Digene terminates merger with Cytyc after FTC action

CEO notes likelihood of long-term litigation to defeat effort to block deal

July 02, 2002|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

Digene Corp., a Gaithersburg-based maker of diagnostic tests, announced yesterday the termination of its merger with Cytyc Corp.

The decision was widely expected after the Federal Trade Commission voted last week to attempt to block the merger on anti-competition grounds.

Evan Jones, Digene chairman and chief executive officer, said the key factor in cancellation of the merger was the company's unwillingness to fight an uncertain court battle with the FTC.

"The litigation path could have taken up to a year in the courts, and we didn't feel - given the strength of our underlying operations - that would have been the best use of resources," Jones said.

The announcement came a week after the FTC voted to seek a court order blocking the merger, saying that combining the companies would lead to reduced competition, limited innovation and increased prices for cervical cancer screening.

Digene terminated the merger in a letter sent to Cytyc on Sunday.

"We're obviously disappointed," Daniel J. Levangie, Cytyc's president and chief operating officer, said in a telephone interview yesterday. "We have said repeatedly that the FTC has reached the wrong conclusion concerning our proposed acquisition of Digene."

When announced in February, the cash-and-stock offer from Cytyc was worth $538 million, but shares of Cytyc have tumbled since then, and the deal had fallen in value to $252 million.

Yesterday, shares of Digene fell $2.50 to a 52-week low of $9.26, after trading as high as $38 a share a year ago today.

Cytyc, based in Boxborough, Mass., makes ThinPrep, a leading Pap test, while Digene makes the only approved gene-based test for a virus that causes nearly all cervical cancer. A previous co-marketing agreement between the two companies - which promotes Digene's technology as a secondary test to Cytyc's ThinPrep - is still in place, Cytyc said in a statement.

Under terms of the merger, either Digene or Cytyc could terminate the deal if the FTC issued a second request for information, either party failed to provide necessary information or the transaction did not occur by June 28, Digene said. Both Cytyc and Digene responded to a second request that the FTC issued May 24, Digene said.

FTC officials did not return telephone calls for comment yesterday.

To some analysts, the merger seemed like a logical step between two companies that make medical diagnostic tests for cervical cancer. Cytyc, which had $221 million in revenue last year, has a wider international distribution network.

Digene had sales of $34.2 million last year but has an up-and-coming technology that might someday be used as a primary test for cervical cancer that could put it in direct competition with Cytyc, analysts said.

But a scuttled merger doesn't necessarily pose a setback to Digene's future, they said.

"I'm relatively more sanguine about Digene's prospects simply because their products have terrific growth opportunity," said Scott Keller, an analyst with DealAnalytics.com, a New York firm that focuses on mergers and acquisitions.

"Cytyc has a terrific set of products but their growth is limited. ... They were counting on Digene to provide them with technology growth, not just distribution growth. Though Digene's results are worse historically, it looks like they're in a better position to do better going forward."

Ronald Opel, an analyst with H.C. Wainwright & Co., said Digene has a broad-based diagnostics technology that can be applied to a number of disease categories and to pharmaceutical drug development.

"I think they're already an attractive acquisition for others," Opel said.

Jones of Digene said no plans exist for a merger with another company, though many have expressed interest.

"Should we choose to pick another partner in the future, we believe we'd have a number of alternatives," Jones said.

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