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Recently, Hologic Inc. (HOLX - Analyst Report) inked a definitive agreement to divest its LIFECODES business unit to Immucor Inc. to focus more on its core business activities. The divestiture is expected to close during the second quarter of fiscal 2013.  

Per the agreement, Hologic will receive cash payment of $85 million at closing along with an additional contingent payment of $10 million, depending on the fulfillment of certain financial targets in 2013.

The LIFECODES business of Hologic comprises of transplant diagnostics division under its Diagnostics segment. Following the acquisition of Gen-Probe (August 2012), the Diagnostic franchise became the largest segment at Hologic (representing 43.1% of revenues in the fourth quarter of fiscal 2012).

The divestment of LIFECODES will enable the company to sharpen its focus on other operating platforms under its Diagnostic segment, which are more in tune with its current growth strategy. The sale will allow Hologic to direct resource on its core operations in order to fuel its growth engine. The company’s financial outlook for fiscal 2013 issued earlier in November 2012 has already taken into account the sale of LIFECODES and consequently, it would have no material impact on its guidance.

Management asserts that the divestment will garner incremental funds for the company and reduce its debt. In fiscal 2012, Hologic’s long-term debt (net of current portion) increased more than two fold to almost $5 billion.

With a debt-to-capital ratio of approximately 63% in fiscal 2012, the balance sheet appears to be highly leveraged. In light of this fact, we are wary of Hologic’s ability to improve its debt position immediately on the back of the LIFECODES divestment.

Our Recommendation

Despite several challenges such as economic uncertainties in Europe, slower sales cycles and increasing pricing pressure, Hologic continues to witness solid growth. We currently have a long-term ‘Neutral’ recommendation on Hologic. The stock carries a Zacks #3 Rank which translates into a short-term Hold rating. It competes with several companies in the clinical market such as Abbott Laboratories (ABT - Analyst Report), Becton Dickinson and Company (BDX - Analyst Report) and Qiagen (QGEN - Analyst Report), each carrying a Zacks #3 Rank (Hold).

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