Quidel Corp: Great Company, Just Too Pricey

Jun.30.08 | About: Quidel Corporation (QDEL)

The Short Story:

Quidel Corp. (NASDAQ:QDEL) is a company that develops and manufactures rapid point of care testing devices to diagnose such things as influenza. Through generating large amounts of free cash flow, the company has been able to substantially buy back stock while continuing to develop new products.

In-Depth Analysis:

Quidel is one of those companies that I am just dying to own. They have excellent management, low capital expenditures, a large (and growing) net cash position, have competitive advantages, and are buying back stock.

For those of you who don’t know Quidel, they manufacture point-of-care diagnostic tests. Doctors use point-of-care tests in order to diagnose a specific disease. If this sounds similar to the products made by companies like China Medical Technologies (CMED), well, it is. There is a big difference, however, between Quidel and more traditional diagnostic applications: point-of-care tests do not require processing from a lab or laboratory equipment.

This leads us right into the heart of Quidel’s business model. The company tries to engineer every product to live up to its “Quidel Value Build” criterion. This criterion revolves around “clinical validation” and “economic validation.”

According to management clinical validation is

the enabling of rapid patient management decisions leading to improved treatment and outcomes.

Economic valuation is

the reduction of overall costs associated with patient testing emphasis upon critical reimbursement and payer performance criteria.

Quidel looks to produce products that perform better in clinical trials than alternatives, but are also cheaper. The company has been successful in this endeavor, evinced by strong clinical performance and revenue growth of 20 percent over the last year. Since these tests are disposable, the company has a re-occurring revenue stream.

In the past, Quidel sold products mainly in America, some parts of Europe and Japan. This is all about to change as the company recently created a partnership with bioMerieux. bioMerieux has operations in over 160 countries and this should allow Quidel to penetrate many international markets. In addition to distribution, Quidel and bioMeriuex will co-develop many products in such areas as upper respiratory and sexually transmitted diseases.

This firm generates the majority of its revenue from influenza tests. In 2007, influenza tests accounted for 64 percent of revenue but Influenza is a fickle disease. Last year, the season started seven weeks late in America and was one-third the normal strength in Japan. Since Quidel’s upper respiratory test for the flu has a shelf life of two years, a weak influenza season could wreck havoc on the firm’s operations.

Management and CEO Caren Mason are extremely competent and passionate about the business. During the latest conference call, Ms. Mason could hardly contain her excitement about the company’s new products R&D efforts. Also, in earnings press releases the company disclosed the amount of stock compensation expense, something that is extremely rare in corporate America today.

After backing out the company's large cash hoard, Quidel is trading at 18.9 times free cash flow. Even though this is not a pricey valuation for a company of this quality, there is not a significant enough margin of safety to justify investment. However, management believed the company was undervalued earlier this year as they bought back a stock $6.6 million in stock (about 5 times stock compensation expense) at an average price of $14.33 a share. For now, I find Quidel too pricey for my tastes, but I will be waiting for an opportunity in the future, especially during this volatile market.

Disclosure: Chandler Lutz owns shares of China Medical Technologies (CMED) but no other company mentioned.