Qiagen reported fourth-quarter results above our expectations on Tuesday on account of better than expected revenue, tight cost controls, and a lower tax rate. We plan to raise our fair value estimate modestly to reflect the outperformance and higher-than-anticipated earnings potential in 2013, but consider the risk/reward balanced at current valuation levels. Anemic spending in global academic research, intense competitive pressure within the U.S. HPV market, and continued macroeconomic difficulties are unresolved issues, rendering Qiagen shares fairly valued, in our opinion.
Overall, Qiagen ended 2012 on a strong note. Fourth-quarter net sales rose 4% year over year to $346.5 million, driven by growth across most customer classes and geographic regions. The molecular diagnostics segment continued to shine as the successful global rollout of QIAsymphony, strong QuantiFERON TB penetration, and contributions from the AmniSure acquisition more than offset the decline in HPV sales. The applied testing division also performed better than our internal projections, highlighting another pocket of strength for the company.
The academia and pharma units were less robust–a trend we predict to continue throughout 2013. Adjusted gross margin and operating margins expanded significantly from the prioryear period as higher sales and marketing costs were more than offset by lower R&D, G&A, and milestone expenses. Excluding one-time items, adjusted earnings per share rose 10% to $0.34, soundly exceeding our estimate and consensus.
Qiagen’s initial 2013 outlook calls for revenue in line with and adjusted earnings above our forecast. With solid contributions expected from molecular diagnostics and recent acquisitions helping to offset pressure within the U. S. HPV and academia segments, we view these projections as achievable. Potential growth drivers should include progress on new and existing pharmaceutical partnerships (including the recent FDA approval of Qiagen’s KRAS companion diagnostic for use with Erbitux), a broadening geographic footprint (particularly into high-growth emerging markets), new product ramp-up (most notably QIAsymphony and recently acquired Intelligent Bio- Systems), and share buybacks. Qiagen’s efficiency program should further help to support earnings throughout the year, in our opinion.
However, academic funding weakness in the U.S. and a highly volatile European economy are notable pressures. Given Qiagen’s exposure to these markets–roughly 25% of revenue is tied to academic and government budgets; nearly 40% of sales are generated in Europe–we believe the company may face steeper-than-anticipated headwinds. Furthermore, we note that QIASymphony, a crucial component of the firm’s strategy in the molecular diagnostics market, has not yet reached critical mass, particularly within the U.S.
While the platform does afford differentiated components, the field is crowded with fierce competition from large, established foes and Qiagen’s ultimate position remains uncertain. We are cautious that competitors’ customers may not be willing to swap suppliers or learn a new method and need more confidence that Qiagen is able to overcome such obstacles.
Furthermore, we believe challenges within the HPV franchise, a need for heightened R&D spend and external acquisitions to drive innovation, and soft growth within the pharma and academic segments may limit Qiagen’s growth in the medium term. We remain enthusiastic about the firm’s potential over the long term but believe shares are fairly valued given the aforementioned issues and lack of visibility for the next 1-2 years.
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