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On Apr 5, we reaffirmed our long-term Neutral recommendation on Hologic (HOLX - Analyst Report) as the numerous headwinds in play might limit the growth prospects of the company. This leading player in the field of women’s health carries a Zacks Rank #3 (Hold).

Why Neutral?

Hologic continues to record robust sales growth on the back of the Gen-Probe acquisition in Aug 2012. The company envisages cost synergies of over $40 million by the end of the first year of the takeover and an additional $35 million by the end of the third year. We also look forward to revenue synergies from the complementary product portfolio, cross-selling opportunities and enhanced global footing.

Revenues from Hologic’s largest segment – Diagnostics are soaring, primarily led by the Gen-Probe portfolio. Under the Breast Health segment, the ongoing shift from the company’s legacy Selenia to the higher-priced Dimesions product line is a highly profitable trend. The results from the Oslo clinical trial, competitive wins and positive reimbursement decision should catalyze growth further.

Hologic’s growth in the international market is also encouraging. The company has taken up inorganic means to support growth, especially in emerging markets — a strategy which is already yielding positive results.

However, sales in the European market remain lumpy due to the economic environment. The margin erosion on Diagnostics and Breast Health franchise is another downside for Hologic. The company, operating in a highly competitive industry, also faces challenges like slower sales cycles and increasing pricing pressure for its offerings.

Evidently, unfavorable patent ruling has hurt sales in the past and we remain watchful on the company’s patent sphere going forward. Further, higher interest expense is a looming concern and will continue to affect the profitability in the near-term.

Other Stocks to Consider

While we remain on the sidelines for Hologic, other medical stocks such as Cyberonics (CYBX - Analyst Report), Cepheid (CPHD - Analyst Report) and Given Imaging are likely to do well. These stocks carry a Zacks Rank #1 (Strong Buy).

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