Hologic (HOLX)

Adoption ramp was very steep but will taper. First, as great as their product is, its adoption might not have been so rapid were it not for the results of a study published in the New England Journal of Medicine almost two years ago. Though the clear superiority was evident statistically only in younger women and those with dense breasts, it was compelling enough to convince hospitals and centers to invest in this vastly more expensive machine despite reimbursement being only slightly higher (there is better through-put too). In my opinion, the early adopters were most likely in the more competitive markets. Ultimately, the adoption will be driven in less competitive markets by the obsolesence of older analog machines. Additionally, due to the better through-put, the number of machines needed may be lower than the current installed base. Certainly, new entrants into the market will hesitate if there is excess capacity

Hologic, currently just above support at 51 and struggling with resistance near 53, has come a long way over the past few years. The technology driving this growth, digital mammography, is simply awesome. It is no wonder that investors want to own the name. The stock, though, is expensive, and the fundamentals may be about to deteriorate..

The company sees a lot more competition in Europe than here. Domestically, they had a lead over GE due to a product comfort issue. I don't believe that there is any significant advantage any longer and that it will be increasingly difficult to win sales to former GE customers. So, domestically, the playing field is more level, and the company admits that the competition in Europe is strong.

Cytyc merger is very expensive and signals internal concerns about growth. One has to wonder why they really bought CYTC and, more importantly, why they paid such a big premium. Often these types of mergers take place to disguise lack of internal growth potential. While CYTC has some neat stuff (Novasure, Mammosite), it has a very large segment that is rather mature. While I don't think that the merger is in and of itself troubling, the fact that they paid so much (and made it accretive by simultaneously leveraging financially).

The stock trades on its own at 24X 2008 EPS expectations, which is rather low for this company. CYTC trades at 27X. The combined entity (with lots of debt) will trade at closer to 21X if the merger goes through (though the rise in the cost of financing could lower the EPS projections). Technically, the stock appears to be topping. I am presently short the stock.

Adoption ramp was very steep but will taper. First, as great as their product is, its adoption might not have been so rapid were it not for the results of a study published in the New England Journal of Medicine almost two years ago. Though the clear superiority was evident statistically only in younger women and those with dense breasts, it was compelling enough to convince hospitals and centers to invest in this vastly more expensive machine despite reimbursement being only slightly higher (there is better through-put too). In my opinion, the early adopters were most likely in the more competitive markets. Ultimately, the adoption will be driven in less competitive markets by the obsolesence of older analog machines. Additionally, due to the better through-put, the number of machines needed may be lower than the current installed base. Certainly, new entrants into the market will hesitate if there is excess capacity