In June, 2008, Hologic, Inc., of Bedford, Mass., announced that it signed a definitive agreement to acquire Third Wave Technologies, Inc. for a purchase price of $11.25 per share, or approximately $580 million in value, representing an approximately 24% premium to Third Wave’s average trading price over the last three months. The Boards of Directors of both companies unanimously approved the transaction in which Hologic acquired 100% of Third Wave’s stock in a cash tender offer to be followed by a merger to acquire any untendered shares. The transaction, was completed in the third calendar quarter of 2008, and is expected to be modestly dilutive to Hologic’s adjusted earnings per share in the first full year after closing, and increasingly accretive thereafter.
Third Wave develops and markets molecular diagnostic reagents for a wide variety of DNA and RNA analysis applications based on its proprietary Invader® chemistry. The company’s current clinical diagnostic offerings consist of products for conditions such as Cystic Fibrosis, Hepatitis C, cardiovascular risk and other diseases. The company recently submitted the pre-market approval (PMA) applications for its two human papilloma virus, or HPV, tests to the U.S. Food and Drug Administration (FDA) being submitted under the brand name Cervista. These submissions are based on a recently completed clinical trial for its 14-type high-risk and 16/18 genotyping tests where all primary clinical endpoints were achieved. Subsequent to this submission, these applications have been accepted for review by the FDA. There are currently 10 million HPV tests being performed in the United States, representing a $200 million market and growth in excess of 40% in each of the past five years. Hologic believes the global market for HPV testing will increase to $800 million in the next few years.
Jack Cumming, Chairman and Chief Executive Officer of Hologic, said: “The combination of Hologic and Third Wave brings together two great companies that employ complementary technologies but share a common mission: to help save the lives of women. Hologic is an established, diversified provider of diagnostic products and therapeutic devices. Third Wave’s HPV tests and other products currently in development employ a patented molecular diagnostic platform to help identify cervical cancer and other diseases at an early stage. This important transaction will broaden Hologic’s range of diagnostic product offerings, enhance our revenue and earnings growth potential and, we believe, create long-term value for our shareholders.
“Specifically, we expect our acquisition of Third Wave to help accelerate the growth of our diagnostics division with the addition of the Cervista HR and Cervista 16/18 HPV testing products,” Mr. Cumming continued. “These products, pending FDA approval, are a complementary fit with our current suite of products, and broaden our product offerings into high-growth diagnostic markets for women.
“Hologic has an established sales and distribution network for women’s health, as well as extensive relationships with clinical labs and OB/GYN channels,” Mr. Cumming said. “If and when Third Wave’s HPV tests receive FDA approval, expected sometime in the first half of calendar 2009, we will be well-positioned to take these products quickly and effectively to market. We expect the integration process to be smooth and seamless. We look forward to welcoming Third Wave’s outstanding associates to Hologic when the transaction is completed, and to participating in the launch of Third Wave’s HPV test.
“We have great respect for Kevin Conroy and his team, the exciting products they have developed and the expertise they bring to Hologic. Before offering to acquire Third Wave, we conducted extensive due diligence on its HPV tests and related technologies, and concluded the Cervista HPV test represents an important new molecular diagnostic platform. Importantly, the senior management team of Third Wave is so confident about the future of this technology that six top executives have voluntarily deferred the vesting of their options and the acceleration of most of their long-term incentive plan payments otherwise due upon a change in control until after the receipt of FDA approval - the strongest possible vote of confidence in Third Wave’s technology and in this transaction, which we fully share,” Mr. Cumming concluded.
“We welcome this opportunity to deliver outstanding value to our stakeholders,” said Kevin Conroy, Chief Executive Officer of Third Wave. “We believe that our Cervista HR and Cervista 16/18 products, coupled with Hologic’s women’s health franchise will accelerate the development and commercialization of innovative molecular diagnostic tests. We look forward to working with Hologic to complete the transaction efficiently and to delivering its benefits to our respective shareholders, customers, employees and to women worldwide.”
Benefits of the Merger
The anticipated strategic benefits of the transaction include, among others:
• Provides a solid platform for future opportunities in molecular diagnostics. Third Wave’s unique Invader chemistry provides an exciting platform to explore new diagnostics for women’s health.
• Accelerates Hologic’s growth in cervical cancer screening. With a strong existing presence in cancer screening, the addition of Third Wave’s HPV tests will allow Hologic to expand its ability to serve this important segment of the industry. Cervista HR and Cervista 16/18 are a natural adjunct to Hologic’s ThinPrep pap test.
• Broadens Hologic’s presence in women’s health. The addition of Cervista HR and Cervista 16/18 further broadens Hologic’s comprehensive suite of products and diagnostic tests for women’s health.
• Enhances Hologic’s value proposition to laboratories and OB/GYN customers. Improves the standard for HPV testing by providing a more efficient test process with increased specificity to Hologic customers, as well as a platform for additional tests and services.
Financing and Structure
Under the agreement, Third Wave shareholders will receive an aggregate amount of an estimated $580 million in cash, assuming the conversion of Third Wave’s outstanding convertible notes, warrants and restricted stock. Hologic intends to borrow $600 million to finance this transaction in the form of a senior secured credit facility on terms substantially consistent with the company’s existing credit facility. Hologic has secured fully committed debt financing for the full consideration from Goldman, Sachs & Co.
Timing and Approvals
The transaction will be conducted through a tender offer to be launched as promptly as possible, to be followed by a merger to acquire any untendered shares. The closing of the tender offer is subject to customary closing conditions and antitrust review, including expiration or early termination of the applicable Hart-Scott-Rodino waiting period, and various country filings, and the acquisition by Hologic of a majority of Third Wave’s shares.
Update to Hologic’s Financial Guidance and Expected Impact
This transaction is expected to be slightly dilutive to Hologic’s non-GAAP EPS in Fiscal 2008 and we anticipate $0.02-0.03 per share dilution to the company’s previous guidance, excluding acquisition-related charges. The acquisition is expected to be approximately $0.10 dilutive to non-GAAP EPS (excluding the amortization of intangibles) in Fiscal 2009 and to be accretive to non-GAAP EPS beginning in Fiscal 2010.
Hologic expects to record non-cash acquisition related costs related primarily to the write-off of in-process research and development following the completion of the tender offer. The amount of this charge will be determined by an independent valuation and is expected to be material.
Hologic expects the transaction to be cash flow neutral in Fiscal 2009 as a result of the use of $160 million in acquired tax NOLs, including interest and financing expense of approximately $40 million from the term loan of approximately $600 million to finance the acquisition.
In connection with the transaction, Goldman, Sachs & Co. acted as exclusive financial advisor to Hologic, and Brown Rudnick LLP provided legal counsel. XMS Capital Partners and Merrill Lynch & Co. acted as financial advisors to Third Wave. Kirkland & Ellis LLP and Kennedy, Covington Lobdell & Hickman LLP provided legal counsel to Third Wave.