Hologic Inc. is slated to sell its profitable blood screening business, which accounted for almost 20 percent of the Marlborough, Mass. company's diagnostic revenues in fiscal 2016. The price is $1.85 billion in cash, which is much richer comparatively than other recent diagnostic acquisition comps, at least one Wall Street analyst noted.
The business will be going to Hologic's longstanding partner, Barcelona-based Grifols S.A., which is already responsible for marketing these blood screening products while Hologic is primarily responsible for manufacturing and R&D.
Under a deal that originally dates to 1998 under predecessor companies, Grifols is fully responsible for marketing worldwide—but had to pay 50 percent to Hologic for all products sold. So, the purchase will make these products much more profitable for Grifols once the business is wholly owned. The partnership between the current corporate entities started in 2014, after a series of strategic deals since the initial partnership.
For Hologic, blood screening had proven a highly profitable business, although revenues from the partnership stumbled last fiscal year. Hologic revenues from the Grifols partnership slipped almost 12 percent to $223.3 million in fiscal 2016 from $253.1 million in fiscal 2015; its fiscal year closes on the last Saturday in September. The Grifols revenues account for almost one-fifth of total diagnostic revenues at Hologic
Still, the margins on the business remained stellar – and after the acquisition Grifols could make its offerings more competitive against diagnostics giant F. Hoffmann-La Roche Ltd., which is based in Basel, Switzerland and cited by Hologic as its primary competitor in the blood screening business.
Wall Street reacts
"As competition intensified in blood screening, the relationship with Grifols left the two parties at a disadvantage to more price aggressive competitors. Grifols split the profits with Hologic, but shouldered all of the sales and marketing costs. In the end, owning the entire enterprise was important enough over the long term for Grifols to make an offer Hologic couldn't refuse," said Jefferies analyst Raj Denhoy in a recent note.
He added that Hologic had not been looking for a deal – but it had just been too good to pass up.
Last month, Hologic released its 2017 financial guidance, which it plans to update once the Grifols transaction closes. The blood screening business was included in that forecast for about $240 million in revenue, $155 million in EBITDA and non-GAAP EPS of $0.34 in fiscal 2017.
Jefferies' Denhoy noted that the price tag for the blood screening is roughly 8x its fiscal 2017 projected sales—and 12x EDITDA. That's much higher than similar comps that he cites, which are in the 4-5x sales and 9-10x EBITDA range.
"We feel this divestiture makes strategic sense for Hologic as blood screening was a non-core asset that was flat to declining and likely to face pricing pressure and possibly new competition," summed up BTIG analyst Sean Lavin in his note.
Despite analyst endorsements – Wall Street remained neutral on the deal. Early trading of Hologic shares (NASDAQ: HOLX) on the news of the sale to Grifols was almost entirely flat. Hologic's momentum on Wall Street has slowed of late; it is up only about 5 percent so far this year – but gained a whopping roughly 55 percent over the last two years.
What's next for Hologic?
"Divesting our share of our blood screening business to Grifols will strengthen our efforts to build a sustainable growth company by accelerating top- and bottom-line growth rates, while significantly increasing financial flexibility," said Steve MacMillan, Hologic chairman, president and CEO.
He continued, "We believe that the business and our blood screening employees are best positioned to succeed under a single owner, and that this sale to Grifols provides excellent value for Hologic and our shareholders."
Hologic businesses include diagnostics, which accounts for the largest share of revenues, as well as breast imaging and solutions, gynecological surgical and skeletal health products. Its remaining diagnostic offering includes cytology and perinatal as well as the high-growth molecular diagnostics unit.
The blood screening business accounted for 16 percent of Hologic's projected fiscal 2017 EPS—and only 8 percent of its sales. So, the company will have a big whole to fill in its profitability. Hologic acquired the blood screening business in August 2012, when it bought Gen-Probe for $3.8 billion. And now it could use the cash – it's been working to reduce its debt, which remained at $3.3 billion at the end of last quarter.
The deal is expected to close during the first quarter of 2017; Grifols will gain a fully paid license to Hologic blood screening products. Hologic's manufacturing facility in Rancho Bernardo, Calif. will transfer to Grifols, as well as about 175 employees, mostly in R&D and operations.
Specifically, Hologic blood screening products include the Proceleix family of assays and the Tigris system on which it runs. The assays include the Ultrio and Ultrio Plus assays, which detects HIV type-1, or HIV-1, the hepatitis C virus, and the hepatitis B virus; the Ultrio Elite assay, which detects HIV-1, HIV type-2, or HIV-2, HBV and HCV; the HEV assay, which detects the hepatitis E virus; the WNV assay, which detects West Nile Virus. and the Parvo/HAV assay, which detects the Parvovirus and hepatitis A virus. Grifols gets ready
As for Grifols, it is counting on the deal giving it an edge in the tightly competitive field of blood services by better enabling a vertical integration of its offerings.
"It is an obvious step that allows us to strengthen a leading position that we first achieved in 2014 in transfusion diagnostics with the acquisition of assets from Novartis. The transaction enabled us to enhance our capabilities to be one of the only companies capable of offering comprehensive solutions to blood and plasma donation centers, from donation to transfusion. Now, with this new transaction, we have contributed our vertical integration process as we also have control over the production and R&D phases," said Victor Grifols, chairman and CEO of Grifols.
He said the acquisition decision was made in conjunction with the incoming co-CEOs of the family business: Raimon Grifols Roura and his son Victor Grifols Deu, who were officially tapped in early 2015 and assume control of the company on Jan. 1, 2017.