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The recent issue of the prestigious New England Journal of Medicine published a negative abstract on CAD (Computer Aided Detection). Radiologists use CAD to assist them in reading mammograms. CAD is a second pair of eyes for the doctor. It is supposed to find growths that are undetectable to the human eye.

The summary in the New England Journal asserted that CAD did not find additional cancer. Even worse, it caused women to have unnecessary biopsies.

More than 212,000 women were diagnosed with breast cancer in 2006. Approximately 41,000 will die this year making it the second leading cause of terminal cancer. Each year 34 million women have a mammogram.

As someone whose family includes two breast cancer survivors, the “second opinion” from CAD helped relieve any worry for me about possible misdiagnosis. Even the hint that CAD was not effective at detecting cancer had ratcheted up my anxiety. Although breast biopsies can be down by needle, one third (close to 600,000) are still done in a surgeon’s office resulting in some breast tissue being taken and significant discomfort. Although there are no significant side effects to biopsies, unnecessary biopsies stress women that are already stretched thin juggling career and family.

My personal anxiety, concern for the welfare of other women, and a little greed unleashed my inner Sherlock Holmes. When stocks fall for no reason due to misunderstood headlines, it can be a great opportunity to make money if I buy on the dip. The stock can bounce back after the situation is correctly analyzed. James Cramer of CNBC had already recommended selling the stock of one company in the field of CAD based on the New England Journal of Medicine article.
The two main companies in the field of CAD are Hologics (NASDAQ:HOLX) and iCAD (NASDAQ:ICAD). They both fell on the day that the study was released. Hologics fell 5%.

HOLX ICAD

Emily Johnson of W. R. Hambrecht immediately challenged the article. “The study used five to ten year old now obsolete technology.” The technology has changed dramatically. The technicians were not fully trained in the technology. CAD is best at detecting the earliest stages of cancer which was not the focus of the study.

Medicare has already validated the technology of CAD. It pays an extra $20 for the study. In the real world of dollars and cents, doctors would be reluctant to give up this money unless the CAD was moribund.

The article should not have had a significant impact on the stocks, especially Hologics. CAD is a very small part of their business. Hologics is the market leader in the field of diagnostic imaging products for women’s health care concentrating on digital mammography and diagnosis of osteoporosis. The stock has a market capitalization of over 3 billion dollars. The current Price/Earnings ratio is a steep 79 with a forward P/E of 31. The company’s main product is not CAD. It is a direct to digital mammography systems called Selenia.

Digital mammography systems are vastly superior to analog systems because they have been proven to provide more accurate diagnosis. Digital mammograms eliminate the need for chemicals and films, suspicious areas can be quickly enlarged and the digital technology makes it easier for second opinions. The CAD program is easily integrated into a digital mammography.
Currently, digital mammography captured 15% of the market in the United States. Eventually, as radiologists replace their old analog machines with digital machines, Hologics will have over 50% of the market. This does not include foreign markets. The CAD is integrated into the digital mammography machines.

W. R. Hambrecht’s price target is 67. At the current price of 59, today’s buyer will receive a 15% return. I would hold if I already own but would only buy if the stock dipped in price.

I am much more excited about the potential of iCAD. It is the only stand alone provider of Mammo CAD and shows great potential with new products like virtual colonoscopy and an adjunct product to computed radiography. iCad is a high risk investment which is reflected in its market price of $3. But I think that iCad is a risk worth taking.

Stand alone companies whose technology is integrated into another company’s products are often takeover candidates. Phillips, Fuji, and Siemens all with digital mammography product lines are possible acquirers. A price tag of less than $ 190 million at a takeover price of $5 is just lunch money for these multinational conglomerates. At the current price of $3, it will provide investors with 60% return.

Hologic recently bought iCad’s only competitor in the field of CAD, R2. Hologic’s competitors in the digital mammography field like General Electric and Siemens do not want to use their competitor’s product. They are leaving R2 and transitioning into iCad. iCad will soon have 90% of their business up from 30% a year ago.

I do not buy a stock just because it is a potential takeover target. I expect the new CEO Ken Ferry to lead a turnaround. The company is still losing money. Ferry came from Phillips and is recruiting many old timers to iCad’s sales force. Sales in the medical field are very dependent on relationships.

The corporate hippie in me hopes that both Hologic and iCad keep making money and helping women fight disease.

Source: Negative CAD Research Shouldn't Impact Hologics, iCAD