holx

Analyst: Victor Sula, Ph.D. Initial Report February 6th, 2009

2/06/09

HOLX daily

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volume

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MARKET DATA

Share Statistics

NASDAQ

FY2007 FY2008 %Chg

(02/04/09) Symbol

HOLX

Revenues, $ Mn.

Current Price

$13.13

Gross margin

738

1,674 126.7%

46.8% 53.3%

6.5%

Q1Fy

Q1FY

2008

2009

371

429

45.1% 53.7%

%Chg

126.7% 8.6%

Low/ High 52 weeks $10.34 - 33.37 Operating margin 20.0% -11.8% -31.8% -87.0% 21.8% 108.8% Average Volume (3m)

127,916

Market Capitalization

$3,024 Mn

Shares Outstanding

4,184 Mn

Net margin

12.8% -23.0% -35.8% -96.7% 11.2% 107.8%

EPS, $

0.86

-1.57

n/m

-1.65

0.19

n/m

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

Background Hologic Inc. (HOLX) is a diversified diagnostic and medical product and device company, working with its subsidiaries to develop, manufacture and distribute medical imaging systems and surgical products dedicated to serving the healthcare needs of women. The Company’s core business units are focused 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 cushion, and photoconductor coatings. The Diagnostic Products segment provides ThinPrep System, cervical cancer screening and Fetal Fibronectin Test for preterm 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 Hologic Inc. (NASDAQ: HOLX)

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Analyst: Victor Sula, Ph.D. Initial Report 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.

Highlights 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 historical 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 including 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.

Revenue ($Mn)

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

Hologic Inc. (NASDAQ: HOLX)

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Analyst: Victor Sula, Ph.D. Initial Report 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 revenue 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 number 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 company 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 Gross Margins, %

Source: SEC filings;

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%.

Hologic Inc. (NASDAQ: HOLX)

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Analyst: Victor Sula, Ph.D. Initial Report 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.

Selected consolidated balance sheet data, $ Mn

Total Assets, including Cash and cash equivalents Liabilities, including Debt Equity

27-Sep-07

27-Sep-08

27-Dec-08

1,066 100.4 260.6 11.2 805.7

8,134 95.7 3,492 2,200 4,642

8,139 171.5 3,443 2,171 4,697

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

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 CerVista 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 approved 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 digital mammography system, which represents the main driver for HOLX’s revenue. The Company’s efforts led to the adoption of digital mammography as a standard of care for breast cancer screening. In fiscal 2007, HOLX became the digital mammography market 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 history. Overall, HOLX has nine products with No. 1 market share.

Hologic Inc. (NASDAQ: HOLX)

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Analyst: Victor Sula, Ph.D. Initial Report February 6th, 2009

Meanwhile, breast cancer affects the lives of one in eight women. Worldwide, breast cancer is the fifth most common 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.

Investment sentiment HOLX is a leading developer, manufacturer and supplier of premium diagnostics products, medical imaging systems 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.

Comparative analysis Company Name 04.02.2009

Ticker Price per Mrkt. Cap. Symbol Share, $ $ Mn

P/E

P/S

2008

2009

2008

2009

Johnson & Johnson Siemens AG Medtronic Inc. Baxter International Inc. Beckman Coulter Inc. C.R. Bard Inc. American Medical Systems Holdings Inc. Celera Corp.

Boston Scientific Corp.

Median

JNJ SI MDT BAX BEC BCR AMMD CRA BSX

58.32 59.10 34.2 60.42 50.77 87.00 11.57 9.46 9.17

160,064 483,49 37,449 36,373 3,115 8,848 784.2 679.2 13,318

12.96 8.22 26.93 16.16 14.22 19.64 17.27 946.00 19.51 17.27

12.05 8.13 22.21 14.25 12.98 17.13 15.22 72.77 15.28 15.22

2.58 0.51 2.55 2.93 1.00 3.60 1.57 3.86 1.65 2.55

2.49 n/m 2.42 2.73 0.97 3.28 1.51 3.21 1.61 2.45

Hologic Inc

HOLX

13.07

3,024

11.08

9.40

1.71

1.56

Source: Yahoo Finance

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.

Hologic Inc. (NASDAQ: HOLX)

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Analyst: Victor Sula, Ph.D. Initial Report February 6th, 2009

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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 liquidation. 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.

Hologic Inc. (NASDAQ: HOLX)

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