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Morningstar | HOLX Updated Forecasts and Estimates from 28 Nov 2018

Hologic posted fiscal fourth-quarter results that, on the whole, matched our estimates and our fair value is unchanged. Hampered by new marketing complications in the medical aesthetics segment, Hologic saw fourth-quarter revenue grow 1.7% in constant currency. While the breast health segment exceeded our projections, this was offset by lower-than-expected gynecological surgery growth. Likewise, SGA for the year outpaced our expectations, but this was offset by lower-than-expected R&D spending.  Nonetheless, we saw little to materially change our longer-term projections for this narrow-moat company.

Medical aesthetics took it on the chin with a decline of 13% in constant currency, fueled by even steeper drops in the body and women’s health product lines. This reflects the company’s decision to halt the marketing of MonaLisa Touch for vaginal rejuvenation following the Food and Drug Administration’s warning letter from this summer. The letter was aimed at a range of companies that had been marketing their various laser products to stimulate generation of collagen in the vagina (thereby relieving some of the symptoms that are associated with hormonal changes in post-menopausal women). Hologic’s product is based on laser technology that’s been approved for other aesthetic uses, including reducing the appearance of acne scars. However, off-label use in the vulvular region has been steadily growing among practitioners, aided by marketing from the manufacturers. In the wake of reports of burns and other complications in vaginal rejuvenation, the FDA has taken a more aggressive stance, demanding more clinical support for the safety and efficacy of the procedures. In the end, we expect this will be a near-term drag on aesthetics growth as Hologic heads into fiscal 2019, but the impact did not materially move our valuation, mainly because the body and women’s health categories within the aesthetics segment accounts for roughly 5% of Hologic’s total revenue.

Aside from the difficulties in aesthetics, we were pleased to see solid 6% growth in breast health. We also like the recent tuck-in acquisitions of Faxitron Bioptics and Focal Therapeutics that add to Hologic’s suite of breast health products. For a company that doesn’t necessarily enjoy scale across multiple categories, Hologic is making some smart decisions to bulk up its product portfolio in certain areas where it can increase its footprint by offering a range of adjacent products. For example, Focal’s key product—a small tag implanted in the breast to designate where a lumpectomy took place—dovetails nicely with the firm’s established strength in mammography. Though these types of acquisitions are relatively small, we like that they make strategic sense and the financial risk is minimized.