Third Wave's Invader Gets Invaded

Apparently Third Wave Technologies' (NASDAQ:TWTI) Invader technology wasn't high-tech enough to stop an "invader." But then, the Invader technology isn't meant to keep people away, either.

Hologic (NASDAQ:HOLX) announced yesterday that it's buying the diagnostic-test company for about $580 million in cash. That works out to $11.25 a share, some 7% higher than Friday's close. While that's not much of a premium to Friday -- the stock is up about 9% for the year -- it has been down most of the year, so I doubt investors are complaining much.

Third Wave's senior management sure seems excited about it. Six of the company's top executives are voluntarily giving up the "change in control" acceleration of their incentive plans and vesting of their options. That's a vote of confidence.

The acquisition seems like a good fit for Hologic, too. Third Wave's most advanced products are a pair of tests for human papilloma virus (HPV -- a cause of genital warts and cervical cancer) based on its Invader chemistry. Expectations are that it will be on the market by the middle of next year, after FDA approval. Those tests should fit right in with Hologic's current products focused on women's health.

In addition, Third Wave has two diagnostic tests on the market -- one for cystic fibrosis and one for a genetic variation that causes patients to be more sensitive to Pfizer's (NYSE:PFE) Camptosar. However, those won't be enough to get the acquisition into the black. Hologic expects non-GAAP earnings per share to be $0.02 to $0.03 lower for this fiscal year (ending Sept. 27, 2008) and about $0.10 dilutive to fiscal 2009, which ends Sept. 26, 2009. Once the HPV tests are approved, the acquisition should be accretive.

Hologic is using about $600 million in debt to buy up the shares. That will raise debt-to-equity to about 50% from its current 39% level, but the extra leverage should not be too much of a problem, thanks to nice levels of free cash flow. In addition, it will be able to use Third Wave's tax net operating losses.

In the long term, the deal looks really good. The Invader technology should allow Hologic to develop additional molecular diagnostic tests. That plays right into a growing market in the age of personalized medicine.

For instance, drugmakers will need to determine which patients will best respond to their drugs, as Amgen (NASDAQ:AMGN) and ImClone Systems (NASDAQ:IMCL) have recently done for Vectibix and Erbitux, respectively. Makers of diagnostic tests, such as Hologic and Genzyme (NASDAQ:GENZ), will be there to supply them.

If Hologic can "invade" a few more testing areas, this investment is going to look like a steal.

More Foolishness on diagnostic-test makers:

• Third Wave Making Tiny Ripples
• Test Results Boost Sequenom's Stock
• Ilumina Tests New Waters
• The 2 Sides of Bio-Rad