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With Lackluster FY '13 Results and 2014 Guidance, Hologic Sees Gen-Probe MDx as Future Growth Driver

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Hologic this week posted less-than-stellar fiscal fourth quarter and full-year financial results and provided weak guidance for fiscal 2014, causing the firm's stock to take as much as a 15 percent hit and prompting at least one investment bank to downgrade the stock.

However, during a conference call held this week to recap the company's earnings, President and CEO John Cumming — who rejoined the company over the summer and immediately set to conducting a strategic review of the business in light of recent disappointing growth — laid out a plan intended to put Hologic back on the path toward revenue growth by fiscal 2015.

"We expect to generate organic revenue and earnings growth in the low-single digits in FY '15; and in the years following, we expect to return to mid-single-digit revenue growth with earnings growth outpacing this," Cumming said. "We anticipate continued strength in our cash flow generation, which we plan to allocate towards high-return R&D projects, deleveraging our balance sheet and returning capital to our shareholders."

Cumming also made it clear that Hologic's Diagnostics business — which actually enjoyed strong growth in Q4 and fiscal '14 primarily due to the contribution from the Gen-Probe molecular diagnostics portfolio — is expected to continue buoying Hologic's sales as it works toward its overarching goal.

For the three months ended Sept. 28, Hologic reported revenues of $622.1 million, up 6 percent from $588.5 million in the same quarter last year, and falling short of the average Wall Street estimate of $624.4 million. However, Hologic's Q4 Diagnostics revenues increased 14 percent to $290 million from $253.4 million in Q4 2012.

Meantime, in other business segment results, Breast Health revenues grew 2 percent to $234.2 million, Gyn Surgical revenues dropped 4 percent to $76.7 million, and Skeletal Health revenues dropped 15 percent to $21.2 million.

Growth in the Diagnostics segment was driven primarily by the inclusion of a full quarter of Gen-Probe revenues of $147.9 million (as compared to non-GAAP revenues of $101.1 million), partially offset by a decrease in legacy Diagnostics product sales, primarily ThinPrep products, the company said.

During the conference call, CFO Glenn Muir noted that, on a pro forma basis representing a full quarter of Gen-Probe and excluding the company's divested businesses in the prior year, the Diagnostics segment declined 2.6 percent. "This is driven primarily by the combination of an 11 percent increase in legacy Gen-Probe sales, offset by a 13 percent decline in legacy Diagnostics," Muir said.

Muir also said during the call that, beginning in the current quarter (fiscal Q1 2014), Hologic will "be speaking to Diagnostics revenues and growth rates on an organic basis, and will no longer refer to legacy Diagnostics and Gen-Probe separately, as we have passed this anniversary and fully integrated the acquisition."

Further breaking down Diagnostics revenues, Muir noted that clinical diagnostics revenues within Gen-Probe, which primarily consist of the Aptima family of assays for chlamydia/gonorrhea, human papillomavirus, and trichomonas, grew almost 17 percent.

"The largest contributor to this increase was from the significant number of instrument sales to Quest [Diagnostics] as part of our new agreement," Muir said. In June, Hologic announced that it was entering into a strategic alliance with Quest to more broadly offer Aptima testing (PCR Insider, 6/13/2013).

"To date, we have installed almost all of the instrumentation that will be required to support conversion to our women's health assays," Muir said. "While these equipment sales had below-average Diagnostics margins, they demonstrate Quest's commitment to our leading technologies and lay the groundwork for substantial downstream assay revenues. Capturing these incremental volumes will be an important element of our growth in molecular diagnostics during fiscal 2014 and beyond."

Muir said that assay revenues related to Panther, the company's nucleic acid testing platform, "continued ramping up nicely," and that the company "looks forward to a continuation of this trend, as the launch of HPV on Panther is still relatively early." Hologic has now installed almost 500 Panther systems worldwide, he said.

"Also, blood screening revenues were up 1 percent," Muir said. "Overall, we remain pleased with the integration and performance of Gen-Probe, though the pace of incremental revenue growth is slower than our initial projections at the time of the acquisition. We remain excited about the long-term outlook for this business, especially as the Panther rollout progresses, as we further expand our test menu."

Further detailing the performance of the Diagnostics unit, Cumming noted that Hologic added "a significant number of new medium- and high-volume molecular customers in the US" in Q4.

"Aptima HPV has been an important driver of new account wins and this trend should continue, following our recent FDA approvals for use on Panther, including last week's announcement of approval of the Aptima HPV 16 18/45 genotype assay," Cumming said. "Based on the strength of our molecular franchise, we are confident about our prospects for additional large laboratory business, which, we believe, will be a mix of new contract wins and growth in existing accounts."

Cumming said that for the full fiscal year, Hologic more than tripled its installed base of Panther systems in the US, with Q3 and Q4 the most prolific quarters. He also noted that the company remains on track to achieve its previously stated goal of installing 1,000 Panthers by the end of 2015.

A full recap of Hologic's Q4 and FY '13 earnings can be found here.

Molecular pipeline

During this week's call, Cumming also provided an update on Hologic's molecular diagnostics product pipeline, framing them in the context of the company moving toward increased earnings in FY '15.

"In FY '15, we expect tailwinds will drive top-line growth and increase our earnings trajectory," Cumming said. "Hologic's number one market share position in all its key product categories is a distinct competitive advantage, which will help leverage our strong relationships and global infrastructure. When you couple this with the anticipated organic growth from the continued investment of recent R&D initiatives and the steady gains we are making in international markets, the result will be a continual increase in revenues."

In the Diagnostic segment, he noted, "we plan to expand our menu of molecular assays to further establish the value and revenue potential of our instrument platforms, especially Panther. After 2015, we plan to launch our viral load assays, accessing a large new market opportunity that will leverage our current efforts to lock up sockets among key lab customers."

Cumming also noted that the company is eagerly anticipating the completion of an internal development project to expand Panther's technological capabilities by enabling it to perform real-time PCR-based tests. Prior to being acquired by Hologic, Gen-Probe originally disclosed this development project in early 2012. Panther and its predecessor Tigris use an isothermal amplification technology called transcription-mediated amplification (PCR Insider 1/19/12).

This new development, Cumming said during this week's call, "will greatly increase Panther's utility and will be a catalyst for further menu expansion."

Finally, Cumming said that Hologic plans to continue to register Panther and related Aptima assays in key new international markets, including China.

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