Hologic bids $220 million for CAD pioneer

April 26, 2006

Less than a week after going public with its intent to acquire Suros Surgical, Hologic announced the signing of a definitive agreement to acquire R2 Technology, the acknowledged pioneer of computer-aided detection. The stock swap is valued at $220 million. With the Suros deal (valued at $240 million) already on the table, Hologic now has about a half-billion dollars in transactions in the works.

Less than a week after going public with its intent to acquire Suros Surgical, Hologic announced the signing of a definitive agreement to acquire R2 Technology, the acknowledged pioneer of computer-aided detection. The stock swap is valued at $220 million. With the Suros deal (valued at $240 million) already on the table, Hologic now has about a half-billion dollars in transactions in the works.

Like the Suros deal, which would bring breast biopsy expertise and technology to Hologic (see DI SCAN 4/24/06, Hologic bids $240 million for breast biopsy equipment manufacturer), the proposed R2 transaction advances a major strategic goal of the company - to expand its presence in women's health. It also affords the opportunity to make use of the company's existing sales infrastructure, according to Hologic CFO Glenn P. Muir.

"We see CAD as an emerging opportunity for the future," he said. "The acquisition of R2 is a natural fit for our sales and distribution channels, and it allows us to leverage our U.S. market presence. We will be able to improve international distribution of CAD with an extensive dealer network, which will become an advocate for R2 CAD."

R2 Technology became the first firm to commercialize CAD for mammography in 1998, when its ImageChecker system was approved by the FDA for screening mammography. The technology platform was also the first approved for use with digital mammography, which has been driving the adoption of mammography CAD.

Hologic and R2 have been partnering since 2003, when the two companies cut a deal to integrate R2's ImageChecker software with Selenia full-field digital mammography systems (see DI SCAN 8/6/03, Hologic and R2 sign definitive agreement). Last quarter marked a high point for their alliance with the sale of 93 Selenia units outfitted with R2's CAD software.

The transition of R2 into a wholly owned subsidiary of Hologic would afford its new parent a higher margin on the sale of Selenia products integrated with R2 CAD, while simultaneously providing opportunities to evolve the coming generation of Hologic mammography systems, according to Hologic executives.

"Their CAD know-how will be very helpful for us in developing tomosynthesis," said Jack Cumming, Hologic chairman and CEO. "Extension into tomosynthesis will be a natural progression for them. We view it as a redirection that they are more than capable of accommodating."

R2 Technology is expected to enter the Hologic fold within three months, following the completion of a fairness hearing before the Commissioner of the California Department of Corporations and expiration of the U.S. antitrust waiting period. Closure is subject to due diligence by Hologic and the approval of R2 investors. If this happens, the Hologic subsidiary will remain headquartered in Sunnyvale, CA, although management will be "part of the Hologic team," Cumming said.

The proposed acquisition will bolster Hologic's strategy to extend further into women's health. R2 has 2500 mammography CAD installations worldwide, including 1000 digital CAD systems. The company estimates the mammography CAD industry at $100 million in 2005 and expects the adoption of CAD to increase on its own merits, as well as through the widening adoption of digital mammography systems.

As FFDM grows in popularity, CAD will shift away from film-based workstations and more toward accommodating these digital systems with software-only solutions, according to Muir. This shift to software is expected to help improve sales margins at R2.

About one-third of R2's $45 million in annual revenues last year came from supplying CAD to the makers of FFDM systems. Another third came from the sale of analog workstations running ImageChecker. The final portion came from service agreements on installed ImageChecker products.

About half the sales of CAD software for use on FFDMs were to Hologic, meaning the prospective acquirer of R2 accounted for about 15% of the company's total revenues. The other half of those software supplies were to GE Healthcare and Siemens Medical Solutions.

"Certainly, we would welcome the customers that R2 serves today," Cumming said. "We see no reason to change what R2 has shown to be a successful strategy."

There is a precedent for Hologic continuing its dealings with Siemens and GE, even though they are competitors in the digital mammography marketplace. Hologic already serves as a supplier to Siemens, providing the flat-panel detector that the German company incorporates into its Novation FFDM.

"We have had an open relationship with Siemens over the years," Cumming said. "We have been able to air any differences and work together."

He noted that R2 software is highly regarded, which is why most of the CAD software integrated with Hologic Selenia units is from this company. The bond will be totally seamless if the acquisition goes through. But Hologic might yet continue selling CAD software from an R2 competitor, iCAD, as it does now, if customers request it.

"They have a new president, and we will be talking to him once he gets his feet on the ground," Cumming said (see DI SCAN April 25, 2006, Executive shuffle goes into high gear).

Much but not all of R2's CAD software is complementary to Hologic's focus on women's health. R2 has developed and is currently marketing ImageChecker CT Lung, which assists in the clinical assessment of lung nodules found in chest CTs, as well as signs of pulmonary embolism. The product offers an "excellent opportunity" for Hologic, according to Cumming, who said Hologic will nurture both its product development and distribution, if the deal to acquire R2 goes through.