Hologic Inc.  (HOLX)   The Henry Fund Stock Rating 

The Henry Fund Henry B. Tippie School of Management Casey Farrier Spoden [casey‐[email protected]] March 2, 2016
Hologic Inc. (HOLX) Investment Thesis We are recommending a BUY for Hologic, Inc due in part to the large market share they encompass in the women’s health services sector. Hologic, Inc. presents unrecognized value in the market due to the increase in demand for women’s health services due to the increase in health care coverage because of the Affordable Care Act, and breakthrough patented mammography technology. Drivers of Thesis  Large aging population will increase demand for medical services, spurring medical device sales, due to the disproportionate spending by older adults. In addition, females make up a slightly higher proportion of healthcare spending overall at 56%.  Management push for international growth. The company experienced slight growth in overseas breast health market in FY15, and is expected to make gains again in 2016.  Breast tomosynthesis (3D mammography technology) FDA approval show increased ability to diagnose cancers which will increase purchases of this newer technology due to higher rates of and greater accuracy of diagnosis. Risks to Thesis  Decreased frequency of government recommended mammograms and an increase in age to start regular mammograms will negatively affect patient visits, which will decrease the likelihood of hospitals to upgrade medical equipment.  Consolidation in the healthcare industry overall will lead to higher pricing power of customers (health systems/provider offices/laboratory systems) therefore decreasing company profitability.  Fluctuation in foreign exchange rate in light of the strong dollar, will negatively affects profits which. Approximately 25% of revenues come from foreign markets. Hologic has plans in place to begin hedging currency risk in FY16. Earnings Estimates Year EPS growth 2013 $(4.36) ‐14.6% 2014 $.06 101.3% 2015 $.47 683.3% 30%
2016E
$.55
16.1%
2017E
$.66
21.5%
2018E
$.73
9.5%
S&P 500
25%
20%
15%
10%
5%
0%
‐5%
‐10%
M
A
M
J
J
A
S
O
Target Price Henry Fund DCF Henry Fund DDM Relative Multiple Price Data Current Price 52wk Range Consensus 1yr Target Key Statistics Market Cap (B) Shares Outstanding (M) Institutional Ownership Five Year Beta Dividend Yield Est. 5yr Growth Price/Earnings (TTM) Price/Sales (TTM) Price/Book (mrq) Profitability Operating Margin Profit Margin Return on Assets (TTM) Return on Equity (TTM) HOLX
N
D
J
F
$42‐48 $47.15
NA
$26.19
$36.62
$31.30 – 43.00
$42.31
$10.2
$283.8
$127.53
.927
0.00%
8.00%
56.17
3.75
4.71
18.38%
6.88%
3.97%
8.78%
Industry
Sector
60
50
40
56.2
42.1
30
40.8
20
19.4
10
12 Month Performance HOLX
Buy Stock Rating Healthcare – Medical device and Equipment 8.8
8.1
0
P/E
ROE
Company Description Hologic, Inc. is a developer, manufacturer, and supplier of medical equipment and diagnostic tools with a focus specifically on women’s health. The company operates in four major business segments including Diagnostics, Breast Health, Gynecological Surgery, and Skeletal Health Data Source: Factset, Yahoo Finance Important disclosures appear on the last page of this report. Page2
EXECUTIVE SUMMARY We are initiating coverage on Hologic, Inc. and are recommending a BUY due to the large market share Hologic, Inc. holds in the breast health and breast imaging equipment market and the large upside potential in the stock price1. The calculated intrinsic value of the company shows that there is a very large upside potential to the current share price of $36.62. In the past five years, Hologic, Inc. has experienced much volatility in its financials. However, the company’s growth is strong following a change in management in team in 2013. After the appointment of the new CEO, operational changes were put into effect to improve efficiencies and decrease cost of operations which will add increased value for shareholders as unnecessary spending continues to be reviewed and eliminated. COMPANY DESCRIPTION Hologic, Inc. is a developer, manufacturer, and supplier of medical equipment and diagnostic tools with a focus specifically on women’s health. The company operates in four major business segments including Diagnostics, Breast Health, GYN Surgical, and Skeletal Health 4. The revenue mix by segment is shown below and explained in greater detail following the chart. Hologic, Inc. Revenue Mix FY2015 12.41%
3.48%
44.80%
39.31%
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Source Data: Hologic 10‐K Diagnostics Hologic, Inc. provides a large range of diagnostic products that are primarily used in the diagnosis of human infectious diseases or screening of human blood and/or plasma donations. The main products include the following: 1)
2)
3)
4)
Aptima assays Procleix blood screening assay ThinPrep cervical cancer screening system Rapid Fetal Fibronectin Test The Aptima line of assays is used to test for the infectious microorganisms that are present in or cause most common sexually transmitted diseases. These diseases include chlamydia, gonorrhea, certain strains of HPV, and the parasite Trichomonas Vaginalis that causes trichomoniasis. Each detection system uses Hologic, Inc. proprietary technology like target capture, Transcription Mediated Amplification (TMA), hybridization protection assay (HPA), and dual kinetic assay (DKA) technologies in order to produce the most refined amplification assays that in turn improve the accuracy of assay performance. These assay technologies also serve to improve the efficiency of the laboratories and to reduce laboratory costs associated with the screenings 4. Hologic, Inc. also develops and manufactures the Procleix family of assays and corresponding instrumentation. This assay segment includes screening processes for detecting the presence of HIV, Hepatitis A, Hepatitis B, Hepatitis C, Hepatitis E, and West Nile Virus. Both types of assays require proprietary instrumentation to run the assays for disease detection. They range from semi‐automated to fully‐automated and serve both low and high volume laboratories. For example, the Tigris system is fully‐automated and approved specifically for high volume labs. The Panther system can be semi or fully automated and used in both low and high volume laboratory settings. The newest system, Tomcat, was introduced in FY 2014 and its automation features are designed specifically to eliminate many of activities and errors associated with manual sample testing and pre‐
analytical manual manipulation. The ThinPrep cervical cancer screening system is the most widely used method in the United States (10‐k). ThinPrep refers to any of the following associated products: processor, imaging system, reagents, filters, and supplies. The ThinPrep process differs from that of a normal Pap smear as the cervical sample obtained is inserted immediately into a vial containing the proprietary PreservCyt Solution instead of smeared onto a microscope slide. This allows cell samples to be preserved before the specimen can be damaged or contaminated in the air. The Important disclosures appear on the last page of this report. sample is then sent through the ThinPrep Processor, where the process of preparing cervical slides is automated within the machine to reduce human error and test result accuracy. This system can also be used for other fine‐needle aspirations of tissue including breast, thyroid, lung or liver. Cervical Cancer Cases by Age 2) Breast Tomosynthesis Technology 3) Computer‐aided detections 4) Breast biopsy devices The digital mammography system developed by Hologic, Inc. use photoconductors to directly convert x‐rays into electrical signals for imaging. These 2‐D DirectRay systems do not need to use intensifiers or additional processes to convert x‐rays to light (as most non‐Hologic systems do) which allows very high resolution images and quality contrast. Hologic, Inc. developed and manufactured a mammography machine that makes use of tomosynthesis 3‐D technology. The Dimensions tomosynthesis system allows providers to take a series of low‐does x‐ray images that are processed into small visual “slice” images. Providers are then able to view the internal structure of the breast tissue which allows for the identification of even the most subtle lesions or abnormal tissue growth. The clinical results for FDA approval show that the 3‐D technology is superior to the 2‐D systems already in use. This new technology would will ultimately increase the rate of cancer detection and reduce the risk of patient callbacks. Source: cdc.gov 2013 As shown above, cervical cancer is most prevalent in women over the age of 40 13. With the growing population in the over 40 category, this will help to drive growth in the Hologic, Inc.’s Diagnostic division 28. The Rapid Fetal Fibronectin Test is a Hologic, Inc. patented test used to determine a patient’s risk of pre‐term birth. This is a single‐use or disposable test that detects levels of the protein fetal fibronectin – present in vaginal secretions during pregnancy. The sample is analyzed on a Hologic, Inc. patented screening system called TLI IQ. Breast Health Hologic, Inc. includes a broad range of breast imaging machines and technology. This includes products consisting of: 1) Digital mammography systems Hologic already controls over 50% of the market share in the mammography market, which will be difficult to increase substantially 1. As a result, while forecasting revenues we kept our growth estimates largely in line with analyst projections for the overall medical device industry, at an average of 6.65% from 2016 to 2020. The computer‐aided detection software was designed for use with other mammography products. They are visualization and analytical tools that assist radiographers in reading the results of x‐ray or MRI images. These allow providers to see outcomes that may not be easily detected with the naked eye, therefore increasing the rate of cancer detection. Hologic, Inc. has developed two types of breast biopsy products. These include two tethered vacuum‐assisted products that use disposable tools and are powered by a console and use a patented fluid management system. The ATEC biopsy tool can be read in any standard imaging system, but their Eviva product can only be used with the stereotactic X‐ray guidance that Hologic also produces. The company also produces Celero, a non‐tethered disposable core biopsy product that can be used only Page2
under ultra‐sounds guidance. All of Hologic, Inc.’s biopsy products were designed to accommodate a large range of patients and be effective in many hard to reach spaces of the chest cavity. Gynecological Surgical The GYN Surgical segment of Hologic, Inc. consists of the NovaSure and MyoSure systems. NovaSure is used in a minimally‐invasive procedure used to treat abnormal uterine bleeding. This is a disposable device that uses radio frequencies to ablate (destroy) the uterine lining in order to stop profuse bleeding. The radio frequency used is customized for each patient and the controller system automatically monitors other safety limitations. NovaSure is approved by the FDA to be administered sans anesthesia and is typically performed as an outpatient procedure. Hologic, Inc. generates revenues from the sale of medical equipment categorized in one of the four device segments – Diagnostics, Breast Health, GYN Surgical, and Skeletal Health ‐ they operate in. Together, these drove revenues of $2.705 billion dollars in fiscal year 2015. $2.27 Billion of that revenue came from direct product sales, while $434.6 million came from installation and service contract revenues. Servicevs.Product
Revenue
$434.60 Service revenue
Product Sales
MyoSure is a product used to remove fibroids and polyps in the uterine cavity. The system consists of a disposable removal device, control unit and hysteroscope that features a simultaneous cutting and removal unit that allows the removed tissue to remain intact. $2,270.00 Source: Hologic 10‐K data The skeletal health branch of Hologic, Inc. consists primarily of bone density scanning devices. Bone densitometer is important in the diagnosis and continued monitoring of bone diseases such as osteoporosis that can lead to bone breaks or fractures. Hologic, Inc. was the first company to develop and introduce the use of dual‐energy x‐ray technology to the market in 1987. This technology continues to be the leading bone densitometry assessment tool in the market and is industry standard technology. Company Analysis Hologic, Inc. operates in the Medical device industry and has a very narrow niche focus on female health services. Currently, they are a market leader in this niche. There are many firms that compete directly with Hologic, Inc. on the product level, no other firm as a whole fits this narrow market definition. In this way, Hologic, Inc. hold unique market growth potential. Products sold through direct sales force typically carry warranties on parts and labor for twelve months. Products sold through dealers have twelve month warranties also, but cover only parts and components. Additional service contracts are voluntary and offered from one to five years after warranty expiration. There is an overarching service department that installs and provides application and biomedical training for all new installations as well as continuing medical education training at intervals throughout the life of the device. Service revenues are expected to increase proportionally to product sale revenue. Revenue growth was projected by segment and the 5 year compound annual growth rate for each is shown below: Skeletal Health Page3
Hologic, Inc. CAGR by Segment
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Breast
Diagnostics Health
GYN Skeletal
Surgical
Health
Overall
Hologic
Source: KLAS research 7. Source: Hologic 10‐K data The performance rankings in the table above help to prove that Hologic, Inc.’s new 3‐D mammogram technology is superior not only to other Hologic, Inc. product, but also superior to other products in the market. While Hologic, Inc. already enjoyed a 52% market share in the mammography industry, the development of a new technology called tomosynthesis will increase provider ability to detect difficult and subtle breast health issues with the new machine. This will help to increase revenues in their breast health division. Overall growth in the healthcare sector –medical device and equipment is projected to grow at a rate of 6.1%, while demand for breast health services are expected increase as much as 9.82% both by 2019. These projections are positive for Hologic as a member of the medical device industry, but also their unique focus on women’s health issues will put them in a good position for a rate of steady growth. The 5‐year CAGR for diagnostics is calculated at just over 3%. This is driven primarily by the cervical cancer screening product ThinPrep that leads the liquid market at over 75% market share. This product is different than conventional Pap test because it offers less exposure to air and contaminates which increases testing accuracy. However, we kept growth at a reasonable rate, less than the overall industry because of the strong competition from Becton Dickinson in the liquid testing and conventional test makers. Another factor that contributes to the largely successful 2‐
D digital products is the fact that the digital technology work with no light conversion. The conversion of light energy to film often decreases accuracy and provider ability to make a correct diagnosis. Film‐screen mammography is likely to continue a steady decrease in usage 8. Approximately 1 in 8 women will develop women breast cancer in their lifetime, and early/accurate diagnosis is key for effective treatment processes. In trials, women screened for breast cancer over multiple years using Hologic, Inc.’s Genius 3D Mammography exam reported significant benefits in terms of cost and stressful recalls. Increased government focus on preventative medicine and increased access to these services will help to drive demand/growth in this area 3. This is evident in our 4.97% 5‐year CAGR in the breast health division. Page4
Our estimates are optimistic on the level of growth in for the 3‐D tomosynthesis technology division. The 9.82% breast health industry CAGR is a good benchmark when considering overall breast health division growth (cite). However, it is necessary to account for both the increase in sales/services for the new machines and also the decrease in use of their 2‐D model, currently one of the main drivers of revenues in that space. Taking into account the possible cannibalization of sales in the 2‐D digital segment and the growth opportunities for the 3‐D tomosynthesis product, we have forecasted revenue growth in the breast health category at a 4.97% CAGR over the 5‐year forecast period. This will account for revenues of just under $1.4 billion by 2020. Hologic, Inc. generated $335 million in revenues in the GYN surgical division. We have projected revenue growth in the GYN surgical division at a 2.3% CAGR over the next five years. This is driven by two main factors. The first factor is illustrated in the chart shown below: Also in the GYN surgical division, the MyoSure product is also the only device in the market that allows for the clean removal and preservation of fibroid and polyp tissue. This is very important for further testing accuracy for serious diagnoses. Although this product is clearly premium and allows for higher quality diagnostic testing, it is not yet the industry standard procedure. As such it is subject to slow growth as physician’s transition away from more common procedures. Skeletal health division generated $94 million in FY2015 which account for only 3% of Hologic, Inc.’s overall business. Historically, this percent of revenue has not fluctuated greatly, and there are no developments in the skeletal pipeline that would result in large growth forecasts. As a result, we have projected low but steady revenue growth at a rate of just under 1% (5‐year CAGR). Overall, Hologic, Inc. operates in a very unique space within the medical device industry which has positioned them strategically for large growth specifically in their breast health segment. Our combined revenue forecast expects revenue to grow at 3.3%, which is slightly lower than analyst projection consensus of 4%, and Hologic guidance of 4‐5%. RECENT DEVELOPMENTS Beat 2016 Q1 Earnings Estimate First, industry growth projections are strong in the radiofrequency ablation device market for pain management as shown in the chart above. The industry is trending upward, especially in the disposable market in which Hologic, Inc. operates. The second factor is that with Hologic, Inc.’s NovaSure product requires no pre‐treatment and is the only device of its kind that is FDA approved for use with no general anesthesia and is often performed as a short outpatient procedure. This provides differentiation even from competitors with similar devices. This provides opportunities for growth in the emergency treatment market since no prep work is required by the patient. Hologic, Inc. is forecasted to report earnings per share of $0.45 and a revenue of $686.79 million for the 2nd Quarter of the fiscal year 2016. Quarter 1 FY2016 earnings were release on January 27, 2016 which showed Hologic, Inc. beat estimates by close to 10 percent. Earnings of $0.46 per share were reported, beating analyst estimates of $0.42 by $0.04. The company posted a revenue of $695.2 million compared to an estimation of $688 million. I remain optimistic about Hologic, Inc. growth potential and am projecting 2016 earnings at $0.55. This growth was driven by strong domestic sales growth of over 18% in both 3‐D breast tomosynthesis and surgical divisions 17. Changing government recommendations In 2015, the American Cancer Society update and changed the recommended frequency and age at which women are supposed to begin regular mammogram screenings. Previously, women were prompted to begin annual mammograms at age 40. As of October 2012, Page5
mammograms are recommended to start at age 45 and only recur every 2 year. This will likely adversely affect the sales of the new 3‐D tomosynthesis technology systems. However, I believe the focus on preventative medicine and the published benefits of 3‐D vs. 2‐D cancer detection capabilities will more positively affect revenue growth than regulations will affect negative growth. These types of recommendations are however, something to pay close attention to as Hologic continues to invest in R&D. networks/systems gain more pricing power due to larger orders, and lower customer pool for the firms5 . The graph below illustrates the growing trend with physicians to move toward system employment vs. owning their own practice. INDUSTRY TRENDS Preventative Medicine Healthcare legislation enacted over the last five years has greatly increased the focus on preventative medicine 4. The affordable care act states that the law now requires coverage of many women’s health services, including mammograms to be provided at no cost to women 15. Even going to so far as to tie physician salary and bonuses to quality outcomes and time between patient visits. As patients increasingly gain access to healthcare services, it stands to reason that more will seek out the benefits of preventative care. This change presents growth opportunities as Hologic and their focus on female health is able to reach more patients, therefore increasing demand for their products. Provider Consolidation SOURCE: MGMA, via NY Times 11. Health systems and providers are increasingly interested in providing high quality care at lower costs, primarily because quality outcomes are being increasingly tied to physician reimbursement and compensation. In recent years, the provider network has been transitioning away from individually‐owned spaces and more toward employment or affiliation with larger hospital systems and organizations. This trend affects medical device sales by greatly decreasing the number of purchasers in the market, largely concentrating purchasing power. Individual physicians have much less power as an employee to dictate purchases of medical equipment. This could change the fundamental sales model of many device firms that historically rely on building strong individual relationships to drive sales 10. This trend poses a major threat to overall profitability of the medical equipment industry as larger hospital Increased consolidation through M & A in the healthcare systems industry continues to lead to higher pricing power of customer will adversely affect the revenue and therefore profitability of Hologic and the medical device industry overall. Specifically, Hologic supplies to a small number of large laboratory and health systems in the US and customer consolidation could greatly reduce revenues Government subsidized healthcare There is a large (and growing) population of citizens globally that are aged 65 and older. At least in the United States, the majority of medical expenses for eligible patients are paid by the government. However, there is a very high risk of lower reimbursement as more people are covered with a Medicare system that is slated to run short of money by 2024 13. Page6
The increase the number of older adults is good for the healthcare industry and therefore Hologic, Inc. in terms of number of visits, which is a key revenue driver in the industry. However, the risk of lower reimbursement gives large healthcare organizations and laboratory systems less of an incentive to make large device purchases like the products sold by Hologic, Inc 8. high as these companies already have significant capital expenditures and are competing to produce the best products. There is great demand from hospitals/providers for this equipment, but as previously discussed, individual providers are increasingly losing purchasing power and larger organizations typically make decisions based heavily on price. However, buyers still have some amount of power in this industry. They do not have infinite choices in products, but between the products offered, they can be somewhat prices sensitive. Price sensitivity is affected by factors like the size of the hospital operation, and any budget restrictions they may be currently facing. There is a threat of substitutes in the industry, primarily attributed to continued R&D investment and technology improvements of firms already in the medical device market. Improved technology is very attractive to buyers, but is combated slightly by the high costs of switching “brands” or companies. SOURCE: Medicare 12. Market share of the Medical Device industry as a whole is shown below. As illustrated in the graph below, Medicare enrollment continues to increase. This further stretches the Medicare budget allocation and possibly decreases reimbursement rates which could negatively affect the share price of Hologic, Inc. and other medical device firms due to a decrease in sales. MARKETS AND COMPETITION The healthcare industry as a whole, including medical devices and appliances is very competitive and characterized by nonstop improvement and innovations in technology. Overall, the threat of entry into the medical device industry is low because of the extremely high capital requirements to break into the market. Capital is needed for research & development, manufacturing, installing, and servicing medical equipment. There is also a high level of governmental regulation surrounding medical devices and their introduction to the market. For firms already in the device industry, rivalry is Source: Dolcera
It is clear from the chart above that the medical device industry is extremely competitive. No one company possesses a market share greater than 8% percent market share. Hologic, Inc. is small enough that it does not even Page7
tends to compete specifically within product lines vs. overall company competition. Although much larger, Becton, Dickinson and Co. is the closest competitor in terms of products in the Diagnostic space. make the list of the top 10 medical device companies by market share. Most companies listed above have much broader product portfolios that than Hologic, Inc. Some, like Medtronic and GE have major market share not only in medical devices, but also industries unrelated to healthcare in general. More specifically, Becton, Dickinson and Co. is a direct competitor Hologic, Inc. in the liquid Pap testing segment with their SurePath test kit. Hologic, Inc. maintains more than a 75% market share in the liquid Pap market with their ThinPrep test system. There is also direct competition with makers of traditional Pap Smear tests like SafeTouch – No Touch products by Andwin Scientific that are still very popular among healthcare providers. Despite being relatively small, Hologic, Inc. has major upside potential in its niche market focus of women’s health. No other companies compete directly with Hologic, Inc. as a whole. Some of the companies listed above do compete with specific Hologic, Inc. products lines, however which will be discussed in more detail in the following section. Internationally, there is greater competition in both types of Pap test supplies because of the allowance of sales from non‐FDA approved devices that are legal overseas. This highly competitive atmosphere is also causing firms to compete more and more on price. In order for Hologic, Inc. to remain competitive the company needs to demonstrate differentiation in its product capabilities throughout all segments. They have been successful in demonstrating that their breast health 3‐D tomosynthesis is a premium product that health systems and providers are likely to pay for. The Rapid Fetal Fibronectin Test is currently the only FDA approved in vitro diagnostic tool in the United States which provides ample opportunity to increase market share in this product space and likely in the overall diagnostic segment as well. Internationally, this test faces direct competition from the ActimPartus test by Medix Biotech that is not approved for sale in the US. Peer Comparisons Hologic, Inc. has a current P/E ratio of 54.13 compared to a healthcare industry overall P/E of 43.38 and a medical device sector P/E of 42.1. Competitor Metric Comparisons
Market Cap
(in millions)
EPS
4.12
0.66
0.05
(0.56)
8.48
5.56
4.81
2.94
3.33
(0.18)
0.78
(0.62)
Varian Medical Systems, Inc. (VAR)
Hologic, Inc. (HOLX)
American Science & Engineering Inc (ASEI)
Cutera Inc (CUTR)
McKesson Corp. (NYS: MCK)
Johnson & Johnson (JNJ)
Danaher Corp. (DHR)
Abbott Laboratories (ABT)
Becton, Dickinson and Co. (BDX)
Baxter International Inc. (BAX)
Zimmer Biomet Holdings Inc (ZBH)
General Electric Co (GE)
PE Ratio
71.44 - 96.14
31.79 - 42.92
22.88 - 53.16
10.43 - 15.98 N/A
150.03 - 242.75
90.73 - 107.22
81.88 - 97.35
36.34 - 51.20
130.40 - 156.53
15.78 - 18.94 N/A
91.68 - 119.21
23.27 - 31.28 N/A
19.48
54.13
533.00
19.00
19.38
18.77
13.41
45.01
130.58
% price
change (100
days)
(1.62)
(14.15)
(39.07)
(14.91)
(16.13)
4.92
(7.72)
(12.80)
(2.04)
(5.09)
(0.46)
0.40
Source: Mergent Online data Preterm birth can also be detected in ways other than the in vitro testing required by the Rapid Fetal Fibronectin test. These alternative ways include digital in‐clinic ultrasounds, or clinical exams using palpation techniques. However, Other competitor metrics are shown in the graph above. The range of companies is quite large, as Hologic, Inc. 7,590
9,831
191
156
36,300
293,905
61,122
58,431
31,177
23,339
19,993
280,478
52 Week
Range
Page8
these alternative techniques are largely based on physician intuition and therefore exposed to great amounts of human error. As medicine moves more toward data‐driven decision making, physician process choices will migrate more toward diagnostic testing tools like the Hologic, Inc. provides. Digital Mammography Market Share 11%
Hologic
There are many competitors in the market for blood screening and infectious disease testing assays. Companies include Becton, Dickinson and Co., and Roche Diagnostic Corporation. The major growth driver for this segment is their Panther system installation as this is the most versatile of the assay system processor. Also, the likelihood of health systems switching once a Panther process has been installed is very low, ensuring continued sales of assay kits from Hologic, Inc. Hologic, Inc. maintains a 52% market share in digital mammography equipment sales, followed by GE Healthcare, and Siemens 1. Other smaller competitors in this space include Fuji, IMS, and Toshiba. With the development and 2014 FDA approval of Hologic, Inc.’s 3‐D tomosynthesis mammography machines, we do not foresee this market share decreasing over the length of the forecast period. In fact, we projected growth in this segment at a compound annual growth rate of over 8%. This is slightly less optimistic than the overall mammography industry CAGR of 9.82% for two reasons. The first is that while sales the 3‐D tomosynthesis machine are projected to increase, sales of Hologic, Inc.’s 2‐D digital machines are likely to decrease – somewhat offsetting the positive growth. The second reason is the recent FDA approval of GE and Siemens company tomosynthesis machines. Hologic, Inc. was the first to receive approval which gave them a head start in sales and market share. Although that will slow slightly as competition arises with GE and Siemens, the large market share that Hologic, Inc. currently possesses should not be negatively affected overall. 10%
27%
Siemens Healthcare
Other
Source: GII Research data 1.
Competition in the Gynecological Surgical segment of Hologic, Inc.’s business is very high. Although Hologic, Inc. has a current market share in abnormal uterine bleeding ablation products of over 65%, major corporations like Johnson & Johnson and Boston Scientific both produce products similar to NovaSure for intra uterine ablation procedures. The procedure also faces high competition from other types of treatments that can provide similar results to the patient. These include full hysterectomies, intrauterine implants, or drug therapy. Drug therapy is the most dangerous competitor to Hologic, Inc.’s sales in this segment. Major pharmaceutical companies have major pricing power in the industry. Also, the majority of patients would prefer the use of hormonal drugs or drug therapy to surgical procedures given the same outcome and symptom relief. MyoSure products face high competition primarily because industry standard practice still favors hysteroscopic loop resection. The main competitive advantage of Hologic, Inc.’s MyoSure product is that the unique simultaneous cutting and removal system allows the removed tissue to stay largely intact. This allows for more comprehensive and more accurate tissue testing. We believe this product is the major growth driver for Hologic, Inc.’s GYN surgical products 29. 52%
GE Healthcare
Page9
ECONOMIC OUTLOOK Rising economic living standards, GDP growth and an aging population make the health care sector an attractive long‐
term investment. Advanced economies like the U.S., Europe, and Japan spend about twice as much of their income (averaging 12% of GDP) on health care as do emerging markets and developing economies (average of 6% of GDP). Overall, about two‐thirds of the $8 trillion in global health care spending occurs in advanced economies, The US accounts for approximately $3 trillion alone 9. forecast is largely in line with our estimated revenue growth projections through 2020. We have seen that although the healthcare is slightly less volatile than the market, healthcare spending does fluctuate with GDP 30. As long as GDP growth projections do not hit levels of 2008/2009 proportion, Hologic, Inc. (and the rest of the market) is in a good position for sustainable constant growth. Hologic revenue from international markets account for approximately 25% of overall sales as seen in the chart below. This is a significant portion of Hologic, Inc. business and an area of growth with great potential for increased sales opportunities. There are two main reasons that health spending varies with income. The first reason is that health care is a somewhat of a superior good ‐ demand rises more than proportionately with income. As countries become richer, people become more willing to spend money on healthcare services that are able to improve or extend life. These are services that before, they may not have been able to afford 14. Revenue by Region FY2015
8.50%
3.70%
11.80%
76.00%
Secondly, very large aging populations are more prevalent in advanced economies. Overall, the aging population (65+) makes up almost one quarter of the populations in more advance economies. United States
Europe
Asia‐Pacific
All other
Source: Hologic, Inc. 10‐K data 34
GDP Growth projections are shown in the chart below : Hologic management is focused on increasing revenues in the international market where the company has already identified several attractive growth opportunities. The company had slight growth in its overseas breast health business in FY15 2. However, the landscape in international markets is currently pessimistic as evidenced by the strong dollar and weak global economies. If these markets were to rebound, that would provide much benefit to the Hologic share price. Source: The Wall Street Journal 16. However, the strong dollar has affected margins and in FY2016 Hologic has begun to hedge against a portion of the revenue generated in foreign currency. Although this has not significantly affected overall profitability, volatile rates in the future could have a negative push on shareholder value if exposure to international markets increases as management intends 5. Although no specifics This shows that GDP projections are slated to increase through FY 2017 before leveling off close to 2020. This Page10
overall profitability with continued exposure and growth in the international market. were given in the most recent annual report, Hologic has stated that in 2016 they will begin to hedge against foreign currency risk. CATALYSTS FOR GROWTH The primary catalyst for growth in the medical equipment industry is the development and innovation of new technologies and the improvements of existing ones. As previously discussed, buyers are looking for higher quality products and lower costs, with buyers trending toward an increase in pricing power. Innovation will become increasingly important not only in the devices themselves, but in the medical equipment firm operations as well. Emerging markets and developing economies remain a large growth opportunity for this market as well. Hologic, Inc. is increasingly focused on international growth as they look to expand their market share 2. Small increases in GDP per capita increases healthcare spending significantly. This is good for Hologic, Inc., especially as these economies grow and become more advanced, there will be increasing demand for healthcare services and infrastructure. INVESTMENT POSITIVES 


Defensive nature of healthcare stocks – they are typically not greatly affected by changes in the market as healthcare is a service needed regardless of income or economic state Increasing number of citizens with insurance (primarily an effect of the affordable care act) leads to increase demand for products and services Larger population with chronic medical issues such as diabetes, obesity, COPD, etc. INVESTMENT NEGATIVES 


Consolidation of medical device purchasers will increase purchasing power and force companies to compete primarily on price Changes in government recommendations that have decreased the recommended frequency of regular mammograms and Pap smears. With 24% of Hologic, Inc. revenues coming from international sales and services, foreign exchange rate fluctuation can affect margins and decrease VALUATION To forecast an accurate intrinsic company value and target price, we used three varying valuation methods – Discounted Cash Flow, dividend discount, and relative multiple. Differences in these methods revealed a spread of close to $20 after elimination of the dividend discount model. The dividend discount model did not forecast an accurate target price since Hologic, Inc. has historically never issued dividends to shareholders – however, it may be useful in the future should the company decide to do so. The relative multiple valuation price target was not as accurate or predictive as the DCF – mostly because there are relatively few companies that directly compare to Hologic in market cap, or product lines. Therefore, the target price with the most weight is the DCF model which generated a target price of $47.15 – higher than analyst estimates 5, 6. WACC Calculations Hologic, Inc. has not recently issued any debt, and the debt that is outstanding is comprised primarily of convertible notes with a large variance in yield to maturity. To find cost of debt, we started with a similarly rated 30 year bond from competitor Zimmer Biomet with a YTM of 4.94%. We then measured a short term Hologic bond less the risk free rate to find the default risk, and applied that default risk to the 30 year risk free premium to make sure the comparison holds. To determine cost of equity, we used a Beta of .927 5, a market premium of 5% and a 30 year treasury bond as the risk free rat of 2.63%. This gave a weighted cost of capital of 6.12%. DCF/EP Models The Hologic, Inc. estimated target price is based most heavily on the Discounted Cash Flow Model (shown in detail in appendix sheets). A target price of $47.15 shows significant undervaluation by the market with an approximately 30% upside. This is justified by the large market share in female health and the increase in female health services that will help to continue the steady growth that Hologic has recently experienced. This growth will also be fueled by the projected steady growth in ROIC as the company continues to invest large amounts in its research and development of new products. Page11
Dividend Discount Model KEYS TO MONITOR  Continuing changes in governmental regulations will affect the frequency at which patients receive the types of treatments and screenings that Hologic, Inc. provides equipment for.  Foreign exchange rate risk will continue to affect Hologic, Inc. as the company pushed to expand internationally. As Hologic, Inc. has never issued dividends, and has no immediate plans to do so, the dividend discount model holds no weight in our BUY recommendation. Relative Price/Earnings Multiple Hologic, Inc. hold a unique position in the medical device industry as the only company that has product focused specifically in women’s health. As such, it is extremely difficult to get a good idea of Hologic, Inc. performance as a whole, relative to peers. We used a variety of large and small medical equipment firms with similar product lines. This model gave a much lower price of $26.19 which is not a great comparison to other companies. However, I still believe a BUY recommendation holds due to DCF model price and key growth factors discussed previously. Considering revenue drivers, risks to the company, and key assumptions for model generated target prices, a BUY recommendation continues to be enforced. Strategically, Hologic, Inc. is positioned for opportunities to grow internationally, and to remain a market leader in the women’s health niche overall and specifically in the breast health segment. Taking advantage of these growth prospects will continue to increase value for shareholders. Sensitivity Analysis This analysis showed that both Beta, CV growth, and WACC assumptions can have a profound effect on the target share price. Five‐year historical cost and sales data yield an average 50% profit margin. Our revenue and cost growth assumptions are such that the profit margin average of 50% is maintained through my five year future forecast. Operating expense assumptions were forecasted as a percent of total revenue, which was driven by my baseline revenue growth assumptions previously discussed by business segment. The overall forecasted revenue growth CAGR is calculated at 3.3% ‐ under the medical device industry CAGR of 6.91%. Our estimations were most optimistic in the breast health division, but slightly lower than industry projections overall because of the niche market that Hologic, Inc. operates in and the high levels of competition in the majority of the company’s business segments. Hologic, Inc. has historically not paid dividends to its shareholder, instead continuing to invest in research and development of new products lines and technologies, as well as improvements of existing proprietary systems and technology. As a result, we have forecasted R&D expenditures to grow at an average rate of 5.1% over the next 5 years. Page12
REFERENCES 1. Full Field Digital Mammography Equipment Market, Global. 2010 2. Zacks Equity Research. “HOLX Grows Overseas, Shifts Strategy to Drive Growth”. 24 August 2015 3. Hologic, Inc. 10‐K 4. Arvantes, James. “Healthcare Reform Law Will Increase Demand for Preventative Services” AAFP. 28 July 2010. 5. Bloomberg data 6. Yahoo Finance Historical Data 7. Gamble, Kate. “New Technique Driving the Digital Mammography Market” HealthSystem CIO. 10 April 2012 8. World Health Organization Population Data 9. Adamant Biomedical Investments. “The IVD Market from an Investors Perspective” Asia‐Pacific Biotech News. 2015. 10. Dwan, Christina & Ginestro, Mark. “Medical Device Trends” Clarkson Consulting. 2013 11. Harris, Gardiner. “More Doctors Giving up Private Practices” Wall Street Journal. 25 March 2010 12. Medicare Enrollment Data. cms.gov 13. CDC Cervical Screen Recommendations. 29 March 2016 14. Morgan, David. “Focus on Health Spending” OECD Health Statistics. 2015 15. Department of Health and Human Services. “Report to Congress Re: Activities to Improve Women’s Health as Required by the Affordable Care Act”. 2015 16. Zumbrun, Josh. “The US Economy Will Soon See it’s Best Years in Decades” Wall Street Journal. 2 Feb 2015. 17. Hologic Earnings call transcript. 27 January 2016 18. are intended to provide potential employers and 19. IMPORTANT DISCLAIMER Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. Page13
Hologic, Inc.
Revenue Decomposition
Fiscal Years Ending 9/26/2016
Total Segment Revenues:
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Total Revenue
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
1189.80
905.10
307.10
90.30
2492.30
1186.80
944.70
307.90
91.30
2530.70
1211.80
1063.40
335.80
94.00
2705.00
1226.56
1153.41
343.21
90.02
2813.20
1252.01
1222.90
349.40
87.35
2911.66
1277.58
1274.58
356.88
89.97
2999.01
1315.91
1315.91
364.50
92.67
3088.98
1355.38
1355.38
375.43
95.45
3181.65
% Revenues:
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Total % Revenue
47.74%
36.32%
12.32%
3.62%
100.00%
46.90%
37.33%
12.17%
3.61%
100.00%
44.80%
39.31%
12.41%
3.48%
100.00%
43.60%
41.00%
12.20%
3.20%
100.00%
43.00%
42.00%
12.00%
3.00%
100.00%
42.60%
42.50%
11.90%
3.00%
100.00%
42.60%
42.60%
11.80%
3.00%
100.00%
42.60%
42.60%
11.80%
3.00%
100.00%
Total Segment Revenue Growth:
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Total Revenue Growth
65.69%
3.35%
‐1.92%
‐5.64%
24.45%
‐0.25%
4.38%
0.26%
1.11%
1.54%
2.11%
12.56%
9.06%
2.96%
6.89%
1.22%
8.46%
2.21%
‐4.23%
4.00%
2.08%
6.02%
1.80%
‐2.97%
3.50%
2.04%
4.23%
2.14%
3.00%
3.00%
3.00%
3.24%
2.13%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
Total Geographic Revenues:
United States
Europe
Asia‐Pacific
All other
Total Revenue
1866.7
329.0
201.9
94.7
2492.3
1900.6
336.6
194.9
98.7
2530.7
2055.8
319.2
229.9
100.1
2705.0
2138.03
334.77
241.94
98.46
2813.20
2209.95
349.40
253.31
99.00
2911.66
2279.25
374.88
263.91
80.97
2999.01
2347.63
401.57
274.92
64.87
3088.98
2418.06
413.61
286.35
63.63
3181.65
% Revenues:
United States
Europe
Asia‐Pacific
All other
Total % Revenue
74.9%
13.2%
8.1%
3.8%
100.0%
75.1%
13.3%
7.7%
3.9%
100.0%
76.0%
11.8%
8.5%
3.7%
100.0%
76.00%
11.90%
8.60%
3.50%
100.0%
75.90%
12.00%
8.70%
3.40%
100.0%
76.00%
12.50%
8.80%
2.70%
100.0%
76.00%
13.00%
8.90%
2.10%
100.0%
76.00%
13.00%
9.00%
2.00%
100.0%
25.96%
36.89%
26.00%
‐21.18%
24.45%
1.81%
2.31%
‐3.47%
4.21%
1.54%
8.17%
‐5.17%
17.99%
1.41%
6.89%
4.00%
4.88%
5.22%
‐1.62%
4.00%
3.36%
4.37%
4.70%
0.54%
3.50%
3.14%
7.29%
4.18%
‐18.21%
3.00%
3.00%
7.12%
4.17%
‐19.89%
3.00%
3.00%
3.00%
4.16%
‐1.90%
3.00%
Total Geographic Revenue Growth:
United States
Europe
Asia‐Pacific
All other
Total Revenue Growth
Hologic, Inc.
Income Statement
Fiscal Years Ending 9/26/2016
Revenue
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Total revenues
Cost of Revenues
Product
Amortization of intangible assets
Impairment of intangible assets
Service & other revenues
Gross profit
Operating Expenses
Research & development expenses
Selling & marketing expenses
General & administrative expenses
Amortization/impairment of intangible assets
Total operating expenses
Income (loss) from operations
Interest income
Interest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Total shares outstanding
Earnings per share ‐ basic
Div per share
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
1189.80
905.10
307.10
90.30
2492.30
1186.80
944.70
307.90
91.30
2530.70
1211.80
1063.40
335.80
94.00
2705.00
1226.56
1153.41
343.21
90.02
2813.20 1252.01
1222.90
349.40
87.35
2911.66 1277.58
1274.58
356.88
89.97
2999.01 1315.91
1315.91
364.50
92.67
3088.98 1355.38
1355.38
375.43
95.45
3181.65 818.16
307.90
1.71
203.12
1161.39
731.30
314.60
26.60
212.70
1245.50
755.50
299.70
0.00
217.10
1432.70
841.61 314.23 0.00 244.19 1413.17
871.07 325.23 0.00 252.73 1462.63
897.20 334.99 0.00 260.31 1506.51
924.12 345.04 0.00 268.12 1551.70
951.84 355.39 0.00 276.17 1598.25
197.65
342.14
227.68
112.60
2067.67
(906.28)
1.30
(281.08)
(1192.96)
(20.12)
(1172.84)
271.82
(4.36)
0.00
203.20
331.70
259.80
119.40
965.80
279.70
1.30
(220.60)
48.10
30.80
17.30
277.97
0.06
0.00
214.90
363.00
261.00
110.20
977.60
455.10
1.30
(205.50)
177.20
45.60
131.60
282.50
0.47
0.00
209.30
377.53
275.13
113.37
975.34
437.83
2.17
(179.66)
260.33
105.33 155.00
283.87
0.55
0
216.63
390.75
284.76
117.34
1009.47
453.15
2.24
(137.73)
317.67
128.53 189.14
285.25
0.66
0
223.13
402.47
293.30
120.86
1039.76
466.75
2.31
(137.88)
331.18
133.99 197.18
286.62
0.69
0
229.82
414.54
302.10
124.49
1070.95
480.75
2.38
(190.18)
292.95
118.53 174.42
288.00
0.61
0
236.71
426.98
311.17
128.22
1103.08
495.17
2.45
(171.88)
325.74
131.79 193.94
289.10
0.67
0
Hologic, Inc.
Balance Sheet
Fiscal Years Ending 9/26/2016
ASSETS
Cash & cash equivalents
Restricted cash
Accounts receivable, net
Inventories, net
Deferred income tax assets
Prepaid income taxes
Prepaid expense & other current assets
Total current assets
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
822.49
6.91
409.27
289.36
44.75
51.36
1624.14
736.10
5.50
396.00
330.60
39.40
22.40
35.80
1565.80
491.30
1.40
416.10
283.10
19.00
21.70
33.80
1266.40
880.09 4.78 445.05 373.31 0.00 0.00 75.39 1778.62
586.55 4.95 460.62 386.38 0.00 0.00 78.03 1516.54
2295.46 5.10 474.44 397.97 0.00 0.00 80.37 3253.34
2557.95 5.25 488.68 409.91 0.00 0.00 82.78 3544.57
4301.00 5.41 503.34 422.21 0.00 0.00 85.27 5317.22
Property & equipment, at cost
Less: accumulated depreciation & amortization
Property & equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
908.06
(416.53)
491.53
3906.72
2814.53
163.90
9000.82
935.70
(473.80)
461.90
3433.60
2810.80
142.60
8414.70
981.60
(524.50)
457.10
3023.20
2808.20
115.20
7670.10
1007.48 (480.98)
526.49 2612.80 2808.20
115.20 7841.32
1038.58 (493.66)
544.92 2202.40 2808.20
115.20 7187.26
1070.17 (508.91)
561.27 1792.00 2808.20
115.20 8530.01
1102.49 (524.39)
578.11 1381.60 2808.20
115.20 8427.68
1135.67 (540.22)
595.45 971.20 2808.20
115.20 9807.27
Current portion of long‐term debt
Accounts payable
Accrued compensation & employee benefits
Accrued interest
Accrued income taxes & other taxes
Other accrued expenses
Deferred revenue
Total current liabilities
Long‐term debt, net of current portion
Deferred income tax liabilities
Deferred revenue and service obligations
Reserve for income tax uncertainties
Accrued lease obligation ‐ long‐term
Pension liabilities ‐ long‐term
Other long‐term liabilities
Total Liabilities
Common stock/additional paid‐in‐capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Total stockholders' equity (deficit)
563.81
80.53
127.46
23.75
17.37
65.21
132.32
1088.40
4242.10
1535.31
25.46
115.40
33.49
9.69
9.46
7059.30
5539.03
(3616.39)
20.39
1941.51
114.50
92.10
157.60
18.00
9.80
76.70
150.90
619.60
4153.20
1375.40
20.10
131.40
34.10
10.80
7.10
6351.70
5661.00
(3600.60)
2.60
2063.00
391.80
117.00
173.20
14.60
13.30
71.00
163.10
944.00
3248.00
1178.40
19.60
145.10
34.00
10.10
11.70
5590.90
5562.70
(3469.00)
(14.50)
2079.20
400.00
110.72 171.04 16.31 15.47 73.14 171.61 958.30
2390.28
1069.02
21.10 142.35 33.93 10.10 11.70 4636.78
5593.20 (3314.00)
(14.50)
2264.70
84.40
114.60 177.03 12.51 16.01 75.70 177.61 657.86
2708.91
1106.43
21.84 147.33 38.75 10.10 11.70 4702.92
5623.70 (3124.86)
(14.50)
2484.34
1032.40
118.04 182.34 12.52 16.49 77.97 182.94 1622.71
2820.50
1139.62
22.49 151.75 39.13 10.10 11.70 5817.99
5654.19 (2927.67)
(14.50)
2712.02
150.00
121.58 187.81 17.27 16.99 80.31 188.43 762.39
3332.26
1173.81
23.17 156.30 41.01 10.10 11.70 5510.74
5684.69 (2753.25)
(14.50)
2916.94
1050.00
125.23 193.44 15.61 17.50 82.72 194.08 1678.58
3534.57
1209.03
23.86 160.99 43.16 10.10 11.70 6671.99
5709.09 (2559.31)
(14.50)
3135.28
‐
Hologic, Inc.
Cash Flow Statement
Fiscal Years Ending 9/26/2016
OPERATING ACTIVITIES
Net income (loss)
Depreciation
Amortization
2012
2013
157.15
68.95
235.79
(73.63)
71.85
273.90
(1172.84)
95.52
420.49
17.30
94.70
428.50
131.60
81.50
409.90
76.81
35.47
(3.65)
(48.11)
(84.50)
(8.02)
3.30
0.00
0.00
0.00
0.00
29.89
2.45
2.64
0.00
(0.35)
1.45
74.97
40.57
(6.21)
(155.19)
(12.42)
38.47
19.92
5.83
0.00
16.90
4.50
42.35
0.00
3.81
0.00
0.00
(3.57)
81.18
52.31
(7.44)
(197.98)
(53.88)
11.31
52.40
1117.37
9.38
0.00
0.00
9.21
6.44
4.93
(1.97)
0.00
2.92
68.70
50.00
(5.70)
(243.10)
0.00
0.00
0.00
0.00
38.40
0.00
0.00
7.40
6.90
7.10
0.00
5.50
(11.80)
63.80
59.30
(10.70)
(148.80)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
62.70
7.80
6.60
0.00
9.60
14.30
(17.13)
(32.16)
(6.15)
(0.47)
2.59
40.57
(0.48)
456.02
(11.01)
(12.17)
6.07
69.81
3.77
(41.02)
12.73
370.22
4.10
25.17
25.10
0.87
(6.41)
2.34
13.33
493.82
7.90
(44.70)
22.40
17.30
11.80
14.70
15.10
508.40
(30.30)
43.90
0.70
5.70
25.50
36.90
16.10
786.10
(198.74)
(19.66)
2.27
(27.79)
(27.88)
(3.02)
(5.32)
0.00
13.25
0.00
(0.10)
0.00
0.41
0.00
(266.59)
(3762.40)
(9.78)
‐
(33.15)
(45.62)
0.00
0.00
0.00
12.50
(4.50)
(0.25)
0.00
(5.16)
(2.42)
(3850.78)
(6.27)
(16.81)
85.13
(48.95)
(41.18)
0.00
(4.00)
0.00
60.00
0.00
(3.73)
2.10
(1.22)
(7.55)
17.54
0.00
0.00
10.10
(44.30)
(35.90)
0.00
13.80
(7.30)
0.00
0.00
0.00
0.00
1.41
(3.40)
(65.59)
0.00
0.00
0.00
(48.10)
(41.30)
0.00
(6.40)
10.00
0.00
0.00
0.00
0.00
4.10
(0.30)
(82.00)
Proceeds from long‐term debt
Repayment of long‐term debt
Proceeds to extinguish convertible notes
Proceeds from revolving credit line
Repayments from revolving credit line
Repayment of long‐term debt & notes payable
Payment of debt issuance costs
Purchase of interest rate caps
Repayments of note payable
Payment of contingent consideration
Payment of deferred acquisition consideration
Net proceeds from issuance of common stock ‐ employee
Excess tax benefit related to equity Payment of minimum tax withholdings of equity awards
Net cash flows from financing activities
‐
‐
‐
‐
‐
‐
(5.33)
‐
(1.36)
(4.29)
‐
25.40
3.65
(10.40)
7.67
3476.32
‐
‐
‐
‐
‐
(81.41)
‐
‐
(51.68)
(44.22)
28.59
6.21
(5.71)
3328.10
‐
‐
‐
‐
‐
(265.00)
(9.44)
‐
‐
(42.96)
(1.66)
75.10
7.44
(12.26)
(248.77)
‐
(595.00)
‐
‐
‐
‐
(2.40)
‐
‐
‐
(5.00)
81.40
5.70
(9.80)
(525.10)
2495.10
(3095.00)
(543.70)
358.00
(183.00)
‐
(22.70)
(13.20)
‐
‐
‐
70.00
10.70
(12.90)
(936.70)
Net increase (decrease) in cash & cash equivalents
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
196.71
515.63
712.33
(151.90)
712.33
560.43
262.06
560.43
822.49
(86.40)
822.50
736.10
(244.80)
736.10
491.30
Non‐cash interest expense ‐ amortization of debt discount & deferred financing costs
Stock‐based compensation expense
Excess tax benefit related to equity awards
Deferred income taxes
Loss (gain) on sale of intellectual property
Fair value adjustments to contingent consideration
Fair value write‐up of inventory sold
Impairment of goodwill
Asset Impairment
Non‐cash restructuring charges
Acquired in‐process research & development
Debt extinguishment loss
Equity investments impairment charges
Loss on disposal & impairment of property & equipment Loss (gain) on sale of cost‐method equity investment
Loss (gain) on sale of businesses
Other adjustments & non‐cash items
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid income taxes
Prepaid expenses & other assets
Accounts payable
Accrued expenses & other liabilities
Deferred revenue
Net cash flows from operating activities
INVESTING ACTIVITES
Acquisition of businesses, net of cash acquired
Payment of additional acquisition consideration
Net proceeds from sale of business
Purchase of property & equipment
Increase in equipment under customer usage agreements
Purchase of licensed technology & other intangible assets
Purchase of insurance contracts
Net Sales (Purchases) of mutual funds
Proceeds from sale of intellectual property
Acquisition of in‐process research & development assets
Purchases (sales) of cost method equity investments
Sale of cost of method equity investment
Decrease (increase) in restricted cash
Decrease (increase) in other assets
Net cash flows from investing activities
2011
2014
2015
Hologic, Inc.
Cash Flow Statement
Fiscal Years Ending 9/26/2016
OPERATING ACTIVITIES
Net income (loss)
Depreciation and Amortization from PPE
Change in deferred income taxes
Other adjustments & assets
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid income taxes
Prepaid expenses & other assets
Accounts payable
Accrued expenses & other liabilities
Accrued compensation & taxes
Deferred revenue
Net cash flows from operating activities
INVESTING ACTIVITES
CAPEX
Increase in equipment under customer usage agreements
Change in Intangible assets
Decrease (increase) in restricted cash
Net cash flows from investing activities
FINANCING ACTIVITIES
Change in current portion long term debt
Long term debt and other obligations
Net proceeds from issuance of common stock ‐ employee
Net cash flows from financing activities
Net increase (decrease) in cash & cash equivalents
Cash & cash equivalents, beginning of year
Cash & cash equivalents, end of year
2016E
2017E
2018E
2019E
2020E
155.00 43.52 (90.38)
41.59
189.14 12.68 37.42
2.64
197.18 15.24 33.19
2.34
174.42 15.48 34.19
2.41
193.94 15.84 35.21
2.48
(28.95)
(90.21)
21.70
(41.59)
(6.28)
2.14
0.02
10.00
16.56
(15.58)
(13.07)
0.00
(2.64)
3.88
2.56
6.53
6.74
230.30
(13.82)
(11.59)
0.00
(2.34)
3.44
2.27
5.79
5.98
237.69
(14.23)
(11.94)
0.00
(2.41)
3.54
2.34
5.97
6.16
215.93
(14.66)
(12.30)
0.00
(2.48)
3.65
2.41
6.14
6.35
236.59
(25.88)
(47.54)
410.40 (3.38)
333.60
(31.11)
(49.21)
410.40 (0.17)
329.92
(31.59)
(50.68)
410.40 (0.15)
327.98
(32.32)
(52.20)
410.40 (0.15)
325.73
(33.18)
(53.77)
410.40 (0.16)
323.29
8.20
(0.07)
30.50
38.63
(315.60)
4.82
30.50
(280.28)
948.00
0.38
30.50
978.87
(882.40)
1.88
30.50
(850.02)
900.00
2.15
24.40
926.55
279.94
880.09
1160.02
1544.54
1160.02
2704.57
(308.37)
2704.57
2396.20
1486.43
2396.20
3882.63
388.79
491.30
880.09
Hologic, Inc.
Common Size Income Statement
Fiscal Years Ending 9/26/2016
Revenue
Diagnostics
Breast Health
GYN Surgical
Skeletal Health
Total revenues
Cost of Revenues
Product
Amortization of intangible assets
Impairment of intangible assets
Service & other revenues
Gross profit
Operating Expenses
Research & development expenses
Selling & marketing expenses
General & administrative expenses
Amortization/impairment of intangible assets
Contingent consideration ‐ compensation expense
Contingent consideration ‐ fair value adjustrments
Impairment of goodwill
Gain on sale of intellectual property, net
Litigation settlement charges, net
Restructuring & divestiture charges
Total operating expenses
Income (loss) from operations
Interest income
Interest expense
Debt extinguishment gain (loss)
Other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Total shares outstanding
Earnings per share ‐ basic
Div per share
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
47.74%
36.32%
12.32%
3.62%
100.00%
46.90%
37.33%
12.17%
3.61%
100.00%
44.80%
39.31%
12.41%
3.48%
100.00%
43.60%
41.00%
12.20%
3.20%
100.00%
43.00%
42.00%
12.00%
3.00%
100.00%
42.60%
42.50%
11.90%
3.00%
100.00%
42.60%
42.60%
11.80%
3.00%
100.00%
42.60%
42.60%
11.80%
3.00%
100.00%
32.83%
12.35%
0.07%
8.15%
46.60%
28.90%
12.43%
1.05%
8.40%
49.22%
27.93%
11.08%
0.00%
8.03%
52.96%
29.92%
11.17%
0.00%
8.68%
50.23%
29.92%
11.17%
0.00%
8.68%
50.23%
29.92%
11.17%
0.00%
8.68%
50.23%
29.92%
11.17%
0.00%
8.68%
50.23%
29.92%
11.17%
0.00%
8.68%
50.23%
7.93%
13.73%
9.14%
4.52%
3.21%
0.45%
44.83%
‐2.16%
0.00%
1.32%
82.96%
‐36.36%
0.05%
‐11.28%
‐0.37%
0.09%
‐47.87%
‐0.81%
‐47.06%
10.91%
‐0.17%
0.00%
8.03%
13.11%
10.27%
4.72%
0.00%
0.00%
0.00%
0.00%
0.00%
2.04%
38.16%
11.05%
0.05%
‐8.72%
‐0.29%
‐0.19%
1.90%
1.22%
0.68%
10.98%
0.00%
0.00%
7.94%
13.42%
9.65%
4.07%
0.00%
0.00%
0.00%
0.00%
0.00%
1.05%
36.14%
16.82%
0.05%
‐7.60%
‐2.32%
‐0.41%
6.55%
1.69%
4.87%
10.44%
0.02%
0.00%
7.44%
13.42%
9.78%
4.03%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
34.67%
15.56%
0.08%
‐6.39%
0.00%
0.00%
9.25%
3.74%
5.51%
10.09%
0.02%
0.00%
7.44%
13.42%
9.78%
4.03%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
34.67%
15.56%
0.08%
‐4.73%
0.00%
0.00%
10.91%
4.41%
6.50%
9.80%
0.02%
0.00%
7.44%
13.42%
9.78%
4.03%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
34.67%
15.56%
0.08%
‐4.60%
0.00%
0.00%
11.04%
4.47%
6.57%
9.56%
0.02%
0.00%
7.44%
13.42%
9.78%
4.03%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
34.67%
15.56%
0.08%
‐6.16%
0.00%
0.00%
9.48%
3.84%
5.65%
9.32%
0.02%
0.00%
7.44%
13.42%
9.78%
4.03%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
34.67%
15.56%
0.08%
‐5.40%
0.00%
0.00%
10.24%
4.14%
6.10%
9.09%
0.02%
0.00%
Hologic, Inc.
Common Size Balance Sheet
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
33.00%
0.28%
16.42%
11.61%
0.00%
1.80%
2.06%
65.17%
29.09%
0.22%
15.65%
13.06%
1.56%
0.89%
1.41%
61.87%
18.16%
0.05%
15.38%
10.47%
0.70%
0.80%
1.25%
46.82%
31.28%
0.17%
15.82%
13.27%
0.00%
0.00%
2.68%
63.22%
20.14%
0.17%
15.82%
13.27%
0.00%
0.00%
2.68%
52.08%
76.54%
0.17%
15.82%
13.27%
0.00%
0.00%
2.68%
108.48%
82.81%
0.17%
15.82%
13.27%
0.00%
0.00%
2.68%
114.75%
135.18%
0.17%
15.82%
13.27%
0.00%
0.00%
2.68%
167.12%
Property & equipment, at cost
Less: accumulated depreciation & amortization
Property & equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
36.43%
‐16.71%
19.72%
156.75%
112.93%
6.58%
361.15%
36.97%
‐18.72%
18.25%
135.68%
111.07%
5.63%
332.50%
36.29%
‐19.39%
16.90%
111.76%
103.82%
4.26%
283.55%
35.81%
‐17.10%
18.72%
92.88%
99.82%
4.09%
278.73%
35.67%
‐16.95%
18.72%
75.64%
96.45%
3.96%
246.84%
35.68%
‐16.97%
18.72%
59.75%
93.64%
3.84%
284.43%
35.69%
‐16.98%
18.72%
44.73%
90.91%
3.73%
272.83%
35.69%
‐16.98%
18.72%
30.53%
88.26%
3.62%
308.24%
Current portion of long‐term debt
Accounts payable
Accrued compensation & employee benefits
Deferred payment to TCT
Accrued interest
Accrued income taxes & other taxes
Contingent consideration
Other accrued expenses
Deferred revenue
Deferred income tax liabilities
Other current liabilities ‐ assets held‐for‐sale
Total current liabilities
Long‐term debt, net of current portion
Deferred income tax liabilities
Deferred revenue and service obligations
Reserve for income tax uncertainties
Accrued lease obligation ‐ long‐term
Pension liabilities ‐ long‐term
Contingent consideration
Other long‐term liabilities
Total Liabilities
Common stock/additional paid‐in‐capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income (loss)
Treasury stock, at cost
Total stockholders' equity (deficit)
22.62%
3.23%
5.11%
0.00%
0.95%
0.70%
1.53%
2.62%
5.31%
1.60%
0.00%
43.67%
170.21%
61.60%
1.02%
4.63%
1.34%
0.39%
0.00%
0.38%
283.24%
222.25%
‐145.10%
0.82%
‐0.06%
77.90%
4.52%
3.64%
6.23%
0.00%
0.71%
0.39%
0.00%
3.03%
5.96%
0.00%
0.00%
24.48%
164.11%
54.35%
0.79%
5.19%
1.35%
0.43%
0.00%
0.28%
250.99%
223.69%
‐142.28%
0.10%
0.00%
81.52%
14.48%
4.33%
6.40%
0.00%
0.54%
0.49%
0.00%
2.62%
6.03%
0.00%
0.00%
34.90%
120.07%
43.56%
0.72%
5.36%
1.26%
0.37%
0.00%
0.43%
206.69%
205.65%
‐128.24%
‐0.54%
0.00%
76.87%
14.22%
3.94%
6.08%
0.00%
0.58%
0.55%
0.00%
2.60%
6.10%
0.00%
0.00%
34.06%
84.97%
38.00%
0.75%
5.06%
1.21%
0.36%
0.00%
0.42%
164.82%
198.82%
‐117.80%
‐0.52%
0.00%
80.50%
2.90%
3.94%
6.08%
0.00%
0.43%
0.55%
0.00%
2.60%
6.10%
0.00%
0.00%
22.59%
93.04%
38.00%
0.75%
5.06%
1.33%
0.35%
0.00%
0.40%
161.52%
193.14%
‐107.32%
‐0.50%
0.00%
85.32%
34.42%
3.94%
6.08%
0.00%
0.42%
0.55%
0.00%
2.60%
6.10%
0.00%
0.00%
54.11%
94.05%
38.00%
0.75%
5.06%
1.30%
0.34%
0.00%
0.39%
194.00%
188.54%
‐97.62%
‐0.48%
0.00%
90.43%
4.86%
3.94%
6.08%
0.00%
0.56%
0.55%
0.00%
2.60%
6.10%
0.00%
0.00%
24.68%
107.88%
38.00%
0.75%
5.06%
1.33%
0.33%
0.00%
0.38%
178.40%
184.03%
‐89.13%
‐0.47%
0.00%
94.43%
33.00%
3.94%
6.08%
0.00%
0.49%
0.55%
0.00%
2.60%
6.10%
0.00%
0.00%
52.76%
111.09%
38.00%
0.75%
5.06%
1.36%
0.32%
0.00%
0.37%
209.70%
179.44%
‐80.44%
‐0.46%
0.00%
98.54%
Fiscal Years Ending 9/26/2016
ASSETS
Cash & cash equivalents
Restricted cash
Accounts receivable, net
Inventories, net
Deferred income tax assets
Prepaid income taxes
Prepaid expense & other current assets
Total current assets
Hologic, Inc.
Value Driver Estimation
Fiscal Years Ending 9/26/2016
MARGINAL TAX RATE:
Federal
State
Foreign
Marginal Tax Rate
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
‐35.00%
‐0.20%
0.10%
‐35.10%
35.00%
4.30%
10.70%
50.00%
35.00%
1.20%
‐1.60%
34.60%
35.00%
2.84%
2.62%
40.46%
35.00%
2.84%
2.62%
40.46%
35.00%
2.84%
2.62%
40.46%
35.00%
2.84%
2.62%
40.46%
35.00%
2.84%
2.62%
40.46%
EBITA
Operating Revenues
‐ Product
‐ Amortization of intangible assets
‐ Service & other revenues
‐ Research & development expenses
‐ Selling & marketing expenses
+ Implied interest on operating leases
‐ General & administrative expenses
EBITA
2492.28
818.16
307.90
203.12
197.65
342.14
18.10
227.68
413.74
2530.70
731.30
314.60
212.70
203.20
331.70
14.70
259.80
492.10
2705.00
755.50
299.70
217.10
214.90
363.00
12.91
261.00
606.71
2813.20
841.61
314.23
244.19
209.30
377.53
19.24
275.13
570.44
2911.66
871.07
325.23
252.73
216.63
390.75
21.90
284.76
592.39
2999.01
897.20
334.99
260.31
223.13
402.47
21.64
293.30
609.25
3088.98
924.12
345.04
268.12
229.82
414.54
22.60
302.10
627.84
3181.65
951.84
355.39
276.17
236.71
426.98
23.92
311.17
647.31
LESS ADJUSTED TAXES
Income tax provision (benefit)
+ tax shield on interest expense
‐ tax shield on interest income
‐ tax shield on other income
‐ Debt extinguishment gain (loss)
‐ Income (loss) from operations
+ impairment of intangible assets
+ Restructuring & divestiture charges
+ Tax on lease interest
Adjusted Taxes
(20.12)
98.66
(0.46)
(0.81)
3.23
318.10
(0.60)
(11.51)
(6.35)
(695.23)
30.80
(110.30)
0.65
(2.45)
(3.70)
139.85
13.30
25.85
7.35
(167.35)
45.60
(71.10)
0.45
(3.81)
(21.69)
157.46
0.00
9.86
4.47
(143.59)
105.33
(72.69)
0.88
0.00
0.00
177.15
0.00
0.00
7.79
(137.60)
128.53
(55.72)
0.91
0.00
0.00
183.35
0.00
0.00
8.86
(102.59)
133.99
(55.79)
0.93
0.00
0.00
188.85
0.00
0.00
8.76
(102.81)
118.53
(76.95)
0.96
0.00
0.00
194.51
0.00
0.00
9.14
(144.75)
131.79
(69.54)
0.99
0.00
0.00
200.35
0.00
0.00
9.68
(129.41)
CHANGE IN DEFERRED TAX LIABILITIES
Change in net deferred tax liabilities
Net change in DT liabilities
(184.75)
(184.75)
(199.31)
(199.31)
(176.60)
(176.60)
(90.38)
(90.38)
37.42
37.42
33.19
33.19
34.19
34.19
35.21
35.21
NOPLAT
NOPLAT=EBITA ‐ adj taxes + change in DT
924.22
460.14
573.70
617.65
732.39
745.26
806.77
811.94
OPERATING CURRENT ASSETS
Average of cash on B/S 2011 ‐2015
x revenue
Normal cash Cash and cash equivalent
29.61%
29.61%
29.61%
29.61%
29.61%
29.61%
29.61%
29.61%
2492.30
2530.70
2705.00
2813.20
2911.66
2999.01
3088.98
3181.65
737.97 749.34 800.95 832.99 862.14 888.01 914.65 942.09
822.49
736.1
491.3
880.09
586.55
2295.46
2557.95
4301.00
lower of normal or actual cash
Accounts Receivable, net
Prepaid Taxes
Inventories, net
Prepaid expense & other current assets
Operating current assets
737.97 736.10 491.30 832.99 586.55 888.01 914.65 942.09 409.27
396.00
416.10
445.05
460.62
474.44
488.68
503.34
44.75
22.40
21.70
0.00
0.00
0.00
0.00
0.00
289.36
330.60
283.10
373.31
386.38
397.97
409.91
422.21
51.36
35.80
33.80
75.39
78.03
80.37
82.78
85.27
1,532.71 1,520.90 1,246.00 1,726.74 1,511.59 1,840.79 1,896.02 1,952.90
OPERATING CURRENT LIABILITIES
Accounts payable
Accrued compensation & employee benefits
Accrued income taxes & other taxes
Deferred Revenue
Other accrued expenses
Other current liabilities ‐ assets held‐for‐sale
Operating current liabilities
NET OPERATING WORKING CAP
Operating CA ‐ Operating CL
Net operating working capital
+ NET PPE
Plant, property, and equipment
Net PPE
+ OTHER OPERATING ASSETS
Intangible assets, net
PV of operating leases
Other assets
Other operating assets
80.53
127.46
17.37
132.32
65.21
0.00
422.90
92.10
157.60
9.80
150.90
76.70
0.00
487.10
117.00
173.20
13.30
163.10
71.00
0.00
537.60
110.72
171.04
15.47
171.61
73.14
0.00
541.99
114.60
177.03
16.01
177.61
75.70
0.00
560.96
118.04
182.34
16.49
182.94
77.97
0.00
577.79
121.58
187.81
16.99
188.43
80.31
0.00
595.12
125.23
193.44
17.50
194.08
82.72
0.00
612.97
1,109.81
1,109.81
1,033.80
1,033.80
708.40
708.40
1,184.75
1,184.75
950.63 1,263.01 1,300.90
950.63 1,263.01 1,300.90
1,339.92
1,339.92
491.53
491.53
461.90
461.90
457.10
457.10
526.49
526.49
544.92
544.92
561.27
561.27
578.11
578.11
595.45
595.45
3906.72
88.10
163.90
4158.72
3433.60
75.00
142.60
3651.20
3023.20
66.09
115.20
3204.49
2612.80
78.69
115.20
2806.69
2202.40
89.87
115.20
2407.47
1792.00
90.74
115.20
1997.94
1381.60
95.11
115.20
1591.91
971.20
100.09
115.20
1186.49
‐ OTHER OPERATING LIABILITIES
Deferred Revenue and service obligations
Other long‐term liabilities
Other operating liabilities
INVESTED CAPITAL
Invested Capital
25.46
9.46
34.92
20.10
7.10
27.20
19.60
11.70
31.30
21.10
11.70
32.80
5,725.15
5,119.70
4,338.69
4,485.14
21.84
11.70
33.54
22.49
11.70
34.19
23.17
11.70
34.87
23.86
11.70
35.56
3,869.48 3,788.02 3,436.04
3,086.30
VALUE DRIVERS
NOPLAT 924.22 460.14 573.70 617.65 732.39 745.26 806.77 811.94
/ Beginning IC 6,150.28 5,725.15 5,119.70 4,338.69 4,485.14 3,869.48 3,788.02 3,436.04
ROIC
15.03%
8.04%
11.21%
14.24%
16.33%
19.26%
21.30%
23.63%
Beginning IC 6,150.28 5,725.15 5,119.70 4,338.69 4,485.14 3,869.48 3,788.02 3,436.04
x (ROIC ‐ WACC)
8.91%
1.92%
5.09%
8.12%
10.21%
13.14%
15.18%
17.51%
Economic Profit (EP) 547.83 109.78 260.38 352.13 457.91 508.45 574.96 601.66
NOPLAT 924.22 460.14 573.70 617.65
‐ Capital Expenditures (425.13) (605.45) (781.01) 146.44
Free Cash Flow (FCF) 1,349.35 1,065.59 1,354.71 471.21
732.39 745.26 806.77 811.94
(615.66) (81.46) (351.98) (349.74)
1,348.05 826.71 1,158.75 1,161.67
Hologic, Inc.
Weighted Average Cost of Capital (WACC) Estimation
WACC = Re * (E/V) + (D/V) * Rd * (1‐t)
Re = cost of equity
Rd = cost of debt
E = value of equity
D = value of debt
V = E +D
t = corporate tax rate
WACC
6.12%
Cost of Equity
Re = Rf + B (E(Rm) ‐ Rf)
Rf
E(Rm) ‐ Rf
Beta
Re 2.63% based on 30 year treasury
5.00% Henry Fund concensus
0.927 raw daily beta ‐ bloomberg
7.27%
Cost of Debt
Rd
4.94%
Cost of preferred stock
no preferred stock
Market Value of Equity
Shares outstanding
share price
E
Value of Debt
Debt LT & current
PV of Op lease
Total Debt
282,495,000.00
$36.62
10,344,966,900.00
3,639,800,000.00
457,100,000.00
4,096,900,000.00
Market Value of firm
14,441,866,900.00
weight of equity
weight of debt
weight of preferred
marginal tax rate
0.72
0.28
0
34.60%
Hologic, Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
Fiscal Years Ending 9/26/2016
DCF Model
Period
NOPLAT
‐ Capital Expenditures
Free Cash Flow (FCF)
2.00%
23.63%
6.12%
7.27%
2016E
2017E
2018E
2019E
2020E
1
617.65 146.44 471.21 2
732.39 (615.66)
1348.05 3
745.26 (81.46)
826.71 4
806.77 (351.98)
1158.75 5
811.94 (349.74)
1161.67 18,039.20 691.77
913.70
14,224.21
CV
Present Value of FCF
Value of Operating Assets
Non‐operating Assets
other asset
restricted cash
total non‐op assets
Non‐operating liabilities
Total debt obligation
Accrued interest
Employee stock options
Accrued lease obligation
Pension liability
total non‐op liability
Value of Assets
shares outstanding
Intrinsic Value of Stock
EP Model
Period Economic Profit
CV
TO DISCOUNT
Beg invested capital
EP PV of EP
Value of operating Assets
Non‐operating Assets
other asset
restricted cash
total non‐op assets
Total Debt obligation
Accrued Interest
Employee stock options
Accrued lease obligation
Pension liability
total non‐op liability
Value of Assets
shares outstanding
Intrinsic Value of Stock
444.03
17,470.77
1,197.05
115.20
1.40
116.60
4096.90
14.60
102.62
34.00
10.10
4258
13,095.94
283.87
46.13
1.01
as of 2/29/16
47.15
1
352.13
2
457.91
3
508.45
4
574.96
5
601.66
14,603.26
352.13
331.83
457.91
406.62
508.45
425.46
574.96
453.36
14603.26
11514.92
4338.69
13132.19
17,470.88
115.20
1.40
116.60
4096.90
14.60
102.62
34.00
10.10
4258.22
13,096.05
283.870
46.13 1.01
as of 2/29/16
47.15
Hologic, Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 9/26/2016
EPS
Key Assumptions
CV growth
CV ROE
Cost of Equity
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price
Dividends Per Share
Future Cash Flows
Discounted Cash Flows
Intrinsic Value
partial year adjust 2/29/16
2016E
2017E
2018E
2019E
2020E
$ 0.55 $ 0.66 $ 0.69 $ 0.61 $ 0.67
21%
4%
‐12%
11%
2.00%
6.41%
7.27%
0.00
0.00
0.00
0
0
0
$ 8.77
$ 1.01
$ 9.78
$ 15.60
$ 0.67
8.77
0.00
0.00
$ 8.77
0
8.77
Hologic, Inc.
Relative Valuation Models
Ticker
BDX
VAR
STJ
RMD
BSX
Company
Becton Dickinson
Varian Medical St. Jude Medical
Resmed
Boston Scientific
HOLX
Hologic, Inc.
Implied Value:
Relative P/E (EPS16)
Relative P/E (EPS17)
PEG Ratio (EPS16)
PEG Ratio (EPS17)
Price
$149.64
$79.07
$55.00
$57.43
$17.21
EPS
2016E
$2.02 $4.56 $1.01 $0.74 $1.05 $35.55
$0.55 $ 26.20 $ 10.45
$ 9.89
$ 3.89
EPS
2017E
$9.04 $4.91 $4.34 $3.02 $1.19 Average
P/E 16
74.1
17.3
54.5
77.6
16.4
48.0
$0.66 65.1
P/E 17
16.6
16.1
12.7
19.0
14.5
15.8
53.6
Est. 5yr
EPS gr.
13.5
11.3
11.1
9.3
12.6
PEG 16
5.47
1.53
4.89
8.34
1.30
4.3
4.204 15.5
0.042037
PEG 17
1.22
1.43
1.14
2.04
1.15
1.4
12.8
Hologic, Inc.
Key Management Ratios
Fiscal Years Ending 9/26/2016
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
Liquidity Ratios
current assets
/ current liabilities
= current ratio
1624.14
1088.40
1.49
1565.80
619.60
2.53
1266.40
944.00
1.34
1778.62
958.30
1.86
1516.54
657.86
2.31
3253.34
1622.71
2.00
3544.57
762.39
4.65
5317.22
1678.58
3.17
(current assets ‐
inventories)
/ current liabilities
= quick ratio
1624.14
289.36
1088.40
1.23
1565.80
330.60
619.60
1.99
1266.40
283.10
944.00
1.04
1778.62
373.31
958.30
1.47
1516.54
386.38
657.86
1.72
3253.34
397.97
1622.71
1.76
3544.57
409.91
762.39
4.11
5317.22
422.21
1678.58
2.92
cash / current liabilities
= cash ratio
822.49
1088.40
0.76
736.10
619.60
1.19
491.30
944.00
0.52
880.09
958.30
0.92
586.55
657.86
0.89
2295.46
1622.71
1.41
2557.95
762.39
3.36
4301.00
1678.58
2.56
Activity or Asset‐Management Ratios
annual sales
/ average accounts receievable
= receivable turnover
2492.30
409.30
6.09
2530.70
402.64
6.29
2705.00
406.05
6.66
2813.20
430.57
6.53
2911.66
452.84
6.43
2999.01
467.53
6.41
3088.98
481.56
6.41
3181.65
496.01
6.41
365.00
6.09
59.94
365.00
6.29
58.07
365.00
6.66
54.79
365.00
6.53
55.87
365.00
6.43
56.77
365.00
6.41
56.90
365.00
6.41
56.90
365.00
6.41
56.90
Cost of Goods Sold
/ Average inventory
= Inventory Turnover
1330.89
328.28
4.05
1285.20
309.98
4.15
1272.30
306.85
4.15
1400.03
328.21
4.27
1449.04
379.84
3.81
1492.51
392.17
3.81
1537.28
403.94
3.81
1583.40
416.06
3.81
365
/ Inventory Turnover
= Inventory Period
365.00
4.05
90.03
365.00
4.15
88.04
365.00
4.15
88.03
365.00
4.27
85.57
365.00
3.81
95.68
365.00
3.81
95.91
365.00
3.81
95.91
365.00
3.81
95.91
Financial Leverage Ratios
(Total Debt
+ PV of Operating leases)
/ Total Assets
= Debt Ratio
4805.91
88.10
9000.82
0.54
4267.70
75.00
8414.70
0.52
3639.80
66.09
7670.10
0.48
2790.28
78.69
7841.32
0.37
2793.31
89.87
7187.26
0.40
3852.90
90.74
8530.01
0.46
3482.26
95.11
8427.68
0.42
4584.57
100.09
9807.27
0.48
total debt
/ total equity
= debt to equity ratio
4805.91
1941.51
2.48
4267.70
2063.00
2.07
3639.80
2079.20
1.75
2790.28
2264.70
1.23
2793.31
2484.34
1.12
3852.90
2712.02
1.42
3482.26
2916.94
1.19
4584.57
3135.28
1.46
Profitability Ratios
(Sales ‐ COGS)
/ Sales
= gross profit margin
1161.41
2492.30
0.47
1245.50
2530.70
0.49
1432.70
2705.00
0.53
1413.17
2813.20
0.50
1462.63
2911.66
0.50
1506.51
2999.01
0.50
1551.70
3088.98
0.50
1598.25
3181.65
0.50
Net income
/ sales
= net profit margin
(1172.84)
2492.30
(0.47)
17.30
2530.70
0.01
131.60
2705.00
0.05
155.00
2813.20
0.06
189.14
2911.66
0.06
197.18
2999.01
0.07
174.42
3088.98
0.06
193.94
3181.65
0.06
Net income
/ average total assets
= return on assets
(1172.84)
9738.96
(0.120)
17.30
8707.76
0.002
131.60
8042.40
0.016
155.00
7755.71
0.020
189.14
7514.29
0.025
197.18
7858.63
0.025
174.42
8478.84
0.021
193.94
9117.47
0.021
Net income
/ average total equity
= return on equity
(1172.84)
2451.27
(0.478)
17.30
2002.26
0.009
131.60
2071.10
0.064
155.00
2171.95
0.071
189.14
2374.52
0.080
197.18
2598.18
0.076
174.42
2814.48
0.062
193.94
3026.11
0.064
365
/ receivables turnover
= average collection period
Present Value of Operating Lease Obligations (2015)
Present Value of Operating Lease Obligations (2014)
Operating
Leases
16.3
14.5
12.5
7.9
6
21.8
79
13
66
Fiscal Years Ending 9/26/2016
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
16.3
14.5
12.5
7.9
6
6
Present Value of Operating Lease Obligations (2013)
Operating
Leases
18.9
15.1
12.5
11.2
7.3
24.7
89.7
15
75
Fiscal Years Ending 9/26/2016
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Capitalization of Operating Leases
4.94%
3.6
PV Lease
Payment
15.5
13.2
10.8
6.5
4.7
15.3
66.1
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
18.9
15.1
12.5
11.2
7.3
7.3
Fiscal Years Ending 66.0496001302671
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
20.7
16.2
13.6
12.2
10.8
32.7
106.2
18
88
Capitalization of Operating Leases
4.94%
3.4
PV Lease
Payment
18.0
13.7
10.8
9.2
5.7
17.5
75.0
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
20.7
16.2
13.6
12.2
10.8
10.8
4.94%
3.0
PV Lease
Payment
19.7
14.7
11.8
10.1
8.5
23.3
88.1
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outs
Number of Options Outstanding (shares): Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
6,600,000
4.80
1,375,000
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
$ 22.18
6.12%
$35.55
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
2016E
2017E
2018E
2019E
2020E
1,375,000
1,375,000
1,375,000
1,375,000
1,100,000
$ 22.18 $ 22.18 $ 22.18 $ 22.18 $ 22.18
30,497,500 30,497,500 30,497,500 30,497,500 24,398,000
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
0
0
0
0
0
$ 35.55 $ 37.73 $ 40.03 $ 42.48 $ 45.08
‐
‐
‐
‐
‐
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
282,495,000 283,870,000 285,245,000 286,620,000 287,995,000
1,375,000
1,375,000
1,375,000
1,375,000
1,100,000
‐
‐
‐
‐
‐
283,870,000 285,245,000 286,620,000 287,995,000 289,095,000
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Total
Average
Number
Exercise
of Shares
Price
6,600,000
22.18
6,600,000 $ 22.18
HOLX
$35.08
2.63% based on 30 year t‐bill
0.00%
11.23% in bloomberg
Average
B‐S
Value
Remaining
Option
of Options
Life (yrs)
Price
Granted
4.80 $ 15.55 $ 102,624,375
4.80 $ 15.55 $ 102,624,375
$
CV growth
NOPLAT
$
CV growth
ROIC
$
CV growth
NOPLAT
$
CV growth
NOPLAT
47.15
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
5.12%
46.96
51.78
57.93
66.05
77.27
93.79
120.50
171.07
WACC
5.62%
41.12
44.82
49.42
55.30
63.05
73.77
89.54
115.04
6.12%
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
6.62%
32.30
34.61
37.38
40.75
44.93
50.28
57.33
67.07
7.12%
28.88
30.75
32.96
35.59
38.80
42.79
47.88
54.60
7.62%
25.94
27.47
29.25
31.35
33.86
36.91
40.71
45.55
8.12%
23.38
24.64
26.10
27.79
29.79
32.18
35.08
38.69
47.15
8.63%
13.63%
18.63%
23.63%
28.63%
33.63%
38.63%
43.63%
30.46%
37.06
41.53
43.60
44.79
45.57
46.12
46.52
46.83
Tax Rate
35.46%
38.08
42.64
44.75
45.97
46.76
47.32
47.73
48.05
40.46%
39.09
43.75
45.90
47.15
47.95
48.52
48.94
49.27
45.46%
40.11
44.85
47.05
48.32
49.15
49.73
50.16
50.49
50.46%
41.13
45.96
48.20
49.50
50.34
50.93
51.37
51.70
55.46%
42.14
47.07
49.35
50.67
51.53
52.13
52.58
52.92
60.46%
43.16
48.18
50.51
51.85
52.72
53.33
53.79
54.14
47.15
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
0.827
36.32
39.22
42.75
47.14
52.75
60.15
70.37
85.41
Beta
0.877
36.32
39.22
42.75
47.14
52.75
60.15
70.37
85.41
0.927
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
0.977
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
1.027
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
1.077
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
1.127
36.32
39.22
42.76
47.15
52.75
60.15
70.37
85.41
47.15
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
3.00%
35.97
38.85
42.35
46.71
52.27
59.61
69.75
84.68
2016E Revenue Growth rate
3.50%
4.00%
4.50%
36.14
36.32
36.50
39.04
39.22
39.41
42.55
42.76
42.96
46.93
47.15
47.36
52.51
52.75
52.99
59.88
60.15
60.42
70.06
70.37
70.68
85.05
85.41
85.78
5.00%
36.67
39.60
43.16
47.58
53.23
60.69
70.99
86.15
5.50%
36.85
39.79
43.36
47.80
53.47
60.95
71.30
86.52
6.00%
37.02
39.97
43.56
48.02
53.71
61.22
71.61
86.88
CV growth
NOPLAT
CV growth
NOPLAT
$ 47.15
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1.63%
36.34
39.24
42.78
47.17
52.77
60.17
70.39
85.43
$ 47.15
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
$
WACC
47.15
4.62%
5.12%
5.62%
6.12%
6.62%
7.12%
7.62%
8.12%
Risk Free Rate
2.13%
2.63%
36.33
36.32
39.23
39.22
42.77
42.76
47.16
47.15
52.76
52.75
60.16
60.15
70.38
70.37
85.42
85.41
3.13%
36.31
39.21
42.75
47.14
52.74
60.14
70.36
85.40
3.63%
36.30
39.20
42.74
47.13
52.73
60.13
70.35
85.39
4.13%
36.29
39.19
42.73
47.12
52.72
60.12
70.34
85.38
4.63%
36.28
39.18
42.72
47.11
52.71
60.11
70.33
85.37
19.92%
55.25
59.29
64.21
70.32
78.12
88.41
102.64
123.58
COGS (as a % of sales)
24.92%
29.92%
34.92%
45.78
36.32
26.87
49.25
39.22
29.20
53.48
42.76
32.04
58.73
47.15
35.57
65.43
52.75
40.08
74.27
60.15
46.03
86.50
70.37
54.25
104.49
85.41
66.34
39.92%
17.42
19.19
21.34
24.01
27.42
31.91
38.13
47.28
44.92%
7.98
9.18
10.63
12.44
14.75
17.80
22.02
28.22
49.92%
(1.46)
(0.83)
(0.07)
0.88
2.09
3.69
5.90
9.16
3.00%
80.19
65.47
54.80
46.71
40.36
35.25
31.04
27.51
2016E Revenue Growth rate
3.50%
4.00%
4.50%
80.54
80.89
81.24
65.76
66.05
66.34
55.05
55.30
55.55
46.93
47.15
47.36
40.56
40.75
40.94
35.42
35.59
35.77
31.19
31.35
31.51
27.65
27.79
27.94
5.00%
81.59
66.63
55.80
47.58
41.14
35.94
31.67
28.08
5.50%
81.94
66.92
56.05
47.80
41.33
36.12
31.82
28.23
6.00%
82.29
67.22
56.30
48.02
41.52
36.29
31.98
28.37