Hologic bids $240 million for breast biopsy equipment manufacturer

Women's health imaging specialist Hologic has signed a definitive agreement to acquire Suros Surgical Systems, a maker of breast biopsy equipment. The deal, valued at more than $240 million, could make the Indianapolis company a wholly owned subsidiary of Hologic by the end of the second quarter, pending due diligence and final approval by Suros' investors and regulatory clearances.

If completed, it will bring together leading technologies in breast cancer screening and diagnosis to address growing markets for digital mammography and breast biopsy, while adding a recurring stream of revenue to Hologic vis-à-vis the disposables side of Suros' breast biopsy business. (The control console for the Suros equipment runs about $30,000, and biopsy disposables cost about $250 per procedure.)

Hologic, best known for its digital mammography products, has partnered for more than two years with Suros in the sale of that company's biopsy products, generating leads both in the U.S. and in Europe for follow-up by Suros' direct sales force. The proposed merger would take the relationship to the next level, according to Suros president and CEO Jim Pearson.

"With us being under the same umbrella with Hologic, we will have more synergy," Pearson said. "It will be much easier for their reps to pass leads to us and for us to pass leads back to them."

To acquire the privately held company, Hologic has agreed to pay $132 million in cash and an additional $108 million in either cash or shares of Hologic common stock, at the discretion of Hologic. Suros investors' bottom line will be buoyed by a two-year earn-out payable in annual cash installments equal to the incremental revenue growth in Suros' business in the two years following the closing date. The transaction will be accretive to earnings in fiscal 2007, not counting the amortization of intangibles related to the merger.

Suros' revenue in 2005 was $27.2 million, representing a 71% growth over the previous year. Hologic CFO Glenn P. Muir expects sales related to this acquisition to grow by 50% annually in each of the next two calendar years.

Hologic entered the women's health market about 20 years ago as a provider of bone densitometers. A series of acquisitions drew the company into digital mammography and radiography. Today Hologic's Selenia is among the premier full-field digital mammography systems available.

Suros entered the U.S. market in 2002, positioning its ATEC (Automated Tissue Excision and Collection) breast biopsy and excision system as an alternative to open surgery. The company has grown sales by promoting the use of its products in procedures guided by ultrasound, stereotactic x-ray, and MR, all done under local anesthesia and in outpatient settings.

Johnson & Johnson's Mammotome product has about 75% of the current installed base of needle-based breast biopsy in the U.S. Suros holds the number two position with a 15% share.

Muir expects Suros technology to cut into J&J's share by virtue of its inherent advantages. Its vacuum-assisted automated biopsy system can acquire multiple samples rather than the single one obtained with competing core-biopsy products, he said. It's also faster.

A nonexclusive distribution agreement reached in late 2003 brought Hologic and Suros together, with Hologic taking on distribution of the ATEC product line in the U.S., including percutaneous automatic vacuum-assisted breast biopsy systems, ancillary breast biopsy devices, and biopsy site markers.

At last year's RSNA meeting, Suros and Hologic announced an expanded partnership to allow Hologic and its distributor network to sell the ATEC system and its TriMark biopsy site identification system in Europe. Although Suros has had the option to engage other distributors both domestically and internationally, it has chosen not to do so.

"Suros had a limited strategic interest in doing this, as it fielded a direct sales force of its own and didn't want to create other sales channel conflicts," said Hologic president and COO Robert A. Cascella.

Suros' product fit with Hologic's systems provided the foundation for the initial partnership. Compatible management styles and market approaches made the proposed merger a natural, according to Muir.

"We both have a passion for our missions," he said. "The merger will allow both companies to develop stronger and more formidable market positions."

Under the current distribution partnership, Hologic sales efforts generate leads, which are followed by Suros' 30-member direct sales staff, who try to close the deal with demonstrations and explanations of the clinical benefits of the product. Internationally, Suros has begun using Hologic's distribution channels in Europe, an effort that will expand if the proposed deal is completed.

A merger of the two companies could add substantially to the bottom line, as the distribution agreements now in place are laden with the need to share sales margins, Cascella said.

"That sharing is, in some respects, an impediment to the distribution partners' willingness to conduct sales activities," he said. "Once we are on the same team, we can cosell, and there will be no shared margins. The economics will work in favor of both companies."

About 1.8 million biopsies were performed last year in the U.S. Minimally invasive needle biopsy has lowered the number of open surgical procedures. Muir expects this trend to continue at the same time vacuum-assisted biopsy gains in popularity over competing minimally invasive methods.

"We are seeing a more rapid adoption of minimally invasive procedures over open surgery and a conversion of core needle biopsies to the more efficacious motorized technology," Muir said. "We estimate that this represents for vacuum-assisted biopsies a $400 million opportunity in the next five years."

The ATEC system addresses a broad spectrum of patients. "Petite" needles were an early innovation to facilitate biopsies on women with small breasts, for example.

Hologic's partnership with Suros in the distribution of the ATEC products helped establish the groundwork for the proposed acquisition, according to Pearson.

"It led us to understand how we could align the organization, the imaging, and the interventional aspects," he said.

The thought process flows well from one product type to the other. Customers purchasing a digital mammography system naturally think about biopsy, Pearson said.

If the deal with Hologic goes through as expected, Suros will maintain its own identity. Its headquarters and employees will remain in Indianapolis. Hologic leaders expect to retain Suros' entire management and R&D team. The two companies will merge their direct sales forces, however, according to Cascella.

Venture capital firms have invested $19 million in Suros Surgical since 2000. Early investors included Periculum Capital Company, Rose Hulman Ventures, Twilight Ventures, and individual angels. River Cities Capital Funds, Sightline Partners, and Morgan Stanley Venture Partners contributed later on.

The deal would turn these investors into Hologic shareholders, who can decide whether to remain or cash out their positions, Pearson said.

If the two firms merge, the immediate challenge will be putting the right integration plan into effect, he said. The next challenge - or opportunity - is to make sure the biopsy and digital mammography products continue to work well together.

"Ultimately, the goal is to marry the interventional and imaging sides," Pearson said. "I have high hopes for this, because no other organization has done it."