Nt4.zacks.com
|Cytyc Corporation |(CYTC–NASDAQ) |$50.12 |
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 |CYTC is heavily reliant on core ThinPrep products for growth as these account|
|leading edge with its liquid-based cervical cancer test, ThinPrep. |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 |TriPath and CYTC are engaged in a legal dispute, the outcome of which is |
|achieve a foothold in the 10 million annual Pap tests market. |uncertain. |
|Brokerage firms feel Proxima is a compelling acquisition from both medical |CYTC is heavily dependent on single-source suppliers. |
|and economic standpoints, and could be a new growth engine for CYTC. | |
|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 . 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) |
|Positive |11% |
|Neutral |78% |
|Negative |11% |
|Avg. Target Price |$44.98 ↓ |
Please refer to the Zacks Research Digest spreadsheet on CYTC for further details on valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
At the end of 2Q07, Cytyc had $33 million (versus $196.3 million in 1Q07) in cash, cash equivalents, and marketable securities. The Company had repaid $145.3 million of the $200.5 million borrowed under its line of credit, reducing the outstanding balance to $55.2 million. DSOs were approximately 54 days exiting 2Q07, compared to 58 days exiting 4Q06.
On October 01, 2007, CYTC announced it is delivering a notice to the holders of its 2.25% Senior Convertible Notes due 2024 to inform them that the Board of Directors of Cytyc has fixed October 22, 2007 to be the anticipated effective date of the merger of Cytyc with Nor'easter Corp., a wholly owned subsidiary of HOLX. In addition, the notice also stated that the holders of Cytyc common stock of record are expected to be entitled to exchange their Cytyc common stock for the merger consideration payable in connection with the Merger as of such date.
Hologic (HOLX) merger Update: On May 20, 2007, HOLX and CYTC announced a definitive agreement to combine the two companies in a cash and stock transaction for $6.2 billion.
Under the terms of the merger agreement, Cytyc shareholders will receive 0.52 shares of HOLX common stock and $16.50 in cash for each share of Cytyc common stock they own. Based on the companies’ closing stock prices on May 18, 2007, this represents $46.46 per share of consideration to be received by Cytyc shareholders, or a total consideration of approximately $6.2 billion. The consideration represents a premium of approximately 33% to May 18 closing price. It is anticipated that the stock portion of the consideration will be tax free to Cytyc shareholders. HOLX shareholders will retain their shares. Upon completion of the transaction, HOLX shareholders would own approximately 45% of the combined company, and Cytyc shareholders would own approximately 55%. The transaction has been unanimously approved by both Boards, and is expected to close during 3Q07, subject to regulatory and shareholder approval.
Acquisition Update
The company has completed the integration of Adiana on March 16, 2007, and is currently in the process of completing the final PMA modules, although initial indications assumed the possibility of a 4Q08 approval. Management continues to expect approval and launch of Adiana in 1Q08.
Potentially Severe Problems
There are none other than those discussed in other sections of this report.
Long-Term Growth
The long-term growth rates range from 12% (CIBC) to 20% (Buckingham; Cowen; and Piper Jaffray). The Digest average long-term growth rate is 17.0%.
CYTC has one of the strongest franchises in the women’s health market. CYTC generates 80% of its sales from domestic ThinPrep test sales. The domestic cervical cancer market is maturing, as the conversion from traditional tests to the liquid-based Pap test has already occurred; although the international market is still a source of growth based on the conversion from traditional slide tests to liquid-based tests.
Upcoming Events
On October 25, 2007, CYTC expects to release 3Q07 earnings.
Individual Analyst Opinions
POSITIVE RATINGS
Raymond James – Outperform ($50 target price) – 08/01/2007. The firm has raised the target price from $40 to $50. INVESTMENT SUMMARY: The firm believes that given CYTC’s pending acquisition by HOLX, its stock performance is largely tied to the performance of HOLX. Thus, the firm remains positive in the stock.
NEUTRAL RATINGS
Needham – Hold (no target price) – 07/31/2007. INVESTMENT SUMMARY: The firm believes the pending merger with HOLX makes strategic business sense and the combined company will be stronger than either company independently.
Zacks Investment Research – Hold ($46.46 target price) – 08/22/2007. The firm reiterated its rating and increased its target price to $46.46.
Buckingham – Neutral (no target price) – 10/05/2007. The firm has reiterated its Neutral rating on the stock.
RBC Cap. – Sector Perform ($46.46 – target price) – 07/31/2007. INVESTMENT SUMMARY: The firm believes there could be an upside to CYTC EPS if the company can leverage its sales force to generate better revenue from the Adeza acquisition.
NEGATIVE RATINGS
AG Edwards – Sell (no target price) – 07/31/2007. INVESTMENT SUMMARY: The firm has downgraded its rating from Buy to Sell. The firm believes the CYTC/HOLX combination is motivated by the common goal of developing leading devices aimed at improving women’s health.
Rating Suspended
CIBC– Not rated (no target price) – 09/24/2007. The firm suspended rating and target price on the stock.
Thomas Weisel– Not rated (no target price) – 09/06/2007. The firm suspended rating and target price on the stock as on 06/11/07.
Research Associate: Swati Saraogi
Copy Editor: Oindrila Banerjee
Content Ed.: Kinjel Shah
-----------------------
Zacks Research Digest
October 10, 2007
Research Associate: Swati Saraogi, M.Fin.
Editor: Kinjel Shah, C.A.
Sr. Ed: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417
111 N. Canal Street, Suite 1101 [pic] Chicago, IL 60606
-----------------------
[pic]
Zacks Investment Research Page 9
© Copyright 2007, Zacks Investment Research. All Rights Reserved.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.