Hologic: First Mover Advantage In 3D Mammography

Oct. 3.11 | About: Hologic, Inc. (HOLX)

Hologic (NASDAQ:HOLX) is a high-profile company in women's healthcare needs. In fact, it is the goodwill ambasador for the sector. Its four operating segments break down to: Breast Health (45%), Diagnostics (33%), GYN Surgical (17%), and, Skeletal Health (5%) -- a significant body of work. Although all of these business divisions are important to the overall health and well being to women on a world wide basis, this posting will primarily concentrate on the Breast Health segment. Reason being is because this is where the primary thrust of future growth will come from, and my impression is that this will be the catalyst to propel the stock higher where investor psychology is concerned.

We are all aware that battle lines have been drawn in the fight against cancer. Breast cancer is a hot button issue for women because it comes on fast and moves quickly, unlike prostate cancer for men which is a slow moving malady. The medical community has come a long way with preemptive strikes against tumors in the form of screenings which continue to improve as technology marches ahead. In other articles I emphasize that we are in a new era. The album, 8-track and cassette are souvenirs of bygone days. If Hologic has anything to do with it, the traditional mammography will be in that category, too. Their products are on the cutting-edge.

In February of this year, the FDA approved Hologic's Selenia Dimensions 3D tomosynthesis device, and, the company began to sell the units immediately. It's the face of the franchise now. Selenia Dimensions is the first 3D system anointed and appointed globally, done first in the United States, the medical technology innovator of the universe. "...this product was approved on the basis that it's superior to 2D digital mammography.", said CEO Robert Cascella in the May 2nd, 2011, 2Q conference call. He goes on to explain, "I want to remind everybody that the adoption on tomo (tomosynthesis) will take time".

This is a big problem for Hologic investors because the stock is already under pressure with the global recession. In my February 27th, 2011, article, I stated that it would take a few years for the stock to get rolling. The equity is down 25% since that writing; the wind got sucked out of it. As altruistic as the company and its products are, they are still in a large interconnected web known as the global economy. Hologic is also in the smaller ecosystem of medical technology, which needs products to be approved on a national level, then implemented on a per hospital basis.

For example, in Europe Hologic is increasing its global footprint:

"...with respect to international activities, we're seeing great inroads to 3D and 2D systems sold abroad." ... "The clinical trials we've been maintaining are all underway in Europe, including Norway, Italy, France and the U.K., and these have really been designed to gain public sector support and help really spur market adoption on a worldwide basis of this technology. We still expect results from these trials some time over the next 12 to 24 months." (CEO Cascella in the 2Q conference call)

In addition to the product needing to be approved in other countries, there is also the normal business cycle after the authorities grant the approval. Hologic executives state in the August 1st, 2011, Q3 conference call that it is usually a six month sales cycle. Peter Soltani who is the General Manager of Breast Health reports:

"I think it is strongly a typical capital cycle. People have to budget for it...There is an implementation phase. They have to have rooms ready. They have to have folks trained. So it isn't a decision making process that happens overnight.".

There's a long way to go until 3D mammography really starts to ramp up. You're kidding yourself if you think the green-lighting of a product means instantaneous revenues, especially with these big ticket items. In the United Sates, people are out of work, and as a result they have no health insurance and are cash-strapped for regular screenings. It will take time, maybe into 2013. At that juncture, perhaps some of the global sovereign debt crisis will be behind us, and hospitals will be in a better position to upgrade their facilities.

As is, the company expects to sell only 500-700 units domestically in the next two years. The company already has an installed base of 9,000 2D systems which can be upgraded, although management believes most of the 3D sales are coming from new customers, not clients upgrading from the 2D units. However, the company is only at the beginning of the cycle, and, has a lot going for it.

  • First and foremost is its first mover advantage. Competitors GE, Phillips (NYSE:PVH) and Siemens (SI) will have a difficult time catching up, especially if the 3D mammogram systems are in demand by doctors and patients.
  • Secondly, Hologic has launched a direct-to-consumer awareness program. To paraphrase the CEO in the Q2 conference call: in January, the company formally kicked off its efforts in all targeted markets with advertising appearing in many leading women's magazines, online websites, television spots and social networks. This, coupled with word-of-mouth advertising, has increased awareness.
  • Thirdly, ACR (American College of Radiology) has approved a $50 incremental reimbursement for the tomosynthesis test adding incentive for clients to upgrade from 2D to 3D.
  • Fourth, Hologic currently has the 'secret sauce' in tomosynthesis, and, management believes that the 3D Dimensions system has the potential to become the standard of care in mammography screening.
  • Lastly, the company made inroads into the immature Chinese market by acquiring Healthcome, a leader in analog mammography. This enables it to introduce entry-level digital mammography systems to the Chinese and emerging markets, with prospects to upgrade to 2D and 3D products.

I don't use rigorous econometrics to evaluate securities, just your basic P/E multiples and PEG Ratios. Although I do examine other ballistic evidence such as revenue growth, short interest, and, the debt situation, I find the earnings are what really counts to a long term investor. I think it tilts the odds in your favor in evaluations, if you can believe in what CEOs and analysts are projecting. However, you have to go by something other than a technical chart if you a fundamental investor. Enough said.

If we pull back the curtain on Hologic, Yahoo Finance earnings estimates are $1.25/share for 2011, and, $1.40/share for 2012. The last closing price for the company on Friday was $15.21, which gives us P/E ratios of 12 and 10.8 respectively. Very reasonable valuations for a company that is slated to grow 12% next year. Back of the envelope calculations give us a PEG ratio of about one. That's where you want the company to be if you are looking for bargains in the market.

Under normal economic conditions, I would buy a stock like Hologic. It's at a reasonable valuation, and is in a good position to not only advance itself as a company but to save the lives of others. In fact, I've owned it in the past, and, would like to own it again. However, I believe the market is not done correcting, and, will continue to cave. That's the only reason I'm not long on it. You may feel otherwise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am short the market with inverse ETFs.