Note to Readers: All new or revised material since the last report is highlighted.
Reason for Report: Rating suspended by a broker Prev. Ed.: August 31, 2007: Minor changes in estimates
Brokers’ Recommendations: Neutral: 78% (7 firms); Positive: 11% (1); Negative: 11% (1); Prev. Ed.: 8; 1; 0
Brokers’ Target Price: $44.98 (↓$0.40 from last edition; 4 firms) Brokers’ Avg. Expected Return: 10.26%
Recent Events
On July 30, 2007, CYTC reported 2Q07 earnings. Highlights are as follows:
· Total revenues were $188.8 million in 2Q07 versus $150.4 million in 2Q06, up 26% y/y.
· Adjusted EPS was $0.31 in 2Q07 versus $0.27 in 2Q06, up 20% y/y.
On May 20, 2007, CYTC announced that it has entered into a definitive merger agreement with HOLX for 6.2 billion, whereby the shareholders of CYTC will receive 0.52 shares of HOLX common stock and $16.50 in cash. The transaction is expected to close during 3Q07.
Overview
Analysts have identified the following factors for evaluating the investment merits of CYTC:
Key Positive Arguments / Key Negative Arguments· CYTC holds 70% market share in the cervical cancer testing market, and has a leading edge with its liquid-based cervical cancer test, ThinPrep. / · CYTC is heavily reliant on core ThinPrep products for growth as these account for a substantial portion of revenue. If TriPath is successful in capturing market share, growth will slow and the stock could be negatively impacted.
· CYTC’s distribution agreement with Olympus in Japan will help the company to achieve a foothold in the 10 million annual Pap tests market. / · TriPath and CYTC are engaged in a legal dispute, the outcome of which is uncertain.
· Brokerage firms feel Proxima is a compelling acquisition from both medical and economic standpoints, and could be a new growth engine for CYTC. / · CYTC is heavily dependent on single-source suppliers.
· The two new product initiatives – the Cellient instrument and the Helica Thermal Coagulator (HTC) product – present a combined market opportunity of $200 million for CYTC.
· The merger with Adeza is expected to leverage the sales force of CYTC, increase its margin, and help improve its topline growth.
· Brokerage firms believe the merged entity of Hologic (HOLX) and CYTC will be stronger than each company’s individual presence.
Cytyc Corporation (CYTC), based in Boxborough, Massachusetts, is a leading medical device company that designs, manufactures, and markets innovative and clinically effective diagnostic and surgical products. Its products cover a range of cancer and women’s health applications, including cervical cancer screening, preterm birth screening, treatment of excessive menstrual bleeding, radiation treatment of early-stage breast cancer and radiation treatment of patients with malignant brain tumors. Its flagship product is the ThinPrep system, which is a widely used method for detecting cervical cancer CYTC also provides the NovaSure System, an endometrial ablation device to treat menorrhagia. More information on CYTC can be found online at http://www.cytyc.com. CYTC’s fiscal references coincide with the calendar year.
Revenue
CYTC derives revenue from Domestic Diagnostic Products, Domestic Surgical Products, and International sales. Domestic Diagnostic Products revenue consists primarily of revenue from the ThinPrep Pap test and use of the ThinPrep Imaging System. Domestic Surgical Products revenue consists of sales of the NovaSure Endometrial Ablation System and Proxima products. International revenue consists primarily of sales outside of the United States of the NovaSure Endometrial Ablation System, the MammoSite Radiation Therapy System, the ThinPrep Pap test, and use of the ThinPrep Imaging System.
CYTC reported 2Q07 total revenue of $188.8 million, up 26% y/y versus revenue of $150.4 million in 2Q06. Revenue upside was primarily driven by Domestic Surgical Products revenue. The Zacks Digest average total revenue is in line with the company report.
CYTC tightened its 2007 revenue guidance to $740 million–$755 million from $735 million–$760 million. Top line guidance includes approximately $45 million–$50 million revenues associated with the FullTerm test. For 3Q07, the company expects revenues in the range $187 million–$192 million.
Provided below is a summary of revenue as compiled by Zacks Digest:
Revenue ($ in Million) / 2Q06A / 1Q07A / 2Q07A / 3Q07E / 4Q7E / 2007E / 2008ETotal Revenue / $150.4 / $168.9 / $188.9 / $191.4 / $201.9 / $750.9 / $874.4
Digest High / $150.4 / $169.0 / $189.0 / $193.5 / $203.4 / $753.0 / $887.0
Digest Low / $150.0 / $168.9 / $188.8 / $189.6 / $199.0 / $747.0 / $863.9
Digest Average Y/Y Growth / 20.2% / 25.6% / 24.1% / 23.8% / 23.5% / 16.4%
Quarterly Growth / 7.0% / 3.6% / 11.8% / 1.3% / 5.5%
Domestic Diagnostic Products
Domestic Diagnostic Products comprise the ThinPrep System (consisting of the ThinPrep Pap test, ThinPrep 2000 Processor, ThinPrep 3000 Processor, and related supplies) and the ThinPrep Imager.
In 2Q07, Domestic Diagnostic Product revenue increased 19% to $100.3 million, driven by the increase in ThinPrep Imaging System revenue. The Zacks Digest average 2Q07 Domestic Diagnostic Products revenue is in line with the company report.
ThinPrep System: The ThinPrep System was introduced in 1996, and is widely used for cervical cancer screening and non-gynecologic cytology. The ThinPrep system consists of ThinPrep 2000 Processor, ThinPrep 3000 Processor, ThinPrep Imaging System, and its related supplies. The ThinPrep process is unique, with the cervical sample taken with the proprietary liquid PreservCyt solution instead of the conventional microscope slide. The ThinPrep approach allows optimal cell preservation, a reduction on non-diagnostic material, and better test results. This system remains the only liquid-based collection system in which one sample can be used for (1) traditional Pap smear, (2) HPV, (3) chlamydia and gonorrhea, and (4) glandular disease testing. As a reminder in 1Q07 CYTC announced a multi-year agreement with Quest Diagnostics for the ThinPrep Pap test. The agreement will run through the end of 2010.
The company reported 2Q07 Domestic ThinPrep sales (excluding the Imager) of $65.7 million. CYTC sold 9 million ThinPrep tests in 2Q07.
ThinPrep Imager: CYTC’s ThinPrep Imager is a medical device that uses computer-imaging technology to assist in the cervical cancer screening of ThinPrep Pap test slides. This system is designed to increase a cytology lab’s screening productivity and diagnostic accuracy.
The company recorded Imager revenue of $20.2 million in 2Q07, up 33% y/y. CYTC shipped 37 imagers in 2Q07 versus 25 in 2Q06 and 30 imagers in 1Q07. Imager slides represented approximately 49% of volume versus 46% in 1Q07. The Zacks Digest average 2Q07 ThinPrep Imager revenue from the domestic market is in line with the company revenue.
Domestic Surgical Products
Domestic Surgical Products comprise the NovaSure Endometrial Ablation Systems and the MammoSite and the GliaSite Ration Therapy Systems.
The company reported Domestic Surgical Products revenue of $65.9 million, up 32% y/y. The Zacks Digest average 2Q07 Domestic Surgical Products revenue was $65.9 million.
NovaSure Endometrial Ablation System: CYTC acquired Novacept in March 2004. Novacept’s product is the NovaSure System, a minimally invasive endometrial ablation device. The device is designed to treat menorrhagia in a minimally invasive manner. Physicians and brokerage firms believe the device has high potential, and is the best device of its type in the market.
Survey conducted on obstetricians/gynecologists (OB/GYN) showed that NovaSure maintains its market-leading position, and the company expects (1) an increase in procedure volume, (2) expanded opportunity for the device, and (3) additional in-office use. These findings increase confidence that despite the waning effect of cannibalizing hysterectomies and overall market moderation, opportunities for NovaSure growth remain.
NovaSure sales came in solid at $56.5 million in 2Q07, up 33% y/y. CYTC sold approximately 55,000 disposables in 2Q07. Management stated that 8% of NovaSure revenue now comes from the physician’s office.
Proxima (MammoSite): At the beginning of March 2005, CYTC completed the acquisition of Proxima Therapeutics, a private company. Proxima markets the MammoSite Therapy System (RTS), which is a disposable device used in breast brachytherapy. The MammoSite product positions radiation sources directly into the post-lumpectomy site, which can reduce the treatment time for traditional breast radiation therapy from 30–35 days to 5 days.
Proxima sales came in at $8.8 million in 2Q07, up 26% y/y. This increase in small amounts is despite the fact that the company has 50 dedicated MammoSite sales representatives addressing breast surgeons and radio oncologists with 140 million lives covered.
Division sales ($ in Million) / 2Q06A / 1Q07A / 2Q07A / 3Q07E / 4Q7E / 2007E / 2008EDiagnostics Products / $94.2 / $107.9 / $119.5 / $121.2 / $126.2 / $473.8 / $528.4
Surgical Products / $51.3 / $60.9 / $68.2 / $68.9 / $73.1 / $271.2 / $336.1
Helica Products / $0.0
Adeza / $3.7 / $14.2 / $15.1 / $16.4 / $49.0 / $70.9
Provided below is the pie-chart analysis of division sales:
International Revenue
International revenue consists primarily of revenue from sales outside the U.S. of the NovaSure Endometrial Ablation System, the MammoSite Radiation Therapy System, the ThinPrep Pap test, and the ThinPrep Imaging System.
The company reported 2Q07 international revenue of $22.6 million, an increase of 39% y/y. During the quarter, CYTC shipped 67 ThinPrep processors outside of the U.S. These new systems were shipped largely to Canada, China, and Europe, bringing total worldwide installed base to over 1500 systems.
The international business will become a more material contributor in 2007 and 2008. With 170 people sales representatives abroad and a broader product portfolio, Cytyc is well positioned to take better advantage of its international exposure and make this segment a more material growth driver.
Pipeline Product Development
With the successful acquisition of Adiana during 1Q07, CYTC is one step closer to generating increased surgical revenues through the Adiana Complete TCS hysteroscopic sterilization product, pending FDA approval. CYTC announced plans to submit the two remaining pre-marketing application (PMA) modules to the FDA, and looks for approval in early 2008. While it is still early, the company believes that it may be able to tie the NovaSure and Adiana. The Adiana device will compete with Conceptus’s Essure procedure in the transcervical sterilization market, and become the newest nonincisional permanent contraception alternative to surgical tubal ligation.
Management highlighted the potential synergies between NovaSure and the Adiana device. Since every woman who undergoes the NovaSure procedure must adopt some form of birth control, the Adiana device might be used for the purpose, creating high synergies. Finally, Adiana’s sterilization system uses radiofrequency energy, the same source of energy used by both CYTC’s NovaSure product and its forthcoming product Helica.
Helica Thermal Coagulator (HTC) System
HTC is an FDA approved surgical device that is used to treat mild-to-moderate (stage I and II) endometriosis, a painful condition in which endometrial-like tissue develops in areas of the body that are outside of the uterus, affecting an estimated 7 million women in the United States and 16 million women worldwide. In an HTC procedure, a controlled ablation of tissue associated with endometriosis is performed without damaging surrounding tissue. CYTC plans to roll out an enhanced, next generation version of the product that will be commercially available in 2008, and estimates that the domestic market opportunity for Helica is around $100 million per year.
NovaSure Elective
The device is an expanded indication for NovaSure that will address non-symptomatic women who have completed childbearing and who wish to end their menstrual periods. The company hopes to receive approval for commercial launch in 2010. Management pegs the initial market opportunity of this indication at approximately $1 billion annually.
Cellient Automated Cell Block System
Cellient is a laboratory processing instrument that allows individual cells or small tissue samples to be processed for histological evaluation through a fully automated system designed to eliminate operator dependence. CYTC estimates that the domestic market opportunity for Cellient is $100 million. On October 04, 2007, the company shipped its first Cellient Automated Cell Block Systems to four US customers.
GliaSite Spectrum
The GliaSite system works in the same manner and utilizes similar technology as the MammoSite system, using Iotrex, a proprietary, liquid radiation source for which CYTC has an exclusive license. The GliaSite system provides a full course of post-surgical radiation therapy that can be delivered even after a full course of external beam radiation therapy has been given to a patient. A next generation version of the GliaSite RTS is capable of delivering either radiation or intra-cerebral chemotherapy in patients who have undergone brain tumor resection. The company views this product as an innovative device that has the potential to standardize the method by which chemotherapy is delivered to patients suffering from brain cancer. Management estimates that the domestic market opportunity for this device is approximately $200 million and anticipates U.S. commercialization during 2H08. Management stated that it will soon increase the GliaSite sales force from 5 to 10.
Gestiva
Gestiva, an Adeza product, is a branded version of 17 alpha hydroxyprogesterone caproate (17P), and is a drug used for the prevention of preterm birth in women with a history of at least one spontaneous preterm birth. Interest in the efficacy of 17P has largely been due to the growing incidence of morbidity among surviving preterm birth infants that suggests increased annual medical spending of $8.6 billion in the United States or an incremental $17,300 per preterm infant relative to term infants. From an economic standpoint, adoption of the 17P therapy could generate future medical cost savings that substantially exceed the cost of treatment, and reduce discounted medical costs of their offspring by more than $2 billion annually. The company did not provide additional information on Gestiva other than reiterating its plan to launch it in 2H08 if approved.
Please refer to the Zacks Research Digest spreadsheet on CYTC for further details on revenue.