Street Scan: Hologic Buys Cytyc and a Foot in the OB/GYN Door

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With its announcement that it would buy Cytyc, Marlborough, Mass, for $6.2 billion, Hologic Inc, Bedford, Mass, broadens its position in the women’s health care market and buys access to its gatekeeper: the obstetrician/gynecologist. Will the move precipitate a consolidation on the vendor side of diagnostics that would replicate the consolidation currently underway in the provider side of the outpatient imaging provider market?

In an investor relations webcast, Jack Cummings, Hologic CEO, and Glenn P. Muir, Hologic executive vice president and CFO provided an overview of a robust company powered by the adoption of digital mammography and insight into the acquisition strategy. Presently digital mammography represents 50% of Hologic revenues, with an avowed 50% U.S. market share and 38% of the estimated 3,900+ worldwide FFDM installed base.

With FFDM on the early end of the adoption curve, Hologic is well positioned to continue to benefit from market growth: 20.4% of all MQSA-accredited mammography facilities have FFDM, and just 19.6% of accredited mammography units are FFDM.

The purchase of the larger Cytyc by Hologic gives the company access to the OB/Gyn channel in addition to the surgical and radiation oncology channel developed by Cytyc for distribution of its MammoSite partial breast balloon brachytherapy device. Therapy and intervention figure largely in Hologic’s product pipeline for future development. With a combined sales force of 425 people, the new company offers several strategic advantages for Hologic:

A broadened women’s health care product portfolio with nine top brands in the women’s health care market, including ThinPrep cervical cancer screening product, NovaSure, a device that delivers radiofrequency to treat menorrhagia, and the MammoSite breast balloon brachytherapy device

Cross-selling opportunities with access to 30,000 OB/Gyns, 40,000 radiologists, 10,000 hospitals and imaging centers, 4,000 radiation oncologists, 4,000 Gyn surgeons, and 2,500 breast surgeons.

Enhanced international presence, with 20 offices around the world

An opportunity to accelerate R & D efforts in intervention and therapy.

Last quarter annualized revenue for the combined companies is $1.44 billion, 40% from capital equipment and 60% from consumables. While both companies log roughly the same amount of revenue at $724 million for Hologic and $720 million for Cytyc, Cytyc’s gross margin is 75% compared to 75% for Hologic.

With sales of $463 million in the year ended September 30, 2006, and its stock up sevenfold since it went public 5 years ago, Hologic is the smaller of the two companies and will pay 0.52 Hologic share, which was $56.33 as of last Friday’s closing