Digital mammography drives Hologic financials to new records

July 31, 2007

Pending tomosynthesis platform may stem price erosion seen with Selenia

Hologic bested its own projections for Q3, achieving a 60% rise in revenues and more than doubling its profits compared with the year-earlier period. The news was not enough, however, to keep investors satisfied. Although the share price initially rose above $55, it then dropped below $52 before recovering slightly by day's end.

In the quarter ended June 30, Hologic brought in $191.5 million compared with about $120 million in Q3 2006. Earnings leaped to $24.7 million from $12 million in Q3 2006. Primarily responsible were the 328 Selenia digital mammography systems shipped - a record number. Company executives had predicted they would ship 300.

Company financials were boosted to a lesser extent by the inclusion of the recently acquired Suros and R2 Technology. Revenue from bone densitometers, however, fell to about $15.7 million from $19.6 million.

The company's still-pending $6.2 billion acquisition of Cytyc looked good, following the release July 30 of that company's 2Q financials. The women's health specialist posted a 26% rise in revenue to $188.8 million and a 6% rise in net income of $33.5 million compared with the previous year's quarter. Weighing on Cytyc profits were $4.4 million in costs related to the proposed merger with Hologic.

In a teleconference with analysts following release of the company's financials, chief financial officer Glenn Muir cited continuing interest in digital mammography and Hologic's best-of-breed technology as the factors behind the growing backlog of Selenia systems that has allowed Hologic to achieve a 55% market share in the U.S.

At the quarter's end, Hologic had a backlog of 537 systems, which Muir said the company plans to reduce in the months ahead by increasing shipments. In 3Q, Muir predicted Hologic will ship 12 more than in the second quarter. Overall growth will push consolidated revenues to $197 million, he said, about $5.5 million more than the just completed quarter.

The company remains concerned about reimbursement for mammography, which Muir characterized as being too low. Federal activity, particularly the Deficit Reduction Act, has placed a burden on imaging in general, pushing some procedures, including mammography, away from the outpatient environment and into the hospital. This is the opposite of what happened when the Reagan administration pushed procedures into the outpatient arena to make them more efficient.

"In future years we would hope the government will look at bone densitometry, mammography, and pap tests as screening tests that should be outside the standard reimbursement scheme," Muir said.

In regard to Selenia sales in the last quarter, chairman and CEO Jack Cumming noted a shift in the market toward multisystem orders both in the U.S. and overseas. This and the continuing large backlog of Selenia systems present the opportunity to increase production. Muir said capacity exists to do this, either by adding additional employees to existing work shifts or by extending those shifts.

Increased production might offset price erosion, which has occurred partly because of discounts given to customers buying multiple units. The future introduction of a new digital platform to support tomosynthesis could boost revenues further.

Robert A. Cascella, Hologic president and chief operating officer, gave no specific date for the introduction of such a unit but said the product would be configured to support both 2D digital imaging and 3D. Two-D imaging is now being done with the Selenia product; 3D would be possible with the pending tomosynthesis capability.

"We made the decision that the platform would be available in 2D and 3D because it made sense to get it approved (by the FDA) with multiple capabilities," Cascella said.

Pending FDA approval, the product might leave the factory configured for just 2D but offer the option of a software upgrade to 3D in the field.