Qiagen NV(QGEN), a provider of sample and assay technologies,reported third-quarter 2014 adjusted earnings per share (EPS) of 27 cents, in line with the Zacks Consensus Estimate. Adjusted earnings, however, exceeded the year-ago equivalent number by 3.8%. The earnings improvement can be attributed to strong growth in sales as well as margins.
However, considering the one-time items, reported EPS came in at 14 cents, a decline of 21.4% from the year-ago equivalent.
Revenues in Detail
Adjusted net sales in the quarter amounted to $336.8 million, up 4% year over year (same at constant exchange rates or CER), almost in line with the Zacks Consensus Estimate. The top line also met the company's guidance of 4–5% adjusted net sales growth.
The year-over-year top-line growth came primarily on the back of strong sales of consumables and related revenues and instruments as well as improved results observed in the Molecular Diagnostics, Applied Testing and Pharma customer classes. At CER, growth was attributed to about one percentage point from the bioinformatics acquisitions of Ingenuity, CLC bio and BIOBASE, and the remaining from the rest of the business. Excluding sales of U.S. HPV test products, adjusted net sales were up 10% year over year at CER.
With respect to product categories, Consumables and related revenues (accounting for 87% of net sales) increased 3% year over year at CER. Instrumentation revenues (rest 13%) demonstrated 11% growth at CER.
Region wise, the Americas (47% of revenues) witnessed a drop of 3% in sales growth at CER, while revenues from Europe-Middle East-Africa (33%) and Asia-Pacific/Japan (19%) increased 13% and 6%, respectively, at CER.
Segments in Detail
Qiagen primarily generates revenues from Molecular Diagnostics, Applied Testing, Pharma and Academia, which represented 52%, 8%, 19% and 21% of adjusted net sales, respectively, during the quarter. Molecular diagnostics sales registered a 6% increase at CER, driven by the ongoing solid expansion of Qiagen's growth drivers, which in turn, overcame the expected decline in U.S. HPV test product sales. The rest of the portfolio grew at a strong 19% at CER.
Sales derived from Applied Testing climbed 7% at CER, the improvement originating from sales gains from both consumables and instruments, particularly in Human ID/ forensics, with the expansion of the bioinformatics portfolio also contributing to growth.
Pharma sales rose 4% at CER owing to higher instrument sales in the third quarter coupled with a similar single-digit increase in contributions from consumables and bioinformatics, driven by strong expansion in the Americas. Academia sales remained unchanged year over year as a modest decline in instrument sales and largely flat consumable sales, compared to the prior-year quarter, neutralized improving funding conditions in some European countries and the U.S. during the reported quarter. However, Qiagen expects funding levels to improve in the fourth quarter of 2014 and through 2015 although they are likely to remain below the absolute levels of previous years.
Operational Update
Adjusted gross profit rose 5.2% to $244 million in the third quarter. Gross margin improved 80 basis points (bps) to 72.4% from 71.6% in the year-ago quarter. Adjusted operating income in the quarter was $84.8 million; up 6.7% from the year-ago tally of $79.5 million. Consequently, operating margin improved 60 bps to 25.2% in the reported quarter.
Financial Update
The company exited the quarter with cash and cash equivalents and short term investments of $692 million as on Sep 30, 2014, against $380.2 million as on Dec 31, 2013.
Net cash provided by operating activities at the end of the reported quarter was $208.9 million, up from $176.8 million in the third quarter of 2013. This resulted in free cash flow of $148.7million in the quarter, up 23% from the year-ago equivalent number.
Qiagen launched its third $100 million share repurchase program in early August after completing its second $100 million program in mid-2014. As of Oct 27, 2014, the company purchased approximately 1.39 million shares at a volume-weighted average price of approximately $22.65 per share at CER for a total of approximately $31.5 million.
Outlook
Qiagen revised its full year 2014 outlook. The company now expects 2014 adjusted EPS to be approximately $1.08 at CER (previously $1.07–1.09 at CER) compared to $1.02 per share in 2013. The Zacks Consensus Estimate of $1.08 coincides with the guided number. Adjusted net sales are now expected to rise approximately 4% at CER (earlier approximately 4–5% at CER). This current outlook takes into account sales growth of approximately 8% at CER from the current business portfolio, as well as contributions from the bioinformatics acquisitions, which will offset the adverse impact of up to 4% from reduced sales of HPV products in the U.S.
For the fourth quarter of 2014, the company expects adjusted sales growth of about 4% at CER and adjusted EPS of 33 cents. The Zacks Consensus Estimate for revenues is pegged at $376 million while that for EPS is 34 cents.
Our Take
After a sluggish performance in the second quarter of 2014, an improvement was observed in Qiagen's Asia/Pacific segment which delivered faster growth in the reported quarter with solid double-digit growth in China, mainly driven by performance in Molecular Diagnostics. However, results of the top seven emerging markets were disappointing, wherein sales growth figured below the standard double-digit CER growth number.
Nevertheless, we believe Qiagen's strategic collaborations, test menu expansions and moderately balanced international expansion will likely drive growth over time.
Qiagen currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
However, investors interested in the biomedical industry may consider better-ranked stocks like Biogen Idec Inc. (BIIB), Heska Corporation (HSKA) and Illumina Inc. (ILMN). All the three stocks sport a Zacks Rank #1 (Strong Buy).
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