I am a major skeptic when it comes to the benefits of so-called "restructuring." I don't generally believe that companies find prosperity by firing workers and pulling away from marketing or
research and development (R&D). Moreover, I think it sends a very poor message on accountability when the same executives who hired those workers (usually as part of a plan to "invest in growth") are later praised (and rewarded with even bigger pay packages) for firing them.
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Now
Qiagen (Nasdaq:
QGEN) is throwing its hat into the restructuring ring. The real question for
shareholders, though, is whether this is another meaningless shuffling of the deck chairs, or whether management has a cogent plan to attain what the company really needs.
Fire and Reallocate
Qiagen's press release had many of the familiar PR-speak terms in it - there's mention of "reallocating resources," "streamlining" and "
restructuring." Cutting through the palaver, Qiagen will fire about 8 to 10% of its workforce, eliminate redundancies in areas like IT and administration, discontinue low-potential R&D projects and take the forecasted savings and reallocate them into more promising R&D projects. (For related reading, see
Buying Into Corporate Research & Development (R&D)).
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Flowery language aside, it's hard to argue that that doesn't make a lot of sense. What's the argument in favor of wasting money on redundant systems or inefficient purchasing systems? Likewise, what's the argument for continuing to funnel good money into R&D projects that are unlikely to earn their
cost of capital.
If there's a problem here it is in that management felt the need to make a big deal about this - shouldn't Qiagen shareholders EXPECT their management to allocate R&D efficiently and drive unnecessary costs out of
selling, general and administrative expenses?
Now the Real Problem
Qiagen has long been a huge laggard when it comes to
returns on capital - significantly trailing the likes of
Sigma-Aldrich (Nasdaq:
SIAL) or
Meridian Bioscience (Nasdaq:
VIVO), and making other modest return producers like
Gen-Probe (Nasdaq:
GPRO) and
Life Technologies (Nasdaq:
LIFE) look strong in comparison. So, earning more is clearly a worthy goal.
The question for Qiagen management is if they can really take the step that they must take for shareholders to benefit. The biggest problem at Qiagen is not low
margins or low
returns, but a disappointing growth profile.
Much as investors love the idea of life sciences and diagnostics, I think they are surprised when they see the relatively modest growth produced by companies like Gen-Probe,
Abbott Labs (NYSE:
ABT),
Becton Dickinson (NYSE:
BDX), Life Tech and
Thermo Fisher (NYSE:
TMO) from those markets. That, frankly, is one of the reasons that stocks like
Illumina (Nasdaq:
ILMN) and
Cepheid (Nasdaq:
CPHD) have supported such high
valuations - investors cherish that above-average growth. (Investing in the biotech sector can involve both huge losses and major gains. For more, see
A Primer On The Biotech Sector.)
In the case of Qiagen, the company's strong sample prep business is a great cornerstone, but not much of a grower. Likewise, the company gets about 20% of its revenue from HPV testing, and that's an increasingly competitive and slower-growing market opportunity (even with the expansion of testing in developing markets).
A New Path
Qiagen seems to want to take the savings generated from this restructuring and direct it to higher-growth projects. Foremost among those will be expanding the menu of tests offered on the QIAsymphony platform. This is a flat-out no-brainer, and something that potential rivals like Gen-Probe, Becton Dickinson, Cepheid, Meridian and
Bio-Rad (NYSE:
BIO) will all be doing with their respective testing platforms.
Qiagen will also be putting more money into personalized medicine, and this could be the real breakaway opportunity. They hype that personalized medicine has run many years ahead of the scientific realities, but this is likely to become increasingly important in fields like cancer and autoimmune diseases. Not only is there a large opportunity for these tests, but since Qiagen has no internal pharmaceutical operations, they can partner far and wide with no conflicts of interest.
The Bottom Line
Qiagen stock has had a bad run of underperformance, but the upshot is that the stock now looks much more rationally priced. If Qiagen can be a real player in personalized medicine (and maintain leadership in core areas like sample prep), this could be a multi-year winner. At a minimum, at least management has now publicly acknowledged the rational steps it must take to improve results for
shareholders.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
