Hologic Acquires Gen-Probe: A Commercial Analysis

by Greg Emmerich, UW Madison M.S. Biotechnology Program. Business of Biotechnology: Frontiers and Strategies. Final Paper. April 23rd, 2013.  Privacy Disclaimer; Figure Templates.

Executive Summary

  • Hologic closed a $3.97 billion deal to acquire Gen-Probe in August 2012.  Hologic must be able to create significant value in order to justify such a large purchase as it moves forward.
  • Molecular diagnostics is the fastest-growing segment of the in vitro diagnostic market, which is expected to reach $67.2 billion by 2016.
  • The overall analysis of the acquisition is favorable.  However, the market is fiercely competitive and reliant upon decreasing reimbursement plans.
  • Hologic has strong capabilities with its sales force, but is too dependent on single suppliers and very large customers.
  • Success in the market is dependent on ability to innovate and adapt to change.  Hologic’s internal R&D needs to strengthen in that regard.
  • Four action steps are recommended to Hologic to overcome these challenges.

Privacy Disclaimer: This paper was my final for the business portion of UW Madison’s MS Biotechnology program, and was not assigned or specifically endorsed by Hologic.  I am not speaking for Hologic, and the statements expressed in this paper may or may not represent actual strategic decisions facing the company.  This paper represents my unbiased, strategic opinion of the publicly available information about Hologic.

Figure Templates: The four main figures in this paper I created myself, and I have the blank template images and .ai files freely available for noncommercial use through my Flickr, CC by SA license.

Table of Contents

1       Introduction and Market Size
1.1         High-growth IVD Market
1.2         Working Objective
2       Risky Market With High Demand
2.1         Porter’s Five Forces Analysis: Unfavorable
2.2         PESTEL Analysis: Favorable
3       Above Average Internal Capabilities
3.1         Strong History with Bold Claims
3.2         VRINE Analysis: Short-term Advantages
3.3         SWOT Analysis: Favorable
3.4         Financial Analysis: Favorable
3.4.1          Cost Savings
3.4.2          Executive Compensation Needs Better Metrics
3.5         Critical Success Factors
4       Strategy to Build Internal Strength
4.1         Recommended Actions
4.2         Discussion of Recommended Actions
5       Mild Implementation Challenges
5.1         Marketplace Challenges
5.2         Challenges with Incentive Project & Employee Training
6       Conclusion
7       Appendix
7.1         Analyses
7.1.1          Porter’s Five Forces
7.1.2          PESTEL Analysis
7.1.3          VRINE Analysis
7.1.4          SWOT Analysis
7.2         Figures
8       References

1         Introduction and Market Size

I currently work at Hologic, formerly Third Wave Technologies as of five years ago.  Hologic had gone through numerous other acquisitions and mergers before Third Wave but only recently had begun to get its “sea legs” in the diagnostics market with the merger of Cytyc the year before.  Recent events have added some choppiness to the waters of Hologic’s molecular diagnostics division.  In August of 2012 it became official that Hologic closed a $3.97 billion deal to acquire one of the top competitors in the molecular diagnostics ring, Gen-Probe.  This caused quite a splash among members of the biotech industry, but it is the Madison start-up who is really feeling the tempest.  Hologic is currently working diligently to transfer the vast majority of Third Wave operations to the main Gen-Probe facility in San Diego.

Hologic’s reasoning for these changes is the positive impact they can create in healthcare by combining two large biotech companies.  The current competitive “seascape” requires that companies continue to innovate, else they sink. One of the most common ways for larger companies to continue growth is through mergers and acquisitions (M&A).

“Virtually every major player in biotechnology pharmaceuticals participated in at least one M&A deal in 2010.” (Son, 2012)

By combining complementary product lines, companies can more efficiently enter emerging markets where the growth rate is higher than in developed nations.  The more markets Hologic can enter and the more revenue they can bring back in, the more they can expand their product line to not only boost future sales but also to improve healthcare for countless people around the world.  In order to increase positive cash flow and maintain solvency in scope of such a huge purchase, there has to be some necessary cost savings and efforts to improve efficiency, and so relocating Third Wave’s operations was the immediate result.  Hologic has a respectable appetite when it comes to M&A (see 7.2 Table 1) and has thus far done well at commanding a fleet of biotech “ships.”

1.1    High-growth IVD Market

Molecular diagnostics is a very promising field, albeit competitive, and the acquisition of Gen-Probe marked a very serious move to go head-to-head with the big players.  The molecular diagnostics market resides within the broader in vitro diagnostics (IVD) market (NAICS 325413), as detailed in Figure 1 below.  Since the chemical basis behind many of the technologies is relatively similar and companies possess many of the same internal capabilities, it is important to look at the larger IVD market.  The devil is in the details when it comes to molecular technologies, thus patent protection is essential for all these companies to maintain limited competitive advantages.  The 2011 global IVD market was $48.3 billion and the US comprised $18.4 billion of that total (Freedonia, 2012).  The global IVD market is forecast to reach $67.2 billion by 2016.  Of all the segments, molecular diagnostics is expected to grow the fastest, with a compound annual growth rate (CAGR) of 10% between 2011 and 2016.  There are 180 competitors in the US IVD industry (Son, 2012), with nearly half as many more competitors in Europe and Asia.

Figure 1

IVD-market

Data source: Freedonia, 2012

It is very important to note that while the US is the biggest spender on healthcare across every measure, they still only make up approximately 40% of the total spending (7.2 Figure 2).  Thus, an international perspective is necessary for any company that wishes to remain competitive.  Looking into the future, the largest growth rates are expected to be in China, India, and other emerging markets (7.2 Figure 3 – Frost and Sullivan, 2013).  Trends of the IVD market will be discussed more thoroughly in the subsequent section.

1.2    Working Objective

This paper aims to analyze the strategic move to acquire Gen-Probe and identify key elements that will be necessary for successfully managing the acquisition.  A series of standard business tools—namely Porter’s Five Forces, PESTEL, VRINE, and SWOT—will be used to analyze the IVD market, external factors, Hologic’s R&D division, and overall capabilities of Hologic.  A strategy is proposed by combining the external and internal analyses to generate three recommended actions.

2         Risky Market With High Demand

Not surprisingly, where there are a lot of fish, there are a lot of sharks.  The two analyses for the IVD market are conflicting with their recommendations.  The nature of the biotech industry is one of very high risk, but successful commercialization can have grand returns.  Hologic has been in the race for many years and continues to generate positive returns, so the net recommendation is favorable. Table 2 in section 3.1 lists 15 of the top competitors for Hologic.

2.1    Porter’s Five Forces Analysis: Unfavorable

Figure 4:

Porters-Five-Forces

(see 7.1.1 for more information)

 

2.2    PESTEL Analysis: Favorable

Figure 5:

PESTEL-analysis
(see 7.1.2 for more information)

3         Above Average Internal Capabilities

3.1    Strong History with Average R&D Investment

Hologic, founded in 1985 and headquartered in Bedford, MA, has come quite a long ways since their humble beginnings with bone density.  Hologic is now focused on three main areas: women’s health, skeletal health, and laboratory solutions.  Respectively within these areas, Hologic has products covering breast imaging and diagnosis, GYN surgical, and prenatal health; products covering osteoporosis assessment; and products covering cytology preparation, cervical cancer screening, cystic fibrosis testing, nucleic acid detection, and agriculture-based assay development.  Hologic first went public in 1995, with a year-end share price of approximately $6/share (5.4 M shares outstanding) and  $43 million in total revenue, up to nearly $24/share (266.8 M shares outstanding) with over $2 billion in revenue in 2012 (NASDAQ, 2013; Hologic, 2012).  This represents a 25.3% compound annual growth rate (CAGR).

Hologic has a strong history of acquisitions and mergers, and now has manufacturing facilities across the US and in Costa Rica and Germany.  Table 1 in the Appendix summarizes the various companies Hologic has acquired, the aggregate valuation, and their location and primary area of focus.  In summary, Hologic has had 17 mergers and acquisitions since 1995, for a total aggregate valuation (including contingent payments) of approximately $24.6 billion over the 17 years (not adjusted for inflation).  Roughly 40% of the total value has come from two companies—Cytyc and Gen-Probe.  There were some unfortunate external economic factors that came into play with the 2008 recession, making it an especially bad time to take on extra debt with the huge Cytyc purchase in 2007.  Hologic felt the effect of this by having to write off $2.34 billion for impairment to goodwill in 2009.  Case in point, Hologic was able to turn around and start generating increased revenue afterwards.  Gen-Probe may have been a large acquisition, but it is nothing that Hologic hasn’t experienced before.  They have thus far moved swiftly to see that value is created from the deal and wont written off as impairment like before.

The economic seascape is quite different now than it was back in 2007.  While regarding the Cytyc merger gives insight about the management capabilities of Hologic, the factors that will determine success into the future are increasingly tied to innovation.  Research and development is the wind in the sails for all scientific companies, so this is a good place to start.  Hologic claims on their website:

“We know of no other major healthcare company that devotes a higher percentage of its resources to the development and deployment of screening, diagnostic and therapeutic technologies designed to help doctors see better, know sooner and reach further.”

These kind of world-changing statements may be common for biotechnology companies, but does the evidence back them up? How much of Hologic’s revenue actually went towards net R&D for 2012?  About 6.6%.  This lands Hologic right in the middle in terms of R&D spending compared to their competitors, or about $275 million short of being on top (to rank above Luminex at 20.3% Revenue to R&D).  Here is how these figures stack up against competitors:

Table 2: In Vitro Diagnostic Competitors

Company

2012 Revenues ($USD)

COGS

R&D

Sales, Marketing & Admin

Hologic

$2 B

50%  ($1 B)

6.6%  ($131 M)

27.1%  ($542 M)

Abbott

$39.9 B

37.8% ($15.1 B)

10.8% ($4.3 B)

30.3% ($12.1 B)

Alere

$2.8 B

50% ($1.4 B)

6.5% ($183 M)

39.3% ($1.1 B)

BD

$7.7 B

49% ($3.8 B)

6.1% ($472 M)

24.7% ($1.9 B)

bioMerieux

$1.9 B

45.9% ($872 M)

10.5% ($199 M)

25.6% ($487 M)

Bio Rad

$2.1 B

43.6% ($915 M)

10.2% ($214 M)

32.5% ($683 M)

Danaher

$18.3 B

48% ($8.8 B)

6% ($1.1 B)

28.4% ($5.2 B)

J&J (med device & diag)

$27.4 B

32.2% ($8.8 B)

6.1% (1.68 B)

31% ($8.5 B)

Life Tech

$3.8 B

36.8% ($1.4 B)

9% ($342 M)

28.9% ($1.1 B)

Luminex

$203 M

30% ($60 M)

20.2% ($41 M)

36.9% ($75 M)

Meridian Bioscience

$174 M

36.8% ($64 M)

5.7% ($10 M)

28.2% ($49 M)

Myriad Genetics

$496 M

13.1% ($65 M)

8.7% ($43 M)

41.9% ($208 M)

Perkin Elmer

$2.1 B

57.1% ($1.2 B)

6.3% ($133 M)

30.1% ($633 M)

Thermo Fischer

$12.5 B

57.6% ($7.2 B)

3% ($376 M)

27.2% ($3.4 B)

Qiagen

$1.3 B

33.1% (430 M)

9.4% ($122 M)

26.5% ($344 M)

Roche (diag)

$11.1B

46.8% ($5.2 B)

10% ($1.1 B)

25.2% ($2.8 B)

Total (Ave.)

$133.8 B ($8.4 B)

$56.3 B (42%)

$10.5 B (7.8%)

$39.1 B (29.2%)

The numbers in Table 2 came directly from each company’s 10-k or annual report from 2012.  Conversion rates of 1 CHF = 1.07 USD and 1 € = 1.3 USD were used.  Most variability in accounting practices for selected financial income came from cost of goods sold (COGS, or cost of revenue), and in combining selling and marketing expenses with general and administrative expenses.  On first pass it was difficult to assess why Myriad Genetics had starkly different COGS and admin expenses, and Luminex such high R&D expenses.  For larger companies like Abbott, BD, Danaher and Thermo Fischer, while revenue may have been broken down by segment, their R&D and admin expenses were not.  This larger representation of these companies may not as accurately reflect their capabilities in the molecular diagnostics market.

While the results from Table 2 are not conclusive, they create a pretty good map of the competitive seas.  It would be incredibly naïve to simply assume that more money spent on R&D causes a company to perform better.  Numerous other factors are at play, including the individual talent of scientists, the company culture, communication between departments (focusing R&D efforts to meet a significant market need), and organizational practices like recognizing individual achievement.  To further explore Hologic’s R&D, a VRINE analysis was performed.

3.2      VRINE Analysis: Short-term Advantages

Resource-based views on competitive advantage help answer questions about why companies in the same industry perform differently.  The VRINE framework walks through whether or not a particular resource or capability of a firm is Valuable, Rare, Inimitable, Non-substitutable, and Exploitable.  Figure 6 gives a critical analysis of Hologic’s R&D from this perspective.

Figure 6:

VRINE-analysis

(see 7.1.3 for more detailed information)

3.3    SWOT Analysis: Favorable

Combining Porter’s, PESTEL, and VRINE, a more qualitative assessment of Hologic’s Strengths, Weaknesses, Opportunities and Threats is presented in Figure 7.

Figure 7:

SWOT-analysis

(see 7.1.4 for more detailed information)

3.4    Financial Analysis: Favorable

The Gen-Probe acquisition price included a $1.65 billion cost of goodwill, over the value of tangible and intangible assets (see 7.2 Table 3).  The reasoning behind this was the expected synergistic benefits from complementary molecular diagnostic products leading to increased sales of Gen-Probe products internationally. This is where Hologic’s existing direct sales force in Europe and distribution in China really shines.  Hologic took on a considerable amount of debt with this acquisition, but the company has been consistently driving revenue growth which should keep Hologic afloat. Hologic has detailed their plans to improve solvency, but some of the decisions they have made could potentially run afoul in the long-term.  A thorough analysis of Hologic’s stock performance is outside the scope of this paper, but instead a unique perspective will be taken on how Hologic can improve financial efficiency all across their organization.

3.4.1    Cost Savings

Foremost, Hologic had a plan to streamline production and reduce overlap.  Hologic expects to realize $75 million in synergies over three years. The result of this was letting go of some 346 employees and closing down two production facilities.  Suros Surgical systems, based in Indianapolis, will have operations transferred to Costa Rica.  A severance of up to $7 million will be dispersed to 141 employees there (Donnelly, 2013; Hologic, 2012).  Third Wave will receive a severance of up to $6.4 million for 130 employees.  Gen-Probe received $13.3 million + $3.5 million in stock-based compensation expense for severance of 75 employees (Robbins, 2012; Hologic, 2012). Hitec-Imaging, based in Germany, will receive a severance of up to $1.4 million (unknown number of layoffs) after transfer of Selenium Panel Coating production to Newark, Deleware.

3.4.2    Executive Compensation Needs Better Metrics

Executive compensation is a hotly contested issue that bears importance for Hologic.  Hologic’s philosophy for executive compensation cites the need to remain competitive by recruiting and retaining key management personnel.  Compensation is logically tied to performance, meaning base salary makes up a small portion (17-39%) of total executive payment.  Hologic’s executive compensation is detailed in the Appendix: Figure 8.  For the five executives in 2012, average total compensation was a little over $2.5 million (range of $1.2-5.4 million). To put this in perspective, one study found that executives made a median of $2.36 million per year from 1994-2006 (Cooper et al., 2009).  More recently, the median total direct pay for 50 top executives in 2012 was found to be about $9 million (Hay Group, 2013; full study to be released in May 2013).  Companies have clearly been increasing their pay to top executives, and this has largely been tied to performance metrics (see 7.2 Figure 10).  While good in theory, this is subject to much short-sightedness if the goals and metrics are not properly crafted.

Cooper’s main conclusion was that companies with higher executive compensation actually receive negative future stock returns.  The effect was stronger for executives that made a larger proportion of their compensation from long-term incentives and options (see Appendix: Figure 9), whereas higher cash salaries correlated to increased returns. This runs counter-intuitive to traditional philosophies, including Hologic’s.  When executive compensation is tied too heavily to stock earnings growth and return on capital, it becomes easy for executives to shift their focus on the short-term and “game” the system.  Clearly, fair pay is a balancing act, because having no incentives linked to long-term company performance would equally create short-sightedness.  Perhaps just as important to financial incentives are intrinsic motivation and peer recognition.  The former should hopefully come out during prospective interviews, and the latter can be achieved through an ever-increasing amount of web-based mediums like company websites, social media, and more.

It is easy to single out company executives to measure effectiveness of rewards, but this issue runs down to every employee.  Effective organizations are built upon effective employees.  Financial incentives provide a means to focus activity towards the objectives that help the firm stay competitive. When combined with other forms of achievement recognition, a culture is formed where employees are more passionate about their jobs and perform at higher levels.  This is a goal every company should share.  An ongoing challenge is to create meaningful performance metrics, and will be discussed further in the proposed strategy, section 4.2.

3.5    Critical Success Factors

In conclusion from the internal and external analyses, the following are five critical success factors (CSF) specifically identified for Hologic.  Failure to achieve any one of these CSFs could be a cannonball through Hologic’s hull.

  1. Hit the pricing policy “sweet spot”: The healthcare industry is experiencing high levels of consolidation, which increases their bargaining power.  Diagnostic companies are forced to compete more on volume discounts and pricing, yet they should ensure profitability so they can compete into the future.
  2. Operational synergies: Quickly merge internal capabilities within molecular diagnostics to increase operational efficiency and get employees executing on Hologic’s strategies.
  3. Receive FDA approval: For the production migration between facilities, it is critically important that operations are able to transition smoothly and meet market demand.  Delays with this process will be costly via expensive outsourcing or in lost sales.
  4. Adopt quickly to new technology: Very few customers will continue to buy an outdated product when a more sensitive diagnostic is on the market. Hologic needs to keep abreast of new technology and services in order to maintain a competitive edge.
  5. Maintain a good reputation: Establishing and maintaining positive relationships with doctors, hospitals and health-care facilities is important for maintaining and growing market share.  Hologic has already created many positive interaction points with their robust sales force, but this is an ongoing task.

4         Strategy to Build Internal Strength

4.1    Recommended Actions

  1. Focus on differentiators
    1. Apply strong sales force with new, quality diagnostics to emerging markets
  2. Reduce risk from suppliers and buyers
    1. Increase number of diagnostic instrument suppliers and number of Gen-Probe customers
  3. Improved employee performance metrics
    1. Grassroots system for incentives and accountability
  4. Increase organizational flexibility through skilled workers
    1. Encourage tuition reimbursement program and other professional development

4.2    Discussion of Recommended Actions

Considering the acquisition of Gen-Probe became official some 8 months ago, the recommended actions are forward-looking.  The last two recommended actions are discussed in regards to Hologic, although they would likely prove useful for numerous other companies.

As Hologic has identified, the most important element to their strategic plan should be to utilize their existing, strong sales force to increase their impact in emerging markets.  This move is important in the short-term as well as the long-term because these markets expect the largest growth going into the future.  As Hologic expands, they will likely wish to acquire other distribution companies like Beijing-based TCT, in India.  This could have the benefit of being closer in proximity to new customers, which would help Hologic establish and maintain positive relationships with them.

Turning the focus inward, there are numerous, smaller areas that Hologic can improve on.  Currently Hologic is assuming high levels of risk by only having one manufacturer for its diagnostic instrument platforms, and because Novartis alone represents 10% of total diagnostic sales.  Diversification will diminish this risk, although it will require much leg-work.

Hologic recognizes the importance of producing consistently high quality diagnostic products.  Competition continues to be fierce and driven towards economies of scale, and the major deviation from this is when the product offering is significantly more accurate and sensitive than competitors’ products.  This is most effectively conveyed to scientists and physicians thorough clinical trial results.  Significant efficacy in clinical trials comes from having a quality product, which is in turn a byproduct of the quality of the employees that worked on the new product.  The quality of the employees is a direct effect of the company culture and workplace environment.  Thus, it would seem that the most logical place to start would be to nourish a productive culture.

How might meaningful cultural changes be brought about?  Through constant feedback and evaluation on key performance metrics that helps to guide professional development. The challenge is finding the right metrics to accurately measure, using a system that is easy to implement.  While progress is being made on this front, the short answer is that there is no clear winning system to use.  Each organization is unique and will need customized metrics.  Because this would take significant resources and focus away from regular operations, only very large organizations will be able to justify this expense.  However, I propose a simple, alternative solution to customized metrics that any organization can start using immediately with significant, positive results:

Give each employee an arbitrary amount of “points” each year, under one caveat: none of those points can go directly towards that employee.  Throughout the year, employees keep track of the good things their coworkers have done and can award them small bonuses from their discretionary pot. End of the year celebrations could include a recap of the good deeds performed throughout the year, similar to a Dundie Awards. This program would be a free, grassroots incentive and accountability program.  The simplicity of the program allows for total flexibility to each social context, and creates a constant incentive to perform at exceptional levels. Furthermore, managers can use this system when they conduct their annual performance reviews, which can then tie the system to performance-based incentives.

This “Millennial solution” to workplace culture may not be for every organization, but the greater point is that there are endless creative solutions to everyday problems that are being continuously improved upon by advancing technology. Challenges are discussed in section 5.2. Innovation requires adaptability, and is fostered in friendly, open, creative environments.  Biotech innovation is traditionally seen as scientific discoveries, but non-technical employees can also have large impacts through management, marketing, design, and operational efficiencies.

“Sustained competitive advantage is the result of an enduring value differential between the products or services of one organization and those of its competitors in the minds of customers.” (Duncan et al, 1998)

The idea of sustainable competitive advantage is under constant assault by advancing technologies.  Hypercompetition describes the rapid acceleration at which existing competitive advantages are neutralized, made obsolete, or destroyed (D’Aveni, 1998). Biotechnology and other scientific fields are reasonably buffered from this, as compared to information technology companies or other consumer products, thanks in large part to the highly regulated nature of the industries.  In a similar vein, once an attack has been made at a company’s competitive advantage, it is much more difficult to respond to that threat due to technical challenges.  Future competitive advantage will emphasize a company’s ability to change and anticipate future needs of customers.  Agility is needed to be able to create and deliver value faster than the competition.

The need for increased organizational flexibility will only intensify into the future.  Companies are left wondering how they are to prepare for the unknown.  A recent study highlights the importance of a highly skilled workforce towards adapting to change.  That is, workers with more education and experience are better able to embrace innovations because they have developed stronger higher-order problem solving skills.  This gives these workers greater functional flexibility.  Vocational training is also important in conjunction with higher skills to provide increased quality and productivity, which further increases workers’ ability to deal with technical change (Toner, 2011, pages 32-34).   Organizations can achieve this by actively encouraging the continued development of their employees, be that through classes at a technical college, business development workshops, or professional seminars.  The explosion of massively open online classes (MOOC) is something every company no matter the size can benefit from.  Universities like Harvard, Stanford, MIT, Princeton, Berkeley, Pennsylvania, Georgetown, Michigan, Texas, Wisconsin, Miami, and many others are now offering free, low-commitment, online college classes in a wide variety of subjects, open to any and all.

The competition may be high, but the possibilities of the future are even higher.

5         Mild Implementation Challenges

5.1    Marketplace Challenges

Regulatory changes and reductions to reimbursement are major risks to Hologic, although there is little recourse for mitigating these risks.  This could be a reason for a strategic alliance with previous rivals in order to help pass specific legislation that would be mutually beneficial.

Marketplace reputation is not a current problem but it should continue to be emphasized to Hologic’s sales force by establishing positive working relationships with current and prospective customers.  Hologic should continue to invest into marketing and sales to maintain this competitive edge.

Hologic will need to evaluate the potential for its current manufacturers to go under or for Novartis to drop its contract.  A mitigation plan could include evaluating whether or not Hologic would be able to acquire one of the manufacturers in the case of bankruptcy.

Hologic needs to maintain constant vigilance with respect to its competitors, and send their probes out to detect any new products or organizational changes that could harm Hologic’s business.  Hologic also needs to stay abreast of new technology developments that could complement their product portfolio.

5.2    Challenges with Incentive Project & Employee Training

The proposed action of democratizing workplace incentives could carry some concerns for managers and human resources.  Many instances could arise where employees do not share mutual feelings about the worthiness of an action to receive points, or when there is not a “tit” for a “tat” with reciprocating points. This could create rifts between employees, causing internal conflict and organizational dysfunction.  Ways to mitigate this risk are having a project launch meeting where these issues are hashed out, and every employee is given basic ground rules for ethical behavior for the incentive project.  Managers would also need to be trained on conflict resolution. Since participation in this project is voluntary, it is expected that employees would stay as engaged as they wish to.

6         Conclusion

The analysis performed ranked Hologic as capable of executing on the five identified CSFs, and gave a net favorable score to Hologic with respect to external and internal factors.  The current key differentiator for Hologic is their strong sales force, which should allow them to quickly realize value from the Gen-Probe acquisition.  Despite fierce competition, the IVD market is expected to continue to grow, further validating the purchase of Gen-Probe.  Looking into the future, Hologic will need to strengthen its ability to internally innovate and adapt to new technologies and increased competition.  Hologic can accomplish this by strengthening their culture through improved performance metrics and developing employee talents.

7         Appendix

7.1    Analyses

7.1.1    Porter’s Five Forces

Threat of New Entrants

-High barriers to entry: many patents and high cost of infrastructure (less so with CMO, CRO)

-Medium/high brand equity, customer loyalty, switching costs: expensive to buy new instruments to support the new products; once a process is validated, difficult to alter (need studies proving equivalence—not better or worse); also barriers to learning a new method when the current one provides good results; yet scientists will respond positively when enough data (beyond just the company’s own data) support the new product’s advantages.

-Attractive to new competitors due to high industry profitability. This could include non-direct competitors in the IVD market, who would have significantly reduced barriers to entry.

Threat of Substitute Products

-Limited ability for customers to substitute products due to technical limitations and blocking patents, although disruptive innovations can steal significant market share in little time, such as applying physics through SPR in drug discovery, or next gen sequencing replacing other forms of diagnosis.

-Potentially substantial switching costs if new instrumentation is needed

Bargaining Power of Customers

-High: currently there is significant disparity with diagnostic reimbursement.  Many tests aren’t being paid for or have suboptimal payment coverage, which effectively stops hospitals and labs from running these tests.  Not only does this cut off sales for IVD companies, but it also stifles investments for developing new tests.  As rates are being figured out, it isn’t clear if they will accurately reward the value of diagnostic tests and justify the significant investment needed to develop new diagnostics. (Schoonmaker, 2007; Gottlieb, 2013). Also, Gen-Probe has historically relied upon high sales from a smaller number of customers, creating significant risk if a large customer was to switch diagnostic platforms.

Bargaining Power of Suppliers

-High: Certain products have limited suppliers, thus ongoing studies are required to evaluate alternative raw materials for equivalence. All molecular diagnostic instrument platforms only have one third-party manufacturer; KMC Systems for the TIGRIS, Stratec for the PANTHER, and Tecan for the Cervista HTA. Future risk could materialize if Hologic cannot negotiate commercially reasonable prices for patent licenses to enable their own product commercialization.  Also, one of Hologic’s main competitors, Roche, is a main supplier for a key raw material for the NAT diagnostic assay (Hologic, 2012).

Intensity of Competitive Rivalry

-High: Patent protection does not guarantee success. Creative solutions around specific technology or jurisdictions are commonplace, and discontinuous innovations can leapfrog industry leaders to take the lion’s share of the market.  Overlap between existing diagnostic tests.  Small companies may have a very difficult time competing with larger companies who have strong marketing and sales forces.

7.1.2    PESTEL Analysis

Political

-Much uncertainty with medical and diagnostic test reimbursement.  Many contractors followed the example of Medicare (specifically CMS) to determine coverage and payment, which has gone from a confusing process of “code stacking” (based on test complexity) to “gap filling” (based on diagnostic codes for the most common and important molecular tests).  This “gap filling” was left to local carriers to assign prices with no clear direction.  The change-over in reimbursement policy has been in flux since 2011, leaving many tests unpaid for (Gottlieb, 2013).  US healthcare system reforms have limited Medicare reimbursement, with an additional 2.3% excise tax on medical devices. International healthcare spending is expected to increase into the future (Frost and Sullivan, 2012).

Economical

-Recovering from economic recession slowly, with financial investment to match. Combined with uncertainty with international credit markets, customers are more apprehensive about purchasing medical instrumentation. Companies and organizations are looking for ways to improve efficiency on existing processes.  Similar concerns with reimbursement.  Still, international healthcare spending is expected to increase into the future.

Socio-cultural

-Personalized healthcare is highly desirable but difficult to fulfill patient expectations.  Many have privacy concerns with their data.

Technological

-Approaching era of Big Data for healthcare, including whole genome sequencing and other holistic approaches integrating data from numerous tests across entire populations to generate more predictive diagnosis of disease and future disease.  As understanding of the biological world increases, so too do the number of technologies adept at detecting and analyzing human and microbe biology.

Environmental

-No significant impact, although one could argue that improved diagnostics leads to improved healthcare, leading to longer lives, which creates a higher demand on agriculture and economic systems to support increased populations.

Legal

-New laws and regulations could require additional safety monitoring, new labeling specifications, extended regulatory approval, pricing restrictions or taxes.  This could make manufacturing certain products economically unfavorable.  Also, while patent infringement cases continue to be prevalent and hotly contested, securing patent protection is still the mainstay for biotech companies’ strategic plans.

7.1.3    VRINE Analysis

Valuable – Do investments into R&D provide value?

Yes: The entire pharmaceutical and biotech industries are founded upon R&D and earn the vast majority of their profits from successful products.

Rare – Is good R&D a scarce commodity?

No: While it is difficult to assess the quality of different organization’s R&D, it is still meaningful to look at how many resources are being devoted to that division, and the final output of marketable products.  Hologic ranks 5th out of 16 investigated companies in terms of R&D spending dollars, and 8th in terms of % Total Revenue (3.1 Table 2).  The amount of trained scientists continues to rise more than the general workforce: from 2000-2009, science and engineering occupations grew 1.4% annually, versus 0.4% annually (National Science Board, 2012).

Inimitable – Is Hologic’s R&D hard to copy?

No:  For similar reasons as the rarity component, Hologic is average when it comes to R&D investment. Roche, the dominant player in the IVD market, spent 21.4% of sales on pharmaceutical R&D and 9.2% of sales on diagnostics R&D (Son, 2012; Roche, 2012).  If a customer wishes to detect small nucleotide polymorphism changes, there are a wide variety of technologies at their disposal beyond Hologic’s Invader technology.  The ability for companies to work around patents is prevalent and creates significant competition.

Non-substitutable – Could internal R&D employees not be replaced by external innovation?

No: US firms have already been substituting internal R&D with external R&D through outsourcing to foreign countries where the costs are lower.  From 2004 to 2009, this type of employment doubled, compared to less than 5% within the US (National Science Board, 2012).  Also, significant revenue can be generated from third-party outlicensing, academic collaborations, and strategic alliances, as demonstrated by Roche (Roche, 2012). Strategic alliances are a less expensive alternative to M&A by allowing companies to leverage the core competencies of others, although there is less control over the process than an outright acquisition.

Exploitable – Can Hologic be innovative?

Yes: Hologic has continued to grow revenue for the past four consecutive years (9.2 Table 4).  Hologic has captured increased market share through internal innovation, as evidenced by their Cervista high throughput automation system receiving FDA approval in December of 2011.

7.1.4    SWOT Analysis

Strengths

Strong sales force: In 2012, Hologic had employed 2750 people in marketing, sales, field service engineering and technical support (Hologic, 2012. In 2010, Hologic had 125 sales representatives and 150 distributors internationally (Datamonitor, 2011).

Diverse product line (detailed in section 5.1)

Weaknesses

High dependency of sales on fewer, large customers: Novartis accounts for more than 10% of diagnostic sales (with a $585 million contract, see 9.2 Table 3), and is expected to continue into the future (Hologic, 2012).

Opportunities

Revenue growth from acquisitions: Gen-Probe has a significant portfolio of clinical diagnostics that will complement Hologic’s existing diagnostic products, realized through Hologic’s strong, international sales force.

Regulatory approval on new products – Hologic states that regulatory approval is key to their strategy: “critical element of US diagnostic sales has been utilizing clinical trial results to demonstrate safety and efficacy to our customers” Thus the results from clinical trials could greatly help or hurt Hologic in the future.

Threats

Intense competition and reduced healthcare reimbursement: many competitors are larger and have a broader portfolio of products, greater technical capabilities, and brand recognition. Customers are worried about reduced reimbursement and are increasingly looking towards economies of scale through consolidation, meaning competition quickly turns towards price.  Also, Hologic’s products could be rendered obsolete by new technology or changing industry standards.

7.2    Figures

Table 1: Hologic Mergers and Acquisitions

Company Acquired Year Valuation Location Company Focus
WalkerSonix (part) 1995 Worcester, MA Ultrasound bone analyzer
Sopha Medical (part) 1995 Paris, France Bone densitometry
FluoroScan Imaging Systems (merger) 1996 $59 M Northbrook, IL Mini c-arm X-ray imaging
Direct Radiography Corp. 1999 $21.9 M Newark, DE Digital radiography
Trex Medical Corp. 2000 $55 M Danbury, CN X-ray machine, breast biopsy and mammography equipment
Fisher Imaging Corp. (IP) 2005 $32 M n/a Intellectual property: Mammotest prone breast biopsy and Senoscan digital mammography systems
AEG Elektrofotografie 2006 $26.4 M + $2.1 M earn-out Warstein, Germany Photoconductor materials
R2 Technologies 2006 $220 M Sunnyvale, CA Computer aided detection systems
Suros Surgical Systems 2006 $240 M Indianapolis, IN Minimally invasive biopsy and tissue excision
BioLucent Inc. (part) 2007 $70 M Aliso Viejo, CA MammoPad breast cushion
Cytyc Corp. (merger) 2007 $6.2 B Marlborough, MA Cervical cancer diagnostics
Third Wave Technologies 2008 $591 M Madison, WI Molecular Diagnostics
Sentinelle Medical Inc. 2010 $84.8 M + $29.5 M contingent payments Toronto, Canada Breast health
Interlace Medical Inc. 2011 $126.8 M + $134.8 M contingent payments Framingham, MA GYN Surgical Products
TCT International Co. 2011 $148.4 M + $93.1 M contingent payments Beijing, China Medical products distributor
Beijing Healthcome Technology Co. 2011 $8.8 M + $5.6 M contingent payments Beijing, China Mammography equipment
Gen-Probe 2012 $3.97 B San Diego, CA Molecular Diagnostics

(Hologic, 2012; Mergent, 2013)

Figure 2: Worldwide Healthcare Expenditures

worldwide-healthcare-expenditures
Figure 3 – Emerging World Markets

emerging-world-markets

Table 3: Acquisition Price of Gen-Probe ($1,000s)

Cash

$ 205,463

Accounts Receivable

80,301

Inventory

153,416

Property, plant and equipment

274,095

Other assets

191,868

Assets held-for-sale

87,465

Accounts payable

(19,671)

Accrued expenses

(131,102)

Other liabilities

(19,255)

Identified intangible assets
     Developed technology

1,565,000

     In-process research and development

227,000

     Customer contract*

585,000

     Trade names

97,000

Deferred income taxes

(976,950)

Goodwill

1,652,546

Purchase Price

$ 3,972,176

*Customer contract with Novartis, estimated using Excess Earnings Method (Hologic, 2012)

Table 4: Consolidated Statement of Operations

$M (% 1-year growth)

2012

2011

2010

2009

2008

Breast Health

875.77

(6.1%)

825.55

(9.3%)

755.54

(3.7%)

728.88

(-15.3%)

860.85

Diagnostics

718.06

(25.7%)

571.26

(3.4%)

552.50

(1%)

547.89

(13%)

485.00

GYN Surgical

313.09

(4.2%)

300.54

(6.1%)

283.14

(6.9%)

264.90

(19.8%)

221.07

Skeletal Health

95.73

(4.1%)

92.00

(4.1%)

88.37

(-7.4%)

95.46

(-11.3%)

107.58

Total Revenues

2002.65

(11.9%)

1789.35

(6.5%)

1679.55

(2.6%)

1637.13

(-2.2%)

1674.5

 

 

 

 

 

COGS (incl. depreciation)

1080.25

924.50

874.42

826.79

807.21

R&D

135.46

(16.1%)

116.70

(11.9%)

104.31

(10.6%)

94.33

(15.9%)

81.42

Marketing & Sales

322.31

(12.4%)

286.73

(15.9%)

247.37

(3.5%)

238.98

(-8.6%)

261.52

Total Expenses

1888.94

(33.5%)

1414.90

(-12.1%)

1609.62

(-55.9%)

3653.81*

(95.2%)

1872.04

Operating Income

163.55

304.33

305.11

328.21

376.94

Net Income

-73.63

157.15

-62.81

-2216.64

-415.59

* In 2009, a goodwill impairment of $2.34 billion was realized due to Cytyc assets exceeding their estimated fair value. Half of this impairment came from GYN Surgical, and 39% came from Diagnostics (Hologic, 2012 and 2010).

Figure 8: Executive Compensation at Hologic

executive-compensation

(Hologic, 2013b)

Figure 9: Cumulative Returns Graph by Incentive Pay

compensation-graph

(Cooper, 2009)

Figure 10: Executive Compensation Changes

compensation-bar-graph

(Thurm, 2013)

8         References

Cooper, Michael J. et al. (2009) Performance for pay? The relationship between CEO incentive compensation and future stock price performance. Wall Street Journal. Retrieved from http://online.wsj.com/public/resources/documents/CEOperformance122509.pdf

Datamonitor. (2011) Hologic, Inc. Company Profile.  Accessed through http://www.datamonitor.com

D’Aveni, Richard A. (1998) Waking up to a new era of Hypercompetition. The Washington Quarterly, 21:1, 183-195

Donnelly, Julie M. (2012) Hologic to pay Gen-Probe CEO $6.9M to stay on board. Boston Business Journal. Retrieved from http://www.bizjournals.com/boston/blog/mass-high-tech/2012/07/hologic-to-pay-gen-probe-ceo-69m-to-stay.html?page=all

Donnelly, Julie M. (2013) Hologic to close Indianapolis facility, lay off 141. Boston Business Journal. Retrieved from http://www.bizjournals.com/boston/blog/bioflash/2013/01/hologic-to-close-indianapolis.html

Duncan, Jack, Peter Ginter and Linda Swayne. (1998) Competitive Advantage and Internal Organization Assessment.  Academy of Management Executive. Vol 12, No 3.

Freedonia. (2012) In vitro diagnostics products: United States. The Freedonia Group Focus Reports. Retrieved from http://www.freedoniafocus.com

Garde, Damian. (2013) Hologic sells former Gen-Probe unit for $85M.  Fierce Medical Devices. Retrieved from http://www.fiercemedicaldevices.com/story/hologic-sells-former-gen-probe-unit-85m/2013-01-04

Gottlieb, Scott. (2013) Medicare has stopped paying bills for medical diagnostic tests.  Patients will feel the effects.  Forbes: Pharma and Healthcare.

Hologic. (2012), (2010) & (1995) Hologic10-K SEC Filings. Retrieved from http://investors.hologic.com/annual-filings

Hologic. (2013) Hologic Annouces Organizational Changes to its Diagnostics Segment; Integration of Gen-Probe Proceeding Ahead of Schedule. Investor Relations-News Releases.

Hologic. (2013b) Proxy Statement: 2013 Annual Meeting of Stockholders. Retrieved from http://investors.hologic.com/proxy-statement

Mergent Online. (2013) Hologic Inc. History. Retrieved from http://www.mergentonline.com

NASDAQ. (2013)  Hologic Inc. Stock Quote and Summary Data.  Retrieved from http://www.nasdaq.com/symbol/holx#.UU5ICFdyVj4

National Science Board. (2012) Science and Engineering Indicators 2012. National Science Foundation. Retrieved from http://www.nsf.gov/statistics/seind12/

PhRMA. (2012) Pharmaceutical Industry 2012 Profile. Retrieved from http://www.phrma.org/sites/default/files/159/phrma_industry_profile.pdf

Roche. (2012) Roche 2012 Annual Report: Research and Development. Retrieved from http://www.roche.com/investors/annual_reports.htm

Robbins, Gary. (2012) Gen-Probe laying off 75 workers. UT San Diego. Retrieved from http://www.utsandiego.com/news/2012/sep/16/gen-probe-laying-75-workers/

Schoonmaker, Michele. (2007) Reimbursement for molecular diagnostics. IVD Technology. Retrieved from http://www.ivdtechnology.com/article/reimbursement-molecular-diagnostics

Son, Anna. (2012)  IBISWorld Industry Report 62151: Diagnostic and Medical Laboratories in the US. Retrieved from http://www.ibisworld.com

Stuart, Mary. (2007) In women’s health, Hologic stays ahead of the curve. Elsevier Business Intelligence. IN VIVO.

Thurm, Scott. (2013) ‘Pay for Performance’ No Longer a Punchline. Hay Group, Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424127887324373204578372444079319544.html

Toner, Phillip. (2011) Workforce Skills and Innovation: An Overview of Major Themes in the Literature. OECD Science, Technology and Industry Working Papers, OECD Publishing.

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  1. assignment prompt: You will present (1) an assessment of the strategy of your current firm or a firm of your choosing using the tools and concepts discussed in the class and (2) your recommendations, based on your analysis, for what strategy the firm should now pursue (or keep).

    A good project will: clearly and logically apply course material to the phenomenon being studied; present a thorough and rigorous qualitative and/or quantitative analysis; draw implications and suggest recommendations for “your client.”

    • Richard Schifreen
    • April 23rd, 2013

    Very thoughtful analysis. Best wishes.

    • Priyanka
    • May 30th, 2014

    Very nice analysis. All the dimensions are nicely explained. Thanks! This has helped me in my study.

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