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Goldman Sachs Issues Buy Rating for Hologic, Noting Contributions from Gen-Probe Purchase

NEW YORK (GenomeWeb News) – Goldman Sachs has placed a Buy rating on Hologic with a six-month price target on its stock of $24, as the Gen-Probe acquisition, completed a week ago, is expected to accelerate top line growth.

Analyst Isaac Ro removed his previous Not Rated designation on the Bedford, Mass.-based company and increased revenue estimates for fiscal-year 2012 to $2.00 billion from an earlier estimate of $1.91 billion, but he lowered the EPS estimate to $1.36 from $1.38.

Hologic's fiscal-year 2012 ends on September 29, and in its fiscal third-quarter earnings announcement last week, before the Gen-Probe deal closed, Hologic provided full-year 2012 revenue guidance of $1.9 billion and adjusted EPS guidance of between $1.36 and $1.38. The guidance does not include contributions from Gen-Probe.

For 2013, Ro raised revenue estimates to $2.72 billion from $2.05 billion and raised EPS estimates to $1.77 from $1.50.

In a research note, Ro noted that the Gen-Probe buy is expected to provide Hologic with assets that, along with the legacy Hologic business, will be key drivers to top and bottom line growth during the next four years. New products from Gen-Probe — mainly in HPV, chlamydia and gonorrhea, and the new Panther system — and Hologic's tomosynthesis and Myosure businesses, he said, will expand to 17 percent of the business' total revenues by 2015 from 4 percent in 2012.

The importance of Gen-Probe to Hologic was made clear in June at an investor conference when Hologic CFO Glenn Muir said that Gen-Probe would be Hologic's diagnostics hub and the diagnostics business would be based out of San Diego, where Gen-Probe is based.

The combined company's revenues for HPV tests are estimated to grow to $109 million by 2015 from $71 million in 2013, implying a 26 percent share of the market, compared to 14 percent currently. Ro said, however, that pricing will be a factor as laboratories and payors look increasingly to lower costs and negotiate for long-term contracts.

Hologic management has stated that they can improve on the approximately 40 percent market penetration that the firm has in the chlamydia and gonorrhea space due to Hologic's distribution channel and the combined diagnostics offerings. Ro noted, though, that pricing may be an issue moving ahead as the arrival of new entrants such as Becton Dickinson and "sluggish overall volumes suggest a more conservative view is warranted."

Similarly, he is taking a conservative view of the Panther system due to slower testing volumes and a delay in capital spending by hospitals, and he forecasts 265 system placements for 2013; 315 placements in 2014; and 310 placements in 2015.

At the June investors conference Muir said that his firm's sales and distribution reach would increase adoption of Gen-Probe products, and Ro agrees.

Just in the Ob-Gyn space Hologic has more than 600 direct sales representatives, which should benefit Gen-Probe immediately, he said. More importantly, Hologic has 550 representatives internationally, largely focused on sales and marketing. By comparison, Gen-Probe's total sales and marketing team was about 280.

In Europe, the size of Hologic's distribution channel should drive up market penetration and increase margins "as it shifts [Gen-Probe's] sales away from distributors," Ro said. In Japan, where Gen-Probe's products were not sold direct, it can now take advantage of Hologic's direct presence, and in China, Hologic recently bought its distributor, giving Gen-Probe direct access to that market for the first time.

Hologic uses a "one vial" approach to its pap smear/HPV/STD products in North America. This, Ro said, should immediately boost Gen-Probe's gonorrhea/chlamydia franchise by allowing it to bundle those products with Hologic's ThinPrep pap test. Additionally, this would provide competitive hurdles to new entrants.

Ro also expressed confidence that Hologic will achieve its stated cost synergy goals of $40 million by 2013 and $75 million by 2015 by shutting down some manufacturing facilities, cutting Gen-Probe's sales force, and eliminating redundant R&D costs.

Ro called the Hologic figures conservative and expects cost synergies of $64 million by 2013 and $115 million by 2015.

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