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Hologic (HOLX - Analyst Report) reported net income of $3.1 million or a penny per share in the first quarter of fiscal 2013 compared with $20.8 million or 8 cents per share in the year-ago quarter. After taking into account certain one-time items, adjusted earnings came in at 38 cents. The result surpassed both the company’s guidance and the Zacks Consensus Estimate by a penny and beat the year-ago adjusted earnings of 34 cents as well. The reported quarter’s adjusted EPS includes a benefit of a penny related to the legislative changes associated with the reinstatement of the federal research tax credit.

Revenues were $631.4 million in the quarter, up 33.7% year over year, but significantly below the Zacks Consensus Estimate of $646 million. However, this was excluding the $13.3 million of contingent revenue received under an agreement of Gen-Probe with Novartis (NVS - Analyst Report). Hologic completed the acquisition of Gen-Probe on Aug 1, 2012.

Segments

Subsequent to the Gen-Probe deal, Diagnostics became the largest segment at Hologic, recording revenues of $305.9 million during the reported quarter compared with $154.1 million in the year-ago quarter. The upside was primarily due to the inclusion of Gen-Probe revenues for the full quarter, higher international ThinPrep revenues and strong growth in the molecular diagnostics products.

The company’s other segments − Breast Health, GYN Surgical and Skeletal Health − recorded respective sales of $220.8 million (up 2.5% year over year), $80.9 million (up 3.0%) and $23.7 million (down 4.1%).

The upside at the Breast Health segment was driven by a 12.2%, increase in service revenues from the company's growing installed base of digital mammography systems, partially offset by a 2.2% decline in product revenues. Hologic noted that the decline in mammography product revenues reflects the ongoing mix shift to the Dimensions product lines from the company’s legacy Selenia. 

After adjusting for the discontinuance of Adiana, the GYN Surgical business recorded growth primarily from an increase in MyoSure hysteroscopic tissue removal (MyoSure) system sales.

Guidance

Hologic provided its guidance for the second quarter of fiscal 2013. For the said quarter, the company expects adjusted revenues of $635−$640 million (representing annualized growth of 35%−36%) resulting in adjusted earnings of 33−34 cents per share, lower than the current Zacks Consensus Estimate of 38 cents. The revenue guidance excludes an expected purchase accounting reduction of $5.2 million related to the Novartis collaboration.

Hologic reaffirmed its fiscal 2013 revenue guidance. The company still expects to report adjusted revenues of $2.61−$2.64 billion, representing 30%−31% growth. However, the company increased its adjusted EPS guidance to $1.58−$1.60 (earlier guidance was $1.56−$1.58). This 2 cents increase was due to the recently-reinstated federal research tax credit, partially offset by an increase in expected operating expenses. 

Recommendation

Despite several challenges such as economic uncertainties in Europe, slower sales cycles and increasing pricing pressure, we are encouraged with the increasing acceptance of the 3D Dimensions system. We are also encouraged with the improving growth in GYN Surgical, with increased focus on NovaSure and MyoSure systems. Offering a wide range of products, Hologic has become an industry giant in the field of women’s health.

With the Gen-Probe acquisition, Hologic has further strengthened its foothold in the HPV business. Moreover, an increasing debt burden along with higher interest expense will continue to affect the bottom line. The company now carries a Zacks Rank #3 (Hold).

While we prefer to remain on the sidelines for Hologic, other medical device stocks worth a look are Cyberonics Inc. (CYBX - Analyst Report) and ResMed Inc. (RMD - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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