Most drug trials still prioritize men, leaving women underserved and at risk of adverse effects. Hologic is changing the game by focusing on unmet needs in women’s health through innovation and smart investments. This commitment positions them as a leader in tackling one of healthcare’s biggest gaps. In today’s FA Alpha Daily, we delve how Hologic’s disciplined capital allocation further supports its long-term prospects.
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It’s an unfortunate fact that most pharmaceutical treatments are tested far more robustly on men than on women.
Many companies have shied away from conducting thorough studies on women, fearful that factors like pregnancy and monthly cycles could lead to adverse health effects.
After scares like the thalidomide tragedy in the 1960s, which led to mass birth defects, drug researchers have become more hesitant to include women in drug trials.
With lives at stake and the risk of bad data, it’s easier, though certainly not more accurate, for drug trials to be made up of predominantly men.
This has led to unexpected reactions from drugs that have only been thoroughly tested on men being used with women.
For example, there have been cases of women who, after taking medication such as Ambien and Cisapride, have suffered life-threatening side effects.
By and large, the healthcare industry continues to overlook women’s healthcare needs, and women as a whole represent an underserved market.
Hologic (HOLX) is trying to fill this social need by focusing specifically on women’s health.
Hologic produces both diagnostics and surgical products, ranging from breast health, OB-GYN surgical needs, and diagnostics for fetal health.
A significant portion of its revenue comes from its diagnostics segment, which was a major beneficiary during the pandemic, driving record sales and earnings.
However, as COVID-19-related diagnostic demand has declined, Hologic is transitioning back to its core business while continuing to grow in other areas.
The company’s business is largely driven by recurring revenue, with two-thirds of its sales coming from consumables and the remainder from services and capital equipment.
Around 75% of its sales are generated in the U.S., though there is a clear focus on international growth.
Hologic has used the pandemic-related surge in revenue wisely, reducing its net debt significantly and strengthening its balance sheet.
After previously operating with high leverage, the company now has minimal net debt, giving it financial flexibility to pursue strategic opportunities.
Hologic’s approach to growth includes ongoing investment in research and development and targeted acquisitions to enhance its product offerings..
Recent deals include the acquisition of Endomagnetics, which focuses on breast cancer surgery technology, and Gynesonics, which develops solutions for treating uterine fibroids.
These acquisitions align with the company’s mission to address unmet needs in women’s health while expanding its capabilities in key areas.
Investments in research and development further reinforce Hologic’s commitment to innovation.
The company prioritizes projects that address unmet needs in women’s health, such as improving diagnostic accuracy or reducing recovery times for surgical procedures.
This focus drives organic growth and mitigates regulatory risks by diversifying its product pipeline.
For instance, advancements in AI-powered imaging tools could streamline breast cancer screenings, reducing healthcare providers’ costs and improving patient outcomes.
All these factors combined enabled Hologic to achieve a 23% Uniform return on assets ”ROA” with 34% asset growth last year.
However, the market has concerns about moderating procedure volumes as healthcare systems address backlogs from the pandemic and prices to the company’s performance to continue to decline below pre-pandemic levels.
Our EEA model clearly shows this.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 15% from 21% last year.
These concerns, while valid, may be overblown given Hologic’s history of navigating complex market environments successfully.
Hologic’s disciplined capital allocation further supports its long-term prospects. The company has engaged in share buybacks, reduced its debt, and reinvested in its business through acquisitions and R&D.
Its ability to maintain a strong balance sheet while pursuing growth opportunities highlights its efficient management and operational strength.
The company’s efforts to innovate and expand its market presence are key drivers of its continued success.
Looking forward, Hologic appears well-positioned to capitalize on its strengths as a leader in women’s health.
The fading headwinds from the pandemic create a clearer path for growth, while strategic acquisitions and ongoing innovation provide additional upside potential.
The market’s concerns about regulatory uncertainty and moderating procedure volumes could provide opportunities for investors if these fears prove to be overstated.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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