2023-09-27 06:56:11 ET
Summary
- QuidelOrtho benefited from the pandemic, using proceeds to buy back shares and announce a large deal.
- The acquisition of Ortho Clinical Diagnostics added diversification but also increased leverage.
- QuidelOrtho's shares have been under pressure, but a recovery is possible, even as the pandemic retreats and stable growth returns.
On the final day of 2021 I offered some thoughts on shares of QuidelOrtho ( QDEL ) after the pandemic was on its retreat and a large deal was announced. The company benefited from the pandemic, with proceeds used to buy back shares and announce a large deal.
That deal created diversification but added leverage as well as Quidel was seeing a huge reversal of its performance during the pandemic, originally for the better, thereafter for the worse. Ironically, the added debt outweighed added diversification amidst the pullback in the results. While the situation is a bit concerning, I see a road to recovery down the line, making me upbeat, although that there is some volatility to be expected.
A Recap
Quidel is a provider of rapid diagnostic testing solutions, virology assays and molecular diagnostics systems. Pre-pandemic, that is the year 2019, Quidel posted a modest 2% increase in sales to $535 million on which the company posted operating profits of $93 million and earnings of $1.73 per share.
With 43 million shares trading at $70 at the time, the company commanded a $3.0 billion market value, while holding a tiny net cash position. Even as adjusted earnings came in at $3.07 per share, valuations were quite demanding with growth not being too impressive.
The business showed strong growth in 2020 with first quarter sales up 18% to $175 million, second quarter sales up 86% to $202 million, as third quarter sales came in as high as $476 million. Fourth quarter sales of $809 million even surpassed the revenue number for all of 2019, as the company saw a huge boom from the pandemic, with quarterly earnings coming in as high as $11 per share! This made that shares saw volatile and higher trading action, with shares trading in a $150-$300 range.
With the pandemic soon on its retreat, shares fell to the $100 mark by April 2021 as volatility started to subside. This came as first quarter sales for 2021 fell to $375 million and second quarter sales fell to $177 million, with non-Covid-19 revenues stuck just below $100 million per quarter.
With shares trading at $160 in December 2021, the company commanded a $6.7 billion equity valuation, or $6.1 billion enterprise valuation if we factor in the net cash position, roughly double the $3 billion valuation pre-pandemic.
Taking advantage of the strength, the company acquired vitro diagnostic company Ortho Clinical Diagnostics in an $8 billion deal, structured as a cash and stock deal. Ortho was set to add $2 billion in sales at similar multiples as Quidel, but Ortho´s business seemed more stable and diversified than Quidel which saw a huge boom from the pandemic.
The market did not like the deal as shares fell from $166 to $140 overnight, with shares losing some $1.1 billion in value in response to the deal, with shares down to $127 by year-end 2021. Pro forma net debt came in at $3.3 billion which was high as EBITDA was quite volatile, although I liked that Quidel threw in a stock component in the deal.
Given the complexity of the deal and operating condition in Quidel, I concluded not to get involved, but keep an eye on the developments.
Shares Are Stuck
With shares trading in the low $100s late 2021, shares have gradually come under further pressure as they fell to the $80s by year-end 2022, to now trade around the $70 mark. This makes that shares are down by a roughly 40% over a near two year-period.
The deal between Quidel and Ortho finally closed in May 2022. Fast forwarding to February this year, the company posted its 2022 results, the first (partial) year in which the merger was effectuated. Annual revenues nearly doubled from $1.70 billion to $3.27 billion, as adjusted earnings rose by a percent to $13.80 per share.
The fourth quarter results showed the impact of the pandemic on the reverse with sales of $866 million reported on which a mere $0.45 per share in GAAP earnings were reported based on a share count of nearly 67 million shares, as adjusted earnings fell by two-thirds to $1.76 per share. Net debt was down to $2.3 billion, and it was good to see debt being down by a billion since the announcement given the underlying trends (i.e. the retreat of the pandemic) as fourth quarter EBITDA only trended at a billion.
In May, the business posted first quarter sales of $846 million, down 44% on a pro forma basis (as if the deal would have closed a year before). With sequential revenues being flattish, adjusted earnings came in flattish at $1.80 per share (that is sequential) with most of the discrepancy from a GAAP $0.73 per share number due to amortization charges, as adjusted EBITDA was stable at $245 million, while net debt fallen just below $2.2 billion.
In August, Quidel reported second quarter sales of $665 million, down 26% on a pro forma basis, with the business posting a GAAP loss of $0.80 per share with adjusted earnings only coming in at $0.26 per share after the company made no less than ten adjustments to the earnings number. The lack of earnings made that net debt ticked up to $2.3 billion, worrisome as quarterly EBITDA only came in at $113 million, which annualized works down to a 5 times leverage ratio.
Despite the seasonally softer quarter, the company largely maintained the full year sales guidance with sales seen between $2.88 and $3.08 billion, with non-respiratory revenues seen at a midpoint of $2.29 billion and respiratory revenues seen at $610-$775 million, including a $300-$400 million Covid-19 contribution. Despite the very soft second quarter, the company still sees adjusted earnings between $4.85 and $5.30 per share, down thirty to forty cents from the previous guidance as the quarter was soft after all.
Appeal Emerges
The 67 million shares of Quidel now value equity at $4.8 billion at $71 per share, as an enterprise value of $7 billion is modest. In fact, it is lower than the peak valuation of Quidel, while the business announced an $8 billion deal for Ortho on top of that as well. Based on the adjusted earnings numbers, the company trades around 14 times adjusted earning which looks reasonable, but comes amidst many adjustments to earnings as some leverage works remains to be done.
That being said, leverage concerns should alleviate if the results recover in the seasonally stronger quarters to come. Moreover, about three quarters of the business is showing stable and steadily growing results, notably labs and transfusion medicine. This comes as the volatile Covid-19 component is rapidly becoming less important, therefor having less potential to hurt the reported results.
This means that revenues should be stable and perhaps shows some growth again, which should translate on to the bottom line. Such performance could quickly avail any leverage concerns, creating a nice roadmap for the shares to see a re-rating over time, in their approach to break the $100 mark again.
For further details see:
QuidelOrtho: Thoughts After A Tough Time