NEW YORK – Already an established presence in the breast cancer testing space, Hologic's planned acquisition of Biotheranostics provides an opportunity to further expand its footprint in that market, according to company executives.
Last week, Hologic announced the deal to acquire molecular diagnostics firm Biotheranostics for approximately $230 million.
Biotheranostics develops and provides diagnostic, prognostic, and predictive tests that support physicians in the treatment of cancer patients. The firm has a CLIA-certified, CAP-accredited laboratory from which it runs its tests, which is located close to Hologic's headquarters in San Diego, and it is authorized to perform testing in all 50 US states.
The new firm has posted 20 percent year-over-year revenue growth for the past several years, and Hologic believes it can continue to grow the business at a similar rate post-integration, Kevin Thornal, president of diagnostic solutions at Hologic, said in an interview.
The company expects the acquisition to close in February and to be slightly dilutive to its non-GAAP earnings per share in fiscal 2021, break-even in 2022, and be accretive thereafter.
In 2010, Biotheranostics launched its first PCR-based gene expression test, CancerType ID, as an aid to diagnose the tumor type and subtypes representing 95 percent of all solid tumors. Then, in 2014, it launched Breast Cancer Index, also a PCR-based gene expression test, which physicians use to determine whether women who have had breast cancer should receive endocrine therapy treatment.
Hologic said that both tests have been validated in large studies involving oncology patients in areas with high growth potential, and the Breast Cancer Index test is included in clinical practice guidelines.
According to Thornal, both tests are being reimbursed by Medicare and some private payors. "However, there's a long runway for growth because we are seeing low market penetration right now," he said, adding that the Breast Cancer Index test has about 5 percent penetration, and the CancerType ID test has about 3 percent penetration.
Hologic believes the total available market is greater than $1 billion per year for Breast Cancer Index and greater than $300 million per year for CancerType ID, he said.
The acquisition of a firm, whose gene-expression based cancer tests are complementary to some of Hologic's products and markets, makes solid business sense, according to at least one investment analyst.
"It's as simple as Hologic coming in with its skills and commercial presence to build awareness and drive adoption of the Biotheranostics tests," Evercore ISI analyst Vijay Kumar said in an interview.
Hologic, he noted, has already established a strong market presence in molecular diagnostics and breast cancer mammography, two areas it can leverage to help grow Biotheranostics business revenues.
"Hologic has evolved over the years from a company whose primary business was driven by capital expenditures for sales of mammography systems," Kumar said. "They've had plans to diversify that revenue stream for years because they've hit the peak of the adoption cycle on mammography."
The company completed a number of successful acquisitions, and in 2012, for example, acquired MDx firm Gen-Probe for $3.8 billion, enabling it to adopt the Tigris and Panther automation platforms and menu of sexually transmitted disease tests.
More recently, Hologic tried to enter the medical aesthetics business by acquiring Cynosure in 2017. The acquisition turned out, however, to be a costly experiment for Hologic, which paid about $1.65 billion for the firm but sold it for about only $140 million in November 2019.
What has changed recently for Hologic and other IVD companies, Kumar noted, is that they "now have cash that they weren't expecting 12 months ago, which gives them a lot of bandwidth to do tuck-in acquisitions."
In a research note last week, William Blair analyst Brian Weinstein said that the proposed $230 million acquisition of Biotheranostics represents roughly seven times its 2020 revenue of $33 million. "As far as valuations in the space go these days, this certainly is not unreasonable and some would even argue it is a discount to what should be expected, especially given the 70 percent [or so] gross margins Biotheranostics already sports," he said.
Steve MacMillan, Hologic’s chairman, president, and CEO, said during a presentation at the 39th Annual JP Morgan Healthcare Conference on Monday that the firm is looking to "take the revenue, profits, and the cash we're generating to continue to strengthen our business for the future.
"At the end of the day, we're still thinking about our core businesses and how we strengthen those," he said, "and the Biotheranostics business … [is] a great fit for us as we continue to broaden our businesses over time."
At the beginning of 2021, Hologic finds itself in a position of strength and can afford to be selective, MacMillan noted. Hologic completed fiscal year 2020 last September with $701.0 million in cash and cash equivalents. Its fiscal Q4 revenues soared 56 percent year over year, driven by increased production and global demand for its two molecular SARS-CoV-2 assays, which run on the fully automated Panther and Panther Fusion systems.
Last Friday, the company announced preliminary year-over-year revenue growth of 89 percent for its fiscal first quarter 2021, also on the back of unprecedented demand for its coronavirus tests.
Such demand and its revenue effects have "enabled us to look at companies that are complementary and adjacent to what we do," Thornal said. "When you look at Biothernostics and Hologic, we share a focus on women's health and a passion to make sure that we can impact women's lives."
Biotheranostics' leading test, Breast Cancer Index, fits in especially well with that strategic imperative and enables Hologic to also leverage established networks associated with breast cancer mammography, Thornal said.
Breast cancer patients are often diagnosed using a Hologic mammography machine, he noted, and they may then need chemotherapy and long-term treatment, including endocrine therapy. Biotheranostics' Breast Cancer Index test analyzes the risk of breast cancer recurrence and detects whether a patient will benefit from endocrine therapy. Additionally, if the test shows the patient can avoid endocrine therapy, she will avoid its unhealthy side effects, Thornal said.
As such, the test provides insights to oncologists and OB/Gyns ─ healthcare professionals already in contact with Hologic's sales teams.
Michael Watts, vice president of investor relations at Hologic, said in an interview that Biotheranostics over the years has "done a great job of amassing the clinical data that it needs to demonstrate the utility of its products and building up reimbursement."
However, Hologic intends to leverage its more extensive commercial resources to help the business achieve broader reimbursement with private payors. It also intends to deploy its sales and marketing teams to help educate clinicians about the clinical utility of Biotheranostics' products.
Longer term, while Biotheranostics currently markets its products only in the US, Hologic plans to leverage its own sales and marketing teams to promote them internationally. Also in the long run, Hologic may configure Biotheranostics' tests to run on Hologic's Panther Fusion platform, Thornal added. Kumar noted that if that can be accomplished, it could enable a significant scale-up of testing using the new firm's assays.
Further with a CLIA laboratory, Hologic may be able to develop and test the utility of new high-complexity, laboratory-developed assays prior to pursuing regulatory clearances for them as IVD tests, Kumar added. Hologic's Panther Fusion already has an open-access function that enables running laboratory-developed assays.
Following MacMillan's presentation on Monday, JP Morgan analyst Tycho Peterson said in a research note that going forward, Hologic continues to look for deals that "would leverage its existing channels or expand into near adjacencies, similar to Biotheranostics, [and] there are attractive targets within MDx, Breast Health, and GYN Surgical."