Monday, July 02, 2007

Which do you want first?

Hologic Inc. management presented plenty of good news last week at the Jefferies Healthcare Conference in New York.

But there's a bit of bad as well.

First, the good. CFO Glenn Muir and Jack Cummings, Chairman/CEO, laid out a very promising picture for the future of Hologic as it acquires Cytyc Inc., maker of medical devices and diagnostics for women's health.

In their view, Hologic’s digital mammography business clearly will benefit from the channels that Cytyc’s sales force already built into OB/GYN offices. But don’t take our word for it. Listen to the web cast here. The good financial stuff comes up 19 minutes into it.

The $6.2 billion price tag obviously is a big undertaking for Hologic management. In a Q&A session, Cummings only half-joked that the biggest challenge facing Hologic management is to not mess up such a well-run company as Cytyc. But another challenge will be the $2.2 billion Hologic borrowed to make the deal.

The company is keeping its eyes on interest rates. At this point, the rising rates aren't impacting the accretive qualities of the deal. But Muir says management's goal will be to "rapidly pay down that debt."

This suggests—at least to us—that the new Hologic-Cytyc will be out of the company-buying business for a while, which would be too bad. Prior to the merger, venture capitalists and the blogs that cover them saw both Cytyc and Hologic as up-and-coming companies that could be steady acquirers of venture-backed businesses as they grew from their mid-tier status.

IN VIVO Blog suggested this to Cummings after the presentation, and he disagreed. Cummings said Hologic could be in the market for smaller companies with products that would plug easily into Hologic’s increasingly impressive sales and marketing machine.

As an example, he cited the company’s recent acquisition of BioLucent Inc. The privately held company makes and sells the MammoPad, "a radiolucent foam cushion that covers the cold, hard surfaces of all commercially available mammography equipment," according to the release. (Two side notes: Tom Fogarty had a role in starting the company. BioLucen's brachytherapy business, which you can read about here, will be spun out into a separate company.)

According to Muir, BioLucent had 10% penetration of its market with each pad costing $5 and carrying 64% gross margin. Hologic sees the company initially bringing in roughly $25 million in annual revenue. Hologic paid $70 million for the company with the potential for earn outs tied to revenue.

So Hologic appears to be on a solid path toward becoming a major mover in women’s health care. That’s the good news. The bad news is the company will need time to digest the recent merger. It may still make the occasional acquisition, but any such company will need to fit neatly into the company's current business.

p.s. Muir deserves extra credit for making a lucid presentation at 8:10 in the morning. In response to a poke from Cummings, he revealed his 2 p.m. Wed. shuttle out of Boston arrived at 1:30 a.m. "Not the flight to be on." IN VIVO Blog is glad we drove down to CT and grabbed a morning MetroNorth.

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