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We had covered QuidelOrtho Corporation (NASDAQ:NASDAQ:QDEL) 4 times previously. Therefore, in this stock pitch, we analyzed whether the company’s fundamentals remain and then compared Quidel with its peers to examine the management’s claim that it has a strong ranking in customer service and system performance and then determine whether our previous financial assumptions align with the company’s first half results and full-year management outlook.
Fundamentals Remain
To determine whether Quidel’s fundamentals remain, we looked at our previous analyses of Quidel to determine if our views on Quidel still hold, supported by evidence from Quidel’s latest earnings briefing.
Views
Still Holds True
Evidence
Quidel is the only pure-play POC diagnostic company with the 4th largest market share in the high-growth (9.89%) POC market providing a wider range of products relative to its competitors.
Yes
“Point of care was particularly strong here the shipment of the last 35 million tests to the federal government pursuant to our 108 billion test contract. However, we still grew mid-teens, excluding COVID related revenue”
Quidel has a global presence by utilizing global distributors better than its competitors resulting in lower sales & marketing expenses as a % of revenue (12%)
Yes
“We’re currently working with CVS, Walgreens, Amazon, and other major retail distributors on ways to expand our availability and are excited that Quick View recently became available via Amazon Prime. We also sell through over 5,000 independent pharmacies via our partnership with McKesson and are continuing to pursue additional partnerships with institutional and government agencies to advance testing accessibility.”
Increased exposure in China mainly through its past acquisitions.
Yes
“Quarterly performance by geography on a constant currency basis, North America revenue grew 59%, EMEA grew 6%, China grew 25% and other regions which includes Latin America, Japan and other Asia pack markets grew 2%.
China is a very profitable market for us and is a big investment area for us as evidence, we are in the process of expanding our footprint with both analyser and assay partnerships with the goal of providing a local manufacturing presence in the near term.”
We expect it to grow at 11.65% organically even without covid revenue.
Yes
“Recent quarter, excluding COVID related revenue total revenue increased by 11% in constant currency”
Quidel has a successful acquisition strategy driving its outsized revenue growth, with a 0.61 revenue-to-acquisition cost ratio in 2018.
Yes
“Joint commercial efforts as quickly as possible beginning with a U.S. lead sharing program that is expected to accelerate cross sales.
While our integration is still in the early days, the pieces are aligning, and the chemistry is even better than expected, which is remarkable given our high expectations.”
Quidel has the 2nd highest 5-year R&D/ Revenue average (11.4%) due to its product development in its main focus area, POC.
Yes
“We’ve made good progress on the approximately 100 R&D projects we currently have underway.
Long term we plan to continue to invest in R&D to develop and broaden our portfolio, which we will leverage to accelerate worldwide market penetration.
Moving down to P&L and R&D expenses increased 2% year-over-year”
Quidel acquisition of Ortho is expected to double Quidel market share in the global IVD market to 3.4% in 2022. The strong acquisition synergies are believed to account for 3.3% of revenue in 2025.
Yes
“We’ve achieved over 240 critical integration milestones, identified over 100 integration projects and are executing on over two dozen functional and cross functional workstream.”
Source: Quidel, Khaveen Investments
Thus, as shown in the table above, we believe all of our previous views on Quidel’s fundamentals still hold true.
Lack of Competitiveness Compared to Its Peers
Management claimed that Quidel has a strong ranking in customer service and system performance from its latest earnings briefing.
We were ranked first for the seventh consecutive time in the service track clinical laboratory survey for integrated systems, which includes the top ranking in customer service and overall system performance. We were also recognized as number one in overall service performance for chemistry and amino acid systems. Importantly, as part of the ranking, service track, records a net promoter score for each of the vendors, QuidelOrtho’s score was 20 points higher than our next closest competitor. – Douglas Bryant, Chairman and CEO.
To determine the management’s claim and Quidel’s competitiveness, we compared Quidel with companies operating in the IVD market that we previously identified.
|
Review Comparison |
NPS |
Medical Marketed Products |
Medical Clinical Trials |
Medical Pipeline Products |
2021 Patents Publications |
2021 Revenue (‘mln’) |
|
Roche (OTCQX:RHHBY) |
39 |
550 |
330 |
330 |
7,253 |
72,180 |
|
Abbott (ABT) |
48 |
720 |
1,100 |
130 |
2,152 |
43,075 |
|
Danaher (DHR) |
28 |
– |
– |
– |
2,548 |
29,453 |
|
Thermo Fisher Scientific (TMO) |
30 |
– |
– |
– |
2,512 |
39,210 |
|
Siemen Heathineers (OTCPK:SIEGY) |
46 |
820 |
240 |
240 |
1 |
22,320 |
|
bioMerieux (OTCPK:BMXMF) |
50 |
130 |
130 |
40 |
96 |
3,843 |
|
Sysmex (OTCPK:SSMXY) |
51 |
120 |
30 |
50 |
409 |
2,989 |
|
Hologic (HOLX) |
35 |
270 |
250 |
30 |
572 |
5,632 |
|
PerkinElmer (PKI) |
21 |
210 |
40 |
50 |
499 |
5,067 |
|
Quidel |
20 |
220 |
60 |
100 |
78 |
1,699 |
Source: Comparably, Global Data, Company Data, Khaveen Investments
As seen in the table, among all 10 companies, Quidel has the lowest NPS score indicating that Quidel’s customer satisfaction levels are low. Hence, we believe that this contradicts the management’s claim of Quidel being the top rank in customer service. Additionally, Quidel has the 5th highest number of medical marketed products (220), 6th highest number of medical clinical trials (60), 4th highest in terms of medical pipeline products (100) and has the lowest number of patents publications in 2021 (78).
We believe that Quidel’s low positions in all metrics (lowest in NPS and 2021 patents publications) indicate that Quidel is less competitive as compared to its peers. However, we believe that the low numbers are also due to Quidel being the company with the smallest revenue size among its peers ($1,699 mln) in 2021, 42.5x smaller than Roche. Nevertheless, Quidel dominated the first wave of 2022 IMV ServiceTrak™ Clinical Laboratory Awards by winning 5 of the 7 awards. Overall, we believe Quidel is less competitive as compared to its larger peers such as Roche and Abbott, but has huge potential to improve given its smaller size.
Financial Metrics Performing Better than Our Assumptions
|
Metrics |
Our FY2022 Assumption |
H1 2022 Figures |
Management FY2022 Guidance |
|
Total Revenue Growth |
176.28% |
193% |
126% |
|
Revenue Growth Excluding Covid |
267.98% |
155.90% |
486.19% |
|
EBITDA Margin |
21.06% |
65.04% |
36.8% |
|
Adjusted Free Cash Flow Margin |
-4.74% |
41.76% |
4.03% |
Source: Quidel, Khaveen Investments
To determine whether our valuation is still valid, we compared our 2022 full-year assumptions of metrics (total revenue growth, revenue growth exclude covid, EBITDA margin, and adjusted free cash flow margin) with the company’s actual performance for H1 of 2022 and the management’s full-year outlook for 2022.
To obtain the growth of H1 2022, we summed up the figures for Q1 and Q2 2022 and compared them with the sum of Q1 and Q2 2021. We then compared the 2022 figures from management guidance with the 2021 figures to obtain the full-year guidance.
The company’s revenue growth excluding Covid was higher (486.19%) as compared to our assumption (267.98%) in 2021, the company’s Covid revenue is much higher ($1,267 mln) than our assumption of its Covid revenue ($407 mln). Additionally, the company forecasted its Covid revenue to be $1,315 mln in 2022 whereas we forecasted a lower covid revenue of $213 mln. Moreover, our assumption of its EBITDA margin (21.06%) is lower as compared to management guidance (38.8%) due to the higher EBITDA ($1,415 mln) forecasted by the management as compared to our forecast ($815 mln).
Lastly, we have a lower assumption of the company’s adjusted free cash flow margin (-4.74%) as compared to the management outlook (4.03%) due to our lower projected FCF (-$ 454 mln) as compared to the management’s forecast ($115 mln).
To conclude, management’s full-year guidance for revenue growth excluding Covid, and EBITDA margin is lower compared to our assumptions whereas the full-year guidance for total revenue growth is higher than our assumption. However, Quidel’s H1 2022 figures for all metrics except for the revenue growth excluding covid are higher than our assumptions. This indicates that Quidel has done relatively well in the first half of 2022 as compared to the first half of 2021. However, we believe the lower full-year guidance for most of the metrics except for revenue growth excluding covid revenue as compared to H1 2022 is due to Quidel’s stellar H2 2021 that outperformed H1 2021.
Risk: Delay in Launch of New Product
We believe Quidel faces the risk of a delay in the launch of its new Savannah product line due to the new products needing to be reviewed by the FDA after the EUA submission. As stated by the company, the review normally takes 90 days. However, if the reviews take longer, this will cause a delay in the launch of its new product, affecting near-term revenue projections.
Verdict
To conclude, Quidel’s fundamentals remain as strong compared to our previous analysis. However, it is less competitive as compared to its peers in terms of NPS, and the number of medical marketed products, medical clinical trials, medical pipeline products and patents. We believe this is due to its smaller scale. Nevertheless, the full-year financial guidance from the management except for total revenue growth is better than our previous assumptions which indicate the company is expected to perform better than what we assumed in our previous analyses.
Quidel’s stock price decline of 44% over the past 1 year further increases its attractiveness. Based on the analyst consensus, Quidel has a price target of $135.25 represents a 72.2% upside as compared to the current price. We however have had more accurate projections of Quidel’s financials, and stick to our most recent price target of $330.66. Thus, we maintain our Strong Buy rating.
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