Stretching its wings

Hologic acquires Gen-Probe for a total enterprise value of approximately $3.7 billion

Jeffrey Bouley
BEDFORD, Mass.—With both companies' boards of directors inunanimous agreement about the transaction, Hologic Inc. and San Diego-basedGen-Probe Inc. announced at the end of April that Hologic will—pendingshareholder approval and regulatory clearance—acquire all of the outstandingshares of Gen-Probe for $82.75 per share in cash, or a total enterprise valueof approximately $3.7 billion.
 
 
The all-cash transaction—which represented a 20-percentpremium over Gen-Probe's closing price on April 27—is expected to be fundedthrough available cash and additional financing of term loans and high-yieldsecurities, with expected completion of the deal in the second half of thisyear. The combined company expects to realize approximately $75 million in costsynergies within three years following the close of the transaction and theparties anticipate strong free cash flows that reportedly will be usedprimarily to reduce debt. The expectation is to return to pre-transactionleverage levels within three years.
 
 
Gen-Probe is "an ideal partner and strategic fit toHologic's existing diagnostics business" and complements the company's focus onwomen's health while adding diversification to its product portfolio, accordingto Rob Cascella, president and CEO of Hologic, who adds, "this transactioncombines best-in-class technologies with strong market presence and globaldistribution to more effectively target the rapidly growing moleculardiagnostics market, strengthens Hologic's diagnostics business through theaddition of Gen-Probe's broad product portfolio and automation platforms—morespecifically, this gives Hologic critical mass in the molecular diagnosticsmarket and makes Hologic the largest diagnostic company focused on women'shealth—it enables Hologic's direct sales and dealer network internationally tofurther drive the adoption of Gen-Probe's tests in developed and emergingmarkets around the world, and it is expected to be 20 cents accretive toHologic's adjusted earnings per share in the first fiscal year following theclose of this transaction and significantly more accretive thereafter."
 
Cascella also expects the combination of the two companiesto be accretive to both top- and bottom-line growth rates and notes thatbringing Gen-Probe into his company's corporate fold will move Hologic intoadjacent diagnostic markets—specifically organ transplant and infectiousdisease areas—which are new to Hologic and offer promising opportunities.
 
 
Hologic is a developer, manufacturer and supplier ofdiagnostics products, medical imaging systems and surgical products that servethe healthcare needs of women, with core business units focused on breasthealth, diagnostics, surgical gynecology and skeletal health. The company'sportfolio covers mammography and breast biopsy, breast magnetic resonanceimaging, radiation treatment for early-stage breast cancer, cervical cancerscreening, treatment for menorrhagia and uterine fibroids, osteoporosisassessment, preterm birth risk assessment and more.
 
 
For its part, Gen-Probe is a leader in molecular diagnosticsproducts and services, offering such fare as the TIGRIS and PANTHER automationplatforms and an extensive menu of sexually transmitted disease tests, includingthe APTIMA line of chlamydia/gonorrhea, human papillomavirus and trichomonasproducts.
 
 
In addition, Hologic says that Gen-Probe's PROCLEIX line ofHIV, hepatitis and West Nile virus blood screening products and strongpartnership with Novartis provide an attractive market, "with a global reachand significant growth opportunities for the combined company," which wouldreach more than 150 countries.
 
 
With Hologic's direct sales and marketing structure inEurope, and its investment in China distribution, "the growth trajectory ofGen-Probe's products is significantly enhanced," the companies maintain, notingthat, in particular, Hologic has more than 500 employees focused on diagnosticsin China.
 
 
"This transaction provides compelling cash value for ourshareholders and represents an outstanding opportunity for our business," notedCarl Hull, chairman and CEO of Gen-Probe, in the news release about the deal."Together, Gen-Probe and Hologic will be very well positioned to pursue acomplete range of diagnostic opportunities in women's health, with a strongerfocus on the dynamic molecular diagnostics market."
 
Investors haven't been nearly as excited about the potentialacquisition, however. After hovering around $21 for much of April, share pricesfor Hologic dropped to around $19 the day the acquisition was announced andthen continued to drop, though the price remained fairly stable at around $17per share for most of the first half of May, when this story went to press.
 
While wary about the acquisition—and also disappointed atthe recent decision by Hologic to discontinue its Adiana system—ZacksInvestment Research acknowledged the potential value of combining the twocompanies.
 
"Though the company [Hologic] reported an uninspiring secondquarter, the announcement of the Gen-Probe acquisition was significant," Zackspointed out in an investor note. "If the deal goes through, the combinedcompany will become a prominent player in the HPV business, which has playerslike QIAGEN. However, an increasing debt burden along with higher interestexpense will adversely affect the bottom line …
Offering a wide range of products, Hologic has become anindustry giant in the field of women's health products. The proposedacquisition will further strengthen its position in this field. We are alsoencouraged by [recent] product approvals, which should help the company inrecording higher sales going forward. Over the long term, we are neutral onHologic."
 
 
A more jaundiced view came from Tycho Peterson, an analystwith JP Morgan, who wrote in a note to clients the day of the announcement,"Given Hologic's history of value-destructive M&A (e.g., Cytyc,Third Wave Technologies), and that both companies are in the midst of majorproduct launches where street expectations have come up, this deal raisessignificant questions about the ability of each company to independentlyaccelerate organic growth."

Jeffrey Bouley

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