(Reuters) - Medical device maker Hologic Inc (HOLX.O) is buying diagnostic test firm Gen-Probe Inc (GPRO.O) for $3.75 billion cash, gaining access to molecular diagnostics products used to screen for blood diseases and test transplant compatibility.
The deal would combine Gen-Probe’s leading diagnostics for sexually transmitted diseases and its blood screening business with Hologic’s global market presence and distribution primarily targeting women’s health.
Under the deal, Hologic will pay $82.75 for each Gen-Probe share, a 20 percent premium to the stock’s closing price on Friday. Gen-Probe shares surged 18.7 percent to $81.57 in afternoon trading on Monday.
Shares of Hologic, which is financing the deal with a combination of cash and debt, fell 10.1 percent to $19.08. Earlier on Monday the company reported quarterly revenue that fell short of expectations, and analysts said Hologic was paying full price for Gen-Probe.
“It’s certainly a good acquisition for them (Hologic), but they definitely paid a lot and the Street is probably reacting to the price they paid as well as the weak earnings number they put up,” said Jeremy Feffer, an analyst at Cantor Fitzgerald.
Hologic Chief Executive Rob Cascella said in an interview that he has been talking with his counterpart at Gen-Probe, Carl Hull, in recent months about a potential acquisition.
“When you look at this business as a combined entity, this is our diagnostics franchise which will now be the largest franchise within Hologic and it will be primary dedicated to women’s health, which is the emphasis behind Hologic’s other businesses like breast health,” Cascella said.
The deal comes nearly a year after Gen-Probe put itself up for sale and Novartis AG NOVN.VX, which already had a partnership with the company, pulled out of the bidding process.
“The $3.7 billion proposed acquisition of Gen-Probe by Hologic looks to be at a full but fair valuation; experience over the last year suggests that a competitive bid is unlikely,” Cowen and Co analyst Doug Schenkel said.
Hologic focuses on women’s healthcare and makes diagnostic and breast health products and conducts minimally invasive procedures for women suffering from excessive menstrual bleeding.
Schenkel said if the deal receives anti-trust clearance, the combined company will challenge Qiagen QGEN.DE QGEN.O, the dominant player in the market with screening tests for the human papillomavirus (HPV) that causes cervical cancer.
The Federal Trade Commission earlier blocked Cytyc, now a part of Hologic, from acquiring Digene, now a part of Qiagen, due to competitive concerns about the HPV business.
Hologic is confident the Gen-Probe deal will receive regulatory clearance because the companies’ HPV platforms target different segments of the market, with Gen-Probe being at the higher end, Cascella said in the interview.
“Hologic has been struggling with its Cervista HPV platform. The prospects for Gen-Probe’s HPV are widely viewed as superior,” Schenkel said.
The acquisition of Gen-Probe will attract the attention of investors to the remaining independent companies with molecular diagnostic platforms, including Qiagen and Cepheid CPHD.O, Oppenheimer & Co analyst David Ferreiro said in a note.
Hologic said the transaction will add about 20 cents per share to its earnings in the first fiscal year after the deal closes, which is expected in the second half of the year.
The company expects annual cost savings of about $75 million within three years of the closing, and about $40 million in the first year.
Hologic, which has more than 500 employees in China focused on diagnostics, said it plans to market Gen-Probe’s products, including blood tests and sexually transmitted disease tests, in both developed and emerging markets.
“Hologic’s larger international presence, particularly in China, should help grow Gen-Probe’s ex-U.S. businesses,” Oppenheimer’s Ferreiro said.
Morgan Stanley (MS.N) advised Gen-Probe on the transaction, while Goldman Sachs Group Inc (GS.N) and Perella Weinberg Partners advised Hologic. Goldman Sachs is also providing fully committed financing to Hologic.
On Monday, Gen-Probe reported better-than-expected first-quarter results, helped by strong sales of its women’s health products.
Separately, Conceptus Inc CPTS.O said it settled patent infringement litigation related to Hologic’s Adiana Permanent Contraception System. Under the settlement, Hologic agreed to remove its Adiana system from the market by May 18.
Reporting by Soyoung Kim in New York and Anand Basu in Bangalore, Editing by Roshni Menon, Andre Grenon and John Wallace