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Covid Companies Are Losing Steam. Not This One.Covid Companies Are Losing Steam. Not This One. Barron's (Online); New York Stocks that got hot early in the Covid-19 pandemic have had a tendency to turn frigid as the virus fades into the background. Rarer than pandemic-era flameouts like Teladoc Health (ticker: TDOC) and Zoom Video Communications (ZM) are companies able to parlay the Covid boost into long-term growth. Medical technology company Hologic (HOLX) may be one of those rare opportunities. As Covid-19 cases spread in early 2020, clinical laboratories faced an avalanche of demand for molecular diagnostic tests. That drove a spike in demand for a Hologic machine called the Panther, which runs polymerase chain reaction (PCR) tests and other diagnostics, and is capable of processing hundreds at a time, with little input from technicians. Prepandemic, there were about 1,700 Panther systems installed around the world. That number has nearly doubled in the years since. The company uses the so-called razorblade model, placing the machines at little cost to the lab, then charging for the tests, known as assays. Now, Hologic says that with approximately 3,200 Panthers in hospitals, labs, and public-health authorities worldwide, it expects sales of assays to test for diseases like chlamydia and gonorrhea to pick up as the pandemic demand drops. "As Covid use goes down, you will see the base business go up," says Hologic's CEO, Steve MacMillan. "It's why we're perfectly positioned." Hologic was never one of the white-hot pandemic-era plays, but the stock rose 40% in 2020, outperforming the S&P 500, which climbed 16% that year, but nowhere close to Covid-era darlings like Moderna (MRNA) or Zoom. More recently, performance has been middling; the stock is slightly outperforming the broader market this year. The debate for investors is whether revenue growth from having more Panthers in the field will outweigh the lessening demand for Covid assays, as well as challenges to other segments of Hologic's business. In the company's last prepandemic fiscal year, which ended in September 2019, diagnostics accounted for 36% of Hologic's $3.4 billion in revenue. Since then, the diagnostics business has exploded, accounting for 66% of its $5.6 billion in 2021 revenue, largely driven by sales of Covid-19 assays. But already, that overpowering demand is beginning to cool: Covid-19 revenue, which topped out at $823 million in the quarter that ended in December 2020, were down to $212 million for the quarter that ended in June. Some skeptical analysts also point to another potential risk to the diagnostics business, cervical cancer screens, which accounted for 39% of testing revenue before the pandemic. In 2020, the American Cancer Society recommended that doctors screening for the cancer switch from Pap smears to only giving HPV tests. Hologic sells both tests, but Vijay Kumar, an analyst at Evercore ISI, says losing the Pap smear revenue would be a blow, and could happen if gynecologists adjust their habits. Hologic, for its part, says its cervical cancer business is holding steady, and says most women continue to get both tests. Another area of potential concern is Hologic's breast health sector, which accounted for 39% of revenue in the company's last pre-Covid fiscal year. The global chip shortage is cutting into deliveries of the company's mammography systems and contributed to a 19% drop in breast care revenue in the latest quarter. Meanwhile, some analysts say that high interest rates and other macroeconomic factors could cut into sales of the expensive mammography machines. Others are less bothered. SVB Securities analyst Puneet Souda says that he expects chip challenges to ease soon, and says that providers that need the devices will buy them, no matter the state of the economy. "Healthcare is generally not impacted by these trends," he says. Finally, there's the question of just how big an opportunity the company has to expand its molecular diagnostics business . Absent Covid-19, demand for molecular tests hasn't risen significantly since 2019, and Hologic isn't the only company to have placed more high-volume diagnostic testing machines during the pandemic. To some degree, labs have already started to provide an answer. Hologic says more than 90% of its Covid customers around the world are now also running at least one other test. Analysts say the Panther system is simply better and more automated than the tools sold by many of Hologic's peers, and requires less time from lab techs. That could be a major advantage, given the acute labor shortage plaguing the healthcare sector. Hologic also sees expanded opportunity outside of the U.S. after placing more machines internationally during the pandemic—a move it says could benefit not just the Panther business but its other products as well. For investors, concerns over the mammography and Pap smear segments shouldn't be ignored, but the opportunity to sell more Panther assays could more than make up for those worries, making the stock a worthy bet. An important proof point will come at the end of October, when the company reports earnings. The company has forecast revenue growth of 5% to 7% through 2025. With Covid-19 cases easing, investors will have a chance to see if adoption of non-Covid assays is growing. "People kept saying, gee, you placed all these Panthers, we're not yet seeing it in the base [business]," MacMillan says. "I think we're in a little bit of that show-me period." |
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