Qiagen- another way to play the diagnostics market

In 2010, I wrote about Illumina which doubled since.

I have not given up on the diagnostics space but I am no longer interested in ILMN. Its valuation is high while the growth rates have slowed.

I am now looking at Qiagen – QIA GY.

Why the interest?

There are three main arguments.

a)      The space may see accelerated growth

The healthcare world is undergoing change as treatments are becoming more customised.

In the future, it is likely that drugs dosage will be personalised according to each individual’s characteristics.

This means that diagnostics will play a larger role than today.

Nowadays, diagnostics are associated with 80% of medical decisions but represent only 2% of overall revenues.

Seeing a doubling will imply that industry wide revenues grow 8% pa before even taking into account higher healthcare expenditures (which may not happen in the developed world though). Industry leaders could then see revenues grow at a 10% annual clip. Qiagen’s are expected to grow around 5-6% only, which means that the market thinks diagnostic revenues will grow maybe 2pp faster than total healthcare revenues.

Other applications are of course a return of pandemics, such as tuberculosis, for which they developed a new test.

b)      The company is a market leader and has a strong business model

Qiagen is a market leader in most of its 4 businesses (molecular diagnostic, applied testing, pharmaceuticals and academia). It is just now investing in emerging markets which implied that topline may accelerate from the current level going forward.

More importantly, its business model is the Nespresso one: 15% of sales are instruments for which they sell the consumables (the remaining 85%). Thus, customers are locked for 5-10 years, improving revenue predictability.

Capital intensity remains high at the moment (capex/sales around 7-8%) which accounts for the international expansion.

c)       The sell-side is widely disagreeing about how much money it will make

Surprisingly, while analysts agree on revenue forecasts (dispersion of 3%), they do not on Ebit (30% dispersion), even on 2013 (and we are already 5 months into it).

It is likely that analysts are anchored on past negative events (competition in HPV testing eating sales, former leverage and also uncertainties about the launch of the major product: QIA Symphony). As the company has beaten expectations in the last 4 quarters, it looks like the higher estimates are more accurate for now.

Valuation notes

This means that the stock can be valued as high at 22x EV/Ebit 2014e if you are pessimistic (unattractive) or less than 12x 2014e (a relative bargain). With net debt/ebitda at 0.5x and a FCF yield above 6%, Qiagen will soon be debt-free and will consider either further acquisitions or buybacks/dividends. 

One drawback is the poor return on capital as Qiagen has made a number of acquisitions, whose goodwills burden the balance sheet. 

Finally, with a 100% free-float and the example of Roche pursuing Illumina, it could be that a predator arises.

Conclusion

Illumina is predicted to grow revenues at more than 12% pa while Qiagen’s forecast is a moremodest 6% pa. I rather follow the lower expectations and be positively surprised.

Should the diagnostic industry grow its share of total healthcare revenues, Qiagen should grow its topline above the current estimated 6%pa and generated strong returns for their investors.