Unfavorable Ruling for Hologic

Hologic (HOLX - Analyst Report), one of the leading players in the women’s health industry, recently received an unfavorable ruling in a patent infringement suit with Smith & Nephew (SNN - Snapshot Report). The suit involved the sale of MyoSure tissue removal device, which was included in Hologic’s portfolio with the acquisition of Interlace Medical.

The verdict went in favor of Smith & Nephew, which was awarded $4 million as damages for lost profits. Nevertheless, Hologic is indemnified up to a certain amount as part of its deal with Interlace Medical for potential associated liabilities. Though the company is disappointed with the verdict it will continue to sell the MyoSure product and plans to pursue the appellate process. Besides, several issues remain that could impact the applicability of this verdict.

Earlier this year, Hologic decided to discontinue Adiana, another product in its GYN Surgical business, because it found the product commercially not viable. Moreover, it resolved the patent infringement litigation with Conceptus (CPTS) by discontinuing Adiana. In return, Conceptus would forgo the $18.8 million jury award. In addition to Hologic granting Conceptus a license to intellectual property related to Adiana, the two companies have also agreed to dismiss the false patent marking case between them.

During the last reported quarter, Hologic’s Gyn Surgical segment revenues dropped 2.1% year over year to $77.7 million on the heels of decline in sales of both the NovaSure and Adiana systems, partially offset by growth in MyoSure system sales. MyoSure revenues represented more than $10 million in the quarter.

Meanwhile, in August, Hologic strengthened its position in the area of molecular diagnostics with the acquisition of Gen-Probe. Moreover, the adoption of the Dimensions platform boosted growth of the company’s Breast Health segment.

Sales of Dimensions represented 71% of digital mammography revenue and 60% of units in the third quarter of 2012. Moreover, based on installations made till the third quarter, the company has achieved 45% of the goal of placing 500-700 3D systems (and targeting 60% at the end of FY12) in the US within the first two years of approval. After taking into account units in backlog (that will be shipped in the fourth quarter), the company has already achieved the 60% target.

We have a Neutral recommendation on Hologic. The stock retains a Zacks #3 Rank (hold) in the short term.