Morgan Stanley Downgrades Hologic On Tough Cynosure Recovery, Surgery Business Risks

Although Hologic, Inc. HOLX acquired Cynosure to achieve a higher weighted average market growth rate, Cynosure's main businesses have not delivered as expected, according to Morgan Stanley.

The Analyst

Morgan Stanley’s David Lewis downgraded Hologic from Equal-weight to Underweight and cut the price target from $44 to $39.

The Thesis

Hologic diversified into aesthetics with its purchase of Cynosure, with expectations of generating higher WAMGR, Lewis said in the Wednesday downgrade note.

Yet MonaLisa Touch and SculpSure — which drove almost all of Cynosure’s growth prior to the acquisition — have not returned to their pre-acquisition levels, the analyst said. 

The body sculpting channel is showing signs of saturation, and the company's women’s health strategy appears flawed given the FDA’s latest scrutiny of vaginal rejuvenation, Lewis said.

Competition for NovaSure will intensify if Channel Medsystem’s Cerene snags FDA approval in mid-2019, he said. 

Hologic operates in slower growth end markets versus its peers and has a WAMGR of around 3.5 percent, which is significantly below that the competition's 5 percent, the analyst said. 

“A structural 3-percent organic and 8-percent EPS growth profile is below peers at 5-6 percent organic and double-digit earnings growth, which suggests Hologic is likely to relatively underperform peers." 

Price Action

Hologic shares were trading down 6.45 percent at $38.45 at the time of publication Wednesday. 

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Photo courtesy of Hologic.