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Hologic Banking on MDx Acquisitions to Elevate Long-Term Revenue Growth

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NEW YORK ─ An acquisitions strategy that led it to purchase three molecular diagnostic companies in quick succession may lift Hologic's overall revenue growth to between mid- and high-single digits in a post-pandemic world, its CEO Steve MacMillan said on Wednesday.

Its anticipated future revenue growth contrasts sharply with that of pre-pandemic times when Hologic's revenues had been growing at between 3 and 4 percent per year, and striving for 5 percent, MacMillan said on a conference call following the release of its fiscal second quarter financial results.

The acquisitions of three molecular diagnostic companies are expected to play a major role in its overall future plans, MacMillan added.

Hologic recently announced the acquisitions of Mobidiag, a developer of MDx tests and instrumentation, for approximately $795 million; Diagenode, a European developer and manufacturer of MDx diagnostic assays and epigenetics products, for approximately $159 million; and Biotheranostics, a developer of diagnostic, prognostic, and predictive cancer tests, for approximately $230 million.

Seeing a way to broaden its portfolio by buying assets that are growing faster than its base business, the company recently put revenues stemming from its COVID-19 testing business to use. In the past year, high-margin molecular testing revenues fortified Hologic's balance sheet and boosted its cash flow. The company has booked $2.35 billion in COVID assay revenues since the pandemic began, which contributed to operating cash flow of nearly $1.9 billion.

"A tremendous amount of cash flow provided funds to get into faster-growing markets, adjacencies, and other business areas that we know quite a lot about and where we can bring value," Kevin Thornal, Hologic's president of diagnostic solutions, said in an interview. "Without COVID revenue, we might have completed these deals at some point in time because strategically they make sense."

Molecular diagnostics was a suitable target for acquisitions because it was already part of Hologic's core strengths, Thornal said. "We have R&D and assay design experience, and Ph.D.s with a background in molecular microbiology," he said. "When we are evaluating assets and MDx is the core technology, we quickly understand the chemistry underlying tests. Then it's really about making sure that we can bring synergies, or that the new business can get us into markets with sufficient future growth."

MacMillan said on the conference call that Hologic's growing installed base of molecular diagnostics instruments, which climbed 40 percent during the pandemic to 2,600 Panther and Panther Fusion systems, is also expected to drive revenue growth over the next few years. Additionally, a broader menu of assays resulting from recent acquisitions is also expected, further driving revenue growth.

Each of its new diagnostics businesses brings it different competencies, MacMillan said. The acquisition of Biotheranostics in February is already paying dividends. "This business is off to a very strong start based mainly on the inclusion of the breast cancer index test in NCCN guidelines to predict the benefit of extended treatment within different therapies," MacMillan said.

Biotheranostics is a developer of PCR-based gene expression tests for breast and metastatic cancers, which has enabled Hologic to expand into the adjacent growth market of oncology in vitro diagnostic testing. The company generated approximately $33 million in revenue in 2020.

Hologic acquired Diagenode, a Belgian developer and manufacturer of molecular diagnostic assays and epigenetics products, a few days after it closed the sale of Biotheranostics. With Diagenode onboard, Hologic can speed up development of its assays and look to port many of its current CE-marked PCR tests onto the fully automated high-throughput Panther Fusion. The Marlborough, Massachusetts-based company needs a broader menu for its European customers, in particular, and has been "at a little bit of a competitive disadvantage" in the region, MacMillan said on the call this week.

"We know Diagenode's capabilities in assay development well [because] we have been partnering with them since 2016 to develop and manufacture PCR-based assays for Fusion," MacMillan said. "The ability to leverage external PCR expertise was one of the reasons we developed the Fusion system years ago."

Hologic announced its proposed second acquisition in Europe, of Mobidiag, a Finnish developer of innovative molecular diagnostics tests and instrumentation, earlier this month. The European company generated more than $40 million in 2020 revenues without any US sales.

Hologic sees the potential to grow the company's revenues globally but especially in the US "once we get some of their assays approved here," MacMillan said. "Mobidiag brings new capabilities that we have been interested in for more than a decade."

Specifically, the Finnish firm is a developer of near-patient, acute-care diagnostic instruments and tests, which is "a large, rapidly growing area that we don't compete in today," MacMillan said. "This market encompasses tests for respiratory and gastrointestinal conditions, healthcare-associated infections, and antibiotic resistance, among others."

Hologic further believes that Mobidiag's Novodiag platform "is a truly differentiated asset with a unique combination of ease of use, rapid turnaround, multiplexing, and low costs," MacMillan said, adding that it plans to seek clearance for its new company's assays in the US, which should translate into a "massive growth" accelerator starting in 2024. Novodiag combines real-time PCR and microarrays to provide high-level multiplexing that detects multiple pathogens in a single sample.

Acquisition criteria

In addition to its diagnostics business, Hologic has breast health, gynecological surgical, and skeletal health businesses that are recovering after facing pandemic headwinds.

The firm's overall corporate acquisition strategy aims to accelerate revenue growth rates by leveraging current business competencies, including its large installed base and sales force, and by moving into suitable near adjacencies, Michael Watts, Hologic's vice president of investor relations and corporate communications, said in an interview.

In each of its market segments, Hologic has a business development team with responsibility to pursue acquisitions. The top requirement is strategic fit, which includes whether the new firm can leverage Hologic's strengths and move it into new areas, Watts said. "The acquisitions must also have the potential to accelerate our revenue growth rate, which involves more than a one-time step up in growth from doing a deal. The new business often needs to be growing faster than we are, and after that comes requirements for a return on capital and accretion to earnings."

In 2012, Hologic's $3.8 billion acquisition of Gen-Probe turned out to be critical. Gen-Probe's Tigris and Panther platforms laid the foundation of the company's current MDx business.

"Most of our diagnostics focus before the last year or two has been in a relatively small number of infectious diseases," Watts said. "Now, we are moving into areas that we followed for a long time, including near-patient testing and higher-level multiplexing."

UBS analyst Daniel Brennan said in an interview that the combination of recent acquisitions "ultimately is going to help drive faster top-line growth. Hologic's ongoing focus on diversifying into high margin, consumable, repeatable businesses" to offset cyclical, capital intensive businesses, such as mammography, has been an important driver for its recent acquisitions, he said. Additionally, the appetite for acquisitions has grown with "increasing awareness of the importance and the utility of diagnostic testing."

Acquisitions tend to happen more often, he said, when a seller is willing to sell than when a buyer wants to buy, and that holds true especially for attractive acquisition assets. "However, nothing has altered the landscape for these acquired companies for them to believe that they could not continue to compete as standalone companies," he said. On the other hand, with cash on hand buyers are offering high prices that are probably a large factor in the decision to sell for these standalone companies, he added.

Robert Boorstein, medical director of Brooklyn-based Lenco Diagnostic Laboratory, said in an interview that each of Hologic's recent acquisitions "is different from the others, and each is different in scope."

"The likely benefits of these acquisitions are not really obvious, and it'll take some time to see how this acquisition strategy plays out," he said.

Each acquisition has its caveats, Boorstein said. In Mobidiag, Hologic is acquiring a company that would enable it to enter near-patient testing but some of Hologic's competitors have also announced acquisitions recently in this market space. The Mobidiag acquisition is similar in scope to purchases by Roche Diagnostics of GenMark; DiaSorin of Luminex; and Thermo Fisher of Mesa Biotech, Boorstein said.

"Though Diagenode has some interesting technology, it is also going to take time to migrate its tests onto Hologic's platform in sufficient volumes to make an impact," and it is not yet clear how Hologic can obtain substantial growth from Biotheranostics' tests, Boorstein said.

"Companies want a piece of the rapid testing market because the overall COVID-19 testing market is bifurcating into high-throughput testing and rapid testing, which includes near-patient testing," he said, adding that there are a number of companies already in the near-patient testing space, including Cepheid, Abbott, and Quidel, as well as newcomers like Talis Biomedical.

Further, Mobidiag's tests will also not be available in the US, and so won't have a material revenue impact for Hologic, for a few years, Boorstein added.

Evercore ISI analyst Vijay Kumar said in an email that he also sees point-of-care tests, including near-patient assays, taking an increasing share of testing demand. The global pandemic is forcing people to evaluate point-of-care testing, which "is a good adjacency" for Hologic, he said.

Thornal said that despite the potential for stronger competition as a result of acquisitions, he believes there is plenty of room for competitors in the IVD industry.

"The importance of diagnostics is at an all-time high, and the world is seeing the value of getting early information to be able to make informed healthcare decisions," he said. "We see that larger companies doing acquisitions can fund innovation a lot easier and bring lifesaving tests to the market quicker."

No pulling back

On its conference call, Hologic provided a conservative forecast for fiscal Q3 SARS-CoV-2 test revenues of between $200 million and $250 million, but MacMillan said ongoing uncertainty associated with COVID-19 testing demand has not altered its future acquisition plans.

"We're not pulling back," he said. "We'll still generate a meaningful amount of cash in the coming quarters," but people should not expect Hologic to "try to gobble up as many companies in the coming quarters as we just have."

Karleen Oberton, Hologic's CFO, said on the conference call that the firm will continue to use its free cash flow for share repurchases and tuck-in acquisitions "even as the COVID testing comes down."

As it looks at potential acquisitions, Hologic could participate in a lot of new markets within diagnostics, said Thornal, but he declined to be more specific. "We continue to look in those areas that make sense," he said, adding that as it monitors potential purchases, Hologic deliberately stays "close to a number of other diagnostic companies."

UBS' Brennan said molecular testing that provides a rapid result in less than 30 minutes may be of future interest for Hologic. "They have long said that PCR laboratory testing is more accurate than rapid antigen testing, but high-performance rapid molecular testing would be a nice adjacency for them," he said.