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Hologic’s Opportunity (Icahn Sees It. Do You?)
Posted by: Damian Illia (IP Logged)
Date: December 16, 2013 04:37PM

Hologic Inc. (HOLX) is a company that develops, manufactures and supplies medical imaging systems, and diagnostic and surgical products serving the health care needs of women. It has a very strong presence in breast health and diagnosis, the largest of their four market segments GYN surgical and skeletal health being the two other big ones. The firm sells and services its products in an overly competitive market through a combination of direct sales and service forces, and a network of independent distributors and sales representatives.

Hologic’s sales this year have dropped by 5.4 percent while the firm’s debt remains substantial. So, one question arises: Is it time to sell or time to be patient?

Risky Business

The healthy equipment purchasing environment on which Hologic’s sales depend on can be easily and adversely affected by prolonged economic downturns. There’s no doubt that thomosynthesis sales should provide a buffer in the near term, but the firm offers a number of other high-ticket instruments that could come under pressure due to tight credit environments or periods of economic weakness.

As mentioned before, Hologic operates in a highly competitive market and it might lose market share or its ability to extract price increases if established and specialized competitors or even new ones such as large, multinational corporations with greater resources introduce better products or develop stronger relationships with customers.

That also means that the firm must constantly innovate and protect its intellectual portfolio, which enables it to stay ahead of the blistering pace of technological advancement. This, however, is not easy, as recently Hologic has received unfavorable patent ruling, and patent infringement might have an adverse effect on the company even when it pursues an appeal.

In it's efforts to keep expanding into new markets and building out its product portfolio, Hologic has also maintained a healthy pace of acquisitions. Nonetheless, a big risk exists: The company might not be able to achieve the projected post-merger sales, synergies, operating margins and earnings growth. But this is where being patient might pay off.

Long-Run Bet

In August 2012 Hologic acquired Gen-Probe to add value to its holdings over the long term. Gen-Probe came with a hefty price tag, boosting Hologic’s debt. But the successful integration of Gen-Probe with its legacy diagnostics segment is likely to yield positive results as the company is expecting to realize cost synergies of over $40 million by the end of the first year of the acquisition. Also Hologic expects an additional $35 million in cost synergies by the end of the year. Moreover, the complementary product portfolio, cross-selling opportunities and enhanced global footing should result in potential revenue synergies for the company.

The firm also expects to create significant value from the takeover as the integration process accelerates and picks up. The firm’s many competitive advantages in its two strongest segments breast health and diagnostics have deepened, and should warrant Hologic a narrow economic moat over the coming years.

Its narrow approach, as well as its healthy cash flow, enables the firm to capitalize on tailored research and development, as well as on information cross-sharing across divisions, instead of adding complexity with ancillary end markets and products. Hologic’s groundbreaking 3D breast imaging platform represents the future in this market and proves the company’s strength in innovation, as well as its leading position in this market arena and its possibility of expanding in it as its user base continues to grow.

The company has also been expanding overseas in Europe, Japan and the BRIC nations. In third quarter 2013 it recorded 25 percent of its revenues from international operations. Undeniably, the launch of lucrative products in high potential markets is a major upside. Continuing this trend should accelerate growth for Hologic.

Hologic (HOLX) Industry Median Quest Diagnostics (DGX)
P/S 2.38 2.5 1.18
Mkt. Cap. 6.05 B - 7.92 B
ROE (%) -60.4 7.1 13.3

Currently, Hologic is the largest diagnostic company focused on women’s health and can now become a leader in one of the largest and fastest growing niches in life sciences today. Not only might refraining from selling pay off, but also acquiring some of its stock (in spite of its not-so-attractive financial figures and valuation), as did activist investor Carl Icahn by the end of last November when he reported a 12.63 percent stake in this $6 billion diagnostic company, could provide plenty of upside for long-term investors.

Disclosure: Damian Illia holds no position in any stocks mentioned.

Guru Discussed: Carl Icahn: Current Portfolio, Stock Picks
Stocks Discussed: HOLX, DGX,
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