Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 2Q18 Earnings Results
Prev. Ed.: May 2, 2018; 1Q18 Earnings Update
Flash Update [Note: earnings update in progress; final report to follow]
Hologic reported 2Q18 adjusted earnings per share (EPS) of 53 cents, up 6% year over year (y/y) and in line with the low end of the company’s 53-54 cents guidance.
On a reported basis, the company recorded net loss of $2.46 per share, against net income of $1.84 in 2Q17. Notably, the reported figure includes non-cash impairment charges for goodwill and in-process research and development associated with Hologic's Cynosure business.
Revenues in Detail
Revenues grossed $789.3 million in 2Q18, up 10.3% y/y (up 8.3% at constant exchange rate or CER). The top line surpassed the company’s guidance of $770-$785 million.
Solid contributions from Breast Health and international business drove the top line.
Geographically, revenues in the United States grew 3.3% y/y to $588.5 million. Excluding blood screening and medical aesthetics, U.S. revenues declined marginally. International revenues were up 37.8% (up 28% at CER) to $200.8 million, on strong contribution from Cynosure. Excluding blood screening and medical aesthetics, international revenues increased 26.4% or 15.1% at constant currency.
Segments in Detail
Revenues at the Diagnostics segment (35.4% of total revenues) declined 5.5% y/y (down 7.6% at CER) to $279.7 million in 2Q18. Under this segment, Molecular Diagnostics revenues of $150.7 million increased 6.1% (4.4% at CER). The global growth at Molecular Diagnostics was primarily driven by new product revenues along with continued solid uptake of Aptima women's health products.
Cytology and Perinatal revenues of $117.7 million also showed an improvement of 1.8% (down 1.4% at CER).
Revenues at the Breast Health segment (38%) inched up 7% (up 4.9% at CER) to $300.1 million.
Revenue growth in the United States was roughly flat. In 2Q18, the upside was led by higher service and new product revenues. International revenues however climbed 27.6% y/y, marking the third consecutive quarter of growth exceeding 20%.
Revenues from the GYN Surgical business (12.6%) were down 1.7% (down 3.2% at CER) to $99.4 million. Medical Aesthetic business in the quarter reported revenues of $85.5 million, reflecting 10.8% of total revenues. Revenues at Skeletal Health (accounting for the rest) increased 12.6% (up 9.9% at CER) to $24.6 million.
Operational Update
In 2Q18, Hologic’s gross margin contracted 170 basis points (bps) to 52.6%. Adjusted gross margin also decreased 120 bps to 62.7% due to the divestiture of blood screening business, geographic mix and revenues from low-margin Cynosure products.
Hologic’s adjusted operating expenses amounted to $266.9 million, up 19.7% y/y. Adjusted operating margin contracted a massive 380 bps to 28.9%.
Financial Update
Hologic exited 2Q18 with cash and cash equivalents of $614.2 million, compared with $664.4 million at the end of 1Q18. Total long-term debt was $2.74 billion at the end of 2Q18, compared with $2.76 billion in 1Q18.
During 2Q18, the company generated operating cash flow of $266.5 million, compared withthe 2Q17 figure of $253.4 million.
Guidance
Hologic has updated its 2Q18 financial guidance. The company currently expects adjusted revenues of $3.18-$3.21 billion, compared with the previous range of $3.2-$3.28 billion. The company expects revenues to grow in the range of 2.7-3.7% compared with the previously provided range of 3.9-6.5% at CER.
Adjusted EPS guidance remains unchanged, calling for 9.4-11.8% growth to $2.22-$2.27.
For 3Q18, Hologic expects adjusted revenues of $795-$810 million, representing annualized decline of 1% to 2.8% at CER.
Adjusted EPS is estimated at 55-57 cents, reflecting an annualized growth of 10-14%.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON HOLX.
Portfolio Manager Executive Summary
Headquartered in Bedford, MA, Hologic Inc. (HOLX) develops, manufactures and supplies diagnostics, medical imaging systems and surgical products catering to the healthcare needs of women.
Of the 15 firms covering the stock, 10 (66.7%) assigned positive ratings, while five (33.3%) conferred neutral ratings. None of the firms provided a negative rating on the stock.
Positive or equivalent outlook (10/15): Per majority of the bullish firms, Hologic’s earnings and revenues beat estimates in 1Q18. These firms are impressed with solid top-line contributions from Breast Health, Diagnostics and international businesses which drove the sales. These firms are optimistic about the company’s leadership in 3-D mammography, which has witnessed higher growth than the 2-D instruments market. However, there are few growth drivers for FY18, including new reimbursement facilities and the launch of two mammography systems. According to these firms, these products will help Hologic gain more market share and pose competition.
The firms are hopeful about the recent portfolio moves, like divestiture of the blood screening business and the buyout of Cynosure. They believe, the product pipeline of Cynosure is likely to gain traction in the women’s health market and contribute to the company’s top line. According to the firms, although Cynosure’s short-term performance has failed to impress, accretion from Cynosure on the back of management’s efforts can offset the setback in earnings stemming from the divestiture of the blood screening business.
The firms are also optimistic about the long-term performance in core areas including Molecular and the international business. The diagnostic business performance on the back of molecular growth also impressed the bullish firms’. The positive firms believe that diagnostic business will continue to witness momentum in the upcoming days on growing uptake of respiratory and viral load assays. The Breast Health business performance backed by strong international revenue growth also impressed these firms.
Neutral or equivalent outlook (5/15): For the neutral firms, Hologic’s 1Q18earnings results beat estimates. These firms believe that savings from the latest tax reform along with lower share counts led to the EPS beat. At the same time, these firms seem to be impressed with the company’s organic revenue growth number. However, they believe this organic growth will be difficult for the company to sustain as there has been a gradual slowdown in the growth rate of the Molecular Diagnostics, MyoSure and CynoSure businesses. On a positive note, these firms believe upgradation from 2-D to 3-D mammography will continue to boost the Breast Health business.
May 2, 2018
Overview
Hologic Inc. is a leading developer, manufacturer, and supplier of premium diagnostics, medical imaging systems, and surgical products dedicated to the healthcare needs of women. The company’s core business units are focused on breast health, diagnostics, GYN surgical, and skeletal health. Hologic provides a comprehensive suite of technologies with products for mammography and breast biopsy, cervical cancer screening, procedures for treating heavy menstrual bleeding and removal of fibroids and polyps within the uterus, osteoporosis assessment and mini C-arm for extremity imaging.
More information on Hologic is available online at
The firms identified the following factors for evaluating the investment merits of HOLX:
Key Positive Arguments / Key Negative ArgumentsThe increasing adoption of the 3D mammography system has duly met expectations and should be a major boost for Hologic’s Breast Health revenues, going forward. / Increased pricing pressure and unfavorable foreign exchange rate remain major headwinds.
The firms are encouraged by the recent uptake observed in Hologic’s NovaSure product. / The cervical cancer diagnostics market is still extremely competitive.
The firms believe that the Panther system has the latent capability of driving growth in HPV. In their opinion, test menu expansion for use on Panther is a significant growth catalyst. / Management is focused on incremental investments in order to support marketing initiatives. This might pressurize margins and the company might gain a lesser operating leverage.
NOTE: Hologic’s fiscal year ends on Sep 30; fiscal year references do not coincide with the calendar year.
May 2, 2018
Long-Term Growth
According to the firms, in the long run, Hologic is well placed to make most of the opportunities in the women’s health market. They are encouraged with the uptake of the tomosynthesis system so far, which should further improve with publication of data in peer reviewed journals and success on the reimbursement front. Bullish firms believe that through acquisition and internal development, growth in Hologic’s lab-focused sales force is inevitable in the long term. They have considered sales force as the primary mechanism through which future leverage for the company can be generated. These factors would be important drivers of growth for the stock. However, neutral firms are concerned that headwinds like reduced hospital spending environment, declining reimbursement rates for certain procedures, expensive regulatory approval processes and tough competition might linger affecting Hologic’s business in the long term.
In terms of its breast health business, Hologic believes that its Genius 3D mammography systems represent less than 40% of the company’s current mammography installed base and has penetrated less than 25% of this device’s addressable market. So there exists a long-term opportunity for the company to make further market expansion in this space, banking on this device. To establish itself more firmly in the mammography market, management has mentioned results from a survey conducted by the independent market research firm KLAS scored, wherein mammography customers scored Hologic highest in overall product satisfaction.
Meanwhile, to improve its international breast health franchise, the company recently made a few changes in the organizational level. Hologic moved one of its key U.S. breast health leaders to Europe, who is now in charge of building stronger, mutually productive relationships with the company’s dealer network. For further enhancement of these networks, the company signed several new, performance-based contracts with its top dealers. In addition, Hologic hired a new European Head of Service to support its dealers and direct customers. Such organizational transformation is expected to boost the company’s business in the overseas.
Finally, with strong returns on R&D investments, sales force optimization and margin expansion with 3D system production, bullish firms expect Hologic to follow sustainable growth with respect to both the top and the bottom line.
May 2, 2018
Target Price/Valuation
Rating DistributionPositive / 66.7%↓
Neutral / 33.3%↑
Negative / 0.00%
Avg. Target Price / $48↑
Maximum Target / $52.00
Minimum Target / $42.00 ↑
No. of Analysts with Target Price/Total / 12/15
Upside from Current / 21.2%
Maximum Upside from Current / 31.3%
Minimum Upside from Current / 6.1%
Risks to the target price and valuation include hospital capital spending, product liability, further value-destructivemergers & acquisition, reimbursement for the Dimensions platform and market competition.
Recent Events
On Feb 8, 2018, Hologic reported 1Q18 results. Highlights are as follows:
Revenues grossed $791.1 million in 1Q18, up 7.7% y/y (up 6.7% at constant exchange rate or CER).
Hologic reported 1Q18 adjusted earnings per share (EPS) of 55 cents, up5.8% y/y.
Hologic has updated its FY18 financial guidance. The company currently expects adjusted revenues of $3.2-$3.28 billion, growing in the range of 3.9-6.5% compared with the previously provided range of 4-6.6% at CER.
For FY18, adjusted EPS is expected to grow 9.4-11.8% to $2.22-$2.27 from the previously stated range of 3.4-5.9% to $2.10-$2.15.
For 2Q18, Hologic expects adjusted revenues of $770-$785 million, representing annualized growth of 6.5-8.6% at CER.
For 2Q18, adjusted EPS is projected at 53-54 cents, reflecting annualized growth of 6-8%.
Other Events
On Mar 27, 2018, Hologic announced the the receipt of PMA approval from the FDA for the Clarity HD high-resolution 3D imaging and Intelligent 2D imaging technology. Following the approval, the products are now available on the 3Dimensions breast tomosynthesis system. Notably, in conjunction with enhanced 3D image quality for radiologists, this system provides an improved workflow for technologists. Moreover, it aims to provide a more comfortable mammography experience with low-dose options.
On Mar 2, 2018, Hologic announced a worldwide collaboration deal with Royal Philips,a leading health-technology company. The global partnership agreement will provide integrated imaging solutions for women's health. Notably, the financial details of this multi-year, non-exclusive global partnership agreement have not been disclosed. The agreement has been signed to offer integrated solutions to care professionals. These solutions will include diagnostic imaging modalities, advanced informatics, and services for screening, diagnosis and treatment of women across the world.
On Jan 25, 2018, Hologic announced the receipt of the FDA’s pre-market approval for the AptimaHBV Quant Assay for quantitation of hepatitis B viral load on the Panthersystem.
On Jan 25, 2018, Hologic announced the launch of the Fluoroscan InSight FD Mini C-Arm. Notably, this product is an advanced version of mini C-arm imaging.
On Jan 22,2018, Hologic’s Cynosure division announced the launch of TempSure Envi. Per management, this FDA-approved radiofrequency device minimizes facial fine lines and wrinkles, enhances cellulite appearance and tightens skin through soft tissue coagulation.
On Jan 9, 2018, Hologic announced the receipt of CE Mark for the Breverabreast biopsy system with CorLuminaimaging technology. Per the company, this technology will aid in enhancing patient experience and streamlining the entire biopsy procedure.
On Jan 3, 2018, Hologic announced the receipt of CE mark for the MyoSureMANUAL device.
Revenue
Revenues grossed $791.1 million in 1Q18, up 7.7% y/y (up 6.7% at constant exchange rate or CER).Solid contributions from Hologic’s Molecular Diagnostics, Breast Health and international business drove the top line. The top line surpassed the company’s projection of $775-$790 million.
Geographically, revenues in the United States increased 4.1% y/y to $597.2 million. Excluding blood screening and medical aesthetics, U.S. revenues declined 0.8%. International revenues were up 20.6% (up 15.8% at CER) to $193.9 million, led by strong contribution from Cynosure.
Excluding blood screening and medical aesthetics, international revenues rose 17.6% or 11.6% at constant currency.
Outlook
Hologic has updated its FY18 financial guidance. The company currently expects adjusted revenues of $3.2-$3.28 billion, growing in the range of 3.9-6.5% compared with the previously provided range of 4-6.6% at CER.
For 2Q18, Hologic expects adjusted revenues of $770-$785 million, representing annualized growth of 6.5-8.6% at CER.
Segments
Hologic operates through four main segments – Breast Health, Diagnostics, GYN Surgical, and Skeletal Health.
Diagnostics (35.9% of total revenues)
This segment offer a wide range of diagnostic products that are used primarily to aid in the diagnosis of human diseases and screen donated human blood and plasma. Hologic’s primary diagnostics products include its Aptima family of assays, which run on the company’s advanced instrumentation systems (Panther and Tigris), the ThinPrep system, the Rapid Fetal Fibronectin Test and the Procleix blood screening assays. The Aptima family of assays is used to detect the infectious microorganisms that cause the common sexually transmitted diseases (STDs), chlamydia and gonorrhea, certain high-risk strains of human papillomavirus (HPV), and Trichomonas vaginalis – the parasite that causes trichomoniasis.
The ThinPrep System is primarily used in cytology applications, such as cervical cancer screening, and the Rapid Fetal Fibronectin Test assists physicians in assessing the risk of pre-term birth. In blood screening, Hologic develops and manufactures the Procleix family of assays, which are used to detect various infectious diseases. These blood screening products are marketed worldwide by the company’s blood screening collaborator, Grifols S.A., or Grifols, under the Grifols' trademarks.
Revenues: Diagnostics revenues (35.9% of total revenue) declined 12.5% y/y (down 13.5% at CER) to $284.6 million in 1Q18 due to the divestiture of the blood screening business.
Molecular Diagnostics revenues of $148.6 million increased 6.2% (5.3% at CER). In the United States, revenues grew at mid-single digit. Globally, sales rose in high-single digit. Theupside was primarily driven by increasing market share and utilization of fully automated Panther system, market expansion by conforming to testing guidelines, rising utilization of the company’s Aptima women’s health products.This marks the sixth consecutive quarter of double digit-growth for molecular diagnostics globally.
Management also noted that the company has been seeing steady uptake of new molecular diagnostics tests as well. It further added that Hologic has been awarded with regulatory approvals for seven new products in the United States over the past six quarters.
In October, Hologic announced the receipt of 510(k) clearance from the FDA for the Panther Fusion Paraflu assay. Notably, this multiplexed assay runs on the Panther Fusion system and is capable of differentiating and detecting the Parainfluenza viruses 1, 2, 3, and 4. After Panther Fusion Flu A/B/RSV assay, this is the second FDA-approved diagnostic assay available on the system.
Cytology and Perinatal revenues of $123.4 million rose2.6% y/y (up0.9% at CER).
Outlook: Hologic previously expectedmid-single digit growth inDiagnostic segment,excluding blood screening, for FY18.
Recent Developments
On Dec 6, 2017, Hologic announced the receipt of 510(k) clearance from the FDA for its Panther Fusion AdV/hMPV/RV assay. This is a multiplex assay that runs on the new Panther Fusion system and detects Adenovirus, human Metapneumovirus and Rhinovirus. The latest Panther Fusion assays offer a new-age approach to syndromic respiratory testing with the prolific ability to run one, two or all three assays from a single patient specimen. This assay complements the other two FDA-approved assays, namely, the Panther Fusion Flu A/B/RSV and the Panther Fusion Paraflu variety.
On Oct 26, 2017, Hologic announced the receipt of 510(k) clearance from the FDA for the Panther Fusion Paraflu assay. Notably, this multiplexed assay ris compatible with the Panther Fusion system and is capable of differentiating and detecting the Parainfluenza viruses 1, 2, 3, and 4. Moreover, after Panther Fusion Flu A/B/RSV assay, this is the second FDA-approved diagnostic assay available on the system.