As we at the Fool have often discussed in the past, management focus is a key element to long-term success for almost all companies. No company can be all things to all people, and the companies that try to do too much usually end up doing very little to build shareholder wealth.
Cytyc has built its business to this point on the ThinPrep cervical cancer screening system. By offering a better and more accurate way to screen Pap smears for cervical cancer, Cytyc has captured roughly 70% of the U.S. market and more than $300 million in revenue for 2004.
Revenue for the fourth quarter was up 41% to $110.6 million, though $24.5 million of that amount came from the Novacept business that Cytyc acquired early in 2004. On an apples-to-apples basis, then, revenue was up about 10% for the period.
As a 70% market share would suggest, Cytyc has pushed the ThinPrep about as far as it can probably go in the United States. The company has also successfully launched the ThinPrep Imaging System, which will increase the per-test revenue from ThinPrep, but the company has begun to explore other options for growth.
Cytyc purchased Novacept in early 2004 and announced yesterday that it had agreed to purchase Proxima, a small company that sells site-specific cancer treatment delivery systems.
Both acquisitions fit into Cytyc's strategy of targeting women's health. Novacept offers a radio frequency system for a procedure called endometrial ablation (removal of the uterine lining) that's increasingly being considered as an alternative to hysterectomy for treating menorrhagia. In the fourth quarter alone, this business produced 25% sequential growth, and it could become a $200 million-plus opportunity in three years' time.
The newly acquired cancer-treatment business should also be the source of a growth opportunity. For women with breast cancer, surgeons are increasingly opting for breast-sparing surgeries, such as lumpectomies. Promixa offers a disposable device that allows physicians to precisely position radiation sources directly to the post-tumor site. Not only does this spare healthy tissue, but it also dramatically reduces treatment time. At about $16 million in revenue, this business is quite small right now, but it could blossom into an opportunity worth over $300 million annually.
Cytyc clearly intends to grow itself into a larger medical device company, but one that remains keenly focused on women's health. While I wouldn't bet against management's projection that the company will achieve $1 billion in revenue by 2008, the stock's valuation adds risk to the picture. A price-to-earnings ratio of 31 times trailing earnings (excluding a charge) leaves little margin for error, though intrepid Fools might find that the opportunities outweigh the risk.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
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