Digene Corp. will be sold to Mass. firm

Cytyc agrees to pay $537.6 million in cash and stock

Better deal for buyer?

Acquisition includes rights to gene-based cervical cancer test

February 20, 2002|By Julie Bell | Julie Bell,SUN STAFF

Digene Corp., a maker of diagnostic tests poised to turn its first profit thanks to its fast-selling cervical cancer screen, said yesterday that it will be acquired by a Massachusetts company for $537.6 million in cash and stock.

The deal, expected to close in the second quarter, will give Cytyc Corp. rights to Digene's up-and-coming gene-based test for cervical cancer. Boxborough-based Cytyc will keep its ThinPrep Pap test for the same disease, positioning it to combine the two tests into a single, highly sensitive one.

"I think it does make sense for both companies because Cytyc has the distribution in the United States that Digene hasn't had," said H.C. Wainwright analyst Ronald Opel. "It makes sense for Cytyc fundamentally because they have a real old technology."

ABN Amro's Bruce Cranna agreed that the combination makes sense. But, he said, "I'm not happy with the price" Digene got. "For Cytyc, I think it's a great deal."

Shares of Digene gained $2.06, or 8 percent, to close at $27.57 yesterday. Shares of Cytyc dipped 70 cents to close at $20.03. Both trade on the Nasdaq stock market.

The deal calls for Cytyc to issue 23 million shares of common stock. Digene shareholders will receive $4 per share in cash - for a total of $76.9 million - plus 1.969 shares of common stock for every Digene share they hold. Cytyc is scheduled to begin its tender offer Monday. The deal was valued at $537.6 million based on yesterday's closing price of Cytyc stock.

Digene has about 230 employees at its Gaithersburg headquarters and about 250 overall, including a newly hired U.S. sales force of about a dozen and a Brazilian subsidiary focused on marketing the HPV test in that country. The company got a $1 million Sunny Day loan from the state in 1998 when it was combining its Prince George's and Montgomery County operations into a new laboratory and office building in Gaithersburg. At the time, Digene said it would retain its 110 employees and add 156 jobs by 2000, according to a state release.

Chief Executive Officer Evan Jones said the Cytyc deal came together quickly this month, leaving details such as what jobs may be eliminated because of overlap to be worked out.

But Jones said Cytyc will gain molecular diagnostics expertise it needs, making wholesale layoffs in Gaithersburg unlikely. "They have an interest in keeping these people intact," he said.

Evans will become a Cytyc director but won't have a day-to-day management role.

The ThinPrep Pap test is designed to provide clearer, easier-to-read slides from patient swabs than the traditional Pap test.

Approved in May 1996, ThinPrep now accounts for nearly 60 percent of Pap tests, according to Opel. Cytyc said market share is growing at a rate of up to 5 percent per quarter.

Digene's HPV test is approved in the United States only as a means of checking or clarifying a Pap test. But the company recently applied to have it approved as an initial screening method in women over age 30. For about a year, Digene and Cytyc have co-marketed their tests. Cytyc has encouraged labs that use its Pap test to use Digene's HPV test if the Pap results need to be clarified.

Digene booked $700,000 in annual revenue in 1990 when Jones, a principal in a venture firm that had invested in it, stepped in as CEO. It was losing $100,000 a month. The company acquired the HPV test from Life Technologies in late 1990, laying the foundation for growth the company projects will mean $50 million in revenue and profitability this fiscal year.

Yesterday, Jones said he thought that the company's impending profitability helped spur Cytyc's interest. Another factor included Digene's recent reacquisition of rights to diagnostic tests for chlamydia and gonorrhea, which it plans to bundle with its HPV test. That would allow all three tests to be run from a single patient sample. Its application to the FDA to expand marketing of the HPV test was another factor, he said.

The deal makes sense for Digene, he said, because the company can better tap into Cytyc's marketing, especially in Europe.

"Naturally, we would have liked to have gotten a higher price," said Jones, who is one of two partners - along with Digene President Charles Fleischman - in a venture firm that holds 24.5 percent of Digene's outstanding shares. "But we see this as a strategic investment."

In the long run, he said, it will pay off for both Digene and Cytyc shareholders.

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