Cytyc Health Corp.
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Cytyc's purchase a year ago of Pro-Duct Health added a product--a ductal lavage catheter--around which it could leverage the clinical and marketing capabilities it had constructed to commercialize ThinPrep, its liquid cytology sample collection platform now used in roughly 60% of Pap smear applications. But Cytyc is facing a much different set of challenges with ductal lavage. Physicians and patients are not used to undergoing a periodic ctyologic screening routine equivalent to Pap. Also, it may take a combination of ductal lavage, biomarkers, and protein expression patterns to distinguish which high-risk women with mildly atypical epithelial ductal cells will get cancer. Cytyc had intended to obtain a molecular marker development capability through the acquisition of Digene Corp., but the FTC shot down the deal. Unless and until it develops internal R&D, it could remain an opportunistic acquirer, like a specialty pharma company perpetually searching for an encore but holding few chips with which to outbid other players.
As a small company with a strong presence in its niche, Cytyc receives a high multiple for its revenues, which gives it the equity for M&A. And both it and Digene, another player in cervical cancer screening, knew they could realize strategic synergies by combining and leveraging product offerings and marketing and distribution channels. But whether or not Cytyc succeeds in driving the growth of Digene's test for HPV, the cause of cervical cancer, and uses Digene's Hybrid Capture platform technology to enable a broader play in women's health, Cytyc is demonstrating an ability to craft potentially transforming deals-the kind a larger diagnostics or medical device company can't easily make by acquiring line extensions in niche markets.
Dealmaking in the device industry is occasional and incremental when compared with the level of activity in pharmaceuticals, the result of that industry's maturing into a handful of dominant players, not all of which see acquisitions as strategically critical to their long-term success. The less-than-robust public market for small device companies is both symptom and cause of the device dealmaking lull. Because the markets they target are generally too small to sustain years of significant growth, few investors are willing to invest in them as stand-alone companies. And without long-term investor support, smaller firms have few options other than to sell out to large companies and little negotiating leverage when they do so.
With its acquisition of Pro-Duct Health, Cytyc is hoping to transfer its very successful performance with the ThinPrep Pap Test to the field of ductal lavage for breast cancer risk assessment. Cytyc is paying $167.5 million for Pro-Duct, which has sales of less than $1 million. But Cytyc believes ductal lavage represents a multi-billion dollar opportunity with no direct competition. Physicians are excited about the procedure--although they caution a lot of data needs to be compiled to determine the utility of information provided by ductal lavage.
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