and I expect testing to pick up now that the pandemic is no longer such a pressing concern for schools, healthcare facilities, senior care facilities, and prisons. The company is also looking forward to the launch of its Lyme diseases test on this platform, a likely $400M-$600M annual opportunity, and I expect to see further test development on this platform in the coming years.

In Sample Technologies and PCR, Qiagen has seen strong placement growth for QIAcube (up 8% to over 14,000) and QIAcuity (up 78% to over 1,300), and with healthy lab research budgets, I expect good follow-on consumables revenue over the next few years.

The Outlook

With business settling down to a more predictable pattern, I do think M&A is going to feature more prominently in the story given a healthy balance sheet and prospective free cash flow growth. The company recently acquired Verogen, a provider of sequencing products for forensics (an existing area of strength for Qiagen), and I believe future deals will be a lot like this – adding platform technologies/products to areas where Qiagen is already strong.

The one exception could be in areas like oncology and precision medicine. Qiagen wants a bigger presence in these markets (and has for some time), and I could see more meaningful acquisitions in this space as a way of accelerating that plan.

Qiagen could also find itself involved in the other side of M&A. There were rumors back in the fall of 2022 that a merger with Bio-Rad ( BIO ) was a possibility, and there was one with Thermo Fisher ( TMO ) some time back. I believe Qiagen can stand on its own, but I also believe that it would make sense as an acquisition/merger target to at least a few players in the broader life sciences and diagnostics space.

I’m expecting long-term adjusted revenue growth in the 6.5% to 7% range, as Qiagen continues to leverage its strong installed base in sample prep, diagnostics, and PCR with additional consumables offerings (reagents, test panels, et al) and benefits from underlying growth in research activity.

I do expect a step down in margins, with EBITDA margins likely to move from the high-30%’s to the low/mid-30%’s, with longer-term growth back toward the high-30%’s. With the pandemic giving a significant boost to system placements, I’m looking for Qiagen to achieve mid-20%’s free cash flow margins (driven by high-margin consumables running on those systems) relatively quickly, with gradual improvement toward the high-20%’s driving low double-digit adjusted FCF growth.

Discounted cash flow suggests a high single-digit long-term annualized potential return, which is pretty good for the sector, and using my growth and margin-based med-tech valuation approach, I think a forward revenue multiple of 6.25x, supporting a near-term fair value of $54, likewise supports the bull case.

The Bottom Line

With quality life sciences and diagnostics companies (and I would include Danaher ( DHR ) and Thermo on this list), you don’t go in expecting to find obvious conventional bargains, but finding some level of undervaluation is typically good enough. To that end, I think Qiagen is a name worth considering as investors move past the COVID-19 cliff and start reevaluating these companies on their longer-term core growth and margin qualities.

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