"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

21 November 2006

Investing in Women’s Health - August 2006

As the baby boomer generation ages, an important and growing part of the working age population seeks increased wellness and prevention of cancer and pain in their hands, feet and other extremities. With women working in nearly two thirds of households, the stress and strain of the daily slog takes its toll. Heart treatments (cardiology), extremities care (orthopedics), cancer diagnosis/care (oncology) are the key drivers of the medical device industry addressing this aging population.

One emerging leader in women’s healthcare named Hologic has grown organically and acquired complimentary product companies to address this booming marketplace, particularly in the breast cancer diagnostic field. With strong recognition as a high quality instrument supplier among practitioners and the financial markets, HOLX has soared tenfold from 2002, with 20 positive earnings surprises over three years, and doubled in the past year, outperforming 95% of companies in the Russell 2000 index. By undertaking a number of acquisitions during this past year, HOLX is leveraging its existing mammography systems sales channels.

Bedford, MA-based Hologic, Inc. (Nasdaq: HOLX - $43.80) is a rapidly growing, $500 million provider of state-of-the-art diagnostic and digital imaging systems directed towards women's health. After an internal strategy review, the digital detector business will serve to support HOLX’s mammography product line through direct sales force efforts where revenues soared 75% in the Q3 2006 quarter reported July 25th to $85.8m while operating income in this area nearly quadrupled to $19.5m reflecting almost 22.8% margins.

Recently reported Q3 2006 results were driven by the strategic shift to address the high margin mammography and MRI (magnetic resonance imaging) markets, as its Chairman and CEO Jack Cumming explained, “for the future, we expect to leverage our technological advantages, expand our product pipeline and take advantage of the opportunities for organic growth.” The quarter benefited from a record 154 Selenia full field digital mammography systems installed and recognized as revenue, just one year after introduction. HOLX acquired in May 2006 AEG Elektrofotografie ("AEG"- $50m annual revenue run rate), a leading manufacturer of photoconductor materials and HOLX’s sole supplier of amorphous selenium photoconductor coatings used in its Selenia systems. Competitor Fischer Imaging Corporation (NASD-BB: FIMG) also manufactures and services specialty digital imaging systems and other medical devices primarily used in screening, diagnostic and interventional procedures. In contrast to HOLX, FIMG has suffered from a failure to address the radiological specialist community’s need for an affordable, high procedure system and the shares have collapsed as FIMG’s backlog evaporated.

In contrast, HOLX acquisitions have expanded the company into computer aided detection systems for radiologists looking for breast cancer. It bought R2 Technology in April 2006 for $220m in stock. Another buy that just closed took HOLX further into minimally invasive surgical systems (limited surgery) for the breast cancer detection (biopsy) market. Suros Surgical Systems cost $240m in stock and a bonus over two years if it surpasses targets.

Third quarter fiscal 2006 results were outstanding with record backlog, revenues and earnings. HOLX’s backlog soared to $165.7 million (including backlog of $4.1 million at AEG), up 8% sequentially and including 342 Selenia systems. Q306 revenues totaled $119,685,000, a 62% increase when compared to revenues of $74,053,000 in Q3 2005. Nine month revenues increased 47%, to $308.6 million. Net income for Q306 jumped to $13,754,000, or $0.29 per diluted share. With AEG dilution, Hologic’s net rose 51% to $12,017,000, or $0.25 per diluted share, versus Q305 net of $8,158,000, or $0.18. Nine month net income jumped 50% to $28,897,000, or $0.61 per diluted share. Estimates for FY06 point to $410M in revenue and $0.90 in EPS and FY07 revenues of $495m and $1.25.

Two concerns are valuation and regulation for HOLX which trades at roughly one times its growth rate (45 times earnings for FY 2007) and 4 times revenues ($2.05B market cap) and an expanding Department of Justice investigation into anticompetitive practices in the orthopedic industry (HOLX is not believed to be a target). In addition, the US medical device industry regulator, the Food and Drug Administration (FDA), may reclassify full field digital mammography systems to Class 2 from Class 3, which would streamline the approval process for new competitors such as Sonosite (Nasdaq:SONO) and potentially impact the company's long-term revenue growth and gross profit margins. SONO only offers portable ultrasound devices currently. Short sellers are hoping for a stumble with short interest high (14% of tradable shares or “float”) but the market is promising. For investors seeking a long term vehicle to invest in women’s health, HOLX should be considered for purchase by investors seeking long term capital gains or a buyout of the company by larger competitors such as General Electric (GE), Siemens and Agfa.


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