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Hologic: Detecting Breast Cancer

10/07/2005 12:00 am EST


Stephen Biggar

Director, Product Strategy, Argus Research Corporation

"Breast cancer ranks as the second leading cause of cancer-related deaths among women," notes Stephen Biggar in Standard & Poor’s The Outlook. Hologic, his latest "stock of the week" is a "robust player in the up-and-coming field of digital mammography." Here’s his review.

"As with other invasive cancers, lowering morbidity and mortality for those with breast cancer can be directly related to the stage at which the disease is detected, and digital mammography is believed to offer enhanced detection for many women. Our equity research group believes that Hologic (HOLX NASDAQ) has emerged as one of the stronger competitors in the global digital mammography market, a dynamic slice of the medical-equipment industry that we think offers sustainable growth north of 20% through 2010.

"By our analysis, the stock continues to offer compelling valuation based on relative metrics. We think the recent release of favorable clinical trial data showing a notable improvement in breast cancer diagnosis using digital vs. analog mammography will spur a meaningful acceleration in clinician and patient demand, along with improved insurance reimbursement trends. Digital mammography also offers an associated long-term cost benefit to the health care system by eliminating recurring film and processing costs and lowering image storage costs.

"Hologic sold its first FDA-approved digital mammography system in the US in January, 2003. Since then, it has installed nearly 350 Selenia Systems worldwide, representing an estimated 23% share of the 1,500 digital systems that we believe are installed globally. In fiscal 2005, we anticipate that 237 Selenias will be shipped and booked as revenue, up from 143 in fiscal 2004, with 320 to 340 systems likely to be shipped in fiscal 2006. Selenia has an average selling price of about $340,000, according to our estimates.

"By early 2007, we may see the emergence of a key growth catalyst that would provide Hologic with an important new source of revenue and earnings. Referred to as digital tomosynthesis, multiple X-ray pictures of each breast are taken from many angles. The resulting information is sent to a computer, where it's assembled to produce clear, highly focused 3-D images. Initial studies have indicated that tomosynthesis has the ability to reveal 16% more cancers than conventional mammography and reduce false positives by 85%.

"We view Hologic as a compelling investment opportunity. We look for sales growth at a compounded annual rate of about 17% to 18% over the next five years, and we believe that visibility on revenue growth remains high. In our view, Hologic's focus on digital mammography provides it with a highly visible stream of revenues, and we therefore believe that the stock deserves a valuation at least on par with similar small-cap medical device names. On that basis, we have a 12-month target price of $72. We believe Hologic is a strong small-cap growth vehicle and the stock has our highest five-star buy rating."

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