holx

Analyst: Victor Sula, Ph.D.Initial Report

February 6th, 2009

Hologic Inc. (NASDAQ: HOLX) 1


February 6th, 2009

Background

MARKET DATA

Symbol

Current Price

Low/ High 52 weeks

Average Volume (3m)

Market Capitalization

Shares Outstanding

Source: Reuters.com, SEC Filings, Fiscal year-ending September 30

HOLX

$13.13

$10.34 - 33.37

127,916

$3,024 Mn

4,184 Mn

Revenues, $ Mn.

Gross margin

Operating margin

Net margin

EPS, $

738

46.8%

20.0%

12.8%

0.86

1,674

53.3%

-11.8%

-23.0%

-1.57

371

45.1%

-87.0%

-96.7%

-1.65

429

53.7%

21.8%

11.2%

0.19

126.7%

8.6%

108.8%

107.8%

n/m

126.7%

6.5%

-31.8%

-35.8%

n/m

Hologic Inc. (HOLX) is a diversified diagnostic and medical product and de-vice company, working with its subsidiaries to develop, manufacture and dis-tribute medical imaging systems and surgical products dedicated to serving the healthcare needs of women. The Company’s core business units are fo-cused on breast health, diagnostics, GYN surgical and skeletal health.

The Breast Health segment offers a broad portfolio of breast imaging and related products, including digital and film-based mammography systems, computer-aided detection (CAD), breast biopsy guidance systems, minimally invasive breast biopsy and tissue extraction devices, MammoPad breast cush-ion, and photoconductor coatings. The Diagnostic Products segment provides ThinPrep System, cervical cancer screening and Fetal Fibronectin Test for pre-term birth risk assessment. The GYN Surgical segment includes NovaSure Impedance Controlled RF Ablation system, a minimally-invasive procedure that allows physicians to treat women suffering from excessive menstrual

2/06/09

volume

15.0

14.5

14.0

13.5

13.0

12.5

12.0

11.5

11.0

10.5

15

10

5

0

© BigCharts.com

HOLX daily

Dec 09 Feb

Mill

ions

Share Statistics

(02/04/09)NASDAQ FY2007 FY2008 %Chg %ChgQ1Fy

2008

Q1FY

2009

Analyst: Victor Sula, Ph.D. Initial Report

February 6th, 2009



February 6th, 2009


bleeding. The Skeletal Health Segment includes dual-energy X-ray bone densitometers and ultrasound bone analyzers that address a growing market for osteoporosis prevention and treatment.

In October 2007, HOLX acquired Cytyc Corporation for approximately $6.2 billion, creating one of the largest companies in the world focused on advanced technology in women’s health. With its merger with Cytyc, the Company gained several other product lines, including tests to screen for cervical cancer, prenatal diagnostics and radiation treatment of early-stage breast cancer. Cytyc’s strengths in the fields of gynecology, obstetrics, minimally invasive surgery and radiation oncology added to HOLX’s 2008 revenue of more than $700 million, representing approximately 50% of the Company’s total revenue.

The Company has offices throughout Europe, in the UK, Germany, France, Belgium, Italy and Spain, as well as in Australia, China and Canada, which handle sales, service, training and distribution to hospitals and clinical laboratories. HOLX markets its products through a combination of direct sales and service force, and a network of independent distributors and sales representatives primarily in the United States, Europe and Asia. Founded in 1985, the Company is headquartered in Bedford, Mass., and employs more than 4,000 employees worldwide. HOLX is included in the S&P 400 MidCap Index, the S&P 1,500 Super Comp Index and the Nasdaq 100 Index.

Solid revenue stream with a favorable outlook for 2009/2010 despite the economic downturn

The Company’s total revenues increased at a CAGR of 25% from $190 million to $738 million during the his-torical period 2002-2007. The increase was primarily due to increased mammography sales including Selenia, R2 CAD, breast biopsy, Mammopad and Mammosite, as well as osteoporosis assessment product sales includ-ing bone densitometers systems. In 2008, HOLX’s revenues boosted by 127% to $1.674 billion as compared to revenues of $738.4 million in 2007. These results were achieved after the integration of two recent acquisitions - Cytyc and Third Wave – which added two significant new operating segments, as well as enhanced previous operating segments.

Highlights

Revenue ($Mn)

Source: SEC Filings; Yahoo Finance, Fiscal year-ending September 30.


February 6th, 2009



February 6th, 2009


Despite the fact that the breast health, diagnostic and surgical segments will continue to face pressure in 2009 due to cutbacks in hospital spending, analysts surveyed by Thomson Financial Network expect $1.65 billion in rev-enue and a profit of $1.13 per share in 2009 for HOLX.

Rapid growth through an aggressive acquisition strategy to broaden presence in women’s health market

Since the inception in 1985, the Company has been following an active acquisition strategy to enhance its position within its core markets. HOLX’s last years’ economic developments in this field involve the acquisition of a num-ber of solid companies including: Fischer Imaging Corporation (September 2005), AEG Elektrofotografie (May 2006), R2 Technology (July 2006), Suros Surgical Systems (July 2006), BioLucent, (September 2006) and Cytyc Corporation (October 2007), which broadened HOLX’s product portfolio and streamlined production process, as well as strengthened the Company with vertical integration.

The latest significant acquisition (July 2008) made by the Company was Third Wave Technologies Inc., a com-pany that develops and markets molecular diagnostic reagents for a variety of deoxyribonucleic acid (DNA) and ribonucleic acid (RNA) analysis applications based on its own Invader chemistry. Third Wave’s current clinical diagnostic offerings consist of products for conditions such as Cystic Fibrosis, Hepatitis C, cardiovascular risk and other diseases. Third Wave recently submitted to the U.S. FDA pre-market approval applications for two human papillomavirus (HPV) tests. The global market for HPV testing is expected to increase to $800 million in the next few years.

Stable gross margins due to the cost control measures implemented last fiscal year

The Company continues to benefit from a high and relatively flat gross margin despite the weakening economic environment. The gross margin solidness is due primarily to a significant increase in higher margin sales like the Diagnostic and GYN segment’s products. In addition, due to the cost control measures implemented last fiscal year, the Company was not sensitive to Selenia shortfall sales in the U.S. Over the long term, the Company’s gross margin is likely to be relatively flat to slightly up due to lower manufacturing product and service related costs. HOLX’s goal is to drive the gross margin closer to the 75%.

Gross Margins, %

Source: SEC filings;


February 6th, 2009



February 6th, 2009


Strong balance sheet

HOLX has strong cash reserves valued at $171.5 million as of December 27, 2008, in cash, cash equivalents and short-term investments. The Company also reported significant cash flows from operations that neared $364.6 million in 2008, which included a net loss of $385.6 million for the year mostly relating to non-cash charges of $565.2 million of acquired in-process research and development.

In order to finance the cash portion of the merger with Cytyc Corp. and other expenses incurred in connection with the merger, the Company incurred more than $2.35 billion of new indebtedness under a credit facility with Goldman Sachs Credit Partners L.P. and certain other lenders.

Three products awaiting FDA PMA approval to add significantly to FY 2009 revenue

On July 30, 2008, HOLX received a letter from the FDA requesting additional information in connection with PMA application for the new 3-D full field digital mammography system - Selenia Dimensions Tomosynthesis system. The Company compiled the information and responded to the FDA. In addition, HOLX has two other products, the Adiana transcervical sterilization system and two Third Wave HPV filings (CerVista HR and Cer-Vista Genotyping), which are also being reviewed by the FDA. While it is difficult to estimate the timing of approval, there is a high probability that these products will be ap-proved and start generating revenue already in the fiscal year 2009.

Digital mammography market leadership

The Company’s breast health segment offers a broad line of breast imaging products, including HOLX’s flagship Selenia full field dig-ital mammography system, which represents the main driver for HOLX’s revenue. The Company’s efforts led to the adoption of digi-tal mammography as a standard of care for breast cancer screen-ing. In fiscal 2007, HOLX became the digital mammography mar-ket leader in the U.S. with approximately 60% market share. The Company’s sales of more than 1,300 digital mammography systems in 2008 included the largest multi-order system sale in Selenia’s his-tory. Overall, HOLX has nine products with No. 1 market share.

Selected consolidated balance sheet data, $ Mn

Source: SEC Filings; year-ending September, 30.

Total Assets, including Cash and cash equivalentsLiabilities, including DebtEquity

1,066100.4260.6

11.2805.7

8,13495.7

3,4922,2004,642

8,139171.53,4432,1714,697

27-Sep-07 27-Sep-08 27-Dec-08


February 6th, 2009


Meanwhile, breast cancer affects the lives of one in eight women. Worldwide, breast cancer is the fifth most com-mon cause of cancer death. Breast cancer causes more than 500,000 deaths worldwide or almost 1% of all deaths each year. In the United States, breast cancer is the third most common cause of cancer death and causes 41,000 deaths annually. Around 180,000 new cases of breast cancer are diagnosed in U.S. each year.

Fast track for medical devices market

The market for healthcare products and services, including the medical device and diagnostics segment, has exhibited attractive growth recently, driven by increasing demand for healthcare worldwide. The growth in the medical device and diagnostics sector has averaged between 8% and 9% over the past four years, and is projected at 7.2% per year over the next four years, with the global market exceeding $330 billion in 2008. The medical device market is dominated by U.S. companies with 72% of the revenue. The global medical device market is expected to continue its growth, reflecting aging populations and the greater physician need for better and more precise diagnostics and imaging to guide them on patient disease status and accurate disease management.

HOLX is a leading developer, manufacturer and supplier of premium diagnostics products, medical imaging sys-tems and surgical products dedicated to serving the healthcare needs of women. The Company has one the largest sales and service organizations in the U.S. focused exclusively on women’s health, direct operations in more than 20 countries and 150 distribution partners in more than 125 countries.

The Company is currently traded close to its 52-week low of $10.3 mainly due to downward revision of FY 2009 outlook by management and the difficult environment in hospital spending. Moreover the Company is traded with significant discount to peer group P/E multiples, which is not warranted, given its leading position in the digital mammography market.

Despite shortfall of Selenia Systems sales in the U.S. as a consequence of the faltering economy on the hospital market, the Company’s 2009 revenues are expected to remain strong and near $1.65 billion. Going forward, the analyst consensus expects HOLX’s revenue to reach 1.8 billion in 2010, as new products will enter the market and the economy will likely start recovering. We rate HOLX as a Buy, grading the current weaknesses as temporary.

Investment sentiment

Comparative analysis

Source: Yahoo Finance

Johnson & JohnsonSiemens AGMedtronic Inc.Baxter International Inc.Beckman Coulter Inc.C.R. Bard Inc.American Medical Systems Holdings Inc.Celera Corp.Boston Scientific Corp.Median

Hologic Inc

JNJSI

MDTBAXBECBCR

AMMDCRABSX

HOLX

58.3259.10

34.260.4250.7787.0011.579.469.17

13.07

160,064483,4937,44936,373

3,1158,848784.2679.2

13,318

3,024

12.968.22

26.9316.1614.2219.6417.27

946.0019.5117.27

11.08

12.058.13

22.2114.2512.9817.1315.2272.7715.2815.22

9.40

2.580.512.552.931.003.601.573.861.652.55

1.71

2.49n/m

2.422.730.973.281.513.211.612.45

1.56

TickerSymbol

Company Name04.02.2009

Price perShare, $

Mrkt. Cap.$ Mn

2008

P/E P/S

20082009 2009


February 6th, 2009


Disclaimer

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

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Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking state-ments. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquida-tion. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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