In Women's Health, Hologic Stays Ahead of the Curve

Hologic is garnering more attention these days than it might have in the past because it's just come off an "annus mirabilis." In 2006, Hologic made three vertical acquisitions in the area of breast cancer detection, and it reported stellar financial results. The company is now a market leader in osteoporosis assessment and has an approxmately 50% share of the conventional mammography customer base as well as an early lead in digital mammgoraphy, which is remarkable considering that it is a mid-sized company competing in capital equipment markets against the likes of GE and Siemens.

Mid-sized Hologic is besting giant imaging companies in mammography, a product segment that it built up by acquisition, with a highly focused approach on breast cancer and an emphasis on high-end technology.

Mary Stuart

Hologic Inc. is either one of the luckiest or one of the smartest device companies around. From the beginning, it’s made a successful business by taking the risky strategy of staying ahead of the curve. Hologic was founded in 1986 to develop the first imaging system for osteoporosis screening and assessment, based on dual-energy x-ray absorptiometry (DXA), almost a full decade before the first bone-building osteoporosis drug came to market, which then created a large demand for bone densitometry systems.

Hologic’s two founders, Jay Stein, PhD, and David Ellenbogen, were equally prescient when in 1989 they spun out from Hologic nonmedical applications of the DXA technology to Vivid Technologies Inc. for the development of an explosives detection system for baggage inspection. This was a year after the explosion of Pan Am flight 103 over Lockerbie but well in advance of the kinds of national airport security initiatives seen today. In 2002, on the cusp of a revolution in digital mammography, Hologic introduced the first FDA-approved digital mammography system based on direct-to-digital capture technology. (GE Healthcare introduced the first digital mammography system based on indirect capture.) It now leads the digital mammography market in the US. Soon, Hologic hopes to be the first company to offer breast tomosynthesis, a method of performing three-dimensional (3D) x-ray mammography at doses similar to two-dimensional (2D) mammography.

Hologic is a company of many technological "firsts," and although being first doesn’t always translate into market leadership (especially in the world of medical devices), Hologic now holds the number one or two position in almost every major market it serves, a fact that is even more remarkable considering that it is competing, as a mid-sized company with a market cap of $2.5 billion, in capital equipment markets against the likes of GE Healthcare (a division of General Electric Co. ), Siemens AG, Royal Philips Electronics NV, Eastman Kodak Co., Agfa-Gevaert Group, and other giants.

There are perhaps four facets to Hologic’s success: first, it’s pursuing a clinical niche strategy. Hologic focuses on women’s health and only those segments in which it can leverage core imaging technologies or the calling points of its existing sales force. Today the company’s target markets are osteoporosis and breast cancer detection. Second, its emphasis is on providing superior technology. The majority of the company’s revenues come from premium-priced high-end systems that successfully compete against the products of the major manufacturers on the basis of quality. In its chosen niches, Hologic probably spends more than its large competitors on R&D, notes Rob Cascella, president and COO of Hologic, who says that Hologic will spend more than $40 million in R&D this year, 90% of it in breast cancer detection. "Our competitors are competing in many other markets, and they have to be worried about a competitive threat in MRI, CT, the PET market, or ultrasound, which are much larger than the markets in which we participate. We have the advantage of being in a niche market and leveraging our technology to win in those markets," says Cascella.

Third, Hologic has been a master of product management, introducing with regularity new enhancements to platform products—both internally developed and accessed through strategic alliances. At the same time, it has enjoyed the upside of disruptive products, with, for example, its direct-to-digital mammography system, and, it hopes, with its 3D mammography or tomosynthesis system, coming soon.

Finally, Hologic’s timing is propitious. It entered the digital mammography market with a superior system in early 2003 just as an important four-year landmark study on the value of digital mammography versus screen-film imaging was getting underway. The DMIST (Digital Mammography Imaging Screening Trial) demonstrated that for large populations of women, digital mammography is more accurate than analog systems. At the same time, Hologic was positioning itself in a new growth market at a time when sales of its core bone densitometry products were flagging.

Hologic is receiving more attention these days than it might have in the past because it’s just come off of an annus mirabilis. In 2006, Hologic made three vertical acquisitions in the area of breast cancer detection, and it reported stellar financial results. Revenues for 2006 were $463 million, a 61% increase over the previous year, and net income was $27.4 million, which on a non-GAAP adjusted basis (reconciling acquisition and other charges) represented an 84% increase. Revenues in the breast care segment—which now represents more than 70% of the company’s business--increased 113%. Gross margins hit 43%.

In 2006, Hologic celebrated its 20th anniversary. It has an installed base of 13,000 mammography devices around the world, and approximately 13,000 to 14,000 pieces of bone densitometry equipment. The company is now a market leader in osteoporosis assessment with several products in that segment. It also has an approximately 50% share of the conventional mammography customer base as well as an early lead in digital mammography, a market that remains only 15% penetrated in the US, and one that Millennium Research Group estimates will be worth $450 million by 2009.

Hologic may seem like two different companies: the bone densitometry company formed in 1986, and the post-2000 company with a focus on breast cancer detection, but Cascella says its mission today remains true to its roots: "We are very specialized, we sell based on technology and we’re a technology leader. We have a company culture that speaks to the significance of the clinical good that we deliver."

First in Bone Densitometry

In 1986, Hologic’s founders believed osteoporosis wasn’t getting the attention it deserved, and it is indeed a large problem. Today, the International Osteoporosis Foundation estimates that more than 200 million people worldwide suffer from the silent but serious disease. Approximately 30% of all postmenopausal women in the US and in Europe have osteoporosis. At least 40% of these women and 15 to 30% of men will sustain one or more fragility fractures in their remaining lifetime.

Bone loss is responsible for 1.5 million broken bones in the US alone, and some of these fractures, especially in the hip, are associated with significant morbidity and mortality. Twenty percent of the women who suffer from a hip fracture die within the first year. Hologic’s founders believed that the imperative to find and treat patients would become even stronger in the coming years with the aging population and an increased focus on women’s health issues and preventive medicine. Also, in the mid-1980’s, a large number of new osteoporosis drugs were undergoing clinical trials.

At the time of Hologic’s founding, the gold standard for bone density assessment of the hip and spine--the two most critical areas prone to fracture--was dual photon absorptiometry. This method was very imprecise, and it required relatively long scanning times and the use of an expensive radioactive source. Hologic offered a new way to measure bone density called dual energy DXA.

DXA systems consist of an x-ray source mounted beneath a patient, who is positioned on her back. The x-ray source generates alternating high and low energy pulses in a thin beam that passes through an internal reference system (that continuously calibrates a patient’s bone density to a known standard) and then through the patient to an x-ray detector mounted above the patient. Controlled by a computer, the x-ray source and detector are moved in tandem across the patient. When the x-ray beam is detected, it contains information about the x-ray absorbing characteristics of both the patient and the calibration materials in the internal reference system at each of the two levels of radiation. The system converts this information into a digital format that is processed and analyzed by a computer and displayed on a high-resolution color monitor.

The advantages of the DXA systems over their predecessors include high precision and consistency from test to test, low patient radiation exposure (equivalent to 1/10th of a conventional chest x-ray), a relatively fast scanning time, low operating cost, no radioactive source, and the ability to measure bone density of the most important fracture sites, the spine and hip.

Initially, Hologic sold its systems for research purposes, supporting pharmaceutical development, and it generated enough sales to help the company raise $5.6 million in an initial public offering in 1990. Then, in 1995, its business began to take off. That’s the year that osteoporosis drug Fosamax (alendronate) from Merck & Co. Inc. gained FDA approval.

Fosamax was the first nonhormonal drug to slow down bone loss in postmenopausal women with osteoporosis. A string of other new osteoporosis drug approvals followed, for example, Evista (raloxifene) and Forteo (teriparatide), a bone formation agent, from Eli Lilly & Co. Now bone densitometry systems were needed to diagnose patients and to monitor treatment progress, establishing the necessary link between diagnosis and therapy. Hologic’s sales practically doubled from $56.5 million in 1995 to $91.6 million in 1996. (See Exhibit 1.)

Then as now, Hologic’s strategy was to operate in the high end of the business, with superior technology. There was some debate early on in the bone densitometry industry about the technology required for the development of a physician’s office market for osteoporosis assessment, and some manufacturers went in the direction of lower-functionality, lower-cost systems. That was the strategy of Norland Medical Systems Inc., for example, which CooperSurgical Inc. bought for $12 million in 2002. [See Deal] Hologic’s other competitor in the early days, Lunar Corp., offered a larger spine and hip imaging machine, as did Hologic. GE Healthcare bought Lunar in 2000 for $146 million worth of stock. [See Deal]

Over the next few years, Hologic kept up a steady flow of product introductions, introducing advances to its DXA platform, with analyzers selling from $55,000 to $165,000, as well as acquiring and developing adjunctive screening modalities such as the Sahara ultrasound bone analyzer (see Exhibit 2), a lower-cost initial screening tool. In 1996, Hologic acquired FluoroScan Imaging Systems Inc., the manufacturer of a low-intensity, real-time mini C-arm x-ray imaging device primarily used by orthopedic surgeons for extremity imaging, in a stock swap valued at $59 million. This product is sold through a specialized network of orthopedic agents.

Sales in the acute care and hospital-based markets were on an improving trend, but Hologic’s revenues dropped 45% between 1998 and 1999 when the primary care market was slow to materialize in the face of increased competition, which resulted in price reductions. The clinical need was real, but there were some compliance and reimbursement issues keeping the market from reaching its full potential. In the past five years, the primary care market has picked up somewhat, says Cascella, but in the late 1990s, Hologic realized that it needed to diversify.

At that point, Hologic bought Direct Radiography Corp. for $20 million from Sterling Diagnostic Imaging, which had acquired the business from DuPont (EI DuPont de Nemours & Co. Inc. ). The acquisition netted Hologic a proprietary direct-to-digital imaging platform based on amorphous selenium technology, and although the company didn’t realize it at the time, the acquisition would ultimately lead to explosive growth in the years to come.

Transmuting Amorphous Selenium to Gold

Hologic’s acquisition of Direct Radiography is a good example of what it can do as a mid-sized company that its giant competitors can’t. "We were in need of diversification and we were willing to take chances," says Cascella. "DuPont developed it, and they’d already spend millions of dollars on it, but there were still years of development work ahead and it was running out of cash. It had a negative cash flow, and that’s not the profile of a company that a Siemens or GE would acquire, particularly when breast cancer isn’t of overall strategic significance to them."

Hologic initially continued development of some of the Direct Radiography products for chest and extremity imaging, general radiology applications. But in 2000, Hologic had the opportunity to acquire Trex Medical Corp., the leading manufacturer of analog mammography and breast biopsy systems with well-known brand Lorad (as well as some other cardiac and general radiographic products that Hologic chose to discontinue) from Thermo Electron Corp. [See Deal] Hologic paid $30 million in cash and a note in the amount of $25 million. Hologic also gained a prone biopsy table and upright biopsy accessory from Trex.

The acquisition not only catapulted Hologic to a leadership position in the analog mammography market, but it also gave the company the springboard for its largest product ever. "We combined the detector technology (amorphous selenium) with the Lorad platform to create what is by today’s standards the best-of-breed mammography product, our Selenia," Cascella claims. Selenia captured a more than 50% share of the US digital mammography market in 2006.

Selenia uses amorphous selenium as a photoconductor to absorb x-rays and directly generate electronic signals without first converting them to light. The process eliminates light diffusion and cuts radiation scatter, resulting in better resolution and contrast. "It is because of this direct capture technology, we believe, and we have image data that support and confirm this, that our dose efficiency and image resolution are the best in the industry," Cascella claims. There are alternative digital mammography systems on the market that create digital images by indirect conversion. Indirect systems involve the diffusion of light as part of the x-ray detection process, and this degrades the spatial resolution, making it difficult to achieve good dose efficiency.

Hologic has a significant patent portfolio around amorphous selenium detectors, but to further protect its position, in May 2006 it acquired AEG Elektrofotografie GMBH for approximately $26 million, from a combination of cash and stock. (See Exhibit 3.) [See Deal] AEG is one of two companies in the world capable of creating selenium formulations to coat Hologic’s detectors, says Cascella. "Given the significance of the product, it was incumbent upon us to control our supply chain." Longer term, the acquisition also gives the company the opportunity to realize manufacturing efficiencies because AEG now becomes an integrated part of the manufacturing operation. Hologic will thus ultimately lower the cost and improve the quality of the detector over time, Cascella believes.

For its next act, Hologic is offering a disruptive product that leverages its amorphous selenium direct-to-digital platform. Over the next year, it hopes to introduce the first 3D mammography system, based on tomosynthesis.

First in Breast Tomosynthesis

Hologic aims to be first in a race to market breast tomosynthesis—GE and Siemens are also running.

Tomosynthesis yields 3D views of mammography at x-ray doses similar to conventional 2D x-ray mammography, and from the patient’s standpoint, there is little difference between the 2D and 3D x-ray procedures. From a product standpoint, tomosynthesis will be essentially a software upgrade to Hologic’s next generation direct-to-digital detection platform. Clinicians hope that tomosynthesis will help them detect and characterize suspicious lesions better by eliminating many common imaging problems, such as overlapping and shadows that can obscure lesions. Hologic’s CFO Glenn Muir, speaking on December 14, 2006 at the RBC Capital Markets 2006 Healthcare Conference, says, "We will provide to the mammographer not just a 2D image—what they’re looking at today that is similar to film—but the ability to look at various layers of tissue. To peel them away and look at what’s underneath."

Tomosynthesis involves the acquisition of multiple images of a compressed breast at different x-ray source angles. The x-ray source moves through an arc, scans the compressed breast, and produces images every few degrees. The resulting data are processed to create a 3D series of thin high-resolution slices.

Hologic is conducting clinical trials at several sites in the US, and it hopes to demonstrate two things: that breast tomosynthesis results in better detection at an earlier stage of disease and that it will lower the number of follow-up examinations that are necessary today because of uncertainty in the initial exam. At the annual meeting of the Radiological Society of North America in November 2006, Steven Poplack, MD, associate professor of diagnostic radiology and obstetrics at Dartmouth Hitchcock Medical Center/Dartmouth Medical School, reported that tomosynthesis reduced recall rates by 42%.

In thus lowering recall rates, tomosynthesis may be well positioned as a screening tool, as well as a diagnostic device. Speaking at the RBC conference, Muir says, "What we need to focus on—and what mammography does in general—is to move the cost to the front end…We are looking to detect breast cancer early on, and to the extent that we find it early on, we can prevent costly diagnosis and costly other factors down the road."

Drivers of Digital Adoption

Several factors are responsible for the recent shift of the market to digital mammography. First and foremost, there is the compelling clinical need to diagnose and treat breast cancer early; one in eight women in the US will develop breast cancer in her lifetime, and more than 40,000 women die each year from the cancer.

Over the past year, interest in digital mammography has heated up because in September 2005 the results of DMIST, a four-year research study sponsored by the National Cancer Institute , were released. DMIST began in October 2001 and enrolled almost 50,000 patients at 33 sites in the US who had no signs of breast cancer. The study demonstrated that digital mammography was better than film mammography in screening women under the age of 50 or who had very dense breast tissue--some 65% of the population that is eligible for screening.

But other market-related factors encourage the acceptance of digital mammography as well. While five years ago mammography was talked about as an unprofitable loss leader for hospitals hoping to attract patients, today, much breast screening is conducted in profit-driven specialized centers that are interested in the productivity gains that digital technology enables. PACS (picture archiving and communication systems) and computer-aided detection software (CAD) are part of today’s portfolio of technologies helping centers to increase accuracy, throughput, and profitability.

In CAD, Hologic has staked out a substantial position as well. In July 2006, it acquired R2 Technology Inc. , developer of a breast CAD system called ImageChecker, with which it had already had a distribution alliance. (See Exhibit 4.)

R2’s software was already being bundled with 86% of Selenia units sold, says Cascella, and in the near term, the acquisition improves margins from product sales. In addition, R2 offers long-term benefits as well. "We wanted to possess the ability to develop a proprietary CAD offering for our tomosynthesis product that would ultimately give us a competitive advantage in that evolving market."

Today, R2’s CAD for digital mammography is also cleared for use on Siemens and GE systems, and Hologic is negotiating to upgrade the sales agreements that were in place before the purchase of R2. Cascella points out that such a distribution channel gives the company’s sales reps the opportunity to be talking to sites that have competitive equipment and perhaps convert them over to Hologic products when it comes time for replacement.

To a certain extent, reimbursement is also driving the adoption of digital mammography. Last year, when Medicare was making some across-the-board cuts in all medical technologies, mammography emerged unscathed in the new rates that the Centers for Medicare and Medicaid Services introduced for January 2007. In fact, Cascella says, at the moment, reimbursement is helping digital mammography. Analog mammography is reimbursed at $85 per mammogram and digital mammography at $135. That increase is enabling facilities to afford the equipment, he says.

"There are centers that scan 45 to 50 patients a day per machine in a screening environment where work flow has been optimized. Reading has also been optimized, and as a result, it doesn’t take long to pay off even a digital mammography product," Cascella explains.

Digital Pace of Change

As mammography goes digital, something else happens: the rapid pace of change and technological obsolescence that go hand in hand with digital products shorten the replacement cycle of imaging equipment, which for conventional systems is now 7 to 10 years. "If you look at the US market," says Cascella, "there are 13,600 mammography systems in the market, 1900 of them digital. We are at the beginning of the adoption curve as we move from the analog-based world to that of the digital environment. For the last 15 to 20 years, there were only small, incremental changes or improvements to technology. As a result, purchasers had little or no incentive to replace equipment until it was absolutely necessary. The replacement cycle was probably turning over at a rate of 10 to 15% per year." But now digital creates a new paradigm in the imaging world, one that calls for new pricing models and skill sets on the sales and marketing side.

"Digital has created a sense of technological obsolescence, and there are better-defined clinical benefits to new technology. If you can find cancers earlier, even in subsets of women, say those under 50, or those who have dense breasts, or those who are pre- or perimenopausal, you are doing a disservice if you don’t have digital," Cascella says. "The technological obsolescence aspect is driving sales of mammography higher today than the normal replacement rates."

Hologic sees itself as a case in point. "Unique to our history in mammography, within a five- to seven-year period, we will have two to three new technologies. Analog to digital, digital to 3D mammography or tomosynthesis, and tomosynthesis to some image fusion aspect of some other than x-ray based modality. Technological obsolescence and its impact on clinical advantages or competitive demands will cause the replacement rates to be higher than normal," Cascella believes.

In this environment, sales and marketing strategies begin to become more like that of conventional surgical devices; it’s all about more face time with clinicians and maximizing the productivity of existing call points. As a result of its acquisitions, Hologic has now created an integrated sales force of more than 100 account managers and sales specialists calling on the mammography market.

In July 2006, Hologic acquired Suros Surgical Systems Inc., which offers an innovative automated vacuum-assisted biopsy device that complements Hologic’s product lines in biopsy tables and other sampling technologies, for $240 million. Suros offers new revenue streams from its disposable biopsy device and other noncapital equipment products, but the benefits of the deal extend further. A disposable device increases the productivity of sales calls, by giving sales reps the opportunity to meet with clinicians frequently, occasions during which they can prepare them for the next digital product iteration or upgrade. [See Deal] Suros reps can also provide new leads to increase Hologic’s presence in the market place. Finally, the deal broadens Hologic’s scope from imaging to intervention and plays well into the company’s mission of providing a full spectrum of patient care. (Hologic has in part funded the recent acquisitions by drawing down a revolving credit line. At year-end, the credit line was $44 million, and the company expects to pay it off by the end of 2007).

In eyeing future growth, Cascella emphasizes that the company needs to remain focused on areas that leverage its core technology and distribution strengths. He says the thing that keeps him up at night is the threat of an emerging technology that could displace some of his company’s core technologies, particularly as the pace of innovation in imaging increases. Hologic is eternally vigilant in terms of reviewing market, technical, and clinical trends, Cascella says. Today the company has an early lead in some early markets, and although it can be risky to be ahead of the curve, for over two decades the company has demonstrated that it knows how to change course and succeed.