Hologic Inc. (NGS: HOLX) and lifting our price target to $100 from $85. Hologic delivered very strong results in fiscal 4Q20 despite coronavirus headwinds. Demand for COVID-19 assays and robust system placements helped to drive a 55.6% increase in currency-neutral revenue.
Hologic plans to use the higher earnings and cash flow from FY20 for accelerated product development and M&A. The company is developing new products for women’s surgery and AI-platforms to improve diagnoses in mammography scans. We also expect procedural volume and mammography scan volume to increase in FY21, benefiting the GYN Surgical and Breast Health segments.
We believe that Hologic may target larger acquisitions than it has in the past. Although the company will see slower COVID-19-related revenue in FY22, we expect robust product development and M&A to drive overall revenue and EPS growth.
Hologic delivered very strong results for 4Q20 (reported on November 4). Riding a wave of demand for COVID-19 testing, the company recorded a 55.6% jump in revenue (+54.2% in constant currency), to $1.347 billion.
The results were driven by robust demand for COVID-19 diagnostic tests that run on the Panther and Panther Fusion platforms. Notably, sales of the two SARS-CoV-2 assays that run on these systems were in line with the increased placement of new Panther units at customer sites. Some of these placements replaced competitors’ systems or were upgrades from Hologic’s older Tigris system. System placements were especially strong in overseas markets. Since the Panther diagnostic units can be equipped with 18 assays to diagnose infectious diseases such as STDs and seasonal flu strains, in addition to COVID-19, these units have become especially attractive to diagnostic labs.
In all, Hologic placed 511 new Panther systems in FY20, more than double the annual rate over the previous five years. The global installed base now stands at 2,250, up nearly 30% from prior year. The company employs the ‘razor/razor blade’ model, in which each placed system generates recurring revenue from the test assays that detect viruses and infectious diseases.
Revenue in the Diagnostics segment grew 202.8% on an operational basis to $939 million (+217.3% organic). Organic revenue excludes blood-screening activities from a divested business.
Breast Health revenue was $289.2 million, down 16.2% on an operational basis (-18.0% excluding the acquired SSI business).
The pandemic slowed sales of capital equipment, such as the tomosynthesis machines.
GYN Surgical revenue was $100.2 million, down 12.9% operationally due to the deferral of elective procedures.
The strong revenue growth drove higher profit margins.
For FY20, adjusted EPS rose 63.8% to $3.98. GAAP net income was $1.110 billion or $4.21 per share, compared to a net loss of $203.6 million or $0.76 per share a year earlier.
Cash flow from operations in FY20 was $897 million, up from $649 million in FY19.
Hologic plans to use its higher earnings and cash flow for accelerated product development and M&A. It is developing new products for women’s surgery and AI-platforms to improve diagnoses in mammography scans.
EARNINGS & GROWTH ANALYSIS
Hologic provided guidance for fiscal 1Q21. It expects first-quarter revenue of $1.350-$1.425 billion and adjusted EPS of $2.10-$2.25. At the midpoint of the range, this EPS guidance implies impressive year-over-year growth of 257%. Clearly, the strong demand for testing solutions is continuing in FY21.
We also expect procedural volume and mammography scan volume to increase in FY21, benefiting the GYN Surgical and Breast Health segments. In addition, we look for the strong operating cash flows in FY20 to provide additional resources for product marketing and development and M&A, and believe that the company may pursue larger acquisitions than it has in the past. These factors will likely drive revenue and EPS growth. While we expect COVID-19-related revenue to slow in FY22, we also see stronger growth from the GYN Surgical and Breast Health businesses.
In the near term, we expect the company to deploy capital for M&A and internal R&D.
In molecular diagnostics, it faces competition from Roche, Abbott and BD.
Strong sales of COVID-19 test assays are driving placements of Panther Fusion diagnostic systems and helping Hologic to gain Molecular Diagnostics share in overseas markets.
On December 7, BUY-rated HOLX closed at $73.18, up $0.03.