Qiagen (QGEN) Tops Q2 Earnings & Sales; Margins Drop Y/Y

Qiagen NV (NASDAQ:QGEN) reported second-quarter 2016 adjusted earnings of 24 cents per share, beating the Zacks Consensus Estimate by a penny. On a year-over-year basis, however, adjusted earnings declined 7.7%.

At constant exchange rate or CER also, the company reported adjusted earnings per share (EPS) of 24 cents. Adjusted EPS at CER exceeded the company’s guidance of 22 cents.

Considering one-time items, Qiagen’s reported EPS fell 18.1% year over year to 9 cents.

Revenues in Detail

Net sales at actual rates in the second quarter grew 5% on a year-over-year basis at $334.4 million, (up 6% at CER). Meanwhile, the top line comfortably beat the Zacks Consensus Estimate of $328 million. Adverse currency translation dragged the top line growth by 1%.

Meanwhile, top-line growth at CER was driven by a strong growth in sales of consumables and related revenues (87% of net sales; up 6% at CER) as well as instruments (13% of net sales; up 3% at CER). Excluding the predicted impact of lower U.S. HPV test sales, net sales grew 8% at CER in the second quarter.

Region-wise, sales from the Americas (47% of revenues) grew 3% at CER, while revenues from Europe-Middle East-Africa (32%) and Asia-Pacific/Japan (20%) increased 13% and 7%, respectively, at CER. Sales in the top seven emerging markets (16%) exhibited growth of 20% year over year at CER in the quarter.

QIAGEN NV Price, Consensus and EPS Surprise

QIAGEN NV Price, Consensus and EPS Surprise | QIAGEN NV Quote

Segments in Detail

Qiagen primarily generates revenues from Molecular Diagnostics, Applied Testing, Pharma and Academia, which represented 50%, 9%, 20% and 21% of net sales, respectively, during the reported quarter.

Molecular diagnostics sales were up 4% at CER, owing to strong double-digit CER growth in consumables and related revenues, which outweighed a single-digit CER drop in instrument sales. Sales derived from Applied Testing improved 10% at CER, due to a double-digit CER growth in instrument sales and mid-single-digit CER gains in consumables and related revenues.

Pharma sales rose 9% at CER in the second quarter; on account of double-digit CER growth in instrument sales along with robust single-digit CER gains from consumables and related revenues. Academia sales improved 6% at CER, on the back of high-single-digit CER growth in consumables and related revenues, which outweighed the low-single-digit CER drop in instrument sales.

Operational Update

Adjusted gross profit increased 3.9% to $234.4 million in the second quarter. However, adjusted gross margin contracted 50 basis points (bps) to 70.1%.

Adjusted operating income in the quarter declined 12.3% year over year to $69.2 million. Consequently, adjusted operating margin dropped 400 bps to 20.7%, as a result of rise in overall operating expenses.

Financial Update

Qiagen exited the second quarter with cash and cash equivalents of $328.2 million, compared with $355.8 million in the first-quarter 2016. Net cash provided by operating activities as of Jun 30, 2016 was $147.8 million, up from $134.7 million a year ago. This resulted in a 28.3% improvement in free cash flow to $107.9 million.

During the second-quarter earnings call, management announced new plans to return $300 million of capital to its shareholders by the end of 2017. This includes the plans announced in Apr 2016 for a fourth $100 million share repurchase program (not yet initiated) and an additional $200 million of returned capital. As a first step, Qiagen plans to return approximately $200 million by early 2017 and the remaining $100 million before the end of the same year.

Outlook

Qiagen has updated its full-year 2016 guidance. The company currently expects net sales growth of approximately 6–7% at CER, which includes an additional $10 million of sales that the company anticipates to achieve in the second-half 2016 on account of its Exiqon acquisition. Earlier Qiagen expected to deliver a sales growth of 6% at CER, during 2016. Meanwhile, the Zacks Consensus Estimate for revenues stands at $1.34 billion.

On the bottom-line front, the company maintains its 2016 adjusted EPS projection at approximately $1.10–$1.11 at CER. The current Zacks Consensus Estimate for the same is pegged at $1.11.

For the third-quarter 2016, the company expects sales growth of about 8–9% at CER and adjusted EPS of 28 cents at CER. The Zacks Consensus Estimate for revenues is pegged at $334.6 million while that for EPS is 26 cents.

Our Take

Qiagen ended second-quarter 2016 on a promising note, squarely beating the Zacks Consensus Estimates. However, the company’s year-over-year decline in EPS disappoints us. Meanwhile, the company’s overall cash balance seems strong, with escalating free cash flow reserve. Moreover the company’s commitment to pay back its shareholders more through increased share repurchase program is further indicative of the solid cash position it holds.

Besides, the company’s expanded commercialization to the Asia-Pacific region, beyond its initial focus on Europe, further buoys optimism.

However, declining HPV sales in the U.S. continue to be a drag on the overall sales performance. Furthermore, on the profitability front, Qiagen performed poorly on the back of declines in both gross and operating margins. The rise in operating expenses also remains a concern, although they were on account of the expansion initiatives and development programs adopted by the company, in recent times.

Qiagen currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked medical stocks are Cepheid (NASDAQ:CPHD) , Masimo Corporation (NASDAQ:MASI) and Natus Medical Inc. (NASDAQ:BABY) . All these stocks sport a Zacks Rank #1 (Strong Buy).