No, no, no, no, no...

Now wait a doggone minute.

This wasn’t supposed to happen. Hologic merging with Cytyc? No, no, no. Hologic and Cytyc were two of the more reliable mid-tier medical device players, acquiring the venture-backed companies that the big guys no longer had the bandwidth nor time to buy.

See, Hologic and Cytyc operated deep underwater where the storms of consolidation that occupied J&J, Boston Scientific, the former Guidant et al couldn’t reach them. They were supposed to grow steadily by buying smaller companies along the way (along with Kyphon, Inverness and the like.) For a detailed look on this strategy check out colleague Mary Stuart’s extensive piece on Hologic from earlier this year. Also keep an eye out for Hologic coverage in the upcoming issue of Medtech Insight.

But this merger certainly changes the game. Rather than build their women’s health business acquisition-by-acquisition, the two companies—which target two different areas of the market—opted to double in size with one big deal. Check out the presentation by company management (unfortunately we couldn’t access the web cast, but please try.)

This is truly a merger of equals with Hologic and Cytyc bringing roughly half the revenue to what will be a $1.4 billion company. And how do things look next year? The company is advising analysts to expect more than $1.7b in revenue and expects to grow that by 20% each year. The combined company's gross margin (100 * (Revenue - Cost of Goods Sold) / Revenue) would be 65%. Individually, Cytyc's gross margin was 75% while the capital-intensive Hologic boasted a 45%. The company anticipates saving up to $30 million by maximizing efficiences and generating $75 million in new revenues through cross-selling, a broader geographic reach and identifying new markets.

So what’s this mean for future acquisitions? We think this is a positive. Clearly, the new company—called Hologic—will be in a position to do a nice bit of acquiring. Plus, the two independent companies weren’t likely to bid on the same companies anyway. More than two-thirds of Hologic's revenue came from digital mammography, a radiology market, while Cytyc's Pap test and Novasure tissue ablation products targeted to Ob/Gyns accounted for 86% of its revenue. In fact, a few months ago when Mary asked Hologic COO and President Rob Cascella about the company’ strategy for future acquisitions he conceded that perhaps the company wasn’t likely to stray from its imaging roots. “We don’t really have skills that transfer well into a new market.”

Well, they do now. Or at least they will if and when the deal closes in the third quarter.

Here's hoping they'll still be hungry.

Follow-On Biologics: 1984 All Over Again?

Orwellian resonances aside, the year 1984 is a turning point in the history of the biopharmaceutical industry. That is the year when the generic drug industry was born, thanks to a critical and unlikely compromise between Senate Republican Orrin Hatch and Democratic Rep. Henry Waxman.

Their landmark bill created an abbreviated approval process (championed by Waxman) in exchange for enhanced patent and data exclusivity protections for innovator companies (pushed by Hatch). So critical were those two lawmakers to the crafting of the legislation that the entire generic approval/patent restoration process in the US is now known simply as Waxman/Hatch (or Hatch/Waxman, depending on which party is in the ascendancy).

As 2009 gets under way, one key question for biopharma companies of all shapes and size is: can history repeat itself?

It sure looks like the stars are aligned for another historic compromise, this time over a regulatory system for abbreviated approval of biologic products coupled with some version of data exclusivity for innovators. And, as fate would have it, Henry Waxman and Orrin Hatch find themselves add odds over some key points.

Waxman, as chair of the Energy & Commerce Committee in the House, will be at the center of any legislative work on follow-on biologics this year. And he has already put a stake in the ground, offering legislation that gives innovators the same five year data exclusivity that pharmaceuticals get under the 1984 law.

Hatch is not in the same leadership position he held as a member of the Republican majority in 1984, but he is working closing with Senate Health Committee Chairman Edward Kennedy on FOB legislation. Hatch and Kennedy were among a group of senators that forged a compromise in 2007, one that would have granted 12 years of data exclusivity to innovators.

That compromise failed to reach enactment—in no small part because Waxman refused to sign on to push for action in the House.

As Congress gets back to work in 2009, it sure doesn’t sound like a compromise is close. As we reported in The Pink Sheet DAILY, Ann Witt—the key staffer to Waxman on FOBs—sure didn’t sound optimistic about getting a bill done this year when she spoke during a forum sponsored by the Jefferson School of Population Health yesterday.

Then today, Hatch himself addressed the Food & Drug Law Institute annual conference. Like Witt, he did not make any optimistic sounding assessments about the prospects for speedy enactment, saying only that “we are working on it.”

Instead, he highlighted his frustration with New York Democratic Sen. Chuck Schumer for, in effect, defecting back to Henry Waxman's camp in 2009.

"I have some very serious reservations about some of the bills that have been recently introduced," Hatch said. "Sen. Schumer’s bill mirrors Chairman Henry Waxman’s….I was surprised to see Sen. Schumer pushing for this new approach, especially since he was the one who really sealed the deal for 12 years of data exclusivity in the last Congress with us. He came along and realized it was an important thing to do. It is frustrating to me to see that we are so quick to wipe out the incentives for innovation."

This whole exclusivity question sure does get people fired up. Indeed, your humble blogger can testify that innovators and would-be follow-on companies seem very far apart on the question of exclusivity, having gotten an earful from both sides for suggesting during a presentation at the Jefferson School event that the whole question of how much exclusivity is less important than what the follow-on biologics marketplace will actually look like. (A webcast of the event is available here.)

Generic companies, in the words of Boston University Economics Professor Laurence Kotlikoff described industry’s “support” for follow-on biologics in exchange for 14 years of exclusivity protection as simply an effort to “kill biogenerics.” Away from the dais, representatives of innovator biotech companies suggested five years of exclusivity would kill innovation.

Still, as David Nash, Dean of the Jefferson School of Population Health, said in his closing summary of the event: Despite the “fireworks,” most observers can see that there “will be some kind of a compromise” on exclusivity.

And it sounds like Hatch at least is ready to try to make that happen. With Waxman due at the FDLI conference tomorrow, Hatch enlisted the audience to help: “When Congressman Waxman is here, you might encourage him to come on board.”

“Let me tell you something. Henry knows I’m serious. He knows I’m bipartisan. He knows I want this done. I care a great deal for him,” Hatch said. He joked about that unlikely turn of events: “We’ve been good friends for all these years, although he comes from Hollywood and you can’t be any more whacked out than that that group, but he for some reason comes through. He’s a very, very complicated but a very, very good, bright guy.”

“I want this to be the Hatch/Waxman—or let’s make it Waxman/Hatch” of the biologics era, Hatch declared.

But, he added, “Henry’s going to have to come up. He was at zero, then he was at five.” President Obama’s budget proposes seven years of data exclusivity, Hatch added, indicating that too would be too low for him.

Is a compromise likely any time soon? It sure seems like the answer is no, that the two sides are--if anything--more entrenched than ever in their respective corners. But a compromise certainly didn't seem inevitable in 1984, a point that Hatch made in his opening comments to the FDLI conference.

"I can vouch for the fact that the negotiations on Hatch Waxman were, shall we say, trying at times," Hatch said. In fact, "who knows what would have happened had I not needed a root canal right in the middle of negotiations. I threatened to kill every doggone negotiator."

"Toward the end, the two leading negotiators, one for the generic industry one for the innovator industry, they jumped up and said, 'We’re outta here,' and they ran to the door, and they both arrived at the door at the same time and they got stuck in the door. It was one of the greatest days of my life."

Right now it sounds like both sides are heading to the door. Whether they actually get out the other side, we will have to wait and see...