Hologic buys German provider of photoconductor

May 3, 2006

The one indispensable piece in Hologic’s rise to power in the digital mammography marketplace is the amorphous selenium flat detector that serves as the heart of its Selenia full-field digital mammography system. Recognizing the importance of this component, Hologic has acquired AEG Elektrofotografie, its sole provider of the amorphous selenium photoconductor coating applied to Selenia’s digital detectors, in a deal valued at more than €21 million.

The one indispensable piece in Hologic's rise to power in the digital mammography marketplace is the amorphous selenium flat detector that serves as the heart of its Selenia full-field digital mammography system. Recognizing the importance of this component, Hologic has acquired AEG Elektrofotografie, its sole provider of the amorphous selenium photoconductor coating applied to Selenia's digital detectors, in a deal valued at more than €21 million.

The privately held company, headquartered in Warstein, Germany, also develops, manufactures, and sells photoconductor materials for electrophotographic uses, including copying and printing.

With the acquisition of AEG, Hologic takes direct control over a critical step in the detector manufacturing process, according to Robert A. Cascella, president and COO. Although there are hundreds of selenium coating operations in the world, only a handful have the skills and equipment to apply selenium coatings with the quality controls and tolerances needed for medical applications.

"We have looked long and hard and found that we were completely satisfied with the integrity and quality of AEG," Cascella said. "It is a very good fit for us."

Hologic and AEG have worked closely in manufacturing and R&D. Their merger should bolster further manufacturing efficiencies and accelerate R&D, according to Cascella. Bringing the amorphous selenium technology in-house should also allow the company to more efficiently manage its supply chain, improve manufacturing margins, and respond to the continuing demand for Selenia.

Hologic acquired AEG for €16,297,650 in cash and 109,720 shares of Hologic common stock. A one-year earn-out of €1.7 million will be paid in cash if AEG's earnings before interest, taxes, depreciation, and amortization (EBITDA) exceed a preset amount in calendar year 2006. AEG's estimated revenue in calendar year 2005 was €42.7 million. Hologic expects its acquisition to be accretive to earnings.

AEG has been the only source of amorphous selenium coatings for about three years. The thin-film transistor arrays underlying the flat-panel detectors are constructed in South Korea and shipped to a Hologic plant in Newark, DE, for testing and limited additional assembly. The unit then travels to AEG, which applies the photoconductive coating. The detectors are then sent back to the plant in Delaware for final electronic assembly, sealing, and coating before their integration with Selenia FFDM systems.

The acquisition of AEG may present opportunities for simplifying this process, according to Cascella.

"We would still have the pretesting and final assembly and testing done in Delaware, but maybe some of the additional sealing and coating could be done by our new company in Germany," he said.

The amorphous selenium coating, which gives the Selenia detector a gray, metallic look, converts x-rays directly into electrical charges. This process differs from the one used by GE Healthcare on its Senographe FFDM systems, for example, which rely on amorphous silicon to turn x-rays into flashes of light that are then recorded by photomultipliers.

"Our detector is a fundamental differentiator in terms of our leadership in digital mammography," Cascella said.

Hologic has been looking into ways to exert more control over its supply chain for several years, according to Cascella. The success of Selenia, attested to by the company's record revenue and backlog for the past quarter (DI SCAN, 4/25/06, Business briefs, Hologic sales soar in 2Q), spurred the company to action.

The AEG acquisition - the third such move by Hologic in two weeks - gives management plenty to do, but it's all manageable, Cascella said.

Suros Surgical, a maker of breast biopsy equipment in the process of being acquired by Hologic (DI SCAN 4/18/06, Hologic bids $240 million for breast biopsy equipment manufacturer), is a self-contained interventional device company, he said. The entire management team will be retained, as well as its salespeople, thereby placing no additional burden on Hologic. Also, there is no service support aspect to the Suros products.

"Effectively, the integration requirement will be to put them on our reporting system," he said. "From an operations perspective, there is virtually no integration, and we did that intentionally. We want to keep that business separate."

The proposed acquisition of R2 Technology (DI SCAN, 4/26/06, Hologic bids $220 million for CAD pioneer) will involve the integration of sales, but Hologic is currently selling R2 workstations and incorporating its software on Selenia in accordance with a previously established alliance. Most of the R2 portfolio is software, which makes manufacturing, final assembly, and testing relatively simple, Cascella said.

"We will retain (R2's) resources in Sunnyvale, CA," Cascella said. "So the good news on R2 is that its products fit naturally into our distribution mechanism and all else, relative to applications and service support, just merge into our existing group."

As regards AEG, which is a supplier, Hologic's operations and manufacturing groups are already actively involved.

"These three acquisitions give us a lot to do, and we recognize that," Cascella said. "The way that we are able to rationalize it is that two of them are extraordinarily complementary and one is a supplier, where we are talking about grassroots manufacturing people being responsible for the integration process."