Hologic spreads acquisition wingswith plan to buy FluoroScan

Hologic may pursue further acquisitions

Executives at Hologic have taken the first step toward diversifyingtheir company outside its core x-ray bone densitometry market.The Waltham, MA, company announced this month that it plans toacquire FluoroScan Imaging Systems, best known for sales of itsmini C-arms to surgical centers.

The market for mini C-arms has been booming with the growthof outpatient surgery, and FluoroScan has reaped the lion's shareof sales, garnering about 70% of U.S. sales of mini C-arms, accordingto the Northbrook, IL, company. That market is expected to continuegrowing, due to healthcare's emphasis on cost containment andthe advent of a novel type of minimally invasive bone treatment,according to Joel Weinstein, Hologic vice president of businessdevelopment.

"The minimally invasive surgical procedures that are supportedby FluoroScan's products facilitate the ability to reduce healthcarecosts," Weinstein said. "FluoroScan has an exclusiveworldwide agreement with Norian, which has developed a uniqueskeletal repair system that needs the mini C-arm for localizingthe fracture and visualizing the injection of paste into the fracturesite."

Like FluoroScan, Hologic has been a niche player and has recentlybenefited from a rapidly expanding market in bone densitometry,fueled by the Food and Drug Administration's approval of Merck'sFosamax osteoporosis drug last year. But before the U.S. boomin x-ray bone densitometry, Hologic put much of its emphasis onoverseas sales.

That emphasis makes the merger of the companies attractiveto FluoroScan chairman and CEO Larry Grossman.

"Until this year, 75% of Hologic's business was international,so they have a substantial international presence," Grossmansaid.

Plans call for Hologic to leverage its international distributionnetwork, which services some 60 countries, to sell FluoroScanproducts, while allowing FluoroScan to continue selling as ithas in the U.S. market.

Until recently, national security concerns blocked FluoroScanfrom marketing its mini C-arm overseas. Because the device's x-raydetector is based on night-vision technology widely used in themilitary, the U.S. State Department feared that the equipmentmight be reverse-engineered into military gear. But when the SovietUnion fell apart, its various republics began selling their versionsof night-vision components to any country with cash.

"The U.S. government finally said, `It is medical equipment,go ahead and sell it internationally,"' Grossman said.

The FluoroScan acquisition could be the first of several rapid-firepurchases that would extend Hologic's reach in different areasof diagnostic imaging. Hologic is looking for acquisitions amongcompanies serving the women's health market, said David Ellenbogen,Hologic chairman and CEO.

"We would not be interested in going head-to-head withthe established mammography companies, but we would be interestedin companies that make something like mammography reading aids(such as computer-aided diagnosis software) or automated Pap smearreaders," Ellenbogen said.

These future acquisitions will probably be completed with stocktransactions, which have been made especially appealing by Hologic'ssky-high stock valuation. Over the last 12 months, the company'sstock has shot up from $7.75 per share to a high of $49.50 inspring.

If the deal is approved by shareholders of both companies,and if Securities and Exchange Commission filings are accepted,Hologic will issue about 1.5 million shares of its common stockin exchange for the outstanding shares of FluoroScan's commonstock. The deal could be completed before the end of September,Ellenbogen said.

The actual price Hologic will pay for FluoroScan is anythingbut certain, however. In the days surrounding the merger announcement,Hologic stock ranged from $29 to $36, settling at the end of tradingon July 24 at $34.75 per share. FluoroScan stockholders have riddena similar roller coaster, peaking at $11.50 on the day of themerger announcement, up from $8.25 the day before and $6 a yearearlier, then falling back to $9.87 on July 24.

One of the problems is the unpredictability of the stock marketitself, which has been fluctuating wildly in the last severalweeks. Favoring a positive valuation of the two stocks is therecent financial performance of both companies. Hologic in Mayreported second quarter earnings (end-March) of $3 million, comparedwith $153,000 in the same period last year, and revenues of $18.8million, up 100%. FluoroScan also had a strong last quarter (end-March),reporting a 40% increase in revenue, to $3.5 million, and netincome of $403,000, up 18%.