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Hologic Reiterated at Neutral

SNN HOLX

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We have reaffirmed our Neutral recommendation on Hologic (HOLX - Analyst Report) with a target price of $21.00.

The company’s fourth-quarter 2012 adjusted earnings of 37 cents per share were ahead of the Zacks Consensus Estimate by a penny, and beat the year-ago adjusted earnings of 34 cents as well. Revenues increased 26% to $588.5 million, surpassing the Zacks Consensus Estimate of $559 million.Despite several challenges such as economic uncertainties in Europe, slower sales cycles and increasing pricing pressure, we are encouraged with the company’s encouraging performance.

Hologic, with its wide range of products, has become an industry giant in the field of women’s health. Subsequent to the Gen-Probe acquisition (August, 2012), Diagnostics became the largest segment at Hologic (representing 44% of the total sales of Hologic in the last reported quarter). The acquisition is expected to help the company derive a major share of its revenues from the diagnostics business with access to Gen-Probe's molecular diagnostic platforms of Tigris and Panther systems.

We are also encouraged to note that excluding the Gen-Probe impact, almost three-fourths of the company’s growth came from the core diagnostics businesses, primarily ThinPrep Pap test, with the balance coming from the molecular diagnostics products. Worldwide ThinPrep test volume increased substantially and revenues increased 6% on the back of a strong performance by the company’s subsidiary TCT, in China.

However, Breast Health, another important segment of the company witnessed a slight decline in revenues in the fourth quarter,  mainly due to the ongoing shift from the company’s legacy Selenia to Dimensions product lines as well as lower sales due to the economic weakness in the international market.

However, we encouragingly note that, the quarter’s sales benefited from the delayed U.S. shipments of the 3D tomosynthesis backlog at the end of the third quarter as well as strong fourth quarter orders resulting in a 17% sequential increase in the 3D tomosynthesis backlog. We believe that the favorable reimbursement decision for tomosynthesis, likely next year, should further drive growth. Moreover, publication of clinical results from some key studies is expected in the near term.

We are encouraged by Hologic’s focus on the international market that contributed 27% of its revenues during the reported quarter. Despite the persistent economic uncertainties in Europe, Hologic has been building its international infrastructure and fortifying management resources, particularly in the emerging markets of China, Latin America, the Middle East and Eastern Europe.The company has acquired TCT (a distributor of medical products including Hologic’s ThinPrep Pap tests and others) for $135 million and Healthcome Technology (manufacturer of mammography systems) for $16.9 million, both based in China. Following the acquisition of TCT, China became Hologic’s largest ThinPrep market outside the U.S.

Recently, Hologic 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.

Our neutral recommendation is backed by a Zacks #3 Rank (‘Hold’) in the short term.

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