Quidel (QDEL) is a high growth company. The company’s revenue has grown at a CAGR of 27.56% in the last five years. The company’s stock has corrected significantly from the top earlier this month before bouncing back a little. I am bullish on the stock’s valuation around the current price. The company is a long-term growth story based on few of its growth drivers. Long-term investors can buy the stock around the current price, utilizing the pullback.
Quidel develops rapid diagnostic testing solutions. These diagnostic testing solutions have been divided into Quidel’s four product categories: rapid immunoassay, cardiac immunoassay, specialized diagnostic solutions and molecular diagnostic solutions. On October 6, 2017, Quidel acquired the Triage MeterPro cardiovascular and toxicology business, and B-type Naturietic Peptide (BNP) assay business from Alere, which is now a part of Abbott Laboratories (ABT).Source: Pixabay
Sofia 2 FIA
Quidel’s Sofia 2 FIA (fluorescent immunoassay) system is one of its major growth drivers. The Sofia 2 analyzer offers Sofia FIA tests and software. Sofia 2 FIA can be offered in different operational modes to fit in with both small and large laboratories. In addition, it has other features that facilitate its use in hospitals, medical centers and small clinics.
Sofia 2’s proven lateral-flow technology and advanced fluorescence chemistry make it the next generation product in diagnostic testing. Sofia 2 can deliver highly accurate and automated Influenza A+B and RSV results in as few as 3 minutes. As a result, the device will see high adoption rates in the coming years.
The company’s Triage MeterPro device is another growth driver. Triage MeterPro is a menu-driven portable testing platform that is designed to offer diagnostic results quickly and easily. The device has the ability to use whole blood, plasma or urine as sample and its test menu includes cardiovascular and toxicology assays.
Triage MeterPro helps in diagnosis and assessment of patients suffering from congestive heart failure, acute myocardial infarction and acute coronary syndromes. It can reduce hospital admissions and hospital stays, and improve clinical outcomes. Therefore, I believe, its demand will increase as a point-of-care solution in the coming years.
The company’s AmpliVue hand-held molecular diagnostic assay platform is another growth driver. With this device, the detection of the pathogen can be done using a cassette that combines Quidel’s proprietary HDA (helicase dependent amplification) technology with lateral flow detection technology. HDA is an isothermal DNA amplification method.
With AmpliVue, tests can be brought in-house. It helps in reducing turnaround time and reducing hands-on time. With it, large capital investment for molecular testing can be avoided. As a result, the product will see significant growth opportunity in the coming years.
Second Quarter 2020 Financial Results
Quidel’s total revenue for second quarter 2020 came in at $201.8 million, up 86% from $108.3 million in the year-ago period. Non-GAAP EPS in the second quarter of 2020 was $1.86, compared to $0.36 in the year-ago period. GAAP EPS was $1.55, compared to $0.03 in the year-ago period. Quidel generated nearly $60 million in cash flow from operations in the second quarter.
The company’s rapid immunoassay segment revenue came in at $80.6 million, an increase of 270% YoY, primarily driven by $56.3 million in revenue for the company’s Sofia SARS Antigen test. Revenue from the company’s cardiac immunoassay segment was $54.2 million, a decline of 20% YoY, driven primarily by reduced hospital visits by chest pain patients due to the COVID-19 pandemic. The specialized diagnostic solutions segment revenue was $11.8 million, a decrease of 18% YoY. The molecular diagnostic solutions segment revenue increased $51.0 million to $55.2 million, driven primarily by Lyra SARS-CoV-2 assay revenue of $52.7 million.
The company’s total revenue in the second quarter increased 86% YoY driven by COVID-19 tests, namely Sofia SARS Antigen and Lyra SARS-CoV-2 tests. Total revenue from COVID-19 products came in at $109.0 million. However, I believe revenue growth from COVID-19 products will gradually slow down once the COVID-19 vaccine is commercially available in the market and the pandemic is over. The point to note here is that even with vaccine COVID-19 won’t be fully eliminated in the next few years, although the pandemic will be over. The most likely scenario is coronavirus will stay like the influenza virus. As a result, Quidel’s COVID-19 revenue will finally settle at a lower level. However, the company has few products with high growth potential (growth drivers), and it has molecular and rapid immunoassay (Sofia) tests that are currently under development (pipeline products), which will drive its revenue higher in the long term.
Competition in the in vitro diagnostics market is intense, and innovation and product development are driving growth in this market. Quidel competes in this market based on speed to result, specimen flexibility, product menu, clinical needs and price. Its competitors include Abbott Laboratories, Thermo Fisher Scientific (TMO), Becton Dickinson, and Company (BDX), Meridian Bioscience (VIVO) and Danaher Corporation (DHR).
In order to remain competitive in the diagnostics market, the company continuously develops new products and improves existing products. As a result, I believe the company’s chance of losing market share is limited. However, if Quidel’s business slows and its profitability reduces, and therefore it has less resources available to fund R&D activities, it may have to reduce new product development programs and curtail product improvement programs. Since most of Quidel’s competitors are very large companies, they have the ability to develop competitive products and sell them in the market at lower prices. If this happens, Quidel’s business will slow and its profitability will reduce.
Quidel operates in the competitive landscape mentioned above. The company’s core competencies include instrumented immunoassay development, monoclonal antibody development and molecular assay development. These products will drive the company’s revenue growth in the long term.
Quidel’s most similar peers include Abbott Laboratories, Thermo Fisher Scientific, Becton, Dickinson and Company, Meridian Bioscience and Danaher Corporation. Quidel’s forward P/E multiple is 19.98x, compared to Abbott’s 31.04x, Thermo Fisher’s 27.91x, Becton, Dickinson’s 26.49x, Meridian Bioscience’s 17.43x and Danaher Corporation’s 37.68x. Quidel’s trailing twelve months price to sales multiple is 16.33x, compared to Abbott’s 5.72x, Thermo Fisher’s 6.40x, Becton, Dickinson’s 4.33x, Meridian Bioscience’s 3.19x and Danaher Corporation’s 8.53x. Quidel’s trailing twelve months price to free cash flow multiple is 70.35x, compared to Abbott’s 39.44x, Thermo Fisher’s 39.60x, Becton, Dickinson’s 29.66x, Meridian Bioscience’s 21.28x and Danaher Corporation’s 40.24x.
Quidel is richly valued compared to its peers in terms of trailing twelve months price to sales multiple and trailing twelve months price to free cash flow multiple. In terms of forward P/E multiple, the stock is attractively valued. Overall, the stock is attractively valued around the current price post correction. The company has an okay balance sheet comprising of $72.59 million of cash and $109.40 million of debt. The reason for the company’s rich valuation in terms of price to sales and price to free cash flow multiples is its revenue growth from the COVID-19 products in the last couple of quarters. The company’s Sofia 2 FIA, Triage MeterPro and AmpliVue products will drive revenue growth in the next five years. Plus the company’s high-growth molecular diagnostics business, driven by its Solana MDx instrumented system, will also drive revenue growth in the next five years. As far as buying Quidel’s stock is concerned, I believe long-term investors can buy the stock around the current price.
In the last five years, the company’s revenue has grown at a CAGR of 27.56%. I believe revenue will continue to grow at least at a CAGR of high-teens in the next five years, given the company’s strong product portfolio and strong pipeline of products. The company’s trailing twelve months revenue is $655.10 million. At a CAGR of 18%, the company’s mid-2025 revenue will be $1499.00 million or $35.73 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 3x and 20x. Currently, the stock is trading near the top-end of the price to sales multiple, because it is getting support from the forward P/E multiple, which is only 19.98x. If a price to sales multiple of 20x is applied on the company’s mid-2025 revenue per share, its mid-2025 share price will be $714.60.
Apart from COVID-19, a significant portion of the company’s revenue comes from influenza tests. The gross margin that comes from influenza tests is significantly higher than the gross margins coming from many of the company’s other core products. As a result, if the company’s revenue from influenza tests decline, for example, due to a mild flu season, market share loss or price pressure, the company’s overall revenue growth and profitability could be negatively impacted.
There are only a few distributors who dominate the medical diagnostics market, and these limited number of key distributors account for a significant portion of the company’s total revenue. In the international market also the company depends on few key distributors for the majority of its sales. If the company’s relationship with any of these distributors is terminated, and a suitable alternative is not timely found, the company’s revenue growth could be temporarily negatively impacted.
Quidel said in its 10-K that its aim is being a broader-based diagnostic company capable of delivering consistent revenue growth and operating results. I believe the company will develop a significant number of new proprietary products in the long term. Consequently, its revenue and operating results will continue to grow over the long term. For long-term investors, Quidel is an ideal company to hold.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.