GPRO GoPro Inc

Hologic (HOLX) reported a loss per share of 15 cents in the second quarter of fiscal 2012 compared with earnings per share (“EPS”) of 31 cents in the year-ago period. After taking into account certain one-time items in both the periods, adjusted EPS came in at 33 cents, in line with the Zacks Consensus Estimate and ahead of the year-ago quarter’s 30 cents. Among several adjustments, adjusted EPS in the reported quarter excludes charges of $18.3 million related to the write-off of certain assets as a result of the company's decision to cease commercialization of Adiana.

Revenues were $471.2 million, an increase of 7.4% year over year driven by growth across all segments. However, revenues were short of the Zacks Consensus Estimate of $474 million and came in on the lower end of the company’s guidance of $470–$475 million.

The company decided on discontinuing Adiana because it found the product commercially not viable. Instead Hologic preferred to focus on its core products. The company also resolved the patent infringement litigation with Conceptus (CPTS) by discontinuing Adiana in return for the latter forgoing the $18.8 million jury award. In addition to Hologic granting Conceptus a license to intellectual property related to Adiana, the two companies have also agreed to dismiss the false patent marking case between them.  

Gen-Probe Acquisition

In a separate statement, Hologic announced that it has decided to acquire all outstanding shares of Gen-Probe (GPRO), a player in the field of molecular diagnostics, for $82.75 per share in cash, or a total enterprise value of approximately $3.7 billion. The offer price represents a 20% premium over Gen-Probe’s closing price on Friday. The deal will be funded through available cash and additional financing of term loans. The company exited the second quarter with $855 million of cash and cash equivalents.

The transaction, to be completed in the second half of calendar 2012, is expected to be accretive to Hologic’s adjusted EPS by 20 cents in the first year after closure. Apart from boosting both the top and the bottom line, the deal would yield $75 million in cost synergies within three years. The combined company will use its strong free cash flow to repay outstanding debt.

Segments

Hologic operates through four segments − Breast Health, Diagnostics, GYN (Gynecology) Surgical and Skeletal Health − each contributing a corresponding 46.4%, 32.2%, 16.4% and 5% to total revenue during the quarter. These segments recorded robust growth of 6.2% year over year (to $218.6 million), 9.8% ($151.8 million), 8% ($77.2 million) and 2% ($23.5 million), respectively.

The upside at the Breast Health segment was driven by a shift in sales from Selenia to Dimensions, sales of breast biopsy products led by Eviva and to a lesser extent an increase in the total number of digital mammography systems sold. In addition, a 7.1% rise in service revenue related to Hologic’s increased installed base of digital mammography systems also contributed to growth.

Growth at the Diagnostic segment was driven by higher ThinPrep revenues and growth in sales of molecular diagnostics products. Besides, incremental ThinPrep revenue from the TCT acquisition is on an uptrend with $8.2 million in the reported quarter, up from $7.3 million during the last quarter.

The increase in GYN Surgical revenues was primarily due to higher sales from MyoSure, partially offset by lower sales of the NovaSure system and to a lesser extent, Adiana. The increase in Skeletal Health revenues emanated from higher sales of bone densitometry units, partially offset by a decline in Mini C-Arm product sales.

In the recent past, Hologic has received some significant product approvals. These include 510k clearance for Aquilex fluid control system, which reduces procedure and anesthesia time while providing high quality visualization to the surgeon during hysteroscopy procedures. The company’s GYN surgical sales force is working on its penetration in the US market.

Besides, Hologic has begun commercializing its C-View synthesized 2D image reconstruction algorithm for 3D mammography exams in Europe following the receipt of CE Mark approval in November 2011. The company is gradually strengthening its presence in China with the commercialization of Serenity digital mammography system and Cervista HPV HR tests in the second quarter.

Guidance

Hologic provided its guidance for the third quarter of fiscal 2012. For the said quarter, the company expects to report $475−$480 million of revenues (representing annualized growth of 5−6%) resulting in adjusted EPS of 34 cents, a penny short of the current Zacks Consensus EPS Estimate. The current Zacks Consensus revenue estimate stands at $482 million. For fiscal 2012, Hologic still expects to report revenues of $1.9−$1.925 billion (growth of 6−8%) while the adjusted EPS guidance was raised by a penny at both ends to $1.36−$1.38.

Recommendation

Though the company reported an uninspiring second quarter, the announcement of the Gen-Probe acquisition was significant. If the deal goes through, the combined company will become a prominent player in the HPV business, which has players like Qiagen (QGEN). However, an increasing debt burden along with higher interest expense will adversely affect the bottom line. We are also disappointed with the company’s decision to discontinue the Adiana system. The stock retains a Zacks #4 Rank (“Sell”) in the short term.

Offering a wide range of products, Hologic has become an industry giant in the field of women’s health products. The proposed acquisition will further strengthen its position in this field. We are also encouraged by the recent product approvals, which should help the company in recording higher sales going forward. Over the long term, we are Neutral on Hologic.

 
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