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New Hologic CEO Sees Promise in Former Gen-Probe Unit as Firm Seeks Return to Organic Growth

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Hologic this week reported a 3 percent year-over-year decline in fiscal first-quarter revenues, including a 7 percent drop in revenues in its Diagnostics division.

However, the company saw a silver lining in its molecular diagnostic product sales — essentially the remnants of its 2012 acquisition of Gen-Probe — which decreased 8 percent on a non-GAAP basis but increased 3 percent on a GAAP basis, buoyed especially by a women's health testing supply agreement it struck last year with Quest Diagnostics.

In addition, new President and CEO Stephen MacMillan — who was brought on board in December as a 'turnaround' CEO after former top man Jack Cumming departed less than five months after returning for a second stint as head of the company — provided investors with his vision for returning organic growth to the company and how molecular diagnostics is expected to play a significant role in that effort.

"Although Diagnostics declined overall in the quarter, our molecular business posted some encouraging results, especially in the key US market that bodes well for the future and points to the many opportunities ahead of us in this business," MacMillan said during a conference call this week recapping the company's fiscal Q1 earnings. "The initial uptake by Quest has been very successful as increasing volume of our assays drove strong performance for the Aptima product line."

For the three months ended Dec. 28, 2013, Hologic took in $612.4 million in revenues compared to $631.4 million a year ago. Diagnostics revenues declined to $285.8 million from $305.9 million in the prior year Q1 and, on an adjusted basis — including a $13.3 million prior-year addition primarily related to contingent revenues earned and received under its eliminated blood screening collaboration with Novartis — declined almost 11 percent.

Hologic attributed the decline in Diagnostics revenues to the divestiture of its Lifecodes business in March 2013, which generated revenues of $12.6 million in fiscal Q1 2013; decreases in ThinPrep pap test sales in the US, as well as lower sales prices internationally; and a decrease in blood screening revenues from lower West Nile virus assay sales.

A full recap of the company's earnings can be found here.

One of the lone bright spots within Diagnostics and at the company overall in fiscal Q1 was molecular diagnostics, a business that Hologic bolstered significantly in 2012 when it acquired San Diego's Gen-Probe, bringing on board that company's Tigris and Panther molecular diagnostics platforms and associated menus of primarily women's health assays, as well as its molecular blood screening franchise.

During this week's conference call, CFO Glenn Muir noted that Hologic will no longer categorize its Diagnostics earnings as either legacy Hologic or Gen-Probe. However, in order to provide more visibility into its diagnostics business, Muir said it will begin discussing results in three categories: cytology and perinatal, blood screening, and molecular.

Muir said that cytology and perinatal revenues declined 11 percent in Q1, in line with expectations and largely attributable to anticipated volume declines in its ThinPrep business. Blood screening revenues declined 14 percent, also in line with expectations and driven largely by tough comparison to higher-than-usual West Nile virus orders in fiscal Q1 2013.

Molecular revenues also decreased 8 percent on a non-GAAP basis but, excluding $12.6 million of Lifecodes revenues last year, increased 3 percent in Q1. This increase, Muir said, was driven by double-digit growth for Aptima women's health products, including tests for chlamydia/gonorrhea, human papillomavirus, and Trichomonas. A significant portion of this growth, Muir also stated, was attributable to strong uptake of the company's assays by Quest Diagnostics: last June Hologic said that the companies had entered into a strategic alliance under which Quest would more broadly offer Hologic's Aptima assays.

"We also saw growth outside of Quest driven by Aptima HPV and growth in cancer-related assay revenues," Muir said this week. "In molecular, we are in the early stages of seeing some success, especially in the US due to an increase in account closures and competitive wins."

Further pressed by an analyst to discuss the growth of the molecular business outside of the Quest agreement, Muir declined to comment, but provided more detail on the Quest impact.

"Quest had ordered and installed a large number of new Tigris systems in the summer … so this was the first quarter we began to see some real benefit from Quest," Muir said. "The real pickup is on the Aptima CT/GC side. I think some of the new Aptima assays like Trichomonas [and HPV] … [we've] yet to see going forward … so there is a lot of ground for us to pick up with Quest. We're very happy with their initial push for the product, getting [Tigris] up and running."

Although the Tigris system serves as the cornerstone of the Quest agreement, Hologic believes that its Panther system — a mid- to low-volume testing platform that complements the high-throughput capabilities of Tigris and will eventually have multiple nucleic acid amplification capabilities — will be a crucial driver of future growth.

"Panther is proving to be one of our brightest long-term opportunities," MacMillan said during the call. "We installed our highest number of systems to date in the US during Q1 with a substantial portion resulting from competitive conversions for new accounts. We remain well on our way to achieving our stated goal of installing 1,000 Panthers by the end of fiscal 2015."

In general, MacMillan noted that Hologic's Gen-Probe acquisition is just now beginning to bear fruit.

"My initial feeling is that we are in the early innings of beginning to realize the full potential of the Gen-Probe acquisition by combining very strong technical and scientific platforms with a more aggressive and commercially-focused selling team," he said. "While much attention is focused on the assays in this space, we believe we have a significant breakthrough on the instrumentation front with Panther, which delivers very real and meaningful workflow improvements, a key benefit for our lab customers."

Given the importance of the former Gen-Probe business in Hologic's growth plans, another analyst asked MacMillan if he could discuss morale at the organization, which itself has seen several managerial shakeups since being acquired by Hologic.

"When I arrived here there were a number of people, dare I say, with one foot out the door," MacMillan said. "And I think with my arrival a whole bunch of them kind of stopped … making phone calls out and are very intrigued. But … many, and especially I think frankly out in San Diego, are still waiting to believe. But they want to believe they have invested their heart and souls and that so many people at the grassroots level of this company have spent their lives really helping build it up and want this company to fulfill its rightful potential."

MacMillan added that he believes many of these Gen-Probe employees are now "reenergized," but that Hologic still has work to do in that regard.

"You don't go through the amount of leadership turmoil that we went through both at the top of Hologic and … at [Gen-Probe] in a 12-month period without having a meaningful and significant impact on morale," he said. "I think we have bottomed out and are on the way up now. But … I do think that's going to be a big driver of performance in the future. When you have people with one foot out the door, 5 o'clock rolls around they are ready to head home. When they believe what they're working on they're giving you that extra effort, they're making that extra sales call, they're working that extra project and product development, and that's where we need to be."

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